New Zealand Professional Investment Services Firm

Forsyth Barr

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Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand</h2>
Accelerating into Peak
Air New Zealand’s (AIR) November 2019 operating stats show an improvement in trading heading into its peak season after a slow winter/spring. Better than anticipated current trading mitigates some of the risk to its near term earnings outlook.
<ul>
<li>Revenue: We calculate that November 2019 passenger revenue growth was ~+4.7% compared to November 2018. This is broadly consistent with our FY20 passenger revenue growth forecast of ~+4.6%. However, year to date revenue growth is still only +2.8%, which means passenger revenue growth of &gt;5% is required for the remainder of FY20.</li>
<li>RASK (revenue per available seat km): November 2019 group RASK increased ~+2.9%, with both short-haul (~+4.7%) and long-haul (~+1.6%) growth accelerating.</li>
<li>Capacity: November 2019 capacity growth of +1.8% is below FY20 capacity guidance of ~+5%, which we suspect is at risk given the on-going Rolls-Royce engine issues. Long-haul capacity increased +3.5% in November 2019 while short-haul contracted by -0.3%. Long haul will remain above short haul capacity growth through FY20.</li>
</ul>
Our view
November’s passenger revenue growth (~+5%) has escaped the softer trend of recent months and is more consistent with our forecast for the full year. With prior year revenue growth comparatives easing through December the near term operating statistics outlook will continue to improve, in our opinion. However, we continue to believe near term earnings risk is to the downside.
AIR is trading at ~10x one year forward PE and offers a ~8% cash dividend yield. It now trades at a ~-10% discount to Qantas (<a href="http://qan.ax/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://QAN.AX&amp;source=gmail&amp;ust=1576801970907000&amp;usg=AFQjCNFlMz0HYcDVPp5DIkcDavCWMs6tDw" rel="noopener">QAN.AX</a>). We retain a NEUTRAL rating.
Chart: Revenue growth of +4.7% in November 2019
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1653302978837494882&amp;th=16f1b64cb7b43c62&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ9NU-jPx30AlSqgn7aArlJWnqb7QdqXVGTfHNWw5WgKr6Xovbtl1iAbgAPaAvW2g_7lbXFWrNeSPRqUgiwMRTs-ttPzf44PwOwgtD4XUnG4zx8KbC5y5KYCQfU&amp;disp=emb" width="710" height="464" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: AIR, Forsyth Barr analysis
Andy Bowley Head of Research Forsyth Barr Limited
M:+64 21 338 941 | P:+64 4 495 8246 | TF:0800 367 227 Level 22 , 157 Lambton Quay, Wellington

Air New Zealand
Accelerating into Peak
Air New Zealand’s (AIR) November 2019 operating stats show an improvement in trading heading into its peak season after a slow winter/spring. Better than anticipated current trading mitigates some of the risk to its near term earnings outlook.

Revenue: We calculate that November 2019 passenger revenue growth was ~+4.7% compared to November 2018. This is broadly consistent with our FY20 passenger revenue growth forecast of ~+4.6%. However, year to date revenue growth is still only +2.8%, which means passenger revenue growth of &gt;5% is required for the remainder of FY20.
RASK (revenue per available seat km): November 2019 group RASK increased ~+2.9%, with both short-haul (~+4.7%) and long-haul (~+1.6%) growth accelerating.
Capacity: November 2019 capacity growth of +1.8% is below FY20 capacity guidance of ~+5%, which we suspect is at risk given the on-going Rolls-Royce engine issues. Long-haul capacity increased +3.5% in November 2019 while short-haul contracted by -0.3%. Long haul will remain above short haul capacity growth through FY20.

Our view
November’s passenger revenue growth (~+5%) has escaped the softer trend of recent months and is more consistent with our forecast for the full year. With prior year revenue growth comparatives easing through December the near term operating statistics outlook will continue to improve, in our opinion. However, we continue to believe near term earnings risk is to the downside.
AIR is trading at ~10x one year forward PE and offers a ~8% cash dividend yield. It now trades at a ~-10% discount to Qantas (QAN.AX). We retain a NEUTRAL rating.
Chart: Revenue growth of +4.7% in November 2019

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


Air New Zealand

Air New Zealand: Accelerating into Peak