New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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.

Equity Bottom-Up

<h2>Air New Zealand</h2>
1H20&nbsp;— No&nbsp;Vis&nbsp;On&nbsp;COVID
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
NEUTRAL
Air New Zealand (AIR) reported a subdued 1H20 result characterised by below trend revenue growth; however, the result has little relevance to the outlook; there is only one story in town at the moment. Coronavirus uncertainty is having a material impact on profitability given the company's sensitivity to demand changes. Management is responding appropriately with capacity cuts, but remains exposed to demand being weaker, and for longer, than currently anticipated. In this environment its difficult to have a strong view on AIR. While we expect a rapid recovery in demand once the coronavirus is ultimately contained, we anticipate newsflow getting worse before it gets better. We're NEUTRAL on a 12 month horizon but see scope for buying opportunities should the share price weaken further from current levels. The balance sheet and delayed fleet investment provides some protection to the dividend should profitability fall further.&nbsp;
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">AIR</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.37</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">270.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">234.7</td>
<td style="text-align: left; width: 43.2pt;">280.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">331.4&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">4.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">2.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$2.50</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">23.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">20.8&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">24.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">29.4&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">11.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.5</td>
<td style="text-align: left; width: 48pt;">5.1&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-30.4</td>
<td style="text-align: left; width: 42.6pt;">-13.1</td>
<td style="text-align: left; width: 43.2pt;">19.4</td>
<td style="text-align: left; width: 48pt;">18.2&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">9.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">11.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">8.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1123.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.4</td>
<td style="text-align: left; width: 42.6pt;">1.5</td>
<td style="text-align: left; width: 48pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.4</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$2,662m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">9.3</td>
<td style="text-align: left; width: 42.6pt;">9.3</td>
<td style="text-align: left; width: 48pt;">9.3</td>
<td style="text-align: left; width: 42.6pt;">9.3</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">852.8k (NZ$2,314k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">12.9</td>
<td style="text-align: left; width: 42.6pt;">12.9</td>
<td style="text-align: left; width: 48pt;">12.9</td>
<td style="text-align: left; width: 42.6pt;">12.9</td>
</tr>
</tbody>
</table>
What's changed?
<ul type="disc">
<li>Earnings: FY20E PBT reduced by -20% to NZ$326m (mid-point of management's guidance range)</li>
<li>Target price: Cut from NZ$2.60 to NZ$2.50; we expect coronavirus to have a temporary impact on demand only</li>
</ul>
An uncertain outlook&nbsp;
The&nbsp;coronavirus&nbsp;outbreak has created a huge amount of uncertainty for near term demand. AIR is anticipating a -5% impact on 2H20 capacity with ~70% of this accounted for by announced scheduled cuts to date. While we reduce our capacity growth expectations in-line with updated company guidance we believe the risk to this outlook is to the downside, given the global spread of the virus and the potential that it arrives in New&nbsp;Zealand&nbsp;and Australia. However, we remain cognisant that once the virus is ultimately contained&nbsp;AIR’s&nbsp;markets are likely to recover quickly with a corresponding rebound in profitability.​​​​​​​In the meantime,&nbsp;AIR's&nbsp;share price performance will be driven as much&nbsp;by sentiment as fundamentals, in our opinion.&nbsp;
Rational industry reaction should help mitigate yield declines
AIR has a history of being nimble and responding quickly to black swan demand events. It began cutting capacity on 1 February and has continued to make further adjustments since. In contrast, other airlines have historically taken longer to react. However, the general industry response to coronavirus is consistent with our general assessment that the industry is now far more rational than it was. This should provide some yield protection for AIR through this period of uncertainty.
CEO&nbsp;review concluded by mid-year
New CEO Greg Foran is undertaking a strategy review of the business having already received a large amount of feedback from staff and customers. Consistent with his track record at Woolworths Australia and Walmart USA we expect him to conclude that some reinvestment is necessary in the 3 P's — people, product and prices.&nbsp;

Air New Zealand
1H20&nbsp;— No&nbsp;Vis&nbsp;On&nbsp;COVID
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
NEUTRAL
Air New Zealand (AIR) reported a subdued 1H20 result characterised by below trend revenue growth; however, the result has little relevance to the outlook; there is only one story in town at the moment. Coronavirus uncertainty is having a material impact on profitability given the company's sensitivity to demand changes. Management is responding appropriately with capacity cuts, but remains exposed to demand being weaker, and for longer, than currently anticipated. In this environment its difficult to have a strong view on AIR. While we expect a rapid recovery in demand once the coronavirus is ultimately contained, we anticipate newsflow getting worse before it gets better. We're NEUTRAL on a 12 month horizon but see scope for buying opportunities should the share price weaken further from current levels. The balance sheet and delayed fleet investment provides some protection to the dividend should profitability fall further.&nbsp;
         


