Ownership-Governance Structure of Qantas Airways

1. Description of the company:

Qantas Airways is regarded as Australia’s one of the flag carrier and it held as the largest airline based on its size. Qantas Airways is regarded as the third largest airline industry in the world and the airline was founded in the year 1920. Qantas Airways commenced international passenger flights during May 1935 (Investor.qantas.com 2018). Qantas Airways is based on the Sydney suburbs of Mascot having its main flight hub in Sydney. During the year 2014 the airline had Australian market share of around 65% and the airline carried approximately 14.9% of the passengers travelling inside or outside of Australia. Qantas Airways was founded in Queensland by Hudson Fysh, Paul McGinnes and Fergus McMaster. The company operated its first airline in 1920 and had its headquarters in Winton prior to moving Queensland in 1921. During the month of March 2018 Boeing 787 Dreamliner of Qantas Airways became the first scheduled flight with non-stop commercial flight between Australian and Europe.

2. i. Ownership-Governance Structure of Qantas Airways:

Main Substantial Shareholders:

The annual report of Qantas Airways notifies below that they are the substantial shareholders of Qantas Airways;

Shareholders Name	Ordinary Shares Held	Percentage of Issued Shares
BlackRock Group (BlackRock Inc. and subsidiaries)	115,627,833	6.39%
BT Investment Management Limited	100,287,939	5.55%
UBS AG and its related bodies corporate	95,829,066	5.30%

Apart from the substantial shareholder Qantas Airways reported some of the largest shareholders of the company and the same is listed below;

Shareholders Name	Ordinary Shares Held	Percentage of Issued Shares
HSBC Custody Nominees (Australia) Limited	727,130,598	40.21%
J P Morgan Nominees Australia Limited	324,168,744	17.93%
Citicorp Nominees Pty Limited	166,243,299	9.19%

As evident from the above stated shareholders information it is noticed that HSBC Custody Nominees (Australia) Limited held the largest number of shares with the total ordinary numbers of ordinary shares held stood 727,130,598 which approximately stands 40.21% of the total shareholdings (Investor.qantas.com 2018). On the other hand, J P Morgan Nominees Australia Limited held the second largest number of total ordinary shares that stood 324,168,744 which stands 17.93% of the total issued shares. The Citicorp Nominees Pty Ltd held 166,243,299 of the ordinary shares which sums up 9.19% of the issued shares.

ii. Main persons involved in Qantas Airways Governance:

Name	Position Held	Number of Ordinary Shares
LEIGH CLIFFORD	Chairman and Independent Non-Executive Director	362,613
ALAN JOYCE	Chief Executive Officer	2,728,924
MAXINE BRENNER	Independent Non-Executive Director	30,065
RICHARD GOODMANSON	Independent Non-Executive Director	18,780
JACQUELINE HEY	Independent Non-Executive Director	38,170
MICHAEL L’ESTRANGE	Independent Non-Executive Director	6,012
WILLIAM MEANEY	Independent Non-Executive Director
PAUL RAYNER	Independent Non-Executive Director	270,324
TODD SAMPSON	Independent Non-Executive Director	4,695
BARBARA WARD	Independent Non-Executive Director	44,694

Based on the above stated information of the board of the directors it can be stated that none of the directors held more than 20% of the shares. None of the above listed board of directors held more than 5% of the ordinary shares in the governance of the firm. An argument can be bought forward by stating that there is no such presence of family members in the governance of the firm.

3. Fundamental Ratios:

Short term solvency ratios:

Particulars`		2017	2016
		$000	$000
Current Assets	A	3119.0	3458.0
Current Liabilities	B	7095.0	7028.0
Inventory	C	351.0	336.0
Prepayments & Other Assets	D	541.0	353.0
Cash & Cash equivalents	E	1775.0	1980.0
Current Ratio	F=A/B	0.44	0.49
Quick Ratio	G=(A-C-D)/B	0.31	0.39
Cash Ratio	H=E/B	0.25	0.28

Long Term Solvency Ratios:

Particulars`		2017	2016
		$m	$m
Total Assets	A	17221.0	16705.0
Total Equity	B	3540.0	3260.0
Total Liabilities	C	13681.0	13445.0
Debt-to-Equity Ratio	D=C/B	3.86	4.12
Debt Ratio	E=C/A	0.794	0.805
Equity Ratio	F=B/A	0.206	0.195

Asset Utilization Ratios:

Particulars`		2017	2016
		$m	$m
Total Assets	A	17221.0	16705.0
Fixed Assets	B	12253.0	11670.0
Revenue	C	16057.0	16200.0
Trade & Other Receivables	D	784.0	795.0
Total Asset Turnover Ratio	E=C/A	0.93	0.97
Fixed Asset Turnover Ratio	F=C/B	1.31	1.39
Receivables Turnover Ratio	G=C/D	4.88%	4.91%

