AIR - Air NZ.

[Beagle]

sl234 - Welcome to the forum. I've made dozens of posts about the strong fundamentals' of AIR so You're preaching to the converted as far as I'm concerned.
To my way of thinking AIR is presently charged with negative emotion, almost a perfect storm of discontent with management selling with apparent inside knowledge, the well discussed VAH fiasco and now the profit downgrade for FY17. Add in a healthy dose of fear because of the speed of the correction and the uncertainty of with a sale in VAH may or may not eventuate and you'd struggle to find a better script to write in terms of generating a strong downward correction. Often one finds the best opportunities when fear and uncertainty abound. PE based on Friday's closing price is only 4.2, lowest its ever been and the FY17 downgrade wasn't that bad. Not to be considered a recommendation but I'm looking at doubling down as soon as I am sure its bottomed out.

Welcome back on board Winner69, please keep your tray table folded away and seat belt firmly fastened and enjoy the ride

[skid]

Sl234--I suppose if you wanted to do a bit of research you could go back and see just what and how much fundamentals have changed since 2012 and then decide if they are over 250% better. (thats where we are now)

Roger-thats what we all want to know---(sure its bottomed out)

[winner69]

Hey Roger - even though Raz and others already know these tricks you might find interesting when looking fe that cheap fare to vegas

[Baa_Baa]

Management are very fortunate that the SP has tracked north since the VAH announcement on Monday and the investor day presentation on Tuesday. Knowing how the FMA and NZX work this gives them a very convenient defence against any suggestion that the actual release of that information was price sensitive in a negative way. Having invested a huge amount of time in the SUM matter and hundreds of hours working with the Securities Commission on a finance company matter in years gone by I believe this convenient SP bounce would render any further enquiries on this matter as ineffective. I believe you good folks already know my view on the morality of this matter though...Greed, self interest and human nature are seldom pretty things to watch as they play themselves out...over and out from me on that matter.
[snip]

Given that the "bounce" was very short lived, I've been pondering this, and today had some time to bore myself senseless reading AirNZ Policy. The striking thing seems that while the big wigs are perfectly entitled to to trade the company shares during 8 months of the year, in the current period March->Jun, they all chose to do so in a very tight window. And the vast majority of trades were Sells.

No wonder people are left wondering why the exodus? and what might they know that we don't?

You too can numb your mind here and ponder the significance: http://www.airnewzealand.co.nz/asset...ing-Policy.pdf

Attachment 8027

[noodles]

I started this analysis with an open mind. Given the recent share price drop, talk of pe=4, and with a view to enter the stock, I was keen to look at how AIR is valued on a normalised basis . By this I mean using profit margins for the last 10 years and depreciation values that reflect average capital spend.


As we know, when airline margins expand, competitors come in. Additionally, we know AIR is not immune to a weak economy,fuel prices and NZD fluctuates. So we expect margins to contract and expand depending on the business cycle, competitive environment, and multiple other factors.


The table below shows the EBITDA margin and capex for the last few years (and forecasts). I have averaged these up to get a normalised EBITDA % and CAPEX.

	Revenue	EBITDA	EBITDA %	Capex
2018	5818	1157	19.9	962
2017	5565	1293	23.2	945
2016	5336	1361	25.5	982
2015			19.2	1118
2014			19.5	644
2013			15.6	426
2012			11.2	623
2011			9.8	797
2010			11.2	433
2009			10.6	318
2008			14.5	284
2007			13.0	571
Average			16.1	675

It is worth noting that management and analysts think the EBITDA margins will peak in 2016.


My normalised Capex should be equivalent to normalised depreciation when calculating profit. I have chosen not to normalise interest charges. I'll accept we may have low interest rates for longer.


The table below normalises NPAT using the average EBITDA margin of 16% and depreciation of $675m as calculated above. This is much higher than the analyst forecast of just $420m in FY16.

Year	Revenue	Actual EBITDA	Normalised EBITDA	Normalised EBIT	Interest	NPBT	NPAT	eps	EV/EBITDA	EV/EBIT	PE
2018	5818	1157	937	262	87.0	174.6	125.7	0.112	4.0	14.4	21.1
2017	5565	1293	896	221	41.0	179.8	129.5	0.115	4.2	17.1	20.5
2016	5336	1361	859	184	62.0	122.0	87.8	0.078	4.4	20.5	30.2

I must admit being a bit shocked by the result. In 2016 we get an actual pe=4. But we get a FY16 normalised pe=30! It drops to 20 in fY17. Still, at current prices and on a normalised basis, we could argue for a much lower share price.