NZX Code
AIR
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.37
NPAT* (NZ$m)
270.1&nbsp;
234.7
280.3&nbsp;
331.4&nbsp;
EV/EBITDA
4.4&nbsp;
3.0&nbsp;
2.5&nbsp;
2.4&nbsp;


Target price
NZ$2.50
EPS* (NZc)
23.9&nbsp;
20.8&nbsp;
24.8&nbsp;
29.4&nbsp;
EV/EBIT
11.2&nbsp;
6.5
5.1&nbsp;
4.6&nbsp;


Risk rating
High
EPS growth* (%)
-30.4
-13.1
19.4
18.2&nbsp;
PE
9.9&nbsp;
11.4&nbsp;
9.5&nbsp;
8.1&nbsp;


Issued shares
1123.0m
DPS (NZc)
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
Price/NTA
1.4
1.5
4.0&nbsp;
3.4


Market cap
NZ$2,662m
Imputation (%)
100
100
100
100
Cash div yld (%)
9.3
9.3
9.3
9.3


Avg daily turnover
852.8k (NZ$2,314k)
*Based on normalised profits


Gross div yld (%)
12.9
12.9
12.9
12.9



What's changed?

Earnings: FY20E PBT reduced by -20% to NZ$326m (mid-point of management's guidance range)
Target price: Cut from NZ$2.60 to NZ$2.50; we expect coronavirus to have a temporary impact on demand only

An uncertain outlook&nbsp;
The&nbsp;coronavirus&nbsp;outbreak has created a huge amount of uncertainty for near term demand. AIR is anticipating a -5% impact on 2H20 capacity with ~70% of this accounted for by announced scheduled cuts to date. While we reduce our capacity growth expectations in-line with updated company guidance we believe the risk to this outlook is to the downside, given the global spread of the virus and the potential that it arrives in New&nbsp;Zealand&nbsp;and Australia. However, we remain cognisant that once the virus is ultimately contained&nbsp;AIR’s&nbsp;markets are likely to recover quickly with a corresponding rebound in profitability.​​​​​​​In the meantime,&nbsp;AIR's&nbsp;share price performance will be driven as much&nbsp;by sentiment as fundamentals, in our opinion.&nbsp;
Rational industry reaction should help mitigate yield declines
AIR has a history of being nimble and responding quickly to black swan demand events. It began cutting capacity on 1 February and has continued to make further adjustments since. In contrast, other airlines have historically taken longer to react. However, the general industry response to coronavirus is consistent with our general assessment that the industry is now far more rational than it was. This should provide some yield protection for AIR through this period of uncertainty.
CEO&nbsp;review concluded by mid-year
New CEO Greg Foran is undertaking a strategy review of the business having already received a large amount of feedback from staff and customers. Consistent with his track record at Woolworths Australia and Walmart USA we expect him to conclude that some reinvestment is necessary in the 3 P's — people, product and prices.&nbsp;

