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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand &nbsp;&nbsp;</h2>
1H20 Result Initial Impressions
Air New Zealand (AIR) reported a subdued 1H20 result reflecting cargo market weakness and lower demand on its Hong Kong services – no surprises in light of the guidance update earlier this week. PBT (profit before tax) declined -9% to NZ$198m. AIR retains an 11c fully imputed interim dividend. New CEO Greg Foran’s initial commentary highlights his ongoing 100 day review (a diagnostic of the airline’s opportunities and risks). He says “it is clear that we need to remain vigilant at this part of the economic cycle and continuously deliver the high-quality standard of service our customers expect from us, while improving our financial&nbsp;performance”.
Key points:
<ul>
<li>Domestic RASK (revenue per available seat km): Increased +7.7% against the prior year on a capacity reduction of -2.4%, highlighting a robust recovery in demand over the past six months.</li>
<li>Unit costs: Excluding the impact of forex and third party maintenance CASK (cost per available seat km) declined -0.5% further highlighting AIR’s effective approach to cost control.</li>
<li>Cost out programme: Management is on target to achieve its ~NZ$60m cost reduction initiatives announced last year albeit the timing of the ~NZ$20m of operations cost base savings is now more skewed to FY21.</li>
<li>Cargo: Challenges in the global cargo market had an adverse impact on the result with cargo volumes down -8% and yield down -1%. This isn’t as bad as we were expecting.</li>
<li>IFRS 16: The first half result incorporates the introduction of IFR16 (lease accounting) for the first time. The change has a largely immaterial impact on PBT but distorts the disclosure of rental, depreciation and interest costs.</li>
<li>Fleet investment: The delivery timing of four domestic A320/321 NEOs has been shifted to FY22 and FY23, thereby easing the capex burden in FY21.</li>
</ul>
Outlook
AIR provided updated full year guidance earlier this week. In expects to generate underlying PBT in FY20 of NZ$300m-NZ$350m, which compares to a its previous range of NZ$350m-NZ$450m given the weaker first half performance and the impact of coronavirus on current and forward demand.
Capacity guidance has been revised down to +1.5% to +2.5% for FY20. It was previously +4% to +5% for the year.
Fuel costs are now likely to be NZ$1.25bn in FY20 based on an average jet fuel price of US$65 for 2H20.
Conference call
10:00am NZDT Conference ID: 2675967 New Zealand Toll Free: 0800 667 018 Australia Toll Free: 1 800 148 258&nbsp;
1H20 result summary (NZ$m)
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 170.4pt;"></td>
<td style="width: 49.4pt;">
1H19
</td>
<td style="width: 49.4pt;">
1H20
</td>
<td style="width: 49.4pt;">
Change
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Profit and loss account
</td>
<td style="width: 49.4pt;"></td>
<td style="width: 49.4pt;"></td>
<td style="width: 49.4pt;"></td>
</tr>
<tr>
<td style="width: 170.4pt;">
Sales revenue
</td>
<td style="width: 49.4pt;">
2,927
</td>
<td style="width: 49.4pt;">
3,015
</td>
<td style="width: 49.4pt;">
3.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
EBITDRA
</td>
<td style="width: 49.4pt;">
609
</td>
<td style="width: 49.4pt;">
615
</td>
<td style="width: 49.4pt;">
1.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Rentals
</td>
<td style="width: 49.4pt;">
(122)
</td>
<td style="width: 49.4pt;">
0
</td>
<td style="width: 49.4pt;">
-100.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Depreciation and amortisation
</td>
<td style="width: 49.4pt;">
(272)
</td>
<td style="width: 49.4pt;">
(412)
</td>
<td style="width: 49.4pt;">
51.5%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interest expense
</td>
<td style="width: 49.4pt;">
(17)
</td>
<td style="width: 49.4pt;">
(28)
</td>
<td style="width: 49.4pt;">
64.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Associates
</td>
<td style="width: 49.4pt;">
19
</td>
<td style="width: 49.4pt;">
23
</td>
<td style="width: 49.4pt;">
21.1%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
PBT
</td>
<td style="width: 49.4pt;">
217
</td>
<td style="width: 49.4pt;">
198
</td>
<td style="width: 49.4pt;">
-8.8%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Taxation
</td>
<td style="width: 49.4pt;">
(61)
</td>
<td style="width: 49.4pt;">
(38)
</td>
<td style="width: 49.4pt;">
-37.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Underlying NPAT
</td>
<td style="width: 49.4pt;">
156
</td>
<td style="width: 49.4pt;">
160
</td>
<td style="width: 49.4pt;">
2.6%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Abnormals (post tax)
</td>
<td style="width: 49.4pt;">
(6)
</td>
<td style="width: 49.4pt;">
(59)
</td>
<td style="width: 49.4pt;">
n/a
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Reported NPAT
</td>
<td style="width: 49.4pt;">
150
</td>
<td style="width: 49.4pt;">
101
</td>
<td style="width: 49.4pt;">
-32.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
EPS (cents)
</td>
<td style="width: 49.4pt;">
13.4
</td>
<td style="width: 49.4pt;">
8.9
</td>
<td style="width: 49.4pt;">
-33.4%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interim DPS (cents)
</td>
<td style="width: 49.4pt;">
11.0
</td>
<td style="width: 49.4pt;">
11.0
</td>
<td style="width: 49.4pt;">
0.0%
</td>
</tr>
</tbody>
</table>
Source: AIR, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Air New Zealand &nbsp;&nbsp;
1H20 Result Initial Impressions
Air New Zealand (AIR) reported a subdued 1H20 result reflecting cargo market weakness and lower demand on its Hong Kong services – no surprises in light of the guidance update earlier this week. PBT (profit before tax) declined -9% to NZ$198m. AIR retains an 11c fully imputed interim dividend. New CEO Greg Foran’s initial commentary highlights his ongoing 100 day review (a diagnostic of the airline’s opportunities and risks). He says “it is clear that we need to remain vigilant at this part of the economic cycle and continuously deliver the high-quality standard of service our customers expect from us, while improving our financial&nbsp;performance”.
Key points:

