In a significant update for investors and stakeholders, Morgan Stanley has revised its target price for Cathay Pacific Airways (00293), slashing it by 13.8%, dropping from HKD 11.6 to HKD 10. This adjustment is accompanied by a maintained "Equalweight" rating, indicating that the airline is expected to perform in line with the broader market.
The investment bank's decision reflects a cautious outlook for Cathay Pacific's financial performance in the near future. Morgan Stanley has also lowered its earnings forecasts for the airline for the years 2025 and 2026 by 1.4% and 8%, respectively. This downward revision is primarily driven by a weaker forecast for cargo revenue, which has become a critical aspect of the airline's income stream.
Interestingly, while the forecast for cargo revenue has been adjusted downward, this has been partially offset by expectations of lower fuel costs. The bank has introduced a new earnings forecast of HKD 9.3 billion for 2027, indicating some optimism about the airline's long-term profitability.
Despite these adjustments, Morgan Stanley has not adopted a more aggressive stance on its earnings projections. The bank believes that the pricing power of Cathay Pacific in the Hong Kong market, combined with the benefits of declining fuel prices, will help maintain the airline's cash flow in a healthy state. They anticipate that capital expenditure will be lower in 2025, which further supports this outlook.
However, Morgan Stanley has expressed concerns regarding potential downside risks to profits from both cargo and passenger services, particularly on North American routes. The airline industry has faced numerous challenges in recent years, and the ongoing tariff disputes between the U.S. and China could have severe repercussions for Cathay Pacific.
If trade volumes are negatively impacted by these tariff issues, it could lead to a significant decline in both cargo demand and passenger flow. The potential fallout from such trade disruptions is a critical factor that investors are closely monitoring.
In summary, while Morgan Stanley remains cautious about Cathay Pacific's near-term prospects, there are indications of resilience in the company's financial health due to lower capital expenditures and favorable fuel prices. Investors will need to keep an eye on external factors, particularly trade relations, as they could have significant implications for the airline's performance moving forward.