Air New Zealand: 1H20 — No Vis On COVID

<h2>Air New Zealand &nbsp;&nbsp;</h2>
1H20 Result Initial Impressions
Air New Zealand (AIR) reported a subdued 1H20 result reflecting cargo market weakness and lower demand on its Hong Kong services – no surprises in light of the guidance update earlier this week. PBT (profit before tax) declined -9% to NZ$198m. AIR retains an 11c fully imputed interim dividend. New CEO Greg Foran’s initial commentary highlights his ongoing 100 day review (a diagnostic of the airline’s opportunities and risks). He says “it is clear that we need to remain vigilant at this part of the economic cycle and continuously deliver the high-quality standard of service our customers expect from us, while improving our financial&nbsp;performance”.
Key points:
<ul>
<li>Domestic RASK (revenue per available seat km): Increased +7.7% against the prior year on a capacity reduction of -2.4%, highlighting a robust recovery in demand over the past six months.</li>
<li>Unit costs: Excluding the impact of forex and third party maintenance CASK (cost per available seat km) declined -0.5% further highlighting AIR’s effective approach to cost control.</li>
<li>Cost out programme: Management is on target to achieve its ~NZ$60m cost reduction initiatives announced last year albeit the timing of the ~NZ$20m of operations cost base savings is now more skewed to FY21.</li>
<li>Cargo: Challenges in the global cargo market had an adverse impact on the result with cargo volumes down -8% and yield down -1%. This isn’t as bad as we were expecting.</li>
<li>IFRS 16: The first half result incorporates the introduction of IFR16 (lease accounting) for the first time. The change has a largely immaterial impact on PBT but distorts the disclosure of rental, depreciation and interest costs.</li>
<li>Fleet investment: The delivery timing of four domestic A320/321 NEOs has been shifted to FY22 and FY23, thereby easing the capex burden in FY21.</li>
</ul>
Outlook
AIR provided updated full year guidance earlier this week. In expects to generate underlying PBT in FY20 of NZ$300m-NZ$350m, which compares to a its previous range of NZ$350m-NZ$450m given the weaker first half performance and the impact of coronavirus on current and forward demand.
Capacity guidance has been revised down to +1.5% to +2.5% for FY20. It was previously +4% to +5% for the year.
Fuel costs are now likely to be NZ$1.25bn in FY20 based on an average jet fuel price of US$65 for 2H20.
Conference call
10:00am NZDT Conference ID: 2675967 New Zealand Toll Free: 0800 667 018 Australia Toll Free: 1 800 148 258&nbsp;
1H20 result summary (NZ$m)
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 170.4pt;"></td>
<td style="width: 49.4pt;">
1H19
</td>
<td style="width: 49.4pt;">
1H20
</td>
<td style="width: 49.4pt;">
Change
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Profit and loss account
</td>
<td style="width: 49.4pt;"></td>
<td style="width: 49.4pt;"></td>
<td style="width: 49.4pt;"></td>
</tr>
<tr>
<td style="width: 170.4pt;">
Sales revenue
</td>
<td style="width: 49.4pt;">
2,927
</td>
<td style="width: 49.4pt;">
3,015
</td>
<td style="width: 49.4pt;">
3.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
EBITDRA
</td>
<td style="width: 49.4pt;">
609
</td>
<td style="width: 49.4pt;">
615
</td>
<td style="width: 49.4pt;">
1.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Rentals
</td>
<td style="width: 49.4pt;">
(122)
</td>
<td style="width: 49.4pt;">
0
</td>
<td style="width: 49.4pt;">
-100.0%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Depreciation and amortisation
</td>
<td style="width: 49.4pt;">
(272)
</td>
<td style="width: 49.4pt;">
(412)
</td>
<td style="width: 49.4pt;">
51.5%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interest expense
</td>
<td style="width: 49.4pt;">
(17)
</td>
<td style="width: 49.4pt;">
(28)
</td>
<td style="width: 49.4pt;">
64.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Associates
</td>
<td style="width: 49.4pt;">
19
</td>
<td style="width: 49.4pt;">
23
</td>
<td style="width: 49.4pt;">
21.1%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
PBT
</td>
<td style="width: 49.4pt;">
217
</td>
<td style="width: 49.4pt;">
198
</td>
<td style="width: 49.4pt;">
-8.8%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Taxation
</td>
<td style="width: 49.4pt;">
(61)
</td>
<td style="width: 49.4pt;">
(38)
</td>
<td style="width: 49.4pt;">
-37.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Underlying NPAT
</td>
<td style="width: 49.4pt;">
156
</td>
<td style="width: 49.4pt;">
160
</td>
<td style="width: 49.4pt;">
2.6%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Abnormals (post tax)
</td>
<td style="width: 49.4pt;">
(6)
</td>
<td style="width: 49.4pt;">
(59)
</td>
<td style="width: 49.4pt;">
n/a
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Reported NPAT
</td>
<td style="width: 49.4pt;">
150
</td>
<td style="width: 49.4pt;">
101
</td>
<td style="width: 49.4pt;">
-32.7%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
EPS (cents)
</td>
<td style="width: 49.4pt;">
13.4
</td>
<td style="width: 49.4pt;">
8.9
</td>
<td style="width: 49.4pt;">
-33.4%
</td>
</tr>
<tr>
<td style="width: 170.4pt;">
Interim DPS (cents)
</td>
<td style="width: 49.4pt;">
11.0
</td>
<td style="width: 49.4pt;">
11.0
</td>
<td style="width: 49.4pt;">
0.0%
</td>
</tr>
</tbody>
</table>
Source: AIR, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Air New Zealand &nbsp;&nbsp;
1H20 Result Initial Impressions
Air New Zealand (AIR) reported a subdued 1H20 result reflecting cargo market weakness and lower demand on its Hong Kong services – no surprises in light of the guidance update earlier this week. PBT (profit before tax) declined -9% to NZ$198m. AIR retains an 11c fully imputed interim dividend. New CEO Greg Foran’s initial commentary highlights his ongoing 100 day review (a diagnostic of the airline’s opportunities and risks). He says “it is clear that we need to remain vigilant at this part of the economic cycle and continuously deliver the high-quality standard of service our customers expect from us, while improving our financial&nbsp;performance”.
Key points:

