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

SELL: Profit margin

(2.89%) lower than CZ
(3.37%)

BUY: highest leverage

ratio, least likely to go
bankrupt

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

BUY: current ratio more

than 1, can easily convert
current assets to cash in
cash crunch
If talk about similar business profile so can compare and derive price target give 1 mark.
(c) In financial statement analysis, it is important to consider special situations or context that may affect your analysis. Give TWO (2) reasons
from the information provided or from your general knowledge that may affect your decision (2 marks):
Qantas
Cathay
Singapore
China South
Malaysian
Qantas has been lobbying
Full service carriers
Chinese wage cost may be MHs reputation damage
for financial support from
starting new discount
lower than that facing the
from missing MH370 may
the Commonwealth
carrier offshoots may
other airlines which may
affect customer demand
government
toughen the competitive
give CZ a competitive
environment (e.g. Scoot
advantage.
for Singapore Airlines).
Recent rejection by
Launched budget Scoot
China has high inflation
Commonwealth
carrier that squeezed own
which may put cost
government of a debt
margins.
pressure on CZ
guarantee for Qantas may
signal continue tough
times ahead
Recent falling in AUD
The Chinese government
may mean less Australians
may implement policies
flying overseas reducing
that may negatively impact
sales
investors in Chinese shares
Recent losses by both
The Chinese economy is
The Chinese economy is
2

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.