Faculty of the Professions

Cover Sheet for Team Assignments

Financial Statement Analysis, Monday, 24th May 2021

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Khoi Hue Ngo A1795465

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DECLARATION

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Definition of Plagiarism and related forms of cheating, www.adelaide.edu.au/policies/230).
We give permission for our assignment to be scanned for electronic checking of plagiarism. By submitting this
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 Financial statement analysis
I. Overview
In 2020, The Qantas Group faced many challenges due to the impact of Covid on the global travel industry such as the
government-imposed lockdowns, travel restrictions and border closures on the broader economy. The revenue of Qantas
has decreased by $4 billion in FY2020 compared to the prior year. As a result, they launched a three-year recovery plan
to rightsize the business and restructure their cost base. Hence, we decide that the time period of forecast will be 10
years (2021-2030).
II. Net income estimation
In 2020, the net income of QAN decreased significantly to -$1,964 million due to the impact of the Covid pandemic.
According to IBISWorld's analysts, the airline industry revenue is forecasted to decline through 2020-2021 then increase
after this period. The domestic airline industry will be boosted by the easing of travel-related restrictions and is estimated
to increase slightly in the short term. However, due to the effect of coronavirus on the economy, it is predicted to prolong
the industry’s recovery. It also states that: “As of March 2021, Australia is behind schedule on its vaccine rollout and
the industry revenue is expected to strongly rise in 2021-2022”. Airlines are forecasted to expand their capacity over the
next five years, in an attempt to boost profit and offset the severe losses reported during the COVID-19 pandemic. As a
result, the percentage growth of international airlines in Australia will be -67% in 2021 then rise over the period of 5
years from 2022 to 2026. During this period, there is a significant increase in the profit industry because of recovering
customer demand and a strong focus on profitability among airline companies.
Based on their market share and these data, Qantas’s revenue is the sum of domestic industry and international industry.
The IBISWorld's analysts showed that in 2021, the percentage growth of international airlines in Australia will be -67%
and there is no revenue of the international airline sector for Qantas. And then we use NOPLAT margin (%) to estimate
average profit margin (%) and net income for the company.
III. Dividend estimation
Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Dividend($million) 1 1 0 1 4 0 264 249 363 204
Base on the table above, because of the volatile pattern of dividend, the uncertainty of Qantas’s operation in the future
and most recent decision of Qantas to revoke dividend in June 2020 (ASX Announcement 2020) and share repurchase,
we come up with 2 models of dividend, as follow:
a) Qantas will continue its dividend policy and the dividend will grow at 1.6% which is industry average growth of
dividend.
Year 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Dividend 204.00 207.26 210.58 213.95 217.37 220.85 224.38 227.97 231.62 235.33 239.09
b) Qantas will not pay out dividend on the recovery period and resume dividend payment in year 4 (2024) and dividend
will grow at 1.6%
Year 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Dividend 204 0 0 0 207.26 210.58 213.95 217.37 220.85 224.38 227.97
IV. Book Value estimation
As a part of Qantas's three-year recovery plan, the Group planned to conduct a placement to raise $1.36 billion by issuing
372.7 million shares at $3.65 per share on 1 July 2020. On 13 August 2020, the Group conducted a Share Purchase Plan
to raise $71.7 million by issuing 22.5 million shares at $3.18 per share. Therefore, we decided to adjust the 2021 book
value of equity by adding the total value of new shares issued, and we assume that the number of shares outstanding
will remain at this level for 10 years.
We use retained earnings (the difference between net income and dividend) to estimate the book value of equity for the
period of 10 years.
V. Cost of Capital estimation
We use the CAPM model to calculate the CoC. There are three elements of the CAPM model: return on market (Rm),
risk free rate (Rf), and beta.
 Assumption:
- For Rm, we use the history data of ASX 300 transportation for ten years, from 20/8/2009 to 20/8/2020 (S&P/ASX 300
Transportation Historical Rates (AXTRKD) - Investing.com, 2021), to match with the time horizon, and then we choose
two ways to get the Rm: (1) we use Rm on 20/08/2020 - the date to perform the price estimation- to calculate CoC, and
(2) we use geometric growth rate of ten years to calculate the Rm.
- For Rf, we use the history data of government 10 years bond yield from 20/8/2009 to 20/8/2020 (Australia 10-Year
Bond Historical Data - Investing.com AU, 2021) to match with the time horizon, and then we choose two ways to get
the Rf: (1) we use Rf on 20/08/2020- the date to perform the price estimation- to calculate CoC, and (2) we use average
yield of ten years to calculate the Rf.
- For Beta, we use the history data of QAN share price for ten years, from 20/08//2009 to 20/08/2020, (Qantas Airways
Limited (QAN.AX), 2021), and then we do regression analysis to figure out how the indices of ASX 300 Transportation
explain the fluctuation of QAN’s share price. The regression analysis will be based on the daily, weekly and monthly
data. As the result of daily data has the smallest p-value, hence we choose the daily beta, which is 1.18.
Our CoC will not be constant throughout the ten-year period. As discussed above, there are two ways of generating the
Rm and Rf, so we will generate two sets of CoC. First, we use the first selection of Rm and Rf to generate the CoC for
the three-year recovery from Covid-19 (from 2021 to 2023). Second, we use the second selection of Rm and Rf to
generate the CoC for the last seven-year period (from 2024 to 2030). This can be explained as follows:
1. The first calculation using the Rm and Rf as at 20/08/2020 generates the negative result of CoC, which is -1.59%. This
is because the 10-year bond yield at that moment is too low due to the impact of Covid-19, and also, the pandemic
crushed the stock market leading to the historic drop at that time. Therefore, we decided that the negative result will
represent the first stage of our model (from 2021 to 2023) to match with the conditions of this time.
2. The second calculation using the geometric growth rate of Rm and average of Rf generates the positive results of Rm
8.66%, Rf 3.1%, and the CoC 9.66%. We decided these rates will represent the expected return of investors for the
period after Covid-19, as we expect that QAN will recover from Covid-19 afterwards.
VI. Share price estimation
Assumption: The number of shares outstanding in 2021 will be 1,886,044,698 shares, and we assume that it will remain
unchanged for the next period.
To estimate share price, we apply 2 following types of assumption, which lead to 2 results of share price estimation:
1) Model 1: Qantas will pay dividends for 2021-2023, and dividends will grow at 1.6%. CoC is -1.56% for 2021-2023 and
9.66% for 2024-2030
2) Model 2: Qantas will not pay dividends for 2021-2023 and resume dividend payment in 2024, and dividends will grow
at 1.6%. CoC is -1.56% for 2021-2023 and 9.66% for 2024-2030
Therefore, the results of estimating share price will be as follows:
Model 1 Model 2