Domestic RASK (revenue per available seat km): Increased +7.7% against the prior year on a capacity reduction of -2.4%, highlighting a robust recovery in demand over the past six months.
Unit costs: Excluding the impact of forex and third party maintenance CASK (cost per available seat km) declined -0.5% further highlighting AIR’s effective approach to cost control.
Cost out programme: Management is on target to achieve its ~NZ$60m cost reduction initiatives announced last year albeit the timing of the ~NZ$20m of operations cost base savings is now more skewed to FY21.
Cargo: Challenges in the global cargo market had an adverse impact on the result with cargo volumes down -8% and yield down -1%. This isn’t as bad as we were expecting.
IFRS 16: The first half result incorporates the introduction of IFR16 (lease accounting) for the first time. The change has a largely immaterial impact on PBT but distorts the disclosure of rental, depreciation and interest costs.
Fleet investment: The delivery timing of four domestic A320/321 NEOs has been shifted to FY22 and FY23, thereby easing the capex burden in FY21.

Outlook
AIR provided updated full year guidance earlier this week. In expects to generate underlying PBT in FY20 of NZ$300m-NZ$350m, which compares to a its previous range of NZ$350m-NZ$450m given the weaker first half performance and the impact of coronavirus on current and forward demand.
Capacity guidance has been revised down to +1.5% to +2.5% for FY20. It was previously +4% to +5% for the year.
Fuel costs are now likely to be NZ$1.25bn in FY20 based on an average jet fuel price of US$65 for 2H20.
Conference call
10:00am NZDT Conference ID: 2675967 New Zealand Toll Free: 0800 667 018 Australia Toll Free: 1 800 148 258&nbsp;
1H20 result summary (NZ$m)





1H19


1H20


Change




Profit and loss account







Sales revenue


2,927


3,015


3.0%




EBITDRA


609


615


1.0%




Rentals


(122)


0


-100.0%




Depreciation and amortisation


(272)


(412)


51.5%




Interest expense


(17)


(28)


64.7%




Associates


19


23


21.1%




PBT


217


198


-8.8%




Taxation


(61)


(38)


-37.7%




Underlying NPAT


156


160


2.6%




Abnormals (post tax)


(6)


(59)


n/a




Reported NPAT


150


101


-32.7%




EPS (cents)


13.4


8.9


-33.4%




Interim DPS (cents)


11.0


11.0


0.0%




Source: AIR, Forsyth Barr analysis
Andy Bowley&nbsp; Head of Research
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Air New Zealand: 1H20 Result Initial Impressions