So surely I must have missed something here. Will EBITDA margins stay elevated for longer? Is it different this time? Should the GFC margins be excluded? Is this why management are selling?

So as an exercise, I put in a margin of 19% given analysts are look looking at the margins in FY18. See below

Year	Revenue	Actual EBITDA	Normalised EBITDA	Normalised EBIT	Interest	NPBT	NPAT	eps	EV/EBITDA	EV/EBIT	PE
2018	5818	1157	1105	430	87.0	343.2	247.1	0.220	3.4	8.8	10.7
2017	5565	1293	1057	382	41.0	341.1	245.6	0.219	3.6	9.9	10.8
2016	5336	1361	1014	339	62.0	276.6	199.1	0.177	3.7	11.1	13.3

Perhaps this is more reasonable. But what the exercise highlights to me is the sensitivity of the EBITDA margins and the impact a normalised depreciation has on the NPAT.

GLTAH

[Beagle]

Thanks for the link Baa Baa. I will use that as part of my e.mail, as per what follows I had a brief read of that and noted the clauses pertaining to inside information. Honestly the mind absolutely boggles with how management selling in the few days leading up to the release of the FY17 outlook, (note that this was not a downgrade per se), but nonetheless was profit guidance that was at a material variation to consensus analyst expectations. I think shareholders are owed an explanation so I will bang off an appropriately worded communication addressed to Tony Carter as soon as time allows this coming week and will post what reply I get, if any. This will not amount to the scope of another SUM type campaign because I know already from prior experience that they have a technical escape clause in that the SP went up on the day of release of the investor day presentation but I think Tony Carter and the board need to know that management couldn't possibly have known that would be the case for sure and they also need to know shareholders are extremely disappointed with the degree of latitude management have taken here...maybe there is an opportunity for a restricted persons trading policy guidelines improvement here along similar lines to SUM other improvement I recall. All it might take is one e.mail and a discussion so I'll give it a go on behalf of all shareholders and see what happens.
Post #6222 is the best I can do late on a Sunday. Too busy this coming week during normal working hours to do it and timing is crucial here so hopefully my efforts make a difference for other shareholders.

[Hectorplains]

I started this analysis with an open mind. Given the recent share price drop, talk of pe=4, and with a view to enter the stock, I was keen to look at how AIR is valued on a normalised basis . By this I mean using profit margins for the last 10 years and depreciation values that reflect average capital spend.


As we know, when airline margins expand, competitors come in, fuel prices fluctuate. Additionally, we know AIR is not immune to a weak economy. So we expect margins to contract and expand depending on the business cycle and competitive environment.


The table below shows the EBITDA margin and capex for the last few years (and forecasts). I have averaged these up to get a normalised EBITDA % and CAPEX.

	Revenue	EBITDA	EBITDA %	Capex
2018	5818	1157	19.9	962
2017	5565	1293	23.2	945
2016	5336	1361	25.5	982
2015			19.2	1118
2014			19.5	644
2013			15.6	426
2012			11.2	623
2011			9.8	797
2010			11.2	433
2009			10.6	318
2008			14.5	284
2007			13.0	571
Average			16.1	675

It is worth noting that management and analysts think the EBITDA margins will peak in 2016.


My normalised Capex should be equivalent to normalised depreciation when calculating profit. I have chosen not to normalise interest charges. I'll accept we may have low interest rates for longer.


The table below normalises NPAT using the average EBITDA margin of 16% and depreciation of $675m as calculated above. This is much higher than the analyst forecast of just $420m in FY16.

Year	Revenue	Actual EBITDA	Normalised EBITDA	Normalised EBIT	Interest	NPBT	NPAT	eps	EV/EBITDA	EV/EBIT	PE
2018	5818	1157	937	262	87.0	174.6	125.7	0.112	4.0	14.4	21.1
2017	5565	1293	896	221	41.0	179.8	129.5	0.115	4.2	17.1	20.5
2016	5336	1361	859	184	62.0	122.0	87.8	0.078	4.4	20.5	30.2

I must admit being a bit shocked by the result. In 2016 we get an actual pe=4. But we get a FY16 normalised pe=30! It drops to 20 in fY17. Still, at current prices and on a normalised basis, we could argue for a much lower share price.

