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 Zealand</h2>
Flying the White Bird Above the Black Swan&nbsp;
OUTPERFORM
We upgrade Air New Zealand (AIR) to OUTPERFORM from NEUTRAL in light of what we perceive to be a market overreaction to the risk posed by the coronavirus (COVID-19) outbreak. We recognise that picking the trough of any downturn is difficult (not least for an airline), particularly as troughs tend to occur before the peak of negative newsflow. However, AIR's share price has fallen by ~-30% since the emergence of the virus, wiping close to NZ$1bn from its market capitalisation. We believe it is now significantly overpricing the risks. The market cap decline equates to ~3.6x AIR's FY19&nbsp; underlying NPAT, implying a significant decline in profitability for an extended period of time, or material losses over the medium term. In contrast, AIR guided to a COVID-19 hit for 2H20 NPAT of NZ$35m-NZ$75m on 24 February 2020. Our analysis shows that AIR's capacity cuts are deeper than its competitors and historically its responses to black swan events have been rapid and rational. In particular, we highlight that it remained profitable through the global financial crisis, in contrast to most other airlines globally. AIR now trades at a one year forward PE of ~9x and offers a double digit cash yield.&nbsp;
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<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">AIR</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.12</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">270.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">234.7</td>
<td style="text-align: left; width: 43.2pt;">280.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">331.4&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">4.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.8</td>
<td style="text-align: left; width: 48pt;">2.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$2.50</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">23.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">20.8&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">24.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">29.4&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">10.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-30.4</td>
<td style="text-align: left; width: 42.6pt;">-13.1</td>
<td style="text-align: left; width: 43.2pt;">19.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">18.2&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">8.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1123.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.2</td>
<td style="text-align: left; width: 42.6pt;">1.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6</td>
<td style="text-align: left; width: 42.6pt;">3.0&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$2,375m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">10.4</td>
<td style="text-align: left; width: 42.6pt;">10.4</td>
<td style="text-align: left; width: 48pt;">10.4</td>
<td style="text-align: left; width: 42.6pt;">10.4</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">871.5k (NZ$2,343k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">14.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.4&nbsp;</td>
</tr>
</tbody>
</table>
Earnings risk weight to downside particularly for FY21, but more than discounted in share price
AIR downgraded its FY20 earnings guidance ahead of its recent interim result due to (1) COVID-19 demand concerns, and (2) weaker first half performance than previously implied. Its revised guidance is predicated on a 2H20 capacity hit of ~-5%. This captures all existing schedule changes plus scope for further cuts. While we currently see more downside than upside risk to FY20 earnings, the greater risk, in our opinion, is to FY21;&nbsp;particularly if the&nbsp;COVID-19 impact on demand is prolonged. However, this risk is more than factored into the current share price, in our opinion.&nbsp;
Capacity cuts will mitigate yield impact
The response to lower demand has been textbook from AIR, but also far quicker from other international airlines than has historically been the case. Flight schedule data shows that AIR has cut its capacity deeper than its competitors, thereby maintaining higher load factors&nbsp;and protecting yields. Capacity cuts to date have largely&nbsp;focussed&nbsp;on lower yielding Asian and Tasman services. Further capacity adjustments are likely as it continues to demonstrate it nimble approach to managing supply.&nbsp;
Opportunity to strengthen competitive position&nbsp;
AIR's&nbsp;structural position and balance sheet strengths leave it well placed to weather the&nbsp;COVID-19 storm. In contrast, some of its competitors (for example Virgin Australia) are more challenged, in our opinion. We believe there is potential for industry rationalisation and consolidation as a result of any prolonged downturn that could be favourable for&nbsp;AIR's&nbsp;competitive position longer term.&nbsp;&nbsp;&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Air New Zealand
Flying the White Bird Above the Black Swan&nbsp;
OUTPERFORM
We upgrade Air New Zealand (AIR) to OUTPERFORM from NEUTRAL in light of what we perceive to be a market overreaction to the risk posed by the coronavirus (COVID-19) outbreak. We recognise that picking the trough of any downturn is difficult (not least for an airline), particularly as troughs tend to occur before the peak of negative newsflow. However, AIR's share price has fallen by ~-30% since the emergence of the virus, wiping close to NZ$1bn from its market capitalisation. We believe it is now significantly overpricing the risks. The market cap decline equates to ~3.6x AIR's FY19&nbsp; underlying NPAT, implying a significant decline in profitability for an extended period of time, or material losses over the medium term. In contrast, AIR guided to a COVID-19 hit for 2H20 NPAT of NZ$35m-NZ$75m on 24 February 2020. Our analysis shows that AIR's capacity cuts are deeper than its competitors and historically its responses to black swan events have been rapid and rational. In particular, we highlight that it remained profitable through the global financial crisis, in contrast to most other airlines globally. AIR now trades at a one year forward PE of ~9x and offers a double digit cash yield.&nbsp;
         