Domestic RASK (revenue per available seat km): Increased +7.7% against the prior year on a capacity reduction of -2.4%, highlighting a robust recovery in demand over the past six months.
Unit costs: Excluding the impact of forex and third party maintenance CASK (cost per available seat km) declined -0.5% further highlighting AIR’s effective approach to cost control.
Cost out programme: Management is on target to achieve its ~NZ$60m cost reduction initiatives announced last year albeit the timing of the ~NZ$20m of operations cost base savings is now more skewed to FY21.
Cargo: Challenges in the global cargo market had an adverse impact on the result with cargo volumes down -8% and yield down -1%. This isn’t as bad as we were expecting.
IFRS 16: The first half result incorporates the introduction of IFR16 (lease accounting) for the first time. The change has a largely immaterial impact on PBT but distorts the disclosure of rental, depreciation and interest costs.
Fleet investment: The delivery timing of four domestic A320/321 NEOs has been shifted to FY22 and FY23, thereby easing the capex burden in FY21.

Outlook
AIR provided updated full year guidance earlier this week. In expects to generate underlying PBT in FY20 of NZ$300m-NZ$350m, which compares to a its previous range of NZ$350m-NZ$450m given the weaker first half performance and the impact of coronavirus on current and forward demand.
Capacity guidance has been revised down to +1.5% to +2.5% for FY20. It was previously +4% to +5% for the year.
Fuel costs are now likely to be NZ$1.25bn in FY20 based on an average jet fuel price of US$65 for 2H20.
Conference call
10:00am NZDT Conference ID: 2675967 New Zealand Toll Free: 0800 667 018 Australia Toll Free: 1 800 148 258&nbsp;
1H20 result summary (NZ$m)





1H19


1H20


Change




Profit and loss account







Sales revenue


2,927


3,015


3.0%




EBITDRA


609


615


1.0%




Rentals


(122)


0


-100.0%




Depreciation and amortisation


(272)


(412)


51.5%




Interest expense


(17)


(28)


64.7%




Associates


19


23


21.1%




PBT


217


198


-8.8%




Taxation


(61)


(38)


-37.7%




Underlying NPAT


156


160


2.6%




Abnormals (post tax)


(6)


(59)


n/a




Reported NPAT


150


101


-32.7%




EPS (cents)


13.4


8.9


-33.4%




Interim DPS (cents)


11.0


11.0


0.0%




Source: AIR, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Air New Zealand: 1H20 Result Initial Impressions