<h2>Air New Zealand</h2>
1H20 Preview&nbsp;— Maiden Flight in Poor Visibility
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL &nbsp;
We expect Air New&nbsp;Zealand&nbsp;(AIR) to report a subdued 1H20 result on 27 February 2020, impacted by softer revenue growth — a function of weaker demand and consequent reductions in capacity. We&nbsp;forecast underlying profit before tax (PBT) of NZ$202m, down -4% against the prior year. The potential for demand weakness from the&nbsp;coronavirus&nbsp;outbreak beyond China poses a key&nbsp;near term revenue risk. However, this will at least be partly mitigated by lower oil prices for its&nbsp;unhedged&nbsp;fuel exposure. The balance between these two key drivers (demand and fuel) should be weighted to the former through 2H20 (downgrade risk) given fuel price hedging in place but the latter through FY21 (upgrade risk).&nbsp;&nbsp;
<table class="table table-striped"><colgroup><col span="12"></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">AIR</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 48pt;">19A</td>
<td style="width: 48pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 48pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.71</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 48pt;">270.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">285.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">326.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">335.0&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 48pt;">4.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.1</td>
<td style="text-align: left; width: 48pt;">4.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target Price</td>
<td style="width: 48pt;">NZ$2.60</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 48pt;">23.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">25.2</td>
<td style="text-align: left; width: 48pt;">28.9</td>
<td style="text-align: left; width: 48pt;">29.7</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 48pt;">12.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.8</td>
<td style="text-align: left; width: 48pt;">10.3</td>
<td style="text-align: left; width: 48pt;">10.2&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 48pt;">-30.4</td>
<td style="text-align: left; width: 48pt;">5.5&nbsp;</td>
<td style="text-align: left; width: 48pt;">14.4</td>
<td style="text-align: left; width: 48pt;">2.8</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 48pt;">11.3</td>
<td style="text-align: left; width: 48pt;">10.7</td>
<td style="text-align: left; width: 48pt;">9.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1123.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 48pt;">1.6</td>
<td style="text-align: left; width: 48pt;">1.5</td>
<td style="text-align: left; width: 48pt;">1.5</td>
<td style="text-align: left; width: 48pt;">1.4</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$3,043m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 48pt;">8.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">8.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">844.5k (NZ$2,296k)</td>
<td colspan="3" style="width: 144pt;">*Based on normalised profits</td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 48pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.3&nbsp;</td>
</tr>
</tbody>
</table>
Key issues to consider at&nbsp;AIR's&nbsp;1H20 result
<ul type="disc">
<li>Passenger demand outlook: The demand backdrop finished the period better than it started, particularly in the domestic business in light of capacity reductions and the&nbsp;Jetstar&nbsp;regional withdrawal. However, the outlook is uncertain in&nbsp;AIR's&nbsp;international business given the&nbsp;coronavirus&nbsp;outbreak and risk of contagion beyond China.&nbsp;</li>
<li>Capacity growth: Recent schedule changes for Shanghai and&nbsp;Hong&nbsp;Kong services, the uncertainty created by&nbsp;coronavirus, and the ongoing Rolls Royce engine issues, mean the company's +4% to +5% capacity growth&nbsp; guidance for FY20 is likely to be missed.&nbsp;</li>
<li>Cargo:&nbsp;IATA&nbsp;international air freight statistics and Auckland Airport cargo data suggest AIR endured a challenging six months. We expect a modest volume decline with some pressure on yields.&nbsp;</li>
<li>Significant items: AIR recently flagged significant items that would adversely impact the 1H20 reported result: (1) reorganisation costs of NZ$13m and an NZ$46m non-cash charge relating to disestablishment&nbsp;of fair value hedges.&nbsp;&nbsp;</li>
<li>IFRS&nbsp;16: This will be the first period that AIR reports under the new accounting for leases accounting standards. We expect the company to provide both pre and post-IFRS&nbsp;16 results to aid investors in interpreting like-for-like performance.&nbsp;</li>
<li>New&nbsp;CEO: Greg&nbsp;Foran&nbsp;will host the 1H20 result. While he's only just commenced his tenure we expect him to outline initial observations on his feedback from staff and customers.&nbsp;</li>
</ul>

Air New Zealand
1H20 Preview&nbsp;— Maiden Flight in Poor Visibility
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246
NEUTRAL &nbsp;
We expect Air New&nbsp;Zealand&nbsp;(AIR) to report a subdued 1H20 result on 27 February 2020, impacted by softer revenue growth — a function of weaker demand and consequent reductions in capacity. We&nbsp;forecast underlying profit before tax (PBT) of NZ$202m, down -4% against the prior year. The potential for demand weakness from the&nbsp;coronavirus&nbsp;outbreak beyond China poses a key&nbsp;near term revenue risk. However, this will at least be partly mitigated by lower oil prices for its&nbsp;unhedged&nbsp;fuel exposure. The balance between these two key drivers (demand and fuel) should be weighted to the former through 2H20 (downgrade risk) given fuel price hedging in place but the latter through FY21 (upgrade risk).&nbsp;&nbsp;



NZX Code
AIR
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.71
NPAT* (NZ$m)
270.1&nbsp;
285.0&nbsp;
326.0&nbsp;
335.0&nbsp;
EV/EBITDA
4.8&nbsp;
4.5&nbsp;
4.1
4.1&nbsp;


Target Price
NZ$2.60
EPS* (NZc)
23.9&nbsp;
25.2
28.9
29.7
EV/EBIT
12.3&nbsp;
11.8
10.3
10.2&nbsp;


Risk rating
High
EPS growth* (%)
-30.4
5.5&nbsp;
14.4
2.8
PE
11.3
10.7
9.4&nbsp;
9.1&nbsp;


Issued shares
1123.0m
DPS (NZc)
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
22.0&nbsp;
Price/NTA
1.6
1.5
1.5
1.4


Market cap
NZ$3,043m
Imputation (%)
100
100
100
100
Cash div yld (%)
8.1&nbsp;
8.1&nbsp;
8.1&nbsp;
8.1&nbsp;


