Qantas Airways Limited (ASX: QAN) shares could be about to take off.
That's the view of analysts at Goldman Sachs, which believe that the airline operator's shares are undervalued at current levels.
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What is the broker saying about Qantas shares?
According to the note, the broker was pleased with the Flying Kangaroo's full year results release. Commenting on the results, Goldman said:
Result in line / Balance sheet tracking better. Revenue was -1% vs GSe and Visible Alpha Consensus Data (capacity slightly lower and unit revenues slightly higher). PBT of $2,078m was +4% vs GSe and in line vs consensus. Importantly, net debt was A$4.1bn, ~6% below GSe at A$4.4bn.
The broker also highlights that Qantas' outlook is looking positive based on management's commentary. It adds:
QAN quoted stable travel demand and positive revenue momentum into 1H25. Group Domestic revenue intakes were +4% (trailing 6wk average to 24 Aug24) with QAN +2% (leisure -3% with corporate/sme +6%) and JQ +6%. Group International revenue intakes were +13% with QAN +7% and JQ +30%.
Overall, its analysts believe the result and its outlook commentary is supportive of their bullish thesis on the airline operator. They explain:
An inline result and generally consistent/better than expected outlook commentary further suggest that earnings have been sustainably reset higher. This is reinforced by a 2H improvement in key operating metrics that precludes the need for a substantial uplift in customer investment.
Meanwhile, the company expects ongoing transformation (revenue & cost) to offset inflation. In addition, QAN has reiterated that the ROIC on net capex would exceed WACC (network flexibility, fuel burn and higher utilisation) and an announced buyback highlights QAN's ability to accelerate growth capex while also distributing capital to shareholders.
Big potential returns
The note reveals that Goldman has reiterated its conviction buy rating and $8.05 price target on Qantas' shares. Based on its current share price of $6.37, this implies potential upside of 26% for investors over the next 12 months.
To put that into context, a $10,000 investment would turn into approximately $12,600 if Goldman Sachs is on the money with its recommendation.
But the returns may not stop there. That's because Goldman Sachs believes the Qantas dividend is going to make its long-awaited return in FY 2025.
Qantas hasn't paid a dividend since 2019 when it paid out 25 cents per share to shareholders. Goldman reckons an even larger dividend will be paid next year. It has pencilled in a 30 cents per share payout, which equates to an attractive 4.7% dividend yield.
This lifts the total potential return to almost 31% for investors.
