ACCT1511 HOMEWORK

Semester 2, 2012 Final Exam Question 3

(a) You are considering the investment in one of the above airline companies. Choose one (1) of the airline companies listed. What would be
your price target and recommendation? Show your calculations and round to nearest cent. (3 marks)
Company chosen (no marks but for reference purposes in calculating price target): Price target (3 marks): 1 mark for 1st company PE/PEG, 1
mark for 2nd company PE/PEG, 1 mark for price target calculation.
Cathay Pacific
Qantas
Virgin
Singapore Airlines
China Southern Airlines
Cathay Pacific PE =
Qantas PE = 1.16/0.026 = Cathay Pacific PE = 35.33 SIA PE = 10.95/0.31 =
China Southern Air PE =
12.72/0.45 = 28.27
44.62
Virgin Australia PE =
35.32
4.14/0.39 = 10.62
SIA PE = 10.95/0.31 =
Virgin = 0.43/0.025 = 17.2 0.43/0.025 = 17.20
Growth=0.66/0.31
Cathay Pacific Air PE =
35.32
Price target = 1.16 x
Price Target = 0.43 x
Price target=35.32 x 0.66
12.72/0.36 = 35.33
Price target = 12.72 x
17.2/44.61 = AUD0.45
35.33/17.20 = AUD0.88
= SGD23.31
Price Target = 4.14 x
35.32/28.27 = HKD15.89
35.33/10.62 = CNY 13.77
Cathay Pacific PE =
Qantas Airways PE=
Virgin Australia PE (use
China Southern Airlines
12.72/0.45 = 28.27
1.16/0.026 = 44.62
EPS this FY) = 0.43/0.025
Forecast PE:
Growth = 0.92/0.45=104% Cathay Pacific PE =
= 17.2
4.14/0.42=9.86
Price target = 28.27 x
12.72/0.36 = 35.33
Qantas Airways PE=
Cathay Pacific Forecast
0.92= HKD26.01
Price Target Q= 1.16 X
1.16/0.026 = 44.62
PE: 12.72/0.92=13.83
35.33/44.6= AUD0.91
Price Target= 0.43 x
Price target:
44.62/17.2= AUD 1.116
4.14*13.83/9.86=5.81
PEG=28.27/104%=0.27
China Southern Airlines
Price target=12.72 /
PE:4.14/0.42=9.86
0.27=HKD47.11
Cathay Pacific PE:
12.72/0.45=28.27
Price target:
4.14*28.27/9.86=11.87
Recommendation (no marks but must be consistent with price target to obtain marks for price target):
Buy
Sell
Buy
Buy
Buy
Note: Cannot use negative historical EPS not meaningful to calculate PE with negative EPS. Why use next FY EPS instead of EPS for this
FY? If you argue that a companys EPS is not reflective of its long run performance due to short term poor performance, with next FYs EPS
reflecting a more normalised performance.

(b) In your calculation of the price target, you had selected another company as the base for peer comparison. State the name of the peer
company and give ONE (1) reason why your choice of peer comparison is appropriate. (1 mark for reason, no mark for name of peer company)
Cathay Pacific
Qantas
Virgin
Singapore Airlines
China Southern Airlines
Singapore Airlines. an
Virgin is Australian based Qantas is Australian based Cathay Pacific: an Asian
Cathay Pacific is suitable
Asian based carrier most
and compete on similar
and compete on similar
based carrier most closely because both is and China
closely aligned with
domestic routes.
domestic routes.
aligned with Singapore
Southern Air serve
Cathay Pacific in terms of
Airlines in terms of air
principally the booming
air routes and business
routes and business
Chinese market.
segments.
segments.
Singapore Airlines as it
serves international routes.
DO NOT WRITE OUTSIDE THE BOX

(c) Give FOUR (4) reasons in support of the above stock recommendation. (1 marks for each reason):
Cathay Pacific
Qantas
Virgin
Singapore Airlines
Has best 5 year stock price Qantas appears to be in
Virgin has the highest
Singapore Airlines has an
performance.
decline with dropping
sales growth of 18.37%
expectation of increasing
share price over 5 years.
EPS over 3 years from
historical, to this year, to
next year.
Good ROE of 3.25% (not
Sales growth is at 5.75%
Historically, Virgin had
Current ratio of > 1, and
the best China Southern) compared to Virgin of
negative EPS, but
lowest D/E which is close
but better than main
18.37%.
expected EPS have gone
to zero, indicates hardly no
competitor Singapore
up and predicted to be
debt, indicating a very
Airlines.
almost double next FY
conservative financial
management => low
bankruptcy risk.
Well placed to exploit
Its profit margin is
Asset turnover is highest,
Low debt/equity ratio
growth in China.
negative at -4.55%, is
Virgin is utilising its
worse than Virgin at resources more efficiently
1.11%, and indicates
than competitors at 0.9,
company is in decline.
compared to the second
highest (0.78)
Reputation and legacy of a EPS of Qantas is
Both Qantas and Virgin
Stable, increasing EPS.
an airline for great service, improving from historical had experienced declines
Whilst not the highest
for example Singapore
-0.10 to expected future
in their stock prices, but
EPS, Sing Airs EPS has
Airline.
0.124 indicating that its
the price of Virgin tended increased by ~68% each
performance is expected to to increase from mid-2011 financial year, meaning
recover.
till now, but Qantas
shareholders can expect
continues to decline.
increasing earnings.

China Southern Airlines

Has the highest ROE
13.71%.

Has very high sales growth

17.76% suggesting it is
highly likely that higher
revenue will be generated
in the future.

Its low current ratio (0.42)

indicates its ability to
operate using other
peoples money, which
shows it has good
management.
Higher profit margin
(5.37%), indicating that
China Southern Airline is
able to maximise profit
and minimise expense.

Lowest P/E relative to

other companies, indicates
that it is least overvalued.

(d) In financial statement analysis, it is important to consider special situations or context that may affect your analysis. Give TWO (2) reasons
from the information provided or from your general knowledge that may affect your decision. (2 marks)
Low cost carriers such as AirAsia are changing the air travel business paradigm, taking business away from full service carriers.
Alliances of competitors (e.g. Qantas and Emirates, Qantas and China Eastern) may toughen the competitive environment.
Full service carriers starting new discount carrier offshoots may toughen the competitive environment (e.g. Scoot for Singapore Airlines).
Full service airlines relying on business travel will face competition from alternative means of conducting business such as teleconferencing.
The global financial crisis may affect overall demand for air travel.
Oil price cost may increase cost of air travel reducing airline profitability, and also higher cost may reduce demand for air travel.
Relevant for Qantas only: aircraft has been involved with a number of incidents and may lead to air safety concerns and customer avoidance.
Relevant for Qantas only: Qantas has been involved in disputes with employees resulting in strikes/lockouts which may result in customer
avoidance, which may also indicate poor management.
Whether the airline is mostly government-owned (e.g. China Southern Air, Singapore Airlines) will affect the risk of investing in such
companies.
Relevant for Qantas & Virgin only: Australias high currency may affect their business given their exposure to flights to and from Australia
relative to the other non-Australian based airlines.