Narrow-body Expansion And E-Commerce Cargo Will Improve Operations

Key Takeaways

• Anticipated aircraft deliveries and e-commerce cargo expansion are poised to drive revenue growth through increased capacity and rising market trends.
  
• Enhanced fuel efficiencies and dual-brand strategy aim to boost net margins and broader market capture, fostering operational and earnings growth.
  
• Delays in aircraft deliveries, cargo market uncertainty, yield normalization, engine issues, and geopolitical risks could all suppress capacity, increase costs, and impact earnings.

Catalysts

Offers international passenger and air cargo transportation services.

• The future delivery of additional narrow-body aircraft in 2025 and beyond, despite delays in wide-body aircraft, indicates continued capacity expansion, supporting potential revenue growth through increased ASK and flight frequency.
  
• Expansion of e-commerce cargo, which forms a significant portion of Cathay's export from Hong Kong, is expected to drive future revenue growth in the cargo segment as global e-commerce trends continue to rise.
  
• Improved aircraft utilization and unit cost reductions at HK Express suggest operational efficiency gains that are anticipated to enhance net margins, especially as grounded aircraft return to service.
  
• Fuel and cost efficiencies are set to improve as the fleet incorporates more fuel-efficient aircraft, supporting reduced operating costs and improved net margins.
  
• Dual-brand strategy leveraging Cathay Pacific's premium offerings and HK Express's low-cost model aims to capture broader market segments, potentially boosting passenger revenue and overall earnings growth.

Cathay Pacific Airways Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay Pacific Airways's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 8.4% in 3 years time.
• Analysts expect earnings to reach HK$10.4 billion (and earnings per share of HK$1.55) by about April 2028, up from HK$9.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting HK$13.6 billion in earnings, and the most bearish expecting HK$6.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 6.0x today. This future PE is greater than the current PE for the HK Airlines industry at 5.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

Cathay Pacific Airways Future Earnings Per Share Growth

Risks

• Ongoing delays in aircraft deliveries, such as the delay of the 777-9 to 2027, could limit capacity expansion and potentially impact future revenue growth.
  
• Uncertainty in the cargo market, particularly with concern over e-commerce proportion and the outlook's unpredictability, could affect earnings from Cathay Pacific's significant cargo operations.
  
• Yield normalization trends for both Cathay Pacific and HK Express, with reported reductions and expectations of continued declines, could suppress profit margins as ticket prices adjust.
  
• Ongoing engine issues with Pratt & Whitney and potential problems with LEAP engines impacting capacity and increasing maintenance costs could negatively affect financial performance.
  
• The complex geopolitical situation, such as uncertainties regarding Russian airspace access, poses risks to operational efficiency and fuel costs, potentially impacting overall earnings.

Valuation

• The analysts have a consensus price target of HK$10.513 for Cathay Pacific Airways based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$13.05, and the most bearish reporting a price target of just HK$8.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be HK$123.3 billion, earnings will come to HK$10.4 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 9.1%.
• Given the current share price of HK$8.98, the analyst price target of HK$10.51 is 14.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.