Stock Analysis

News Flash: 14 Analysts Think China Southern Airlines Company Limited (HKG:1055) Earnings Are Under Threat

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The analysts covering China Southern Airlines Company Limited (HKG:1055) delivered a dose of negativity to shareholders today, by making a substantial revision to their statutory forecasts for this year. Revenue and earnings per share (EPS) forecasts were both revised downwards, with analysts seeing grey clouds on the horizon.

Following the downgrade, the latest consensus from China Southern Airlines' 14 analysts is for revenues of CN¥105b in 2022, which would reflect a credible 2.6% improvement in sales compared to the last 12 months. Losses are supposed to balloon 45% to CN¥1.08 per share. Yet before this consensus update, the analysts had been forecasting revenues of CN¥124b and losses of CN¥0.41 per share in 2022. Ergo, there's been a clear change in sentiment, with the analysts administering a notable cut to this year's revenue estimates, while at the same time increasing their loss per share forecasts.

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SEHK:1055 Earnings and Revenue Growth May 6th 2022

There was no major change to the consensus price target of CN¥4.18, signalling that the business is performing roughly in line with expectations, despite lower earnings per share forecasts. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. The most optimistic China Southern Airlines analyst has a price target of CN¥6.34 per share, while the most pessimistic values it at CN¥3.49. Note the wide gap in analyst price targets? This implies to us that there is a fairly broad range of possible scenarios for the underlying business.

Looking at the bigger picture now, one of the ways we can make sense of these forecasts is to see how they measure up against both past performance and industry growth estimates. One thing stands out from these estimates, which is that China Southern Airlines is forecast to grow faster in the future than it has in the past, with revenues expected to display 3.5% annualised growth until the end of 2022. If achieved, this would be a much better result than the 5.5% annual decline over the past five years. Compare this against analyst estimates for the broader industry, which suggest that (in aggregate) industry revenues are expected to grow 24% annually for the foreseeable future. Although China Southern Airlines' revenues are expected to improve, it seems that the analysts are still bearish on the business, forecasting it to grow slower than the broader industry.

The Bottom Line

The most important thing to take away is that analysts increased their loss per share estimates for this year. Unfortunately analysts also downgraded their revenue estimates, and industry data suggests that China Southern Airlines' revenues are expected to grow slower than the wider market. We're also surprised to see that the price target went unchanged. Still, deteriorating business conditions (assuming accurate forecasts!) can be a leading indicator for the stock price, so we wouldn't blame investors for being more cautious on China Southern Airlines after the downgrade.

After a downgrade like this, it's pretty clear that previous forecasts were too optimistic. What's more, we've spotted several possible issues with China Southern Airlines' business, like dilutive stock issuance over the past year. For more information, you can click here to discover this and the 2 other flags we've identified.

Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.

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