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 MARKET REPORTS |
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Analyst report - shares
Wise-owl.com "Stock of the week": Regional Express Holdings
August 12, 2007
Tim Morris, Wise Owl analyst
Stock: Regional Express Holdings
Code: REX
Recommendation: Buy
The tyranny of distance is all too familiar for many Australians living in isolated communities across our wide open land. Time is money; hence flying is often the first choice for travellers commuting between regional and rural centres and major cities. Demand on routes such as Adelaide to Coober Pedy is not high enough to warrant investment from the major airlines such as Qantas, Jetstar, and Virgin Blue.
Therefore Regional Express Holdings, affectionately known as ‘Rex’ has been left with little competition on many of its regional travel routes, which are well suited to its smaller turbo prop aircraft. Listing in late 2005, the company emerged from the ashes of the 2001 Ansett collapse when the historic Kendell and Hazelton brands, which were profitable for many years before they became part of Ansett, were integrated and re-branded under the Rex umbrella.
Teachings from investment gurus such as Warren Buffet cause many investors to shy away from airlines, given their high capital requirements and vulnerability to uncontrollable external factors. This was evident last year when record oil prices and the SARS virus scare saw before-tax profits of peers such as Qantas and Singapore airlines decline by 26.6% and 7.2% respectively. In this same period Rex demonstrated its resilience to such pressures, growing profit before tax by 141% in a tough, drought affected market where 5 other regional operators closed their doors.
This performance is unlikely to be repeated as a lot of it arose from synergies out of the integration of the Hazelton and Kendell brands, which have now been realised. However, to ensure that its growth trajectory remains sound, the company has been expanding and upgrading its aircraft fleet, and is set to take delivery of one new aircraft every 5 weeks for the rest of 2007. Rex’s debt free balance sheet also provides an important unused source of funding for further capacity expansion and acquisitions.
Management have flagged a 40% profit increase for the current year, which puts the stock on a forward PE of below 13. This is modest considering its growth profile and monopolistic position, being the sole operator on 30 of its 38 routes last year.
As the drought continues to ease, more cash should start flowing into rural and regional communities, and with mining and exploration activity showing no signs of slowing, demand for services to remote parts of the nation is set to remain firm. After proving their ability to weather tough conditions, we are confident of Rex’s ability to deliver in a robust operating environment.
Wise-owl.com currently has a buy recommendation on REX.
For the full report and further wise-owl.com recommendations and strategies, please click here for your free wise-owl.com trial.
Wise-owl.com is one of Australia's leading independent stockmarket research houses. It empowers all levels of investors and traders with education, advice, actionable strategies and risk management techniques. Its investment philosophy is based on a combination of quantitative, fundamental and technical analysis that has been proven over the years to produce very consistent and powerful returns.
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