The results for this half year were much better than pcp but was not unexpected given the full year contribution of the WA routes. An interesting development which management pointed out was that the downturn in the traditional network appears to have bottomed. Although still very early days (we had false starts before), this is great news if the passenger numbers on the traditional network can recover after 9 consecutive years of decline.
My takeaways from the half year are as follows:
- Both the WA and traditional network are performing well. The half year presentation showed that the passengers on the WA routes made up 9.7% of the traditional work which on the surface doesn’t seem surprising given the historical passengers numbers. However, we do know that Rex increased the WA route service by 35% over the previous operator and therefore for the passenger percentage (10%) to remain consistent, passengers on the traditional network must have increased as well. I’ve analysed the comparable monthly passenger data for year to date (YTD) FY17 and FY16.
As shown above, YTD17 passengers are up 12% but more interesting is the strong pcp growth from November to January. Another indicator that passengers are increasing is that the HY load factor has increased by 2% (54.8% to 56.6%).
- Now that Rex has established itself in WA, the natural progression would be to expand operations there to spread the overheads. Like the eastern states, WA has some regulated and unregulated routes which Rex could expand into. The closest competitor to Rex (besides Qantaslink) is Skippers Air which has the rights to some regulated routes. Rex’s entry into WA can’t be good news for a small operator like Skipper and I won’t be surprised if they end up selling to Rex.
- Pel-air have started medivac operations out of Singapore with 2 aircraft. Currently it is likely to contribute immaterially to earnings and therefore no breakdown was provided, however it is a nice toehold into a new market.
- On the cost front, cost have gone up (Flight & port operations and also salaries) which management have said were due to the new WA routes and medivac operations in Singapore.
Based on the half year result, I forecast net profit after tax to be circa $8 – $12 million with recurring capital expenditure being less than depreciation at the current fleet size. The recent developments are positive and I believe when the dividends are started again, the stock will move higher.