A softer-than-expected interim result has sent shares in Regional Express Holdings Ltd (ASX: REX) into a nosedive today.
The result wasn't bad – it's just that it wasn't good enough for some who had expected a bigger lift in profit given the recent re-rating in the airline sector that sent Qantas Airways Limited (ASX: QAN) soaring to the skies on a big profit turnaround.
The small regional airline slumped 6% to $1.01 during lunch time trade as it failed to do or say anything dramatic.
Pre-tax profit increased 10% to $5.5 million on flat revenue of $104.9 million for the six months to end December 2014.
The repeal of the carbon tax and falling fuel costs were the primary drivers for the uplift, although this implies that the underlying business is slipping backwards given that the carbon tax alone added $1.3 million to operating costs in the first half of 2013-14.
Higher salaries, engineering costs and depreciation and amortisation rates had held back profit growth.
What's more, the drop in the fuel price might actually be a double edged sword. While fuel costs fell 13.3% (they would have dropped more if not for the hedging contracts) to $18.2 million for the period, management is concerned that weak energy prices would impact on industry demand for its shuttle services.
This prompted management to hold back committing to pay a dividend this financial year and to take a cautious stance on the second half.
I believe REX will deliver its first dividend in three years when it reports in August this year. We only need passenger demand to hold in the current half for this to happen.
The good news is that the stock isn't trading on stretched valuations. Assuming a slight second half earnings skew (as has historically been the case), the stock would be trading on a price-earnings of around 12.5 to 13.5 times.
That's similar to Qantas but without the dramatics that the public is used to getting from the global airline. As an investor though, I would pay a premium for "boring".
