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Acct1511 Revisiting Financial Statement Analysis (1) Seminar Question: Final Exam Semester 1, 2014
Acct1511 Revisiting Financial Statement Analysis (1) Seminar Question: Final Exam Semester 1, 2014
Question 7
(a) You are considering the investment in one of the above airline companies. Choose one (1) of the airline companies listed. What would be
your price target and recommendation? Show your calculations and round to nearest cent (2 marks):
Qantas QF
Cathay CX
Singapore SQ
China South CZ
Malaysian MH
PE cannot be calculated
CX PE=15.1/1.01=14.95
CX PE=15.1/1.01=14.95
CZ PE = 2.54/0.25=10.16
for Qantas because it has a SQ PE=10.95/0.34=32.2
SQ PE=10.95/0.34=32.2
CX PE=15.1/1.01=14.95
negative EPS.
Price=15.1*32.2/14.95=H
Price=10.95*14.95/32.2= Price=2.54*14.95/10.16=CN
KD32.53 BUY
SGD5.08 SELL
Y3.74 BUY
You may use the price
CX PE = 15.1/1.01=14.95
SQ PE=10.95/0.34=32.21 CZ PE=2.54/0.25=10.16
book ratio to argue that it
CZ PE=2.54/0.25=10.16
CZ PE=2.54/0.25=10.16
SQ PE=10.95/0.34=32.21
is half the valuation of
Price=15.1*10.16/14.95=H Price=10.95*10.16/32.21= Price=2.54*32.21/10.16=CN
most of the other
KD10.26 SELL
SGD3.45 SELL
Y8.05 BUY
companies.
(b) Give TWO (2) reasons in support of the above stock price target (1 marks for each reason):
Qantas
Cathay
Singapore
China South
Malaysian
SELL: has 2nd worse ROE Higher ROE (4.41%) v.
Lower ROE (3.05%) than Has highest ROE (7.18%)
BUY: Sales growth of
(-5.85%)
(3.05%) than SQ
SQ (4.41%)
9.49% highest of all
airlines
nd
SELL: has 2 worse profit Higher sales growth 1.11% Not as much sales growth Has fattest profit margin
BUY: Current ratio
margin (-2.18%)
v. 0.96% than SQ.
(0.96%) as CX (1.11%)
(3.37%)
0.79 still better than QF
Has highest sales growth
(0.69) and CZ (0.46)
out of those with positive
profit margins
Has negative sales growth Has best relative stock
Its price-to-book ratio
Lower Price-to-book relative SELL: has worse stock
of -2.237%
price performance over 5
(0.91) is quite high
to 3 other airlines shows
price performance over
years
confirming its
possibility of future price
5 years
overvaluation measured by increase.
PE.
SELL: ROE (4.41%)
China Southern: Singapore Lowest current ratio means
SELL: has worse ROE
lower than CZ (7.18%)
has lower PM and ROE
that it is good at managing
(-38.12%)
1
Qantas
Cathay
Singapore
than CSA
China South
money borrowed from other
sources
With negative sales growth
and highest profit margins it
will have a positive profit
impact once sales recover.
Malaysian
Qantas
Qantas and Virgin indicate
a tough competitive
environment for Australian
airlines.
The recent budget impact
may cause Australians to
travel less impacting
Australian airlines more
severely.
Cathay
slowing which may affect
airlines associated with
China.
Singapore
China South
slowing which may affect
airlines associated with
China.
Malaysian
CZ serves primarily
Chinese customer and
China was not affected by
GFC.
Its price-to-book is the 2nd
lowest. Investors believe
that the company is worth
its equity value and
represents a possible risky
investment.
The GFC has affected consumer confidence and impacted airline industry.
Increasing fuel costs from global tensions (e.g. conflict in Iraq, Ukraine) may impact profitability of airlines.
Foreign exchange volatility can affect the earnings of airlines which earn much foreign currency.
MH370 event may cause investors to diversify away from less establish airlines with perceived safety/ risk concerns. Or cause less travel in the
Asian region.
The global recovery from the GFC from 2009 to 2014 means that the world economy is growing and future demand for air travel will increase.
Tighter carbon emissions targets may increase costs for airlines.
Alliances of competitors (e.g. Qantas and Emirates, Qantas and China Eastern) may toughen the competitive environment.
Low cost carriers such as AirAsia are changing the air travel business paradigm, taking business away from full service carriers.
Whether the airline is mostly government-owned (e.g. China Southern Air, Singapore Airlines) will affect the risk of investing in such
companies.
Chinese travel market is booming, a large number of them will choose CX or CZ.
Increased terrorist threats may deter international air travel.
Note: The above are a compilation of answers that were accepted during this exam.