Main persons involved in Qantas Airways Governance

Profitability Ratios:

Particulars`		2017	2016
		$000	$000
Profit for the year	A	853.0	1029.0
Revenue	B	16057.0	16200.0
Total Assets	C	17221.0	16705.0
Total Equity	D	3540.0	3260.0
Net Profit Margin	E= A/B	5.31%	6.35%
Return on Equity (ROE)	F=A/D	24.10%	31.56%
Return on Assets	G=A/C	4.95%	6.16%

Market Value Ratios:

Particulars`		2017	2016
Earning per Share (TTM)	A	0.46	0.49
Dividend per Share	B	0.07	0.04
Market Value per Share	C	$         5.72	$        2.82
Dividend Payout Raio	D=B/A	15%	8%
Dividend Yield Rate	E=B/C	1.22%	1.42%
Price-to-Earning Ratio (TTM)	F=C/A	12.43	5.71

4. i. Graphical Description of Share Price Results:

Figure 1: Figure showing share price movement of Qantas Airways

(Source: As Created by Author)

ii. Analysis of Share Price Index to All Ords Index:

As evident from the graphical description of the Qantas Airways share price it can be stated that the shares of the airline company has been less volatile. Qantas Airways has reported a higher share price against the all ordinary index (Money Morning Australia 2018). The share price of the company stood positively in June 2016 to stand at 12.06% while the all ordinary index stood 6.28%. Though the share price of the Australia’s flag airline carried dipped in the months of August and September to stand negatively at -3.70% and 1.92% but the airline company gained its ground in the latter month of October to stand positively at 7.84% against the all ordinary index of 1.85%.

Moving into the financial year of 2017 the share price of the Qantas Airways has relatively been on the higher side as in the quarter ending March of 2017 Qantas Airways share price stood positively at 9.00% while the quarter ending all ordinary index stood lowly at 0.74%. In the following quarter of April and May the share price stood 18.16% and 14.17% respectively reflecting a higher growth in its share price in comparison to the all ordinary index of 0.05% (Robson, Young and Power 2017). However, in the second half of the 2017 the share prices of Qantas took a dive with the share price falling as low as -11.11% during the month of November but only to gain back in the month of December to stand positively at 4.56%. Overall, the Qantas Airways share prices has been less volatile in comparison to the all ordinary index. The share prices have relatively been stable over the span of two years.

5. Significant factors influencing the share price movement:

The share price of Qantas Airways has jumped by 3% to current stand at $6.12 per share. An important factor that influenced the share price of the Qantas Airways is the “changes in the management earnings forecast”. Qantas Airways has projected a full year profits marginally ahead of the analysis anticipations due to the stronger domestic sales countering the overseas weakness of airline international business (Simply Wall St 2018). The Qantas Airways anticipates a full year underlying EBIT of between $1.35 billion and $1.4 billion with forecaster consensus anticipations has been $1.35 billion of profit. The company surely anticipates a better future earnings to beat its own expectation of 3.7% in earnings.

Fundamental Ratios

Another important factor that create an influence on the share price of Qantas Airways is the “macroeconomic factors”. This includes mainly the sky-high anticipations of rising share price growth. As evident from the graphical results the profits of the company during the latter half did not grew at all (Simply Wall St 2018). The total sales were down by 3.3% and the profits declined by 25.1%. The revenue and the profits from cash operations were lower compared to the figures of 2016. The oil price hardly did anything in 2017 and their competitors were still around Qantas Airways (Barillas and Shanken 2018). However, the primary reason for higher share prices were the double dividends from 7 cents to 14 cents per share largely lured the investors to make investment in the shares of Qantas Airways.

Apart from the macrocosmic and the management earnings forecast another factor that influenced the share price movement of the Qantas Airways is the “change in the company focus” (Au.finance.yahoo.com 2018). Qantas Airways came up with the buyback scheme and brought back around 143.6 million of shares which is more than the double of the amount that the company bought in 2015 (Evstigneev et al. 2015). During the year 2017 the company announced to buy back shares of around $373 million that resulted in significant movement in the share price of Qantas Airways.

6 i. Computation of Beta Values and Required Rate of Return through CAPM:

Calculated beta for Qantas Airways:

The calculated beta for the Qantas Airways stood 0.77.

ii. Computation of Required Rate of Return:

iii. Rationale for Conservative Investment:

The conservative investment in Qantas Airways is largely because of its share price that stands below the future cash flow value with a moderate discount of greater than 20% (Editorial 2018). Though the market observers have stated that Qantas Airways is valued in terms of the earnings compared to the other airline industrial average however the Qantas Airways can be considered as the good value based on the earnings in comparison to the Australian industry market.

