Corporate Action: Qantas' SPP Highlights Poor Stewardship, but Price Compelling; Recommend Subscribe

Buying high and selling low does not lead to positive shareholder returns. But over the past two years, Qantas' management has done just this. The firm has bought back AUD 1.83 billion in shares since the beginning of fiscal 2018 at an average price of AUD 5.77 per share--a premium to our fair value estimates at the time. Qantas is now raising AUD 1.85 billion through a AUD 1.35 billion institutional placement and AUD 500 million share purchase plan, or SPP, at a maximum of AUD 3.65 per share--below our current fair value estimate, and well below the prior share repurchase prices. In our opinion, these capital allocation decisions have destroyed shareholder value, and we downgrade Qantas' stewardship rating to Poor. Although we don't fault management for not foreseeing the onset and impact of COVID-19, demand disruptions are commonplace within the air travel industry, highlighted by our no-moat rating for Qantas (and all airlines globally) and very high uncertainty rating. A cyclical downturn was inevitable at some point.