QAN was a recent brief holding in the Blue Chip strategy, and during the time of holding the stock the company conducted an institutional placement which meant that members would be eligible to apply for the SPP.
Latest update: 15 July 2020
We updated members with our recommendation on the QAN SPP yesterday but after our update the company released an announcement stating that it will extend the SPP deadline by two weeks. This means that a decision is not required just yet, so instead we will provide further advice in two weeks and hope in the meantime that the stock rallies.
Update: 14 July 2020
Despite selling the stock in a recent rebalance, we retained that eligibility and vowed to keep members updated on whether there was a good investment opportunity through the SPP.
The SPP is being conducted at a price of the lower of $3.65 or a 2.5% discount to the volume weighted average price between 16 July and 22 July. The stock was travelling well earlier in the month but the resumption of a lockdown in Victoria has sapped the momentum in the travel sector, and QAN is today trading at $3.47.
We usually like to see a minimum buffer of at least 5% between trading price and SPP issue price, and with QAN around 10% below that buffer level it is highly unlikely we are going to have a worthy opportunity here. We are therefore going to recommend members ignore the SPP.
Original update: 25 June 2020
QAN, a recent inclusion in the Blue Chip strategy, today entered a trading halt as it has bitten the bullet and announced a significant capital raising to help get the company through the unprecedented turbulence the airline industry is facing.
Having fallen to as low as $2.14 in March, the board should be applauded for holding strong and achieving a far better result for shareholders by waiting until the market stabilised. $1.86bn worth of shares are now being sold at a price of $3.65 and it is the higher price that ultimately provided the board the flexibility to pull the trigger today.
As new investors, this discounted capital raising may hit the price but we will get a chance to buy new shares through a Share Purchase Plan (SPP) that will raise $500m, and needless to say the company will be in a far better position to ride out this period of significant losses until domestic travel recovers in the short-term and international travel recovers in the long-term. The placement and SPP are being conducted at a discount of 12.9% to the closing price yesterday, but as travel stocks are significantly weaker today the real discount is probably a lot less than that.
We will advise members how to proceed once SPP documentation is sent out, but for now the narrative on QAN moves from its balance sheet to how soon the recovery comes. The recent surge in COVID-19 cases in Victoria is definitely a dampener on the recent outlook for domestic travel, but overall both Australia as well as potential ‘pacific bubble’ states such as New Zealand, Fiji, Vietnam and Thailand continue to manage the pandemic well and the possibility of a significant recovery in air travel is on the cards in the near term, and this comes in an environment in which its major rival Virgin Australia is hobbled and fighting its way through administration.