The Qantas Airways is anticipated to efficiency make use of the shareholders’ funds in future as the return on equity for the company stands greater than 25%. With return on equity of 25.18% Qantas Airways has surpassed its own industry average of less than exciting 19.64% over the last year (Canly 2018). With higher amount of debt, Qantas Airways can make even greater investment and derive more earnings which ultimately pushes the returns of Qantas Airways upwards.

Share Price Movement and its Analysis

Over the last five years the company has delivered greater than 20% of the yearly earnings growth. The company higher level of physical assets and inventories and the debt of the company is well covered by the operating cash flow which is 66.9% greater than 20% of the total amount of debt (Warren and Jones 2018). Furthermore, the rationale making a conservative investment in the shares of Qantas Airways is the dividends that are paid by the company is well covered by the net profit.

7. i. Calculations of WACC:

Re	Cost of equity
Rd	Cost of debt
Equity	Market value of the firm’s equity
Debt	Market value of the firm’s debt
E/V	Percentage of financing that is equity
D/V	Percentage of financing that is debt
TC	Corporate tax rate
Re	5.5%
Rd	6%
Equity	3540
Debt	13681
E/V	0.206
D/V	0.79
TC	30%
WACC	4.48%

ii. Implications of Higher WACC on managements on the prospects of investment projects:

When the Weighted Average Cost of Capital is on the higher side there is a typical signal that higher risk is related with the operations of the firm (Zabarankin, Pavlikov and Uryasev 2014). It is noticed that investors usually require additional amount of return in order to assume the supplementary amount of risks. The WACC of a firm can employed as the tool of projecting the anticipated sum of costs relating to financing of all the debts (Barberis et al. 2015). This usually comprises of the payments that is made for the debt obligations or the cost involved in the financing the equity and the required rate of return that is demanded by the ownership.

Majority of the companies that are listed possess several sources of funding and WACC makes an attempt in creating a balance among the relative costs of different sources to generate a solitary figure of cost of capital (Kuehn, Simutin and Wang 2017). Valuable investors may show their concern if the WACC of the organization is greater than the original return (Berk and Van Binsbergen 2016). This would reflect that the company is losing out its value and there might be probably more efficient return available in the market than somewhere else.

8. Debt ratio for Qantas Airways:

i. The debt ratio for Qantas Airways over the period of last two years have reflected a marginal fall. The debt ratio for Qantas Airways during the year 2016 stood 0.80 while in the subsequent year of 2017 the debt ratio improved marginally to stand at 0.79. The level of debt in comparison to the net worth over the years have increased (Hoyle, Schaefer and Doupnik 2015).

ii. The debt of the company though is not covered by the short term assets. To further structure their gearing the management of the Qantas Airways has bought more number of shares than sold by the airline company inside the span of one year.

9. Dividend policy:

During the year 2017 in August Qantas Airways directors announced un-franked final dividend of 7 cents per share with further declaration of the on-market share buyback of up to $373 million (Investor.qantas.com 2018). The primary objective of dividend policy of the Qantas Airways is to reduce the number of Qantas Airways shares by 20 per cent and return its shareholders through dividends that totals 14 cents per share based on market buy-back shares of $366 million (McKay and Haque 2016).

10. Letter of Recommendations:

To ABC Company

From Financial Consultative Team

Dear Sir

We would like to draw your kind attention from the above made analysis on the shares of Qantas Airways. The shares of the Qantas Airways are currently the best performing stocks this year with share prices jumping by 3%. Furthermore, Qantas Airways has the trailing pay-out ratio of 26.73% that signifies that the dividends of the company is covered by its earnings.

Moving forward, our team of analyst anticipate that the Qantas Airways pay-out would rise to 30.72% of its earnings that results in dividend yield of 3.04%. The airline company has doubled the dividends from 7 cent to 14 cents per share and our team analyst suggest that the dividend payment would increase to 18 cents in the financial year of 2017. The higher pay-out forecast together with the higher earnings would result in greater dividend for investors in moving forward.

We would like to recommend you that it would be viable to make an investment in the shares of Qantas Airways as the company has greater amount of divided to offer for its investors. We hope the recommendations provided has helped in diversifying your investment portfolio.

Thank You

Conclusion:

The report can be concluded by stating that currently the stocks of the Qantas Airways has the higher yield of 2.38% that is higher for currently airline stocks. The share prices of the company is below the value of future cash flow with a moderate discount of greater than 20%. Qantas Airways can be regarded as the good value investment for the shareholders based on the earnings in comparison to the Australian market. The dividends of the company is also well covered with its debts and it is good value investment for the investors.