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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Air New Zealand<br>Air's Bubble To Inflate Gradually</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Air New Zealand (AIR) is enjoying its first commercial international passenger services for over 12 months. The trans-Tasman bubble opening provides a welcome boost, but to date has been far from a bonanza. The opening sugar-rush of visiting friends and relatives (VFR) travellers has been dominated by New Zealand passport holders from both sides of the Tasman. Demand has since slowed, yet airline schedules suggest a gradual capacity build over the next few months. We expect AIR to still generate a material loss in 2H21 and to be loss-making through FY22. The outlook remains highly uncertain and a required capital raise still has to play out. We remain NEUTRAL but recognise AIR is trading towards the upper end of its trading band.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/203/907/original/image_61881236321620001111691.png?1620001112" class="editor-image img-responsive" data-smartkarma-image-id="203907"></figure>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Earnings upgrades to each of FY21, FY22 and FY23. Losses assumed in FY21 and FY22</li>
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<h3>Bubble boost</h3>
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<p>AIR's international (available seat km) capacity has initially increased by ~+100% as a result of the opening of the trans-Tasman bubble. AIR will fly 19 Tasman routes between 13 airports. Forward schedules suggests a gradual capacity build over the next few months. Competition is currently limited to Qantas/Jetstar, with Virgin Australia not returning to the Tasman until October 2021, and fifth freedom carriers including Singapore Airlines, China Airlines and Emirates likely to be absent until broader border re-openings.&nbsp;</p>
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<h3>Cash burn to continue&nbsp;</h3>
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<p>Cash&nbsp;burn guidance, which was -NZ$45m to -NZ$55m&nbsp;per month through 2H21&nbsp;has been removed given the bubble opening. We expect an initial cash boost from working capital gains (forward ticket sales), but these will slow as the forward book matures and capacity builds. Consequently, cash burn is likely to resume and&nbsp;deteriorate through 1H22 given the resumption of PAYE payments.</p>
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<h3>Valuation</h3>
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<div id="m_4551118814049325906inc8h">
<p>AIR share price has been dogged despite the reality of capital raise to secure much needed equity and ultimately the company's longer term future. In light of the large retail investor base and government's majority stake we expect that investors willing to participate in the capital raise will not be diluted. Its current enterprise value (EV) is just -4% of what it was on 31 December 2019, despite the current loss-making outlook and significant uncertainty over the recovery profile and size of the aviation market in future. However, we are confident that AIR will enhance its competitive position as a result of COVID-19. It's now trading at a ~+70% premium to net asset value (as at 30 June 2021),but after adding our valuation for the airpoints loyalty scheme, is within range of our NZ$1.60 target price.&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>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Air New Zealand Air's Bubble To Inflate Gradually

NEUTRAL
Air New Zealand (AIR) is enjoying its first commercial international passenger services for over 12 months. The trans-Tasman bubble opening provides a welcome boost, but to date has been far from a bonanza. The opening sugar-rush of visiting friends and relatives (VFR) travellers has been dominated by New Zealand passport holders from both sides of the Tasman. Demand has since slowed, yet airline schedules suggest a gradual capacity build over the next few months. We expect AIR to still generate a material loss in 2H21 and to be loss-making through FY22. The outlook remains highly uncertain and a required capital raise still has to play out. We remain NEUTRAL but recognise AIR is trading towards the upper end of its trading band.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Earnings upgrades to each of FY21, FY22 and FY23. Losses assumed in FY21 and FY22



Bubble boost


AIR's international (available seat km) capacity has initially increased by ~+100% as a result of the opening of the trans-Tasman bubble. AIR will fly 19 Tasman routes between 13 airports. Forward schedules suggests a gradual capacity build over the next few months. Competition is currently limited to Qantas/Jetstar, with Virgin Australia not returning to the Tasman until October 2021, and fifth freedom carriers including Singapore Airlines, China Airlines and Emirates likely to be absent until broader border re-openings.&nbsp;


Cash burn to continue&nbsp;


Cash&nbsp;burn guidance, which was -NZ$45m to -NZ$55m&nbsp;per month through 2H21&nbsp;has been removed given the bubble opening. We expect an initial cash boost from working capital gains (forward ticket sales), but these will slow as the forward book matures and capacity builds. Consequently, cash burn is likely to resume and&nbsp;deteriorate through 1H22 given the resumption of PAYE payments.


Valuation


AIR share price has been dogged despite the reality of capital raise to secure much needed equity and ultimately the company's longer term future. In light of the large retail investor base and government's majority stake we expect that investors willing to participate in the capital raise will not be diluted. Its current enterprise value (EV) is just -4% of what it was on 31 December 2019, despite the current loss-making outlook and significant uncertainty over the recovery profile and size of the aviation market in future. However, we are confident that AIR will enhance its competitive position as a result of COVID-19. It's now trading at a ~+70% premium to net asset value (as at 30 June 2021),but after adding our valuation for the airpoints loyalty scheme, is within range of our NZ$1.60 target price.&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



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