Main observations:

• This financial year is going to be a throwaway for QAN, ROE forecast to be minus 98.8%. A much more palatable 14% is expected to return in FY22.
• Revenue and EPS growth will be non-existent as it transitions to a smaller business. FY2 and FY3 are forecast to be much more normal.
• Of the 11 brokers surveyed by Thomson Reuters 73% have a buy or strong buy recommendation, it is trading at a 6.5% discount to the average target price.

WHAT SORT OF INVESTMENT IS QAN? QAN is a domestic recovery play and to a lesser extent a global recovery play until a vaccine is found. Clarity is improving around domestic travel and demand is expected to be robust. QAN’s scenic flight (to nowhere) sold out in ten minutes earlier in the month and 20K seats sold in 36 hours when the SA/NSW border opened. It is also looking to diversify to locations that weren’t previously part of its pre-COVID network, naming Korea, Taiwan and various islands in the Pacific as potential destinations while it waits for its core international markets to re-open. The re-direction of international travel is also viewed as an opportunity, with 11m Aussies that usually fly overseas now likely on the hunt for a domestic trip or two. A strong liquidity position and a significant base of unencumbered assets, progress in its three-year transformation and signs of domestic appetite are the pillars that buoy management confidence. It is a simple investment case, people will want to travel and you’re looking at a company that is arguable undervalued. We’re not taking an obscure data point and extrapolating that into a grand hypothesis. But it should be said, that in hindsight, not all good investments need to be complex. Right now, you could distill all the numbers, the late-night calculations, the board meetings of high-profile fund managers from the last few years into two words, buy tech. If you knew that in 2015, you would not have had to change your strategy once. BROKER STUFF Morgan Stanley retains an OVERWEIGHT rating following the AGM, comfortable with the liquidity and "normalised" valuation upside despite volatility to pandemic-related news flow. Macquarie suspects QAN is likely to experience a faster recovery domestically as borders continue to re-open and pent-up demand for movement around the country occurs. Lifts FY21 estimates by 7% while lowering FY22 by -17%, largely due to lower average seat kilometre assumptions. Target price lifted 16% to 495c, implying upside of 12%. UBS considers the QLD state election a key catalyst for the pace of domestic recovery. Noting a favorable outcome could lift the capacity offered by airlines from 25% to 45% even if Victoria and WA remain closed. Calculates QAN could generate $600m of profit before tax and $800m of free cash at 70% of its pre-COVID capacity.