AIR - Air NZ.

[skid]

Nick Mar (Macquarie) has just put out the best analysis on Air NZ I have ever seen - very fine work, really detailed data (literally route by route) he has got from OAG (subscription database), and more just geeky detailed work. Looking at it in detail I recognize many of his assumptions as similar to my own, although he is conservative in places. I think he hasn't picked up the handling costs of fuel either, but his assumptions work okay with my thinking.
If any of you get the chance do read it.

Anyway he as a $2.45 price target based on 3.5x forward EV/EBITDAR, the historical average (equates about 11x PE - applying virgins losses to earnings).
The issue I would have is that he hasn't added anything for the value of the virgin stake. Last I checked Virgin was worth c.38cps. Even at half that, your looking @$2.64.
The stock has also traded up to 4x EV/EBITDAR regularly which would give $2.85, adding half the virgin stake gives $3.00+

I'm happy to say that I think on medium term assumptions of 80c NZD, and Brent $98bbl, the company is worth somewhere between $2.60 and $2.80. If you paid this sort of price, you could expect a return of around 5-6% pa in dividends and about 8-12% growth in EBITDAR, or EPS (roughly on average over the years FY16 through 2020), offering prospective returns of 13-18%, which I think is what most would require to own the share.

For investors at the current market price, should the stock move towards my valuation range, well thats tasty upside of between 40% and 55%, with a dividend of 7% on top. How many stocks you own with that upside over 1 year?

I'm pretty convinced this is really good analysis, but of course there are uncontrollable factors that may see this not play out.

Now you see why I have so many shares right...

If you think real hard --Can you guess what one of those uncontrollable factors might be--Its sitting right next to you and be careful not to trip over its trunk.

[Beagle]

If you think real hard --Can you guess what one of those uncontrollable factors might be--Its sitting right next to you and be careful not to trip over its trunk.

Well said. Delta currently trades, based on average consensus analyst forecasts on a 2015 PE of 8.5 so AIR really not that cheap taking into account all current known risks.
If, and I think that's now a HUGE "IF" Air can achieve average consensus 2015 analysts forecasts of 23 cps for 2015, (all of which were forecasted before the Elephant got let loose and many of which will doubtless get revised down), that would put AIR on a price of $1.95 in late 2015 if the forecast is achieved. On the other hand the potential downside is quite frankly so scary it appears very few are even contemplating it.

I reckon you can't have it both ways. One minute we're near the top of the economic cycle and therefore by someone's analysis we should arguably therefore be looking at a low PE, the next minute its worth a PE of 11 despite me providing evidence their average PE over the last 10 years is 10. Which is it Mod ? Your new PE of 11 looks "awfully convenient"

If VAH and the wounded pussycat can't make a profit before this unspeakably bad genie was let out of the bottle, what chance afterwards ?

The only thing Mod and I appear to agree on at this stage is that at least if they take full possession of the wounded tiger they can get on with the rationalisation process at full speed without having to worry about minority shareholder interests. That said they have their work cut out as the leisure market would be the first to get absolutely hammered if Ebola spreads considerably further. Maybe they should just skim any cream there is out of it, (best routes and planes) and just put the poor animal out of its misery before it sucks the life out of its mother which itself is really struggling ?

I really don't think they'll achieve 23 cents EPS this year. Most of those forecasts are well before the $6-7 billion dollar hole opened up in the N.Z. economy with the Dairy collapse and none of them have factored in even the slightest revision for the current crisis. I expect significant downward revisions as the situation / year plays out and all thing considered if AIR could match last years normalised earnings they'd be doing exceptionally well. Most of these analyst forecasts are factoring in 5% top line growth which would assume AIR can achieve the same load factors at the same yields as last year as they grow their capacity by 5%. I see substantial risk around these assumptions. Quite apart from the completely obvious major concerns the economy seems to be going flat and I can't imagine the Reserve bank will want to lose face and reduce interest rates any time soon so will business confidence tailing off and other airlines around the world offering dirt cheap fares to entice people to take the risk of flying, I see pressure on both yields and pax loadings.

I must be losing the plot, what would a silly old risk averse accountant know... Maybe I'm just trained to see problems 1000 miles down the road before they happen or maybe I just need to triple my current dose of happy pills and get with the programme

[winner69]

At least she was still flyin

http://www.smh.com.au/world/picture-...18-1182td.html

[modandm]

Well said. Delta currently trades, based on average consensus analyst forecasts on a 2015 PE of 8.5 so AIR really not that cheap taking into account all current known risks.

To me AIR is a better company with significant competitive advantages a newer fleet and greater growth potential. On a forward PE of AIR alone (excluding VAH), is on around 7x so markedly cheaper. One shouldn't get to caught up on PE however, its only one ratio to compare, and there are good reasons for similar companies to have different PE's, such as growth, quality, leverage etc.

I reckon you can't have it both ways. One minute we're near the top of the economic cycle and therefore by someone's analysis we should arguably therefore be looking at a low PE, the next minute its worth a PE of 11 despite me providing evidence their average PE over the last 10 years is 10. Which is it Mod ? Your new PE of 11 looks "awfully convenient"

If you read closely you would have seen this includes VAH losses. This is how people that look at PE in the most basic and simple way (Price/NPAT(pershare)) will see. In my earlier analysis where I say AIR should be on a PE of c.8, this is using AIR NPAT (excluding losses from VAH). I then add a value for VAH. To put VAH losses into NPAT and calculate a PE based valuation is a bad approach. What Nick does is calculates valuation based on EV/EBITDAR using a 3.5x multiple. I think this is a good approach, but the multiple is conservative (I would use 4x), and that he should add some value (maybe 50% of market value) for the VAH stake.

