Virgin FY17 results – subdued trading conditions, remains focused on deleveraging
FY17 results highlights:
Source: Virgin, FIIG Securities
Key points:
- Virgin’s FY17 airline passenger revenue was 13.4% below Bloomberg consensus estimates of AUD4.935bn compared to the group’s reported AUD4.275bn, which was however a marginal improvement of 1.9% compared to per corresponding period (pcp) in FY16. The group’s FY17 underlying EBIT deteriorated by 22.1% to AUD164.1m due to subdued trading conditions and the impact of fleet simplification
- The group’s business segments reported mixed performances:
- The airline’s domestic business recorded a 43% decrease in its underlying EBIT to AUD92.9m compared to pcp, despite recording a 41% improvement in its 4Q17 underlying EBIT to AUD27.3m pcp (with yield – a measure of revenue generated to passenger kilometres travelled – also down by 1.5%)
- Whilst Tigerair’s domestic operations were profitable, its overall performance (including international) reported a negative AUD24.3m in underlying EBIT in FY17, a reversal of its positive FY16 underlying EBIT of AUD2.2m. Tigerair’s FY17 overall performance was impacted by the launch and withdrawal of operations to Bali
- On balance, the group’s international business recorded a positive underlying EBIT of AUD0.5m, reversing the AUD48.8m loss pcp. The positive results were supported by a 1.4% growth in yield and unit revenue following the successful implementation of the airline’s improvement strategies in this segment
- Velocity’s underlying EBIT increased by 2.2% pcp to AUD142.8m, driven by continuing growth in its membership base of 82% since June 2014 to 8 million members as at June 2017
- On a positive note, the group recorded its first positive free cash flow of AUD34.3m since FY12. This was mainly underpinned by a 17.2% increase in cash generated from operating activities (before transformation and finance costs) to AUD525.9m
Source: Virgin
- Financial leverage (defined as net debt adjusted for operating lease rentals to EBITDAR) continued to drop to 4.5x at 30 June 2017 (from 5.2x at 30 June 2016). This improvement follows a 18.9% reduction in gross debt to AUD2.4bn at 30 June 2017 pcp, including accelerated debt repayments of AUD260m. Virgin also benefitted from the AUD931m received from its shareholders following its entitlement offer during 1H17
- Virgin launched the sale of direct services to Hong Kong in March 2017 and commenced its proposed alliance with HNA Aviation, Hong Kong Airlines and HK Express. The airlines also commenced flights from Melbourne to Los Angeles in April 2017
A link to the results is available here.
Outlook
Key highlights from guidance for the group:
- Expects positive momentum from 4Q17 to continue, with underlying performance for 1Q18 to expected to show an improvement compared to 1Q17
- Expects the group’s “Better Business” program (designed to reduce cost base, enhance cash flow and improve capital position) to continue to track ahead of schedule in implementation and expects further balance sheet improvements to be delivered, with expected net free cash flow savings target increased to AUD350m (from AUD300m) per annum by the end of FY19
Relative Value
*Make whole at Treasury rate + 50 bps
Note: Prices accurate as of 10 August 2017 but subject to change; indicative only
Source: FIIG Securities, Bloomberg