AIR - Air NZ.

[Marilyn Munroe]

History may repeat for Cullen Airlines expeditions into the Australian market.

The domestic air-fare war between Virgin and Queer and Nasty and friends is far from settled.

Best outcome for John Key and us taxpayers, flog the lot to Etihad.

Boop boop de do
Marilyn

[Snow Leopard]

from a Rod Oram piece on Stuff

But all is not lost. You can make a far better investment in Air NZ than its shares. If you were smart enough to buy its 2016 bonds when they were issued, you're enjoying a 6.90 per cent coupon. Even if you bought them this week, they still return 5 per cent and your capital is secure

Not exactly 100% true is it?

Best Wishes
Paper Tiger

[biker]

from a Rod Oram piece on Stuff


Not exactly 100% true is it?.

Best Wishes
Paper Tiger

No, it's an outrageous thing to say. Your capital is 'secure' ??? Ask Babcock and Brown bond holders and many others who have lost all their capital or a huge percentage of it.

And he says this!

"Should Air NZ hit the skids again as it did in 2001 when the government was forced to bail it out, - heaven forbid, but that's a real risk in airlines - bond-holders would likely get all or at least a large chunk of their capital back.
And should the airline go bust, as a shareholder you will rank far behind bondholders in the division of the meagre value left in the company"


Which is just crap! In AIR NZ hits the skids as in 2001 or "goes bust" the bond holders will lose their money just like the shareholders. You can rank anywhere you like, but if there is nothing left, where you rank is meaningless.
Some times Rod Oram needs to stop talking from his back side.
A commentator in his position should know better.

[BIRMANBOY]

I don't know that I'd agree with your pessimism there. The Govt still own 51%. this should give you some measure of comfort I would think. I own the bonds and at 6.9% not the best yield but was better than the shares were paying at the time. Risk everwhere as we all know..I think these bonds are very low risk but that's just me.

No, it's an outrageous thing to say. Your capital is 'secure' ??? Ask Babcock and Brown bond holders and many others who have lost all their capital or a huge percentage of it.

And he says this!

"Should Air NZ hit the skids again as it did in 2001 when the government was forced to bail it out, - heaven forbid, but that's a real risk in airlines - bond-holders would likely get all or at least a large chunk of their capital back.
And should the airline go bust, as a shareholder you will rank far behind bondholders in the division of the meagre value left in the company"


Which is just crap! In AIR NZ hits the skids as in 2001 or "goes bust" the bond holders will lose their money just like the shareholders. You can rank anywhere you like, but if there is nothing left, where you rank is meaningless.
Some times Rod Oram needs to stop talking from his back side.
A commentator in his position should know better.

[winner69]

Some of those numbers show how 'risk' doesn't seem to be an issue these days

Gvt Bonds 2027/2019 quoted at around 4% - lets call that the country risk premium

The Air NZ bonds at 5% implies investors putting a 1% company risk premium on Air NZ

Take it a bit further and dividend yield is 5% - implies a equity risk premium of 0% - so are shareholders saying no added risk in holding shares at 160? Punters no doubt playing the capital gain trick

Seems like most think Air NZ pretty risk free anyway

The only thing of value in Orams little piece is that he reckons AIR has destroyed heaps of value ....Air NZ is no exception. From 2003 to 2012, its profits exceeded its cost of capital in only four of the 10 years, according to data it supplied for this column. The last time was 2005. Its total cumulative destruction of shareholder value was $179m.

If that the case AIR isn't worth any more than its book price of 164 anyway ... so improved performance built into the price (ie consistently making more than its cost of capital)

[modandm]

A lot of garbage in the herald and by posters here - almost entirely backward looking. Past performance is no way to judge an investment. Since 2001 the oil price has gone from 30 USD to over 100 USD a barrel. A more than 300% increase. In 10 years time oil prices will not be 400USD per barrel (if it is we are all screwed).

The fact that Air NZ has been profitable throughout this is testament to its strong competitive position and thoughtful conservative management. As far as airlines go Air NZ is nearly as good as the best of them - which have been very successful investments. These are Copa, Ryanair, Easyjet, and a few others. In some ways I see Air NZ as facing less competitive pressure than Ryanair and Easyjet, which means it should deliver more stable returns.

Buffets comments apply to US airlines - a huge market, highly competitive, and one with low barriers to entry. NZ is a small market where AIR has significant incumbent advantages. We have seen the departure of Virgin NZ and Jetstar struggling - it is unlikely there will be any new competitor. Internationally NZ will continue to face competition - but only from Asia. Air NZ has a significant cost advantage over US and Canadian airlines, as well as small pacific airlines.
In asia NZ will compete with efficient aircraft, and do okay bringing tourists to the country (which will likely fly domestically as well). They will increase their focus on outbound destinations such as Bali where they have a competitive advantage - NZers will pay more to fly NZ, Chinese ones may not.

