On Tuesday, HSBC revised its stance on Cathay Pacific Airways Ltd . (293:HK) (OTC: OTC:CPCAY) stock, moving its rating from "Hold" to "Reduce," while simultaneously increasing the price target to HK$8.30, up from the previous HK$8.10.
This adjustment reflects a shift in valuation to the 2025 estimated book value per share (BVPS) from 2024 estimates and incorporates higher projections.
Cathay Pacific's shares are currently trading at a price-to-book (PB) ratio of 1.03 times, according to consensus 12-month forward estimates. This valuation mirrors the brief peak in September 2023, which followed a record operating margin in the first half of 2023, propelled by a surge in traffic and positive guidance on preference redemption.
Despite the airline's strong performance in early 2023, HSBC anticipates a sequential decline in Cathay Pacific's earnings before interest and taxes (EBIT) in the second half of 2024. This forecasted downturn is expected to extend over the next two years.
The anticipated decrease in profitability is attributed to the costs associated with increasing traffic, specifically rising staff expenses, as well as a normalization of passenger yields.
The updated price target of HK$8.30 is informed by HSBC's revised expectations for Cathay Pacific's financial performance. The bank's analysis suggests that the airline's current market price does not adequately reflect the potential challenges it faces with respect to cost management and yield normalization in the coming years.
Investors have taken note of HSBC's revised outlook, which offers a cautious view of Cathay Pacific's near-term financial trajectory. The airline's strategic response to these projected headwinds will be closely monitored by shareholders and industry analysts alike.
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