Qantas has delivered on the market’s expectation of a bumper FY15 result - $975m in underlying pre-tax profit, $2bn in operating cash flow and a $1bn reduction in debt. The FY15 financial credit metrics meet investment grade levels, with the airline now having in place what it considers to be an optimal capital structure
Impressively, all segments reported positive underlying EBIT, with the successful turnaround of the international business delivering a positive EBIT result. The airline has achieved what it considers an ‘optimal’ capital structure, resulting in investment grade credit metrics through improved operating performance and a $1bn debt reduction. As a result, Qantas also announced a $505m payment to shareholders in the form of a distribution.
We note the rating agencies have not yet immediately returned Qantas’ credit rating to investment grade. From a credit perspective, the large shareholder distribution (to be paid in November) is shareholder-friendly but not in itself a ‘credit friendly’ action, and the impact on Qantas’ rating, would have to be considered in the context of the rating agencies’ expectations for improvements in the airlines’ financial profile and cash flow generation.
With the airline delivering the best second half performance in its history, positive momentum continues to remain strong for Qantas.
The key highlights of the FY15 result are summarised below:
- Revenues were up 3% to $15.8bn reflecting improved yields – or return on fares – and higher capacity loads in most of its markets
- All operating segments were underlying EBIT positive. Notably, the international underlying EBIT improved by $764m to be a positive $267m. Qantas Freight, Qantas Loyalty and Jetstar Group all achieved record underlying EBIT results. Underlying pre-tax profit of $975m represents a $1.6bn turnaround from FY14
- Operating cash flows nearly doubled to $2bn, with positive net free cash flow (after capital expenditure) of $1.1bn versus a neutral position in FY14. As a result, the airline was able to reduce debt by $1bn
- In terms of key credit metrics, Qantas’ Debt / EBITDA ratio has improved from 5.1 times in FY14 to 2.9 times in FY15, while funds from operations / net debt improved from 17% to 46%. These are key metrics used by Moody’s and S&P in measuring financial leverage, and the FY15 metrics are above the investment grade rating thresholds used by the rating agencies
- 40% of Qantas’ fleet is now unencumbered with an estimated market value in excess of US$3bn, an increase of 20 aircraft over FY15 and a doubling in value since FY12. A higher proportion of unencumbered fleet improves the asset recovery backing the Qantas corporate debt facilities, including the senior unsecured bonds
- Qantas’ available liquidity has further improved, with $2.9bn in cash and $1bn in undrawn debt facilities (up $410m from FY14). The airline has identified that lower levels of cash are needed going forward with its optimal capital structure in place, providing an opportunity in the future to use cash to buy out existing operating leases
- As mentioned in the Sydney Airport results article, Qantas will receive total cash proceeds of $535m by selling the remainder of its Terminal 3 lease to Sydney Airport. $350m of these proceeds will be received in FY16, with the remaining $185m to be deferred over the period to 30 June 2019. Moody’s has commented that Qantas’ ratings are unaffected by the sale of the Terminal 3 lease with Sydney Airport, but this is dependent on the use of the sale proceeds. For example, if Qantas were to use the full cash proceeds from the sale as a shareholder distribution as opposed to further debt reduction, the transaction could have a minor negative effect on the airline’s credit metrics and future cash flows
Please contact your FIIG representative for more information on the Qantas bonds, which are available to both retail and wholesale investors.