Air NZ shares still over-priced as growing uncertainties cloud earnings outlook: FNZC
By Paul McBeth
Nov. 8 (BusinessDesk) - Air New Zealand shares are trading higher than what First NZ Capital reckons is fair value, and
while the national carrier has a number of tailwinds, the research house sees some clouds on the horizon for the
airline's earnings.
FNZC analyst Richard Steele lifted the stock's target price to $2.90 from $2.55, citing Air NZ's ability to deliver a
return equal to the cost of its capital over the long-run, however he affirmed its 'underperform' rating to reflect the
research house's view on where the trading price was relative to the company's fundamental value. The shares recently
traded at $3.35, down 0.6 percent today.
"In our view, with AIR trading at close to peak multiples relative to recent history; the elimination of a valuation
discount to global peers; recent increases in the cost of fuel; at a time of increased NZ consumer uncertainty we are
concerned that the current share price imputes a level of future returns upside, or alternatively, a level of risk which
is not reasonable for an airline," Steele said in a note to clients.
Auckland-based Air NZ's earnings fell less than expected in 2017 as the country's tourism boom and persistently cheap
jet fuel helped fatten the carrier's margins, offsetting heightened competition in the market.
FNZC's Steele increased his forecast for the airline's jet fuel costs over the next three years, tracking movements in
crude oil prices, while acknowledging the impact of shale oil production could create a structural change driving down
energy costs over the medium-term.
Air NZ faced reduced competition in short-haul domestic, trans-Tasman and Pacific Islands routes which Steele
anticipates will deliver better yields. However, increased competition on long-haul routes to Asia creates "material
competitive pressure on load factors and yields" on a number of those flights.
"While the industry appears to be capturing the lower jet fuel tailwind we could argue that such a short timeframe of
capacity management is currently insufficient evidence of structural industry change allowing it to deliver greater than
WACC (weighted average cost of capital) returns, in our view," Steele said.
FNZC expects Air NZ to generate more passenger revenue over the coming three years than previously predicted, however
more expensive jet fuel is set to squeeze margins. Steele lifted his forecast for the airline's annual profit 1.1
percent to $388 million in 2018, while cutting 12 percent and 4.9 percent from his outlook in the following years to
$362 million and $415 million. The airline reported a profit of $379 million in 2017.
(BusinessDesk)
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