Avg daily turnover
844.5k (NZ$2,296k)
*Based on normalised profits


Gross div yld (%)
11.3&nbsp;
11.3&nbsp;
11.3&nbsp;
11.3&nbsp;



Key issues to consider at&nbsp;AIR's&nbsp;1H20 result

Passenger demand outlook: The demand backdrop finished the period better than it started, particularly in the domestic business in light of capacity reductions and the&nbsp;Jetstar&nbsp;regional withdrawal. However, the outlook is uncertain in&nbsp;AIR's&nbsp;international business given the&nbsp;coronavirus&nbsp;outbreak and risk of contagion beyond China.&nbsp;
Capacity growth: Recent schedule changes for Shanghai and&nbsp;Hong&nbsp;Kong services, the uncertainty created by&nbsp;coronavirus, and the ongoing Rolls Royce engine issues, mean the company's +4% to +5% capacity growth&nbsp; guidance for FY20 is likely to be missed.&nbsp;
Cargo:&nbsp;IATA&nbsp;international air freight statistics and Auckland Airport cargo data suggest AIR endured a challenging six months. We expect a modest volume decline with some pressure on yields.&nbsp;
Significant items: AIR recently flagged significant items that would adversely impact the 1H20 reported result: (1) reorganisation costs of NZ$13m and an NZ$46m non-cash charge relating to disestablishment&nbsp;of fair value hedges.&nbsp;&nbsp;
IFRS&nbsp;16: This will be the first period that AIR reports under the new accounting for leases accounting standards. We expect the company to provide both pre and post-IFRS&nbsp;16 results to aid investors in interpreting like-for-like performance.&nbsp;
New&nbsp;CEO: Greg&nbsp;Foran&nbsp;will host the 1H20 result. While he's only just commenced his tenure we expect him to outline initial observations on his feedback from staff and customers.&nbsp;


Air New Zealand: 1H20 Preview — Maiden Flight in Poor Visibility

<h2><a target="_blank">Equity Strategy</a></h2>
Coronavirus — Impacts and Consequences
The coronavirus outbreak continues to gain momentum with the number of new cases growing daily. It is nigh impossible to predict (1) the length of time it will take to contain the spread of the virus, and (2) future containment measures. Therefore, it also very difficult to forecast the ultimate financial impact on companies with direct or secondary exposure to it. Near term earnings risk exist for a wide variety of companies across the travel, tourism, freight, export and manufacturing industries. However, the coronavirus is unlikely to have a lasting impact on trade and consumer mobility, and therefore we see limited impact on long term intrinsic value of the companies exposed.
Coronavirus in numbers
There are now almost 25,000 confirmed cases of coronavirus globally according to available data, the majority of which are in China. At this stage, the outbreak appears to be contained beyond China’s borders, albeit the number of cases has been growing but remains at very low levels. The death rate is 2%–3%, which is low compared to SARS (~9.6%), but high enough to warrant the dramatic containment initiatives now in place. The path from here is uncertain, given the evolving situation.
Cities in lockdown; disruption will have an impact on supply chains
There are currently 13 Chinese cities in lockdown with a combined population of &gt;50m people. A further 10 cities (combined population of &gt;90m) have closed council controlled services. These containment measures could be widened geographically and prolonged while the virus growth rate increases. A large number of factories across the country remain closed after an extended Chinese New Year holiday.
Global markets react, but modest at this stage
Since the coronavirus started making global headlines on 20 January 2020, the S&amp;P 500 has fallen just -2% and the MSCI All Index has fallen -1%. Locally, the S&amp;P/NZX 50 is down -2% over the same period. However, companies in the travel, tourism and freight industries have fallen more markedly. The SARS episode in 2003 suggests that stocks and markets will recover lost ground once the daily number of new cases peak.
Stock implications
Tourism Holdings (THL) is the only company thus far to downgrade near term earnings as a result of the coronavirus (as well as several other issues). However, other companies are exposed and may see some impact on their near term outlooks. These include Auckland Airport (AIA), Air New Zealand (AIR), Comvita (CVT), Fonterra (FSF), Mainfreight (MFT), Napier Port (NPH), Port of Tauranga (POT), Sanford (SAN), Scales (SCL), Skellerup (SKL), Skycity (SKC), Synlait (SML), and The a2 Milk Company (ATM).<a target="_blank">&nbsp;</a>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Equity Strategy
Coronavirus — Impacts and Consequences
The coronavirus outbreak continues to gain momentum with the number of new cases growing daily. It is nigh impossible to predict (1) the length of time it will take to contain the spread of the virus, and (2) future containment measures. Therefore, it also very difficult to forecast the ultimate financial impact on companies with direct or secondary exposure to it. Near term earnings risk exist for a wide variety of companies across the travel, tourism, freight, export and manufacturing industries. However, the coronavirus is unlikely to have a lasting impact on trade and consumer mobility, and therefore we see limited impact on long term intrinsic value of the companies exposed.
Coronavirus in numbers
There are now almost 25,000 confirmed cases of coronavirus globally according to available data, the majority of which are in China. At this stage, the outbreak appears to be contained beyond China’s borders, albeit the number of cases has been growing but remains at very low levels. The death rate is 2%–3%, which is low compared to SARS (~9.6%), but high enough to warrant the dramatic containment initiatives now in place. The path from here is uncertain, given the evolving situation.
Cities in lockdown; disruption will have an impact on supply chains
There are currently 13 Chinese cities in lockdown with a combined population of &gt;50m people. A further 10 cities (combined population of &gt;90m) have closed council controlled services. These containment measures could be widened geographically and prolonged while the virus growth rate increases. A large number of factories across the country remain closed after an extended Chinese New Year holiday.
Global markets react, but modest at this stage
Since the coronavirus started making global headlines on 20 January 2020, the S&amp;P 500 has fallen just -2% and the MSCI All Index has fallen -1%. Locally, the S&amp;P/NZX 50 is down -2% over the same period. However, companies in the travel, tourism and freight industries have fallen more markedly. The SARS episode in 2003 suggests that stocks and markets will recover lost ground once the daily number of new cases peak.
Stock implications
Tourism Holdings (THL) is the only company thus far to downgrade near term earnings as a result of the coronavirus (as well as several other issues). However, other companies are exposed and may see some impact on their near term outlooks. These include Auckland Airport (AIA), Air New Zealand (AIR), Comvita (CVT), Fonterra (FSF), Mainfreight (MFT), Napier Port (NPH), Port of Tauranga (POT), Sanford (SAN), Scales (SCL), Skellerup (SKL), Skycity (SKC), Synlait (SML), and The a2 Milk Company (ATM).&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Andrew Harvey-Green andrew.harvey-green@forsythbarr.co.nz +64 4 495 8185&nbsp;
Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Equity Strategy: Coronavirus — Impacts and Consequences