Analyst forecasts are factoring in 5% top line growth which would assume AIR can achieve the same load factors at the same yields as last year as they grow their capacity by 5%.

Your loose interpretation of analysts assumptions are incorrect. To provide more detail, scheduled capacity for FY15 is expected to be up 6.8% on last year not 5%. This consists of 2.2% in H1 and 11.5% in H2. The split is Domestic 4.9%, Taspac 3.4%, International 9.5%. Therefore analyst are expecting declining load factor and or yield to get to consensus.

I see substantial risk around these assumptions. I see pressure on both yields and pax loadings.

As above analysts share your view to some extent. If your view is that they are too positive then you entitled to that view, and its not an unreasonable one. In my view they are being too conservative, and I have taken a slightly more fair view. In the past my fair view has been more accurate but that may not continue.

Management have a track record of disciplined capacity management, and I don't believe they are growing capacity ahead of demand. Recent NZD weakness allows yield gains to come through where previously (last 12m) these were offset by strong NZD. This is rolling off in the case of the yen and AUD where moves have been sharp. I note the threat of ebola, but maintain my 6% pax revenue growth assumption, which factors in 4% RSK growth (vs 6.8 capacity) and 2% yield improvement. I think this is fair, and neither conservative nor aggressive. I will be using operating statistics to monitor progress against these assumptions and modify them as necessary. Should ebola spread (highly unlikely in my view) these are the assumptions that would need to be revised.

further on valuation
On EV/EBITDA (not EBITDAR which would be better but harder to work out) AIR is one of the cheapest airlines globally, on 2.7x. SIA is on 3.7x, Cathay 7.3x, Delta 6.5x, Easyjet and Ryanair 7-7.5x. It is my belief that AIR should be at least near average of 5.7x, given its lack of competition (positive), offset by lack of scale (negative). Historically AIR has always been cheap and thats why Nick's analysis uses 3.5x - the historic average. I would argue, given its strong outlook, cashflow, and improved liquidity post sell-down a 4x multiple is appropriate even being conservative. Therefore I continue to stand by my earlier valuation arguments and view that the stock is compelling.

Once again I find myself taking the medium term view, valuing the company based on sensible and fair analysis and assumptions, while other pay more attention to what the stock price is doing, and sensationalist news headlines. In this regard I feel very comforted that I am taking the right course. Indeed it is when excitement builds on this thread as the stock price rises that true enterprising investors should be most careful.

Best regards,
-mod

[Beagle]

I haven't got the time to get into a point by point debate but I appreciate your input. I find it very difficult to believe AIR can grow its yields or pax in the current environment and indeed monthly operating stat's for the 2015 financial year to date validate my point of view.
If it wasn't for the threat of Ebola spreading I'd be there with you. This is the main substantive area where we disagree. We can debate semantics of how VAH's losses should be accounted for later as that's not the major issue here. The risk is real and many American airlines are down ~ 20% since it became obvious the CDC isn't really up with the play as many thought they should be.

Ignoring the absolute peak of $2.29, as something of an aberration if we take say $2.20 as the recent high and deduct the same 20% we are back to $1.76 as a fair price BUT AIR has paid a total of 15.5 cents in final and special divvy's very recently, (neither of which were provided for in the financial statements to 30 June 2014) as noted in page 37.

Perhaps I should add to the debate by noting in those financials total equity was 1.872 billion / 1.114 billion shares = NTA of $1.68 per share but if the divvy's had been provided for, as they've now been paid asset backing currently stands at $1.52.5 plus say 3-4 cents in earnings over the slower winter months since 30 June = ~ $1.56.

In my view AIR's SP has held up remarkably well in the face of the effects of the collapse in dairy prices affecting N.Z. business and consumer confidence, the Ebola threat and the recent payment of substantial dividends but its very hard to see the SP making meaningful progress back north until the elephant is known to be well contained. Until this happens I see considerable risk to the downside.
Lets see how we go in the coming months but I feel very comfortable with my vwap exit price (ex divvy's) of $1.94.4 and the risk to me being out of the money in any meaningful way in the short term appears negligible.

[couta1]

The Medias going to milk this Ebola thing to the max looking for every little hint of a new case anywhere in order to keep the sensational going its just what they do but hopefully savvy investors in Air NZ can see past this and sit tight.

[Schrodinger]

Fuel tipped to fall further things looking good for AIR.

[mp52]

After much deliberation over down-side risk of ebola AIR appears to be moving back to post-div levels but oddly not a peep in the thread. The move appears to coincide with the declaration of Nigeria being ebola free.

Is there a Chinese proverb - "in crisis there is opportunity"? Perhaps there should be though will need traders to confirm it.

[Beagle]

People have short memories and think the Ebola crisis is over just because there's presently something of a break in mainstream media coverage. Just this morning someone was escorted off a plane arriving in America after arriving with a high fever. I am sure the other passengers are "absolutely thrilled" they were sharing that recycled air. Interesting that this made N.Z. news but seemed to be ignored on CNBC this morning. Talk is the new guy in charge of the CDC is nothing but a PR cover-up expert. Crisis over ? I don't think so.
Oil is cheap so some might argue that'll make up the difference from some lost bookings.

[Robomo]

I am sure the other passengers are "absolutely thrilled" they were sharing that recycled air.
Oil is cheap so some might argue that'll make up the difference from some lost bookings.

Ebola is not airborne spread, unlike the flu. Has to be direct contact with body fluids. Wash your hands, don't touch your fellow passengers and don't touch your face after contact with any possible Ebola sufferer.

Agree with low oil prices having some positive impact but would probably be minimal given that AirNZ hedges most of their fuel.