Air NZ share price 'substantially higher' than what it should be, analysts warn

Thursday, 18 June 2020

When Greg Foran started at Air New Zealand as chief executive, Covid-19 was quickly becoming the most significant crisis the aviation industry has ever faced.

Air New Zealand shares are more than 100 per cent overvalued, says one of the country's largest share brokerage firms.

In an update to the New Zealand stock exchange (NZX) on Thursday, Air New Zealand said it was expecting a loss of up to $120 million for its 2020 financial year.

The announcement came days after the release of a report by Forsyth Barr analysts Andy Bowley and Scott Anderson which said Air New Zealand cash losses and asset impairments would materially deplete its net asset value as at June 30, 2020, and likely further to June 30, 2021.

Forsyth Barr reduced its target price per share for Air New Zealand to 70 cents, down from $1, to reflect heavier losses in the 2021 financial year than previously anticipated.

* Air NZ projects loss, says job cuts necessary

The closure of New Zealand's borders and disruption to airlines globally has hit Air NZ hard.

Air New Zealand shares are currently trading at around $1.65, about 135 per cent more than Forsyth Barr's target.

Forsyth Barr acknowledged a wide margin for error concerning its forecast given the range of possible operating outcomes over the next 12 months.

In its NZX statement the airline said that it had suspended earlier guidance ''due to the significant uncertainty surrounding the duration, scale and impact of the Covid-19 pandemic''.

The airline is slowly re-starting its domestic network, but says revenue and earnings for the 2020 year will be ''significantly lower than expected'' prior to the outbreak of Covid-19, it said.

Bowley and Anderson said ongoing cash losses, while narrowing, would continue for Air New Zealand into the 2021 financial year meaning its cash liquidity position would continue to fall.

'Management suggests that it will need to access the Government's $900m debt facility over the coming months. This may not be necessary if it undertakes an equity recapitalisation,' they said.

They said Air New Zealand needed recapitalisation (an equity injection) to allow it to achieve its 800-day 'survive, revive and thrive' plan.

They expected Air New Zealand to be loss making in the 2021 and 2022 financial years.

'Assuming profits resume in FY23 [financial year 2023], the company may then resume its dividends.'

Air New Zealand has said it would be a smaller airline as a result of Covid-19, reducing in size by about 30 per cent.

Bowley and Anderson said they believed it could be profitable at this size, subject to it addressing its fixed cost base, reducing capacity to ensure RASK (revenue per available seat-kilometer) was optimised, and rationalising its fleet to remove capital.

The analysts said Air New Zealand 'offers one of the most favourable structural positions for any airline globally' and a key element of its competitive advantage stemmed from its Airpoints loyalty programme.

'Irrespective of the alleged brand damage as a result of Covid-19 and the company's reluctance to refund non-refundable tickets, we expect no lasting impact on Air New Zealand's competitive position in light of the strength of its loyalty scheme.'

It had more than 3 million members accounting for two thirds of the New Zealand population. In contrast, the Qantas Frequent Flyer programme had the equivalent of about 50 per cent of the Australian population as members.

Air New Zealand said on Thursday that in addition to the loss, it had made both gains and losses on several significant items. Most were unchanged from an update in May but it noted a $70m non-cash gain had been made on unhedged foreign currency debt.

The other significant items were $140m to $160m in restructuring costs,a $85m to $105m loss on the de-designation of hedges; and a $350m to $450m non-cash charge for aircraft impairments.

The airline has also made a $21m gain on the sale of some of its slots at airports.

A $46m non-cash charge to reflect the disestablishment in fair value hedges had been booked in the airline's first half.