<h2>Air New Zealand</h2>
Revenue Growth Recovering, But…
Air New Zealand’s (AIR)&nbsp;December&nbsp;2019 operating stats show a&nbsp;sustained&nbsp;improvement in trading&nbsp;conditions&nbsp;into peak season after a slow winter/spring.&nbsp;However, we are wary of getting too excited given the near term risk to travel markets associated with the coronavirus outbreak.
<ul>
<li>Revenue: We calculate that December 2019 passenger revenue growth was ~+7.2% compared to December 2018. 1H20 passenger growth of +3.7% is below our full year forecast of ~+4.6%, but growth has accelerated in recent months and is supported by easier prior year comparatives over the next six months.</li>
<li>RASK (revenue per available seat km): December 2019 group RASK increased ~+2.2%, with both short-haul (~+2.6%) and long-haul (~+5.1%) showing further month on month improvement. Note that overall RASK growth is lower than both short haul and long haul growth given the mix impact of significantly more long haul capacity growth.&nbsp;</li>
<li>Capacity: December 2019 capacity growth of +4.9% is on par with FY20 capacity guidance of ~+5%. 1H20 capacity growth of +2.8% suggests that full year capacity guidance may be threatened not least given the on-going Rolls-Royce engine issues. Long-haul capacity increased +10.2% in December 2019 (driven by Singapore, Seoul and Taipei) while short-haul contracted by -1.8%. Long haul will remain comfortably above short haul capacity growth through FY20.</li>
</ul>
Our view
December’s passenger revenue growth (~+7%)&nbsp;is the strongest since January 2019, albeit December 2018 was markedly weaker than its preceding months and was followed by the January 2019 profit warning.&nbsp;Management has today reiterated its full year guidance&nbsp;&nbsp;of NZ$350mm-NZ$450m for underlying profit before tax (PBT), while providing insight into a number of “Other Significant Items” which includes (1) a gain on sale of its Heathrow landing slots, (2) reorganisation costs, and (3) the disestablishment of fair value hedges.
In light of the growing concern around the Wuhan coronavirus outbreak we believe the risk to FY20 guidance is to the downside, albeit the impact will likely be softened by the (at least thus far) corresponding decline in global oil prices.
AIR is trading at ~10x one year forward PE and offers a ~8% cash dividend yield. Its discount to&nbsp;Qantas (<a href="http://qan.ax/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://QAN.AX&amp;source=gmail&amp;ust=1580254768159000&amp;usg=AFQjCNEIZrZfI1mYOkKez5Cz-xp46Z64sg" rel="noopener">QAN.AX</a>)&nbsp;has narrowed and now trades on par.&nbsp;We retain a NEUTRAL rating&nbsp;but expect negative sentiment to continue to impact the stock as the coronavirus situation evolves. This may create buying opportunities ahead.
Chart: Revenue growth of +7.2% in December 2019
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1656921650359135719&amp;th=16fe9176564f6de7&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ8Uza_8Q8l-J8D90bineyztXjaIvWI94dc_tASPEe_LpgXYywvzhSeHO21HxMarZigiACmshbiTOKcMgsJ1BzW9Hsafitue33AWaSHv9fYeuKqwC0eRHPuxT3M&amp;disp=emb" width="659" height="430" class="editor-image img-responsive" data-image-whitelisted=""></figure>
Source: AIR, Forsyth Barr analysis
Andy Bowley Head of Research Forsyth Barr Limited
M:+64 21 338 941 |P:+64 4 495 8246 |TF:0800 367 227 Level 22 , 157 Lambton Quay, Wellington

