- In an environment of rising bond yields, Qantas benefits from its negative working capital position.
- The company is able to tap unique funding sources, such as up-front payments by banks for its Frequent Flyer program.
- Qantas’ negative working capital position is by far the highest among ASX200 companies.
Qantas issued guidance this morning for a record full-year profit of between $1.55 billion and $1.60 billion, despite a sharp increase in oil prices.
The result is another step forward in Qantas’ operational turnaround, but analysis from Credit Suisse (CS) highlights another unique factor in its business model — one that could make Qantas shares more attractive in an environment of rising bond yields.
The prospect of higher interest rates has been one factor weighing on global equities this year.
In view of that, CS equity analysts Hasan Tevfik and Peter Liu outlined five equity investment strategies to adopt in a “bondcano” environment of rising bond yields.
One such approach they coined “other people’s money” – and they said Qantas is the clear standout in that regard.
“As the bondcano continues to rumble on we expect the cost of funding for companies will also rise,” the analysts said.
However, “companies which will be less vulnerable to a rise in the cost of funding should be those in a negative working capital position”.
“These companies are fortunate enough to be using their suppliers’ capital to help finance their operations.”
The pair’s definition of a negative working capital position is as follows:
Where the combined total of receivables and inventories amount to less than the sum of a company’s debt liabilities (both short and long-term payables), and customer payments made in advance.
And that last input — customer payments made in advance — is particularly beneficial for Qantas.
“The national airline not only benefits when customers pre-pay for their flights but it also gains when the banks pre-pay for Qantas Frequent Flyer points.”
Qantas’ 2017 annual report shows the total of its prepaid passenger revenue and un-redeemed Frequent Flyer revenue totaled $4.875 billion.
So in addition to the cash received from customer flights paid in advance, the Frequent Flyer program works well as a funding mechanism for Qantas.
Qantas records the Frequent Flyer payments as a liability until the points are redeemed, at which point the income is recognised as revenue.
The winner is Qantas’ cash-flow, as the airline gets the money up front when banks pre-pay for the right to issue their customers Frequent Flyer deals on credit cards.
They said Qantas’ negative working capital position will reach -$6.240 billion as at June 2018.
That amounts to 63% of its market capitalisation of $9.98 billion – a ratio far in excess of the next highest company on the list:
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