Cathay Pacific: First-Half Turnaround and Plan To Redeem Preference Shares Should Boost Confidence

No-moat Cathay Pacific’s 00293 turnaround in the first half is expected, but the plan to fully redeem the HKD 19.5 billion preference shares over the next 12 months is ahead of our forecast for a full redemption by 2025. The preliminary net income guidance ranges from HKD 4 billion to HKD 4.5 billion, translating to HKD 2.1 billion-HKD 2.6 billion in recurring net income after excluding an HKD 1.9 billion one-off disposal gain. We keep our full-year net income forecast at HKD 6.7 billion ahead of its interim results release in August. Our fair value estimate remains HKD 8.90. The shares closed 4% below our fair value estimate on July 14 and we think the shares are fairly valued.

To recap, the dividend rate on the preference shares is currently 3% but will step up to 5% in August 2023, 7% in August 2024 and 9% in August 2025. The dividend savings from the redemption could be substantial, considering Cathay’s net income only averaged HKD 1.6 billion from 2015 to 2019. We think the move should boost investors’ confidence.

Seat capacity was 51% of 2019′s level in June and 46% in the first half. Management kept guidance for seat capacity to reach 70% of the 2019 level by December 2023 and 100% by December 2024. We think full-year seat capacity will fall short of our forecast of 60% of 2019′s level. However, the high passenger yield and load factor should compensate for the low capacity.