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# ACCT1511 TOPIC 5 – Part 1 SEMINAR SOLUTION

Semester 2, 2012 Final Exam Question 3
(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. (3 marks)
Company chosen (no marks but for reference purposes in calculating price target): Price target (3 marks): 1 mark for 1st company PE/PEG, 1 mark for 2nd
company PE/PEG, 1 mark for price target calculation.
Cathay Pacific
Qantas
Virgin
Singapore Airlines
China Southern Airlines
Cathay Pacific PE =
Qantas PE = 1.16/0.026 =
Cathay Pacific PE = 35.33
SIA PE = 10.95/0.31 = 35.32 China Southern Air PE =
12.72/0.45 = 28.27
44.62
Virgin Australia PE =
Growth=0.66/0.31
4.14/0.39 = 10.62
0.43/0.025 = 17.20
Price target=35.32 x 0.66 =
SIA PE = 10.95/0.31 = 35.32 Virgin = 0.43/0.025 = 17.2
Cathay Pacific Air PE =
Price Target = 0.43 x
SGD23.31
Price target = 12.72 x
Price target = 1.16 x
12.72/0.36 = 35.33
35.33/17.20 = AUD0.88
35.32/28.27 = HKD15.89
17.2/44.61 = AUD0.45
Price Target = 4.14 x
35.33/10.62 = CNY 13.77
Cathay Pacific PE =
Qantas Airways PE=
Virgin Australia PE (use EPS
China Southern Airlines
12.72/0.45 = 28.27
1.16/0.026 = 44.62
this FY) = 0.43/0.025 = 17.2
Forecast PE: 4.14/0.42=9.86
Growth = 0.92/0.45=104%
Cathay Pacific PE =
Qantas Airways PE=
Cathay Pacific Forecast PE:
Price target = 28.27 x 0.92=
12.72/0.36 = 35.33
1.16/0.026 = 44.62
12.72/0.92=13.83
HKD26.01
Price Target Q= 1.16 X
Price Target= 0.43 x
Price target:
35.33/44.6= AUD0.91
44.62/17.2= AUD 1.116
4.14*13.83/9.86=5.81
PEG=28.27/104%=0.27
China Southern Airlines
Price target=12.72 /
PE:4.14/0.42=9.86
0.27=HKD47.11
Cathay Pacific PE:
12.72/0.45=28.27
Price target:
4.14*28.27/9.86=11.87
Recommendation (no marks but must be consistent with price target to obtain marks for price target):
Sell
Note: Cannot use negative historical EPS – not meaningful to calculate PE with negative EPS. Why use next FY EPS instead of EPS for this FY? If you argue
that a company’s EPS is not reflective of its long run performance due to short term poor performance, with next FY’s EPS reflecting a more normalised
performance.

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2 .(b) In your calculation of the price target. (1 mark for reason. no mark for name of peer company) Cathay Pacific Qantas Virgin Singapore Airlines Singapore Airlines. and business segments. domestic routes. an Asian Virgin is Australian based Qantas is Australian based Cathay Pacific: an Asian based carrier most closely and compete on similar and compete on similar based carrier most closely aligned with Cathay Pacific domestic routes. aligned with Singapore in terms of air routes and Airlines in terms of air routes business segments. you had selected another company as the base for peer comparison. State the name ONE (1) reason why your choice of peer comparison is appropriate. of the peer company and give China Southern Airlines Cathay Pacific is suitable because both is and China Southern Air serve principally the booming Chinese market. Singapore Airlines as it serves international routes.