NZX Code
AIR
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.12
NPAT* (NZ$m)
270.1&nbsp;
234.7
280.3&nbsp;
331.4&nbsp;
EV/EBITDA
4.1&nbsp;
2.8
2.3&nbsp;
2.2&nbsp;


Target price
NZ$2.50
EPS* (NZc)
23.9&nbsp;
20.8&nbsp;
24.8&nbsp;
29.4&nbsp;
EV/EBIT
10.4&nbsp;
6.0&nbsp;
4.6&nbsp;
4.2&nbsp;


Risk rating
High
EPS growth* (%)
-30.4
-13.1
19.4&nbsp;
18.2&nbsp;
PE
8.8&nbsp;
10.2&nbsp;
8.5&nbsp;
7.2&nbsp;


Issued shares
1123.0m
DPS (NZc)
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
Price/NTA
1.2
1.4&nbsp;
3.6
3.0&nbsp;


Market cap
NZ$2,375m
Imputation (%)
100
100
100
100
Cash div yld (%)
10.4
10.4
10.4
10.4


Avg daily turnover
871.5k (NZ$2,343k)
*Based on normalised profits


Gross div yld (%)
14.4&nbsp;
14.4&nbsp;
14.4&nbsp;
14.4&nbsp;



Earnings risk weight to downside particularly for FY21, but more than discounted in share price
AIR downgraded its FY20 earnings guidance ahead of its recent interim result due to (1) COVID-19 demand concerns, and (2) weaker first half performance than previously implied. Its revised guidance is predicated on a 2H20 capacity hit of ~-5%. This captures all existing schedule changes plus scope for further cuts. While we currently see more downside than upside risk to FY20 earnings, the greater risk, in our opinion, is to FY21;&nbsp;particularly if the&nbsp;COVID-19 impact on demand is prolonged. However, this risk is more than factored into the current share price, in our opinion.&nbsp;
Capacity cuts will mitigate yield impact
The response to lower demand has been textbook from AIR, but also far quicker from other international airlines than has historically been the case. Flight schedule data shows that AIR has cut its capacity deeper than its competitors, thereby maintaining higher load factors&nbsp;and protecting yields. Capacity cuts to date have largely&nbsp;focussed&nbsp;on lower yielding Asian and Tasman services. Further capacity adjustments are likely as it continues to demonstrate it nimble approach to managing supply.&nbsp;
Opportunity to strengthen competitive position&nbsp;
AIR's&nbsp;structural position and balance sheet strengths leave it well placed to weather the&nbsp;COVID-19 storm. In contrast, some of its competitors (for example Virgin Australia) are more challenged, in our opinion. We believe there is potential for industry rationalisation and consolidation as a result of any prolonged downturn that could be favourable for&nbsp;AIR's&nbsp;competitive position longer term.&nbsp;&nbsp;&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246


Air New Zealand: Flying the White Bird Above the Black Swan 