Air New Zealand
Revenue Growth Recovering, But…
Air New Zealand’s (AIR)&nbsp;December&nbsp;2019 operating stats show a&nbsp;sustained&nbsp;improvement in trading&nbsp;conditions&nbsp;into peak season after a slow winter/spring.&nbsp;However, we are wary of getting too excited given the near term risk to travel markets associated with the coronavirus outbreak.

Revenue: We calculate that December 2019 passenger revenue growth was ~+7.2% compared to December 2018. 1H20 passenger growth of +3.7% is below our full year forecast of ~+4.6%, but growth has accelerated in recent months and is supported by easier prior year comparatives over the next six months.
RASK (revenue per available seat km): December 2019 group RASK increased ~+2.2%, with both short-haul (~+2.6%) and long-haul (~+5.1%) showing further month on month improvement. Note that overall RASK growth is lower than both short haul and long haul growth given the mix impact of significantly more long haul capacity growth.&nbsp;
Capacity: December 2019 capacity growth of +4.9% is on par with FY20 capacity guidance of ~+5%. 1H20 capacity growth of +2.8% suggests that full year capacity guidance may be threatened not least given the on-going Rolls-Royce engine issues. Long-haul capacity increased +10.2% in December 2019 (driven by Singapore, Seoul and Taipei) while short-haul contracted by -1.8%. Long haul will remain comfortably above short haul capacity growth through FY20.

Our view
December’s passenger revenue growth (~+7%)&nbsp;is the strongest since January 2019, albeit December 2018 was markedly weaker than its preceding months and was followed by the January 2019 profit warning.&nbsp;Management has today reiterated its full year guidance&nbsp;&nbsp;of NZ$350mm-NZ$450m for underlying profit before tax (PBT), while providing insight into a number of “Other Significant Items” which includes (1) a gain on sale of its Heathrow landing slots, (2) reorganisation costs, and (3) the disestablishment of fair value hedges.
In light of the growing concern around the Wuhan coronavirus outbreak we believe the risk to FY20 guidance is to the downside, albeit the impact will likely be softened by the (at least thus far) corresponding decline in global oil prices.
AIR is trading at ~10x one year forward PE and offers a ~8% cash dividend yield. Its discount to&nbsp;Qantas (QAN.AX)&nbsp;has narrowed and now trades on par.&nbsp;We retain a NEUTRAL rating&nbsp;but expect negative sentiment to continue to impact the stock as the coronavirus situation evolves. This may create buying opportunities ahead.
Chart: Revenue growth of +7.2% in December 2019

Source: AIR, Forsyth Barr analysis
Andy Bowley Head of Research Forsyth Barr Limited
M:+64 21 338 941 |P:+64 4 495 8246 |TF:0800 367 227 Level 22 , 157 Lambton Quay, Wellington

Air New Zealand: Revenue Growth Recovering, But…

New Zealand

Air New Zealand Limited operates an airline business that provides international and domestic air passenger and cargo transport services throughout New Zealand and the South West Pacific. The Company also provides engineering and ground handling services.

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Air New Zealand (AIR NZ)

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