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Moody's Upgrades Qantas' Outlook

Moody's Upgrades Qantas' Outlook
Jun 18, 2015 By Simon Herrmann

The rating agency Moody’s has changed Qantas’ (ASX:QAN) outlook from positive to stable and affirmed all ratings for the airline. Moody’s considers the progress Qantas has made in its transformation program and the favourable trading environment due to a lower Australian dollar and cheaper petrol prices.

Just the like the broader market Qantas' shares are trading lower today at $3.15 at 12:25pm.

Moody’s expects a 20% reduction in Qantas’ lease adjusted debt as a result of the upgraded outlook. The rating agency also emphasised that Qantas has strong credit metrics for its current rating which has strengthened due to the company’s improved operating profile. Moody's also states that Qantas appears to be on track to achieve a net debt reduction of $1bn for FY15 and a increase EBITDA signifcantly.

The Qantas transformation plan was announced on 27th February 2014 when the company announced details of its $2bn cost reduction program and capital expenditure review. Qantas aims to take action to permanently reduce costs in all parts of the Qantas Group through to FY17. Since announcing a record net loss of $2.8bn for FY14 on 28th of August 2014, the strategic transformation plan as well as more favourable trading conditions have positively impacted operating activities of Australia’s national flag carrier.

The first half of FY15 showed a statutory profit after tax of $206m, a $441m turnaround to the previous corresponding period. Revenue increased by 2.1% to $8.1bn.

The fact that Moody’s has upgraded its outlook is a sign that the rating agency believes the improvements are sustainable and will result in a balanced long-term outlook. However, conditions in the operating and competitive environment remain fragile. If Qantas continues to deliver and further improve on its operating performance and if the domestic and international market conditions remain stable, then it will just be a matter of time until rating agencies upgrade the credit rating. Ongoing debt reduction will be a key for Qantas as its debt levels remain relatively high.

Overall Qantas remains on track to deliver a successful turnaround for FY15 following the disastrous FY14. Qantas share price has more than tripled in the past 15 months which makes the equity vulnerable to negative market sentiment. A consolidation around the $3 mark would be a strong sign of technical support and Wise-owl will continue to monitor Qantas as a potential investment opportunity for our premium members.

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Simon Herrmann Author: Simon Herrmann Jun 18, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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