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

Air New Zealand
Gaining Height at Low Altitude&nbsp;
UNDERPERFORM
Air New Zealand's (AIR) June operating statistics imply that passenger revenue declined by around -21% during FY20, reflective of the significant COVID-19 impact through the last four months. The data shows improving domestic passenger flows and a broad recovery in pricing. International passengers remain a rounding error (skeleton services are being supported by the Government sponsored cargo initiative) and will likely continue to be until 2021. We take a more positive view on passenger yields and cargo revenue generation for the year ahead and upgrade earnings forecasts, which erode but not fully, anticipated losses. The adverse impact of operating losses on AIR's net asset value (NAV) is less severe than previously assumed, which leads us to lift our target price to NZ$0.90 from NZ$0.80. However, a valuation gap ​​​​​​​to the share price persists; UNDERPERFORM.&nbsp;


What's changed?&nbsp;



Profit before tax: FY20 upgraded to loss of -NZ$95m; FY21 to loss of -NZ$211m
Target price: Lifted from NZ$0.80 to NZ$0.90 due to a better&nbsp;NAV&nbsp;outlook



Passenger revenue recovery from low floor


We calculate that June passenger revenue was down ~-80% compared to the prior year, an improvement from the ~-90% decline in May, as the domestic recovery takes hold. July will be even better given the impact of domestic school holidays, in our opinion. AIR appears to be applying its revenue management strengths by lifting domestic&nbsp;capacity and optimising yield/RASK&nbsp;(revenue per available seat km).&nbsp; The June data suggests that FY20 passenger revenue declined -21%.


Solid domestic momentum


Domestic demand appears robust considering the lack of international connectivity, which typically accounts for 15%-20% of passengers. AIR plans to have ~70% of pre COVID-19 capacity in August, with a further school holiday boosted lift in October. Demand is being led by leisure traffic, albeit business demand is also recovering.&nbsp;Business customers typically account for ~50% of domestic revenue and ~40% of bookings. We understand that domestic business demand is back to ~65% of pre COVID-19 levels.&nbsp;


Valuation anchored to&nbsp;NAV


AIR's share price continues to closely track its international full-service airline peers, yet it trades at a ~+35% premium to our estimate of its NAV as at June 2020. In light of the challenges facing AIR and the global airline industry, NAV remains the most appropriate valuation benchmark, in our opinion.&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: Gaining Height at Low Altitude