So surely I must have missed something here. Will EBITDA margins stay elevated for longer? Is it different this time? Should the GFC margins be excluded? Is this why management are selling?

So as an exercise, I put in a margin of 19% given analysts are look looking at the margins in FY18. See below

Year	Revenue	Actual EBITDA	Normalised EBITDA	Normalised EBIT	Interest	NPBT	NPAT	eps	EV/EBITDA	EV/EBIT	PE
2018	5818	1157	1105	430	87.0	343.2	247.1	0.220	3.4	8.8	10.7
2017	5565	1293	1057	382	41.0	341.1	245.6	0.219	3.6	9.9	10.8
2016	5336	1361	1014	339	62.0	276.6	199.1	0.177	3.7	11.1	13.3

Perhaps this is more reasonable. But what the exercise highlights to me is the sensitivity of the EBITDA margins and the impact a normalised depreciation has on the NPAT.

GLTAH

There sure is a lot of sensitivity around this stock! Thanks for the post, very interesting. Confirmed my present bias to stay out but watch closely.

[Beagle]

Noodles - Firstly let me say I normally have the upmost respect for your analysis but I am sorry but in my opinion in this particular instance your figures are fundamentally flawed in a number of ways.

First things first I recommend you should revisit the investor day briefing for an accurate guide to scheduled capex for the next 3 years, the data on 4 traders is woefully inaccurate and at a material divergence to the companies own information provided last Tuesday in their investor day material. I know because I looked into this matter on Friday and noted some major discrepancies.

Secondly if you look at the graph of scheduled committed capex as shown in the investor day presentation you'll realise that AIR is half way through a complete modernisation of its fleet that incorporates significant fleet expansion and by FY19 will have an extremely young average fleet age of only 6.2 years that will be materially expanded from its present capabilities.

My contention is that normalising earnings based on depreciation being normalised because AIR are both significantly expanding and dramatically modernising its entire fleet is a grossly misleading methodology to analyse normalised earnings so I am sorry Noodles but in this case I believe you analysis is fundamentally flawed and without merit.

I note AIR have a policy or writing off their aircraft over their useful life and from time to time when necessary make such revaluations either up or down as considered necessary to ensure their balance sheet values of fixed assets and aircraft show a true and fair view. I have no qualms whatsoever about AIR's depreciation as disclosed in their financial statements and accept it has historically been an accurate guide to the actual utilisation rate of its capital equipment and thus I contend any attempt to normalise earnings on the basis that current and expected depreciation is not a fair representation of asset utilisation is wholly inappropriate. Trust me on this, the accountant in me has been all over this issue like a hawk looking for a feed and there isn't any problem here.

Put more succinctly, if you spoke with AIR management and got the data from them I am 100% confident you would find that if you normalised capex over the years taking out the capex costs of the dramatic fleet expansion and modernisation I am sure you would find that normalised capex was accurately reflected by normal depreciation. If anything normalised capex could be slightly less than depreciation as AIR write their fleet off over 18 years normally but we have a bunch of 21 year old 767-300's still flying well and earning AIR good money that will have extremely low or no remaining book value.

Surely people can understand that when you both substantially modernise and grow your fleet this requires billions of dollars of additional capex. If it were not so AIR would not be presently growing at its fastest pace in its 76 year history while contemporaneous aiming for one of the youngest and most fuel efficient fleets in the world. The PE of 4.2 stands as far as I am concerned...just waiting for the bottom...quite when that is...is the $64,000 question.

[winner69]

That management selling of late seems to coincide with the exercising of options from the incentive scheme

Maybe the timing is tied in with vesting periods and it just happens that one lot was able to be exercised recently

Just a thought

[Baa_Baa]

That management selling of late seems to coincide with the exercising of options from the incentive scheme

Maybe the timing is tied in with vesting periods and it just happens that one lot was able to be exercised recently

Just a thought

A bit more homework and you'd be able to confirm whether the bosses vested options to shares and then sold them. "Seems to coincide" infers that you're speculating that there is a linkage? Either way, its not often someone sells their shares if they think they're going 'up'.