MACQUARIE: Qantas can buy back shares worth $1 billion

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Qantas will have enough surplus cash to buy back $1 billion in shares over two years, boosting earnings per share by nearly a third for the year ending June 2020, Macquarie Group’s analysts said.

That estimate stems from Macquarie’s base case scenario where Australia’s largest airline earmarks $1.5 billion in annual capital expenditure, the analysts said in a note to clients titled “Cash generation under-appreciated”. It expects Qantas to buy back shares over the next two financial years.

Qantas is reaping the benefits of lower oil prices and a three-year turnaround plan instituted by CEO Alan Joyce. The airline cut jobs, deferred expenditure, ditched unprofitable long-haul routes and focused on Asia for growth.

These charts from Macquarie illustrate the surplus cash and potential for an increase in earnings per share

Qantas “have been clear that capital that is surplus, post capex commitments and debt reduction, should debt fall beyond the upper end of the targeted range of $4.8 billion to $6 billion, will be returned to shareholders”, the analysts said. Dividends have been reinstated and as the company has no franking credits and is unlikely to pay tax till 2019, “the most prudent form of distribution is via buy-back”.

Macquarie, which has an outperform rating on Qantas, said the stock was undervalued and the announcement of a share buy back can lift the shares.

“Given management’s commitment to increase shareholder value coupled with the clear disconnect between the current share price and underlying value, a share buy-back is the most appropriate and efficient use of the company’s surplus capital,” the analysts said.

Qantas shares were up 3% at $4.13 at 12pm in Sydney while the benchmark S&P/ASX200 index was little changed.

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