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>More Turbulence, but Clearer Skies Ahead</h2>
<div></div>
<p><strong>UNDERPERFORM</strong></p>
<p>Air New Zealand's (AIR) near term outlook remains challenged with the government's recent border reopening deferral and the threat of an Omicron outbreak impacting the demand outlook. AIR's losses and cash burn will continue through 2H22 at elevated rates. The outlook for FY23 is partly clouded by the threat of Omicron and the government's response. Consequently, the flagged equity raise (due by end of March 2022) is increasingly likely to be delayed again with the backstop, a redeemable share offer to the government, increasingly likely as a short term measure to buffer equity capital. Ordinary equity will be untouched by this approach and pressure on net asset value (NAV) for ordinary shareholders remains. With AIR continuing to trade at a material premium to its NAV we retain an UNDERPERFORM rating.&nbsp;&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/252/615/original/image_62478463521642727615117.png?1642727616" class="editor-image img-responsive" data-smartkarma-image-id="252615"></figure>
<div>
<h3>What's changed?&nbsp;</h3>
</div>
<div id="m_8880364239102612412iwrmo3">
<ul>
<li><strong>Earnings</strong>:&nbsp;Material downgrade to FY22 to reflect prolonged border restrictions; FY23 losses reversed and FY24 profit upgraded&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;NAV based approach lowered by ~5c to NZ$1.10</li>
</ul>
</div>
<div>
<h3>Omicron probably on its way</h3>
</div>
<div id="m_8880364239102612412i3mwj">
<p>International data, in particular&nbsp;from Australia, suggests three key points; (1) the Omicron variant is (even) more contagious than the Delta variant; (2) it is less severe; and (3) vaccines and prior infection appears to provide meaningful protection against hospitalisation and death but only modest protection against infection. An outbreak is likely given the very transmissible nature of Omicron&nbsp;but is not a certainty. The longer New Zealand can keep Omicron out, the bigger the dent in near term demand for aviation as border restrictions are likely to be prolonged.&nbsp;</p>
</div>
<div>
<h3>Border reopening deferral could be extended&nbsp;</h3>
</div>
<div id="m_8880364239102612412i1pdi">
<p>In late November the government announced that a staged border re-opening would commence on 17 January 2022. That decision was deferred late last month to late February 2022 in light of the emerging Omicron outbreaks in various countries. This remains the government's stated timeframe albeit we see reasonable risk that it is deferred further.&nbsp;&nbsp;</p>
</div>
<div>
<h3>Valuation stretched&nbsp;</h3>
</div>
<div id="m_8880364239102612412i0i2x">
<p>AIR is trading at a +233% premium to our estimated NAV at year end FY22. While&nbsp;AIR's&nbsp;forward PE to our FY24 earnings estimates at ~9x isn't expensive, investors should be cautious looking out this far given&nbsp;(1) the unknown nature and dilution of a significant equity raise, and (2) a higher than usual&nbsp;degree of forecast risk due to a high level of outlook uncertainty. We believe there remains a wide gap between the economic reality of AIR and its current share price. The only obvious catalyst for a de-rating is a discounted&nbsp;equity raise that helps highlight&nbsp;fundamental value.</p>
</div>

Air New Zealand More Turbulence, but Clearer Skies Ahead

UNDERPERFORM
Air New Zealand's (AIR) near term outlook remains challenged with the government's recent border reopening deferral and the threat of an Omicron outbreak impacting the demand outlook. AIR's losses and cash burn will continue through 2H22 at elevated rates. The outlook for FY23 is partly clouded by the threat of Omicron and the government's response. Consequently, the flagged equity raise (due by end of March 2022) is increasingly likely to be delayed again with the backstop, a redeemable share offer to the government, increasingly likely as a short term measure to buffer equity capital. Ordinary equity will be untouched by this approach and pressure on net asset value (NAV) for ordinary shareholders remains. With AIR continuing to trade at a material premium to its NAV we retain an UNDERPERFORM rating.&nbsp;&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Material downgrade to FY22 to reflect prolonged border restrictions; FY23 losses reversed and FY24 profit upgraded&nbsp;
Target price:&nbsp;NAV based approach lowered by ~5c to NZ$1.10



Omicron probably on its way


International data, in particular&nbsp;from Australia, suggests three key points; (1) the Omicron variant is (even) more contagious than the Delta variant; (2) it is less severe; and (3) vaccines and prior infection appears to provide meaningful protection against hospitalisation and death but only modest protection against infection. An outbreak is likely given the very transmissible nature of Omicron&nbsp;but is not a certainty. The longer New Zealand can keep Omicron out, the bigger the dent in near term demand for aviation as border restrictions are likely to be prolonged.&nbsp;


Border reopening deferral could be extended&nbsp;


In late November the government announced that a staged border re-opening would commence on 17 January 2022. That decision was deferred late last month to late February 2022 in light of the emerging Omicron outbreaks in various countries. This remains the government's stated timeframe albeit we see reasonable risk that it is deferred further.&nbsp;&nbsp;


Valuation stretched&nbsp;


AIR is trading at a +233% premium to our estimated NAV at year end FY22. While&nbsp;AIR's&nbsp;forward PE to our FY24 earnings estimates at ~9x isn't expensive, investors should be cautious looking out this far given&nbsp;(1) the unknown nature and dilution of a significant equity raise, and (2) a higher than usual&nbsp;degree of forecast risk due to a high level of outlook uncertainty. We believe there remains a wide gap between the economic reality of AIR and its current share price. The only obvious catalyst for a de-rating is a discounted&nbsp;equity raise that helps highlight&nbsp;fundamental value.


Air New Zealand: More Turbulence, but Clearer Skies Ahead