Estimated Share price $3.56 $3.65

VII. Discussion
The actual share price of Qantas on 20 August 2020 is $3.76
While model (1) gives us the estimated share price of $3.56, the estimated share price of model (2) is $3.65. We will
adopt the result of model (2) on the basis that the Qantas might try to reserve more capital according to their recovery
plan. The difference between our estimation and actual share price is because of 2 reasons:
Firstly, because we assume the company will not engage in any share buyback activities over the estimated period and
their dividend only increases by 1.6% per year, this leads to the smaller ROE in later years since the firm will retain a
high amount of book value while the earnings only grow by 6.5% on average. Meanwhile, the market might believe
there is much higher ROE in later years of the model. Secondly, the cost of equity we use for the 3-year recovery period
is -1.56% and 7 years after the recovery period is 9.66%. According to the IATA study on airline investor return, the
cost of capital for the Asia pacific regional is well below 6% for two recent decades. Thus, our estimated share price is
lower because our cost of capital is too high. We are expecting a higher growth potential of Qantas than the expectations
of the market. Because of those 2 reasons, our estimated abnormal earning will be lower than the market expects. This
leads to the valuation of the firm to be lower and the lower estimated price for Qantas’s share.
References
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licensee=datpremium> [Accessed 3 May 2021].
3. Iata.org. 2021. New study on airline investor returns Regional divergence impacting overall performance.
[online] Available at: <https://www.iata.org/en/iata-repository/publications/economic-reports/new-study-on-
airline-investor-returns/> [Accessed 3 May 2021].
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com.proxy.library.adelaide.edu.au/au/en/industry/i4902/industry-outlook> [Accessed 3 May 2021].
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May 2021].
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Available at:
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