According to a research note released by Citi this morning, analysts at the global financial services company believe that Qantas Airways Limited (ASX: QAN) shares are looking very cheap. In fact, they believe it is not only the cheapest airline share in Australia, but the cheapest airline share in the world.
I would have to agree with Citi. Australia's flag carrier airline may have had to navigate through a spot of turbulence in the domestic market, but the 30% drop in its share price in the last three months certainly makes it good value again as things pick up.
Yesterday the airline released its traffic figures for May and there was a much needed improvement in its domestic performance. Although Qantas group revenue per available seat kilometre (RASK) declined in May, the group domestic RASK increased year over year for the first time since February.
Furthermore management has stated that the improved performance of its domestic operations has continued in June. In my opinion this shows that the company's decision to cut its capacity growth plans was a wise one.
Both of its international segments produced a strong rise in passengers carried in May. Qantas International carried 479,000 passengers, which was an increase of 6.7% on May of last year. Jetstar International outdid this by carrying 481,000 passengers in the month. This was a whopping 24.5% increase from the same period last year, taking its year-to-date figure up almost 14% year on year to 5.3 million passengers.
With many believing the Reserve Bank of Australia could cut interest rates next week, the Australian dollar could depreciate even further. I believe this would be another boost for tourism into Australia with Qantas Airways likely to benefit from increasing demand.
This all makes me quite bullish on the airline's prospects moving forward. But the big question is whether or not Qantas Airways is actually cheap?
Well by my calculations it is. Its shares are trading on an estimated FY 2016 EV/EBITDA multiple of 2.8. This is a significant discount to Virgin Australia Holdings Ltd (ASX: VAH) and the global airline industry as a whole, which currently trade on an EV/EBITDA ratio of 5.3 and 4.7, respectively.
But before making an investment it is worth considering that compared to many other industries on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), the airline industry is notoriously risky. So much so even legendary investor Warren Buffett won't go near airline shares.
But right now Qantas Airways does look to be cheap, which I believe provides investors with a good risk/reward.
