REX – Sweet sweet dividend

The long wait for this dividend will make it extra sweet for long suffering shareholders. I think the real positive from this dividend is the signal that it sends. Given management’s conservative nature and for them to pay out nearly 87% of FY2017 net profit after tax as dividend (10 cents), they must believe that the fall in passenger numbers has bottomed out.

I also feel like a genius as I have previously forecast FY17 net profit to be between $8-$12 million. Just thought I mention it in case anyone missed it 🙂

Key takeaways

So the key takeaways for me are:

  • The increase in passengers pcp from March 2017 onwards. The WA routes started in Feb 2016 so a comparison from March onwards shows the increase in passengers with the same network. With the exception of April, the network has experience passenger growth. The surplus in March and deficit in April are linked to Easter falling in March last year and falling in April this year. So net, passenger are up 6% which is consistent with May to June figures. 
  • Load factor has increased from 56% (FY2016) to 58.8% (FY2017). This is a good sign as it corroborates with the above recovery.
  • Wage cost increased by 2.5% pcp. I was very pleased to see Rex keep this cost under control. I have been arguing that rising cost is forcing the company to raise ticket price which further drives customers away so this marginal increase in wage cost is very pleasing.
  • The other positives are of course the Pel-Air winning FIFO contracts with Iluka Resource and Cobham.  So I expect the charter revenue of $22.9 million to increase in FY18.

Valuation
Investors cheered the dividend and pushed the share price up to a 5 year high. The last time the share price was at this level was in October 2012. The company is currently trading at:

On a price earnings basis, it doesn’t look very cheap. However, it still appears cheap based on the following (also see chart below):

  1. Profit before tax (PBT) was significantly higher back in FY2006 to FY2011. FY2012 was an unexceptional year for charter revenue which masked the poor results from RPT operations.
  2. Load factors are still depressed compared to FY2006 to FY2011 (back then above 60%).
  3. Although passenger numbers appear to be recovering, in reality Rex today has a larger route network than it had 10 years ago; meaning the passengers on the “traditional” network (NSW, VIC and SA) have still not recovered to previous levels.

Based on the March to July passenger data shown above, it appears that passenger numbers on the “traditional” network is starting to recover. This recovery should increase the load factor and given the fixed cost nature of the business, any increase in load factor falls directly to the bottom line.

Therefore, I think there is a good possibility of Rex getting back to previous profitability levels.

 

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