New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

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&nbsp;Zealand</h2>
<p><strong>Commencing the Journey to Safety</strong></p>
<p><strong>UNDERPERFORM</strong></p>
<p>Air New Zealand's (AIR) liquidity and earnings update (1) highlighted the dramatic changes to its business as a result of COVID-19, (2) confirmed it will be loss making in FY20, and (3) provided some insight into the impending impact to its NTA (net tangible assets) at year end FY20. Ongoing cash burn and flagged impairment charges will have a material impact on NTA as at 30 June 2020, in our opinion. Almost NZ$700m of expected capex has either been cancelled or deferred, which together with labour cost reductions has helped to lower the cash burn by NZ$50m–NZ$60m per month. AIR has short term liquidity of NZ$640m (prior to accessing its NZ$900m Government loan facility) and no debt covenants, which buys it time for a potential balance sheet recapitalisation. However, with its recovery profile very uncertain and NTA in decline, we retain an UNDERPERFORM rating.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/135/926/original/image_18844900821590481562257.png?1590481564" class="editor-image img-responsive" data-smartkarma-image-id="135926"></figure>
<p><strong>A smaller airline</strong></p>
<div id="m_-3573106187905620417i3hrk-2-2-2">
<p>AIR continues to focus on being 30% smaller than its pre&nbsp;COVID-19 size in two years time. Significant labour reductions (accounting for 4,000 employees) will deliver&nbsp;annualised&nbsp;savings of NZ$350m–NZ$400m. Domestic and short haul international are likely to have&nbsp;quicker recovery profiles&nbsp;than long haul, in our opinion. Consequently, we expect long haul fleet rationalisation over the next 12 months, with management (1) suggesting&nbsp;it has early termination options on several B777-300 aircraft and (2) largely writing down the book value of its B777-200 fleet.&nbsp;</p>
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<p><strong>Earnings and cash burn</strong></p>
<div id="m_-3573106187905620417iscyo-2-2-2">
<p>In the absence of a cure, vaccine or medical treatment solution to COVID-19, the earnings outlook remains extremely uncertain for aviation and tourism related companies. AIR acknowledges that it will be loss making in FY20 (we forecast an unchanged NPAT loss of -NZ$116m) but refrains from providing guidance at this time. We estimate its monthly pre-capex cash burn will be ~NZ$100m from early FY21, which we believe could halve when New Zealand moves to Alert Level 1, given the additional demand for domestic services and less restrictions on airlines around social distancing. Thereafter, the prospect of some borders reopening (i.e. a trans-Tasman bubble) will further assist its cash burn outlook. However, its decision yesterday to maintain current depleted international schedules to 31 August 2020, suggests that it's not optimistic of an imminent return to international flying.&nbsp;</p>
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<p><strong>Impact on&nbsp;NTA</strong></p>
<div id="m_-3573106187905620417ilkkt-2-2-2">
<p>In light of (1) the impairment of its B777-200 and some B777-300 aircraft (NZ$350m-NZ$450m), (2) significant cash costs (de-designation of fuel and forex hedges, and reorganisation costs totalling NZ$225m–NZ$265m), and (3) an underlying loss in FY20, we expect a meaningful drop in NTA. Excluding other balance sheet movements, we estimate these items will lower NTA to ~NZ$1.00 from NZ$1.68 (as at 30 June 2019).&nbsp;&nbsp;</p>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
<div></div>
</div>
</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Air New&nbsp;Zealand
Commencing the Journey to Safety
UNDERPERFORM
Air New Zealand's (AIR) liquidity and earnings update (1) highlighted the dramatic changes to its business as a result of COVID-19, (2) confirmed it will be loss making in FY20, and (3) provided some insight into the impending impact to its NTA (net tangible assets) at year end FY20. Ongoing cash burn and flagged impairment charges will have a material impact on NTA as at 30 June 2020, in our opinion. Almost NZ$700m of expected capex has either been cancelled or deferred, which together with labour cost reductions has helped to lower the cash burn by NZ$50m–NZ$60m per month. AIR has short term liquidity of NZ$640m (prior to accessing its NZ$900m Government loan facility) and no debt covenants, which buys it time for a potential balance sheet recapitalisation. However, with its recovery profile very uncertain and NTA in decline, we retain an UNDERPERFORM rating.&nbsp;

A smaller airline

AIR continues to focus on being 30% smaller than its pre&nbsp;COVID-19 size in two years time. Significant labour reductions (accounting for 4,000 employees) will deliver&nbsp;annualised&nbsp;savings of NZ$350m–NZ$400m. Domestic and short haul international are likely to have&nbsp;quicker recovery profiles&nbsp;than long haul, in our opinion. Consequently, we expect long haul fleet rationalisation over the next 12 months, with management (1) suggesting&nbsp;it has early termination options on several B777-300 aircraft and (2) largely writing down the book value of its B777-200 fleet.&nbsp;

Earnings and cash burn

In the absence of a cure, vaccine or medical treatment solution to COVID-19, the earnings outlook remains extremely uncertain for aviation and tourism related companies. AIR acknowledges that it will be loss making in FY20 (we forecast an unchanged NPAT loss of -NZ$116m) but refrains from providing guidance at this time. We estimate its monthly pre-capex cash burn will be ~NZ$100m from early FY21, which we believe could halve when New Zealand moves to Alert Level 1, given the additional demand for domestic services and less restrictions on airlines around social distancing. Thereafter, the prospect of some borders reopening (i.e. a trans-Tasman bubble) will further assist its cash burn outlook. However, its decision yesterday to maintain current depleted international schedules to 31 August 2020, suggests that it's not optimistic of an imminent return to international flying.&nbsp;

Impact on&nbsp;NTA

In light of (1) the impairment of its B777-200 and some B777-300 aircraft (NZ$350m-NZ$450m), (2) significant cash costs (de-designation of fuel and forex hedges, and reorganisation costs totalling NZ$225m–NZ$265m), and (3) an underlying loss in FY20, we expect a meaningful drop in NTA. Excluding other balance sheet movements, we estimate these items will lower NTA to ~NZ$1.00 from NZ$1.68 (as at 30 June 2019).&nbsp;&nbsp;



Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Air New Zealand: Commencing the Journey to Safety