AIR - Air NZ.

[noodles]

Well, I've ignored Buffett today.

[modandm]

Further thoughts on the result:
The reason I was $20m over for pax revenue was because of a 2 day difference in the accounting period vs 2011. Apart from that results were ahead of my estimates at EBITDRA but fleet costs (Depn & lease) were slightly above my estimates. I am more pleased now because it has not been costs which supressed the result vs my estimate just an accounting difference. Adjusting for the difference the result would have been a PBT of around 150 so still below my estimate due to higher fleet costs but not so far off.

Ancillary revenue growth and contract revenue disappointed while cargo was above expectations. We can safely assume continued 5-10% growth in cargo revenue as yield improves and as new 777s are added.

Positive takeaways:
- The buyback suspension was temporary (insider dealing policy) and is only 25% complete so we can expect additional share repurchases
- Acceleration of growth with new A320 and 777 which will replace 744 (previously 787s were to replace 747 so net growth) - should support further earnings growth and margin expansion in 2014-15
- Pulling of HKG-LHR should contribute $20m to profit in 2014 as capacity deployed to stronger demand routes, AKL-HKG now a stronger route with Cathay as a partner - daily 777
- Luxton spoke a bit on sales execution - clearly his strength and something AIR has been weak at - many changes behind the scene in China, and Japan are driving better outcomes and this is starting to come through in operating stats and through ability to increase capacity - tokyo and Shanghai now daily which is excellent progress
- Yield improvements in last few months CFO says "we don't expect a retracment" - in other words the strong yield improvement (circa 7% yoy) can continue in the second half
- Clearly AIR are looking at new international routes - probably from mid 2014 when capacity becomes available

Changes to model and full year result estimate

I now look for 2% RSK growth for the 2nd half (lower) - because RSK growth was strong in the last quarter of FY12 so don't want to be too bullish. My yield estimate has moved up dramatically after the last 2 op stats and on comments and I now look for 6% improvement (this is what is exciting the likes of Marcus Curley at GS if you read his work). This is below the last 2 months which have been 6.9 and 7.1 so I do think 6% is a fair assumption and can tweak this month by month as we go forward.

The combination of these results in a very postive 8% pax rev growth for the 2nd half which combined with best estimates of other revenue and expenses (taking into account lessons from the result) lead me to an EBITDRA for the 2nd half of 471 and a PBT of 150 - vs 40m last year. This means the 2nd half could be better than the first (which is unusual), as a result of a sharp improvement in yield. The improving macro environment is a clear tailwind here - and maybe the hobbit is having an effect!

To conclude the FY13 PBT number would be $291m which is more than triple FY12. EPS would be 9.6 for the second half and 18.6c for the full year. Stunning!

Analysts are mostly around $210-230m and are aware of the yield trends and watching closely - if we see a continuation in good yield stats expect analysts to start to move up to where I am with target price upgrades to boot. if we dont and revenue growth stays at 4% then 14c eps can be expected - which means the stock is probably fair value at 1.80 which is where most analysts have it now. Still good upside from 140 where we are now.

As to my new base case valuation I use my 8% pax rev growth for the 2nd half, and just 4% revenue growth for FY14 to reach FY14 EPS of 24cps. This is holding cargo, contract, and ancillary rev at FY13 levels, iflating all costs except fuel by 4%. Fuel i use 83c and 135USD barrel (jet). This seems an appropriate estimate at this stage. May spend more time on it later.

To valuation - I continue to think a PE of 13x FY13 and 10x FY14 EPS is appropriate given that dreamliners and 777 arrivals in FY15 will support futher cost improvement - meaning even if revenue growth slows (which it shouldn't with capacity coming on), earnings are supported and could continue to grow at 15-25% into FY15 FY16. Clearly there is less certainty about this than FY13 earnings but you have to assume something.

So that gives me a valuation of $2.40 per share. Again no value is attributed for the 24c virgin stake. Factor in dividends of 3c and maybe 5c at full year and we have $2.48 - or a total return of 77% over the 6-8 months.

Thats me guys - and I miswrote earlier - have had a great week no doubt. Have just over 405k shares now. Wider friend and family the number would be close to a million shares . Thanks for the support

[iceman]

Well done modandm and well deserved with your great research and knowledge of this stock and industry and then having the wherewithal and discipline to follow your conviction through. Congrats. Now being such a substantial shareholder, maybe you can start to push for a South American service for me

[Food4Thought]

Share buy back. Does anybody know if this will resume? Has it been mentioned?

[steve06]

Just wondering is the government sell down of AIR going ahead this year? And if so would that bring the SP of AIR down some...?

[CJ]

Just wondering is the government sell down of AIR going ahead this year? And if so would that bring the SP of AIR down some...?

technically they could do as a share placement, similar to skt, STU etc at say a 5% discount. Offer only to nzers.

AIR has a market price so don't expect a big discount or bonuses. Timing? Who knows but Key is no doubt trying to pick the top (Modandm will say that is ages away)

[steve06]

Have some cash lying around, looking to invest, deciding which companies would be a good stable med to long term investment, good financials and divis..

[steve06]

Cheers, Will do

[Food4Thought]

AIR is currently in transit, prior to their next departure. Prepare for a slow but steady climb, Full Year results should be positive. I would also suggest MHI. From a brand perspective, this company shows solid growth, especially as some of their developing market economies are slowely recovering.

[noodles]

I like air and fph. They complement each other nicely as they are negatively correlated on the exchange rate. Both stocks are arguably under valued. Both stocks are in a nice uptrend.

However there are clear risks (apart from exchange rate) for both stocks.