UBS has released a research report noting that Cathay Pacific's (00293) recent share price weakness reflects market concerns over fuel costs, but the market is underestimating the durability of its return on equity. The bank raised its target price from HK$19.4 to HK$20.1 while maintaining a "Buy" rating.
UBS pointed out that Cathay Pacific's return on equity has consistently remained at 19% over the past three years, and its interim results for the first half of 2026 also demonstrated that its pricing power in both passenger and cargo segments is superior to peers, with core profit growing 45% year-on-year even in a high oil price environment.
The bank believes there are at least seven structural drivers supporting more durable and sustainable returns on equity for Cathay Pacific, including wide-body aircraft shortages limiting supply, Hong Kong International Airport market share rising from 49% in the first half of 2018 to 65% in the first half of 2026, relaxation of fuel surcharges, loyalty program reform, investment in premium products, support from local demand factors, and long-term growth opportunities in the cargo business.
On earnings forecasts, UBS lowered Cathay Pacific's earnings per share forecast for fiscal year 2026 by 5%, mainly reflecting higher oil price assumptions, but the forecast still exceeds market expectations by 14%. The bank maintained its net profit forecast of HK$13.3 billion for fiscal year 2026, representing 22% year-on-year growth.
The bank also raised its earnings per share forecasts for fiscal years 2027 to 2028 by 2% to 11% based on stronger yield assumptions, and expects return on equity to average 22% over fiscal years 2026 to 2028, far above the 4.2% average from 2011 to 2019.
UBS believes Cathay Pacific's HK$150 billion capital expenditure plan over the next decade can be supported by strong free cash flow while maintaining a 50% dividend payout ratio, and expects limited equity financing risk in the near term.
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