Its low current ratio (0. 3 . Virgin had Current ratio of > 1. from historical -0. China Southern Airlines Has the highest ROE 13. indicating that China Southern Airline is able to maximise profit and minimise expense. but expected lowest D/E which is close to better than main competitor 18. decline. is worse than Virgin is utilising its Virgin at -1.9. and best –China Southern) but compared to Virgin of negative EPS. expected future 0. Good ROE of 3. for example Singapore Airline. but the price of Sing Air’s EPS has increased indicating that its Virgin tended to increase by ~68% each financial year. which shows it has good management.(c) Give FOUR (4) reasons in support of the above stock recommendation.76%– suggesting it is highly likely that higher revenue will be generated in the future. performance is expected to from mid-2011 till now.75% Historically. EPS have gone up and zero.25% (not the Sales growth is at 5. Higher profit margin (5.78) EPS of Qantas is improving Both Qantas and Virgin had Stable. predicted to be almost double debt. and resources more efficiently indicates company is in than competitors at 0. to next year. (1 marks for each reason): Cathay Pacific Qantas Virgin Singapore Airlines Has best 5 year stock price Qantas appears to be in Virgin has the highest sales Singapore Airlines has an performance. Reputation and legacy of a an airline for great service.37%. indicates that it is least overvalued. Lowest P/E relative to other companies. Has very high sales growth 17.71%. at -4. Qantas continues to decline. EPS over 3 years from historical. decline with dropping share growth of 18. to this year. indicating a very next FY conservative financial management => low bankruptcy risk. compared to the second highest (0.37% expectation of increasing price over 5 years.37%). increasing EPS.10 to experienced declines in their Whilst not the highest EPS. indicates hardly no Singapore Airlines. Low debt/equity ratio growth in China.124 stock prices.55%. but meaning shareholders can recover.11%.42) indicates its ability to operate using other people’s money. Well placed to exploit Its profit margin is negative Asset turnover is highest. expect increasing earnings.

and also higher cost may reduce demand for air travel. Relevant for Qantas only: Qantas has been involved in disputes with employees resulting in strikes/lockouts which may result in customer avoidance.(d) In financial statement analysis. China Southern Air. taking business away from full service carriers. Scoot for Singapore Airlines).g. Whether the airline is mostly government-owned (e. Relevant for Qantas & Virgin only: Australia’s high currency may affect their business given their exposure to flights to and from Australia relative to the other non-Australian based airlines. Relevant for Qantas only: aircraft has been involved with a number of incidents and may lead to air safety concerns and customer avoidance. Alliances of competitors (e. Full service carriers starting new discount carrier offshoots may toughen the competitive environment (e. Qantas and China Eastern) may toughen the competitive environment. Full service airlines relying on business travel will face competition from alternative means of conducting business such as teleconferencing. it is important to consider special situations or context that may affect your analysis.g. which may also indicate poor management. Singapore Airlines) will affect the risk of investing in such companies. Qantas and Emirates. Oil price cost may increase cost of air travel reducing airline profitability. (2 marks) Low cost carriers such as AirAsia are changing the air travel business paradigm. The global financial crisis may affect overall demand for air travel.g. 4 . Give TWO (2) reasons from the information provided or from your general knowledge that may affect your decision.

(1 mark). tea. Note: These answers are provided from when this question was used as a team exercise in 2015s1. size and global recognisability they are appropriate for comparison (2) Give one reason McDonalds is NOT an appropriate peer comparison. so their service ranges do not match well. whereas Starbucks is a coffeehouse chain whose revenue primarily comes from hot and cold drinks. drinkware and coffee machines online while McDonalds does not. Both of the companies. McDonalds may not be appropriate as its main focus is selling fast food whereas Starbucks’ main focus is on selling coffee and café style food. Starbuck focuses on selling drinks and some dessert and McDonalds is a fast food chain with a strong focus on selling burgers and chips to consumers. in terms of their business models. McDonalds already has plans to emulate Starbucks style coffee bars to nearly 14. a comparison of Starbucks and McDonald’s may be inappropriate since better comparisons could be made with other coffeehouse chains. Starbucks sells coffee beans. Both companies are well known and in the hospitality: food and beverage industry. They’re both similar sized Transnational Corporations with a vast number of franchises throughout the world. thus making them similar in their provision of food. they both sell similar products and in a similar industry. Both McDonalds and Starbucks are on a global scale with international stores within the fast food industry. Therefore. Both companies are in different sectors of the food industry and thus. Ultimately. such as Tim Hortons. This can be supported by McDonalds having 36. Ultimately. 2014). fries and desserts with some stores having a “McCafe” coffee section.000 of its American restaurants and has emerged as one of its biggest competitor. McDonalds has only recently introduced online ordering and delivery of food and drink and in a very limited capacity through a small number of stores. McDonalds and Starbucks are chain restaurants that sell coffee and cakes. Note: These answers are provided from when this question was used as a team exercise in 2015s1. but they also sell sandwiches and cakes.000 outlets in 119 countries serving around 68 million customers daily (as at 2012) and Starbucks has 20. (1 mark). Thus. drinks and customer service.Q2: Starbucks (1) Give one reason why McDonalds as peer comparison for Starbucks is appropriate. make and sell different products.519 stores (at 30 March. McDonald’s is a fast food chain that specialises in burgers. it has a broader range of products. 5 .