New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand<br>Long Haul for Profit Recovery&nbsp;</h2>
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<p><strong>UNDERPERFORM</strong></p>
<p>We downgrade Air New Zealand (AIR) to UNDERPERFORM from NEUTRAL in light of further pressure on its net asset value (NAV) from bigger than anticipated losses in FY22. In other words, the company's return to profitability will take longer than we previously anticipated​​​​​​​. While domestic demand is robust, and trans-Tasman demand is likely to build over the next six to nine months, the recovery in long haul is unlikely to be a feature until FY23, even if border re-openings begin early 2022. The effective delay reflects extended booking windows prior to travel, which has been a feature on&nbsp; the Tasman to date. Cash burn has temporarily been halted but is likely to pick up again from 2Q22 when the PAYE deferral ends. A much needed and significant capital raise is still anticipated by 30 September 2021.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Minor upgrade to FY21, but material downgrade more than doubling&nbsp;magnitude of PBT loss in FY22&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Lowered from NZ$1.60 to NZ$1.40 due to 20c reduction in FY22 NAV estimate&nbsp;</li>
<li><strong>Rating</strong>:&nbsp;Downgrade to UNDERPERFORM from NEUTRAL</li>
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<h3>Material losses to continue into FY22</h3>
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<p>AIR has guided to an FY21 PBT loss of no more than -NZ$450m. Despite an expected increase in pax demand, higher fuel costs and ~NZ$300m lower government support mechanisms (wage subsidies, airfreight scheme &amp; air support package) mean material losses are likely to continue through FY22. The company anticipates the FY22 PBT loss will be similar to FY21, but stresses the outlook remains uncertain.&nbsp;</p>
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<h3>Cash burn kept under control, but will deteriorate before it gets better again</h3>
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<p>Cash burn has been mitigated in recent months; the drawn-down portion of the NZ$1.5bn Crown funding&nbsp;facility remains at&nbsp;NZ$350m, as reported in February 2021. However, cash burn is likely to deteriorate from October 2021 when the current PAYE deferral scheme ends. ~NZ$310m of PAYE deferrals&nbsp;will be paid in FY22. AIR has reiterated its&nbsp;intention to raise capital before 30 September 2021.</p>
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<h3>Travel recovery profile is improving, but is likely a long haul journey to reach pre COVID-19 levels</h3>
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<p>AIR's current domestic capacity is back to ~90% of pre COVID-19 levels with demand at ~80%. Tasman capacity remains steady at ~70% of&nbsp; pre COVID-19 levels but loads have been soft with a gradual recovery expected. We estimate current demand is ~30% of pre COVID-19 levels. The longer international booking cycle relative to domestic travel is impacting the international recovery and will be more pronounced for long haul once borders reopen.&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>
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<div><strong>Matt Noland</strong></div>
<div><a href="mailto:matt.noland@forsythbarr.co.nz" target="_blank" rel="noopener">matt.noland@forsythbarr.co.nz</a></div>
<div>+64 9 368 0134</div>
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Air New Zealand Long Haul for Profit Recovery&nbsp;

UNDERPERFORM
We downgrade Air New Zealand (AIR) to UNDERPERFORM from NEUTRAL in light of further pressure on its net asset value (NAV) from bigger than anticipated losses in FY22. In other words, the company's return to profitability will take longer than we previously anticipated​​​​​​​. While domestic demand is robust, and trans-Tasman demand is likely to build over the next six to nine months, the recovery in long haul is unlikely to be a feature until FY23, even if border re-openings begin early 2022. The effective delay reflects extended booking windows prior to travel, which has been a feature on&nbsp; the Tasman to date. Cash burn has temporarily been halted but is likely to pick up again from 2Q22 when the PAYE deferral ends. A much needed and significant capital raise is still anticipated by 30 September 2021.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Minor upgrade to FY21, but material downgrade more than doubling&nbsp;magnitude of PBT loss in FY22&nbsp;
Target price:&nbsp;Lowered from NZ$1.60 to NZ$1.40 due to 20c reduction in FY22 NAV estimate&nbsp;
Rating:&nbsp;Downgrade to UNDERPERFORM from NEUTRAL



Material losses to continue into FY22


AIR has guided to an FY21 PBT loss of no more than -NZ$450m. Despite an expected increase in pax demand, higher fuel costs and ~NZ$300m lower government support mechanisms (wage subsidies, airfreight scheme &amp; air support package) mean material losses are likely to continue through FY22. The company anticipates the FY22 PBT loss will be similar to FY21, but stresses the outlook remains uncertain.&nbsp;


Cash burn kept under control, but will deteriorate before it gets better again


Cash burn has been mitigated in recent months; the drawn-down portion of the NZ$1.5bn Crown funding&nbsp;facility remains at&nbsp;NZ$350m, as reported in February 2021. However, cash burn is likely to deteriorate from October 2021 when the current PAYE deferral scheme ends. ~NZ$310m of PAYE deferrals&nbsp;will be paid in FY22. AIR has reiterated its&nbsp;intention to raise capital before 30 September 2021.


Travel recovery profile is improving, but is likely a long haul journey to reach pre COVID-19 levels


AIR's current domestic capacity is back to ~90% of pre COVID-19 levels with demand at ~80%. Tasman capacity remains steady at ~70% of&nbsp; pre COVID-19 levels but loads have been soft with a gradual recovery expected. We estimate current demand is ~30% of pre COVID-19 levels. The longer international booking cycle relative to domestic travel is impacting the international recovery and will be more pronounced for long haul once borders reopen.&nbsp;



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





Matt Noland
matt.noland@forsythbarr.co.nz
+64 9 368 0134



Air New Zealand: Long Haul for Profit Recovery