The current outlook for Air NZ is very good, the company is on track to grow earnings 20-25% pa over the next 4 years, and dividends at an even faster pace. Whatever metric you use the stock is cheap and not reflecting the quality of the business (its strong competitive position), the growth, or the value of its virgin stake.

And fyi AIR has significantly lagged US airlines this year. They are the best performing stocks in the market - a lot have doubled. As a long term investor I would rather own Air NZ which I think can do consistently well, rather than US airlines which have bounced hard from rock-bottom valuations, but remain structurally challenged.

[modandm]

Some of those numbers show how 'risk' doesn't seem to be an issue these days

Gvt Bonds 2027/2019 quoted at around 4% - lets call that the country risk premium

The Air NZ bonds at 5% implies investors putting a 1% company risk premium on Air NZ

Take it a bit further and dividend yield is 5% - implies a equity risk premium of 0% - so are shareholders saying no added risk in holding shares at 160? Punters no doubt playing the capital gain trick

This is bizarre analysis and it is totally incorrect to apply a dividend yield vs bond yield comparison as a measure of equity risk premium. What would you say about the many stocks with low or no dividend yield.

Not sure what came over you to post such thinking - based on your next point you seem an intelligent guy.

If that the case AIR isn't worth any more than its book price of 164 anyway ... so improved performance built into the price (ie consistently making more than its cost of capital)

Makes some sense - but book value is rising quickly, and I would argue the company can sustainably generate returns above cost of capital - P/B of Copa Ryanair and Easyjet is over 2x! Air NZ currently 0.8-0.9x.

[winner69]

Modandm - isn't one of the key inputs into ERP an expected returns number. Lots of academia using bond and dividend yields to assess implied ERP. I admit such studies are generally at a market level but the rationale does apply at a company level

Just says old fashioned thinking in that investing in the government (govt bonds) is the least risky investment. Investing in company (bond) is more risky and the yield be higher. Investing in a company by having shares is even more riskier and so the dividend yield should be even higher. (Suppose the logic does assume that the most of free cash flow is paid out in dividends)

In AIR case I should have used a dividend yield of 6.944% (nxz gross figure quoted) . So country risk is 4%, company risk 1% and implied equity risk is 2% (not the 0% I said earlier)

Current situation but that is state of play these days in a world of inflated asset prices .....risk premiums are pretty low on a historical basis. Accepting this AIR is probably well priced at the moment.

You mention low dividend companies ......one needs to ask why low dividend. What is being done with any free cash flow? In these companies one could use the FCF and assume it paid as a dividend to apply the sums above. Reminds me of what an old timer told me a while ago in that maybe the generation that follows the baby boomers will be demanding of companies and make them pay out surpluses every year instead if hoarding them. A generational thing eh

[modandm]

Modandm - isn't one of the key inputs into ERP an expected returns number. Lots of academia using bond and dividend yields to assess implied ERP. I admit such studies are generally at a market level but the rationale does apply at a company level

Yeah can be used at the market level, but it must be used along with the markets expected earnings growth to imply a cost of equity. Its not very good at the stock level - but if you try you need to plug in a growth rate - that is the difference between fixed interest and dividends - dividends grow over time.

The formula is Value of stock = Dividends next year / (Cost of equity - growth rate)

For Air NZ say 1.60 = 0.12 / (x - 5%)

solve for x = around 13%

So 13% would be your return per year forever if Air NZ grows its dividend from 12c next year by 5% pa to infinity.

In the case of Air NZ dividend growth is likely to be faster than that - but then growth will slow. You can use a multi period formula and plug in your own dividends for the next few years then use a terminal growth rate.

I don't accept you argument that Air NZ is fairly priced at all - or that the worlds stocks are... There are some assets that are expensive - but its not widespread. Of course stocks feel expensive because they have been very cheap for the last 4 years...

[Marilyn Munroe]

Meanwhile in the land of the underarm bowler Federal Treasurer Joe Hockey has hinted that the Aussie Taxpayer may put money into Queer and Nasty Airlines.

Maurice Williamson had better dash down the corridor to the Minister of Transports office and tell him to unplug the fax machine right now. We wouldn't want the Aussie Government to queer the pitch in favour of their nationalised national airline like last time

Boop boop de do
Marilyn