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<br>Fuelled for Take Off</h2>
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<p><strong>NEUTRAL</strong></p>
<p>We reinstate coverage on Air New Zealand (AIR) after its major balance sheet recapitalisation with a NEUTRAL rating and NZ$0.70 target price. AIR is now firmly in recovery mode with passenger revenue accelerating from increasing capacity and strong demand. Cash burn should no longer be an issue given the working capital benefits of ticket sales. However, losses have and will be significant in 2H22, while FY23 is likely to be transition year before profits recover more visibly in FY24. We are wary of elevated oil prices, though recognise AIR is well positioned to compete in this environment with a modern fuel efficient fleet. As the recovery takes hold, the strategic differences between post-COVID AIR and pre-COVID AIR will be more apparent. In particular, we expect it will be more focussed on generating an improved return on capital than expanding its network. While reinstating coverage we switch valuation tack from balance sheet to earnings potential.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/274/702/original/image_41186188331652663536067.png?1652663535" class="editor-image img-responsive" data-smartkarma-image-id="274702"></figure>
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<h3>What's changed?&nbsp;</h3>
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<div id="m_6410929662971068200iwrmo3">
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<li><strong>Earnings</strong>:&nbsp;FY22 consistent with guidance. FY23 marginally profitable.&nbsp;FY24 up materially with AIR one year ahead of FY25 targets</li>
<li><strong>Target price</strong>:&nbsp;Reinstated at NZ$0.70. Based on simple average of two year forward Qantas PE and ROIC informed EV/IC multiple &nbsp;</li>
<li><strong>Rating</strong>:&nbsp;Reinstated&nbsp;at NEUTRAL</li>
</ul>
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<h3>Valuation more&nbsp;focussed&nbsp;on earnings potential than balance sheet&nbsp;</h3>
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<div id="m_6410929662971068200iciqn">
<p>Over the past two years we have taken a balance sheet approach to valuing AIR, given significant financial losses and equity dilution. With the balance sheet&nbsp;recapitalised, profitability on the horizon, and investors globally more&nbsp;focussed&nbsp;on airline earnings than book values, we switch tack to&nbsp;focus&nbsp;on&nbsp;AIR's&nbsp;earnings potential over the medium term.&nbsp;AIR will be a smaller business post-COVID than pre; its fleet is smaller and its ambitions for growth appear more constrained.</p>
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<h3>Strong demand fuelling early recovery&nbsp;</h3>
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<div id="m_6410929662971068200ib7sh">
<p>Current aviation demand growth is strong. Domestic demand is recovering quickly as evidenced by forward scheduling and our observations of pricing data suggest favourable yields. AIR's international capacity has been constrained but with little competition has generated attractive yields. Competition will increase but will likely remain at favourable levels relative to pre-COVID for some time. Oil price are AIR's biggest earnings headache currently.&nbsp;</p>
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<h3>Oil is a key risk</h3>
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<div id="m_6410929662971068200ioamv">
<p>The rapid acceleration in global oil prices over the past six months adds significant cost to the aviation recovery. Hedging provides AIR some near term protection, and its young, fuel efficient, fleet is very&nbsp;competitive. Prolonged&nbsp;high fuel prices could ultimately have a negative impact on&nbsp;AIR's&nbsp;and the industry's&nbsp;profit recovery.&nbsp;</p>
</div>

Air New Zealand Fuelled for Take Off

NEUTRAL
We reinstate coverage on Air New Zealand (AIR) after its major balance sheet recapitalisation with a NEUTRAL rating and NZ$0.70 target price. AIR is now firmly in recovery mode with passenger revenue accelerating from increasing capacity and strong demand. Cash burn should no longer be an issue given the working capital benefits of ticket sales. However, losses have and will be significant in 2H22, while FY23 is likely to be transition year before profits recover more visibly in FY24. We are wary of elevated oil prices, though recognise AIR is well positioned to compete in this environment with a modern fuel efficient fleet. As the recovery takes hold, the strategic differences between post-COVID AIR and pre-COVID AIR will be more apparent. In particular, we expect it will be more focussed on generating an improved return on capital than expanding its network. While reinstating coverage we switch valuation tack from balance sheet to earnings potential.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY22 consistent with guidance. FY23 marginally profitable.&nbsp;FY24 up materially with AIR one year ahead of FY25 targets
Target price:&nbsp;Reinstated at NZ$0.70. Based on simple average of two year forward Qantas PE and ROIC informed EV/IC multiple &nbsp;
Rating:&nbsp;Reinstated&nbsp;at NEUTRAL



Valuation more&nbsp;focussed&nbsp;on earnings potential than balance sheet&nbsp;


Over the past two years we have taken a balance sheet approach to valuing AIR, given significant financial losses and equity dilution. With the balance sheet&nbsp;recapitalised, profitability on the horizon, and investors globally more&nbsp;focussed&nbsp;on airline earnings than book values, we switch tack to&nbsp;focus&nbsp;on&nbsp;AIR's&nbsp;earnings potential over the medium term.&nbsp;AIR will be a smaller business post-COVID than pre; its fleet is smaller and its ambitions for growth appear more constrained.


Strong demand fuelling early recovery&nbsp;


Current aviation demand growth is strong. Domestic demand is recovering quickly as evidenced by forward scheduling and our observations of pricing data suggest favourable yields. AIR's international capacity has been constrained but with little competition has generated attractive yields. Competition will increase but will likely remain at favourable levels relative to pre-COVID for some time. Oil price are AIR's biggest earnings headache currently.&nbsp;


Oil is a key risk


The rapid acceleration in global oil prices over the past six months adds significant cost to the aviation recovery. Hedging provides AIR some near term protection, and its young, fuel efficient, fleet is very&nbsp;competitive. Prolonged&nbsp;high fuel prices could ultimately have a negative impact on&nbsp;AIR's&nbsp;and the industry's&nbsp;profit recovery.&nbsp;


Air New Zealand

Air New Zealand: Fuelled for Take Off