AIR - Air NZ.

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Thanks heaps for that Hoop, will pore over it this evening.

Ops

[biker]

[QUOTE=Biker] The Air shareprice has always been cyclical. This is very close to the bottom of the cycle IMO
I agree with your comments Modandm.
Bullish comments this morning on National Programme Business from both Palmer and Fyfe. Much more upbeat than the article in the Herald.
I am a buyer at these levels.


[QUOTE=Biker] That was roughly the bottom at 87c. Palmer and Fyfe did give a heads up.



My first post was 18th July, the second, the 31st of August.

Sometimes it is just a matter of eyes and ears open.

[CJ]

So are we at the top. Price seems to be supported by the buyback at the moment providing a large part of the volume. Once that stops, a drop would be expected?

[Hoop]

So are we at the top. Price seems to be supported by the buyback at the moment providing a large part of the volume. Once that stops, a drop would be expected?

My chart has warnings...Realised my capital gain + divy on Monday @123.5/share....on to my next adventure and looking forward to frying new fish.

Disc : don't blindly follow others make your own decisions.

[modandm]

Hi chaps,

well - my charts didnt tell me anything... funny that.

But fundamentally I liked the stock prior to the August 30 results and had been accumulating a sizeable position when the stock was around 85-90c.

I am pleased to say I have more than doubled my position since then including a final top up today at 128c at the open to what is for me a monster oversized position (over 150,000 shares). I have been adding to my op stats tracker and have built out a decent P&L model.

I have been observing analyst research and enjoyed watching them slowly realising how undervalued this company is. They have been beyond conservative in upgrading their profit estimates - glacial I would say. The thing is they are not used to companies doubling profit in one year. The sheer leverage air nz has has and the benefits of improved FX, stablising fuel, 777-330er and a320 deployment, and improving demand has not been well understood - at all. (good - lets us take advantage of the mispricing)

To give you an idea - following the Full year results analyst upgraded earnings to 10-11c for FY13 - despite management saying "more than double(ie.>200%)" analysts gave them about 175% up to 11cps. My analysis came up with about 250% up (15cps). Yesterday management re-iterated guidance AGAIN! and even further gave half year estimate of 120-140m which is 7.5-9c eps for the half year. That means 15c is fair in my opinion (cathay benefit from march), my FY14 estimate is c.20c (subject to fuel and FX). Putting Air NZ on a multiple of 14x this year and 12x next year yields a PT of $2.10 then $2.40 - which is close to 100% upside when you consider you will likely get 10c in dividends this financial year.

My analysis is alot more detailed as you would think to build the conviction required to build this sort of position. I have analysed at the yield and rsk growth trends, calculated fuel expense using hedging stats, and based on my conversations with investor relations, estimated ancillary revenue growth, benefits of Cathay alliance, 777 refurbishment, increased capacity on domestic, likely interest costs and expense based on cash flow position forecast, labour cost, and more.

Air NZ expect to deliver $130m of a planned $250m in profit improvement this year. Another $120m further improvement is expected with 787, and a320 arrivals in the next 2 years, supply chain, and further network re-organisation.

Anyway you stack it PB, PE, EV/EBITDA, the stock is super super cheap. Re analysts - Goldmans upgraded the stock this week and Macquarie did yesterday. Both have PT's around $1.50 - both far to low (still). People are stuck in the past with their analysis on this one.

Look forward to your comments.

[modandm]

Also I didn't mention - based on the target prices above you get a 20% stake in Virgin Australia (worth NZ 25cps) free.

Now - someone - please tell me what are the charts telling you?

[CJ]

Now - someone - please tell me what are the charts telling you?

Agree with your comments if the economy keeps going as it is.

If the economy takes a turn, airline stocks will suffer a bigger drop than most shares.

So need to look to the global economy: not to concerned re fiscal cliff but what about Europe. I cant tell if the longer they draw this out, the safer it gets or the more precarious it gets.

[modandm]

Europe has been bad for the past 2 years and terrible for the past 12 months. With Air not serving europe and reducing flights to the UK to one per day I consider the european macro of low importance.

In order of macro risks facing NZ imho:

- Fuel increases
- NZD falls
- NZ economy tanks
- US economy tanks

The stock copped another upgrade from deutsche bank today - thats 3 for the week!

[Jaa]

Europe has been bad for the past 2 years and terrible for the past 12 months. With Air not serving europe and reducing flights to the UK to one per day I consider the european macro of low importance.

In order of macro risks facing NZ imho:

- Fuel increases
- NZD falls
- NZ economy tanks
- US economy tanks

The stock copped another upgrade from deutsche bank today - thats 3 for the week!

I am more worried about something random. Think SARS, earthquakes, volcanoes, a terrorist attack, accidents or mechanical issues etc. All have had a big impact on the airline business in the past.

[modandm]

Just been playing with my model so a quick update.

The NZD has run up to above 84c vs the USD - what does this mean for AIR going forward?

Well assuming Jet fuel stays flat at 130USD/barrel the change in fuel cost in NZD will be $1206m in FY13 to $1116m in FY14. This adds about 6cps to earnings taking my FY14 estimate from 20c to 26c. FY13 the airline is hedged 79% at 80c but I expect they will get a good benefit in FY14 should the USD continue to remain weak or weaken further.

Note that I haven't taken into account savings on a/c acquisition or lease costs or any other USD costs (because these aren't broken out) and because some revenue is in USD too so it doesn't make sense to.

For reference key assumptions in my model are 3% pax revenue growth p.a, 15% ancillary revenue growthp.a, labour costs rise at 3% p.a, fuel remains $130usd barrel and FX as mentioned at NZD=US 0.84c.

My numbers now run ahead to FY15 (extrapolating current trends) and keeping the same growth rates and Fuel FX assumptions I reach an EPS of 32cps. Obviously this should be taken with a pinch of salt. Alot can happen in 2 years in the airline business. Note that I don't assume any dividend from VAH either which would increase earnings.

As far as a valuation I consider a 10x PE on FY14 earnings of 26c (at current fuel/FX) = $2.60 per share - still attributing no value to the VAH stake which is worth about 24cps. Also not giving credit for the $1bn NZD of cash on the B/S because this is an ongoing liquidity requirement in my view.
With at least 10c in dividends on top of the capital appreciation you are looking at over 100% return over a 12-18month time frame.

Sure there are risks as Jaa mentions - but there are also risks to the upside:
1. NZD strengthens futher vs USD
2. Fuel falls as shale oil depresses energy costs
3. Management deliver cost savings (not all factored in)
4. Stronger than 3%pa pax revenue growth

Overall I maintain my conviction and as said before I am heavily invested.
Cheers

For posterity - AIR currently trades at $1.33 - with concensus at about $1.55 following recent u/gs. FY13 concensus EPS is 14c vs 15.7c my estimate.