JPMorgan joins queue of doubters

Last updated 05:00 21/01/2014

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A major American investment bank has dealt another blow to Australia's national carrier, Qantas, saying the airline will continue to rack up losses in turbulent domestic conditions until 2016.

In the research note, JPMorgan bank analyst Carolyn Holmes reiterated the stock's rank as underweight, or "sell", and said there would be no easy way out for the airline, which is facing intense competition with Air New Zealand-backed Virgin Australia in its domestic market.

"Although it would be nice to think that selling assets and or the [Australian] Government changing the ownership restrictions or guaranteeing Qantas' new debt would solve Qantas' problems, these initiatives are unlikely to change the current difficult operating environment."

Holmes said Virgin's efforts to rebrand itself as a full service carrier and expand its domestic market share left Qantas's core profit centres under attack.

The bank predicted the airline would report an underlying pretax loss of A$289 million (NZ$307m) on February 27, which is in line with the higher end of management's A$250-$A300m guidance.

Ratings agencies Moody's and Standard and Poor's both reclassified Qantas stock to "junk" status this month.

Holmes said selling a minority stake in Qantas's lucrative frequent-flyer programme may be "earnings dilutive" and that selling its domestic terminals would be a better option that could potentially rake in A$1 billion.

Such a strategy would be earnings neutral, whereas "selling a 49 per cent stake in its FF could raise as much as A$1.6b, but may reduce pretax profit in year one by between A$10 to A$30m."

JPMorgan has estimated a return to profit of A$96m in the 2016 financial year.

The bank regards Qantas as undervalued on a net tangible asset basis and has raised its price target on the airline to A$1.14 from A$1.12.

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