The coronavirus-inspired market sell-off could turn out to be a good thing for investors hunting for value.
The potential global pandemic isn't expected to make much of a dent on full year economic growth and the big share price retreat puts shares like Qantas Airways Limited (ASX: QAN) in a sweet spot.
To be sure, Qantas isn't the only travel/tourism stock taking the brunt of the virus scare. The Flight Centre Travel Group Ltd (ASX: FLT) share price and Sydney Airport Holdings Pty Ltd (ASX: SYD) share price have also taken a hit.
Non-stop upgrade
The difference for Qantas though is that UBS believes its long-haul flight will boost its financial fortunes, according to the Australian Financial Review.
Growth isn't easy to come by in this lacklustre economic environment, particularly for large cap industrials. This makes UBS' forecast stand out.
The broker believes Qantas' direct flights to New York and London (called "Project Sunrise") will get final clearance for take-off in March 2020.
Growing dividends
First flights will start in the first half of 2023 and the premiums Qantas will charge for a seat on the long-haulers will exceed what it charges on current flights.
The extra returns will allow Qantas to increase its dividends to 32 cents a share in FY23 compared to the forecast 27 cents a share for the current financial year.
This is notwithstanding the increase in capital expenses (capex) needed to lift Project Sunrise off the ground. Based on UBS' estimates, Qantas will need to up its capex by an average of $300 million over the next five years.
Bigger spend but better returns
Most of the additional spend will be for 12 new Airbus 350 aircraft, but that won't stop Qantas from generating an average revenue per available seat kilometre (RASK) of 12.3 cents from Project Sunrise. This compares with the average RASK of 9.5 cents on existing flights.
What this translates to is nearly $400,000 more in revenue per flight that travels 32,026 kilometres, or an additional $180 million in pre-tax profit in FY25, using UBS's numbers.
How much is Qantas worth?
UBS is assuming Qantas will charge 10% more on the new direct flights compared to those with a stopover (or two). The price of a non-stop return flight between Sydney and New York will average $2,420, while a business- and first-class ticket will set you back $10,780 and $16,170, respectively.
The broker's base case valuation for Qantas is $7.25 a share and the stock is yielding more than 4% at its current price of $6.46 a share.
