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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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand<br>FY20 Preview&nbsp;— Balance Sheet in&nbsp;Focus&nbsp;</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>In the aftermath of&nbsp;Ansett, the&nbsp;then Chair of Air New&nbsp;Zealand&nbsp;(AIR) John Palmer said in his 2003 annual review, "I have come to believe that the only real competitive advantage that a company can have in the airline industry is the ability to prepare for and manage change".&nbsp;While other key areas of competitive advantage have evolved over the past 17 years, particularly for AIR,&nbsp; these words resonate strongly in the midst of&nbsp;COVID-19 challenges (on 27 August 2020, we expect AIR to report its first annual underlying loss since&nbsp;2002). While AIR is, and has been, well equipped to manage the significant operational challenges as&nbsp;COVID-19 took hold, its revenue rapidly collapsed as a result of apathy to travel and government restrictions. Its cost base was unable to keep up. The company's&nbsp;reinstated earnings guidance for FY20 is for an underlying profit before tax (PBT) loss of up to&nbsp;-NZ$120m, implying a&nbsp;PBT&nbsp;loss of up to -NZ$318m in 2H20. With material losses, significant impairments and current operating conditions providing little insight as to the future, the more important aspect of this result will be the shape of the balance sheet, in our opinion.&nbsp;</p>
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<h3>Key things to look out for in AIR's FY20 result</h3>
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<li><strong>Cash burn/net debt</strong>:&nbsp;With a significant reduction in revenue and a high fixed cost base,&nbsp;AIR has endured cash burn since March. We expect the company is close to dipping into the government's NZ$900m&nbsp;lending facility.&nbsp;</li>
<li><strong>Net asset value</strong> (NAV):&nbsp;The combination of asset impairments, reorganisation costs, hedging losses, and 2H20 cash burn will dilute&nbsp;AIR's&nbsp;NAV&nbsp;significantly. We estimate&nbsp;AIR's&nbsp;NAV&nbsp;as at June 2020 is&nbsp;~NZ$1.06 per share.&nbsp;</li>
<li><strong>Opex</strong>:&nbsp;AIR has undertaken a significant reduction&nbsp;in costs (a ~30% downsizing) as a result of&nbsp;COVID-19. However, much of this was effective for the beginning of FY21. Therefore, its cost burden as outlined in FY20 will be substantially higher than the run-rate, albeit partially offset by wage subsidy receipts (~NZ$75m).&nbsp;</li>
<li><strong>Airfreight</strong>: ​​​​​​​AIR's current international schedule is almost exclusively being operated for airfreight purposes, given its pivotal role in the government sponsored airfreight initiative. A significant lift in airfreight yields will likely drive a material jump in airfreight revenue through 2H20.&nbsp;</li>
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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>
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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>
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Air New Zealand FY20 Preview&nbsp;— Balance Sheet in&nbsp;Focus&nbsp;

UNDERPERFORM
In the aftermath of&nbsp;Ansett, the&nbsp;then Chair of Air New&nbsp;Zealand&nbsp;(AIR) John Palmer said in his 2003 annual review, "I have come to believe that the only real competitive advantage that a company can have in the airline industry is the ability to prepare for and manage change".&nbsp;While other key areas of competitive advantage have evolved over the past 17 years, particularly for AIR,&nbsp; these words resonate strongly in the midst of&nbsp;COVID-19 challenges (on 27 August 2020, we expect AIR to report its first annual underlying loss since&nbsp;2002). While AIR is, and has been, well equipped to manage the significant operational challenges as&nbsp;COVID-19 took hold, its revenue rapidly collapsed as a result of apathy to travel and government restrictions. Its cost base was unable to keep up. The company's&nbsp;reinstated earnings guidance for FY20 is for an underlying profit before tax (PBT) loss of up to&nbsp;-NZ$120m, implying a&nbsp;PBT&nbsp;loss of up to -NZ$318m in 2H20. With material losses, significant impairments and current operating conditions providing little insight as to the future, the more important aspect of this result will be the shape of the balance sheet, in our opinion.&nbsp;


Key things to look out for in AIR's FY20 result



Cash burn/net debt:&nbsp;With a significant reduction in revenue and a high fixed cost base,&nbsp;AIR has endured cash burn since March. We expect the company is close to dipping into the government's NZ$900m&nbsp;lending facility.&nbsp;
Net asset value (NAV):&nbsp;The combination of asset impairments, reorganisation costs, hedging losses, and 2H20 cash burn will dilute&nbsp;AIR's&nbsp;NAV&nbsp;significantly. We estimate&nbsp;AIR's&nbsp;NAV&nbsp;as at June 2020 is&nbsp;~NZ$1.06 per share.&nbsp;
Opex:&nbsp;AIR has undertaken a significant reduction&nbsp;in costs (a ~30% downsizing) as a result of&nbsp;COVID-19. However, much of this was effective for the beginning of FY21. Therefore, its cost burden as outlined in FY20 will be substantially higher than the run-rate, albeit partially offset by wage subsidy receipts (~NZ$75m).&nbsp;
Airfreight: ​​​​​​​AIR's current international schedule is almost exclusively being operated for airfreight purposes, given its pivotal role in the government sponsored airfreight initiative. A significant lift in airfreight yields will likely drive a material jump in airfreight revenue through 2H20.&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: FY20 Preview — Balance Sheet in Focus