Hi see weed
AIR has had a magnificent run over this quarter gaining almost exactly $1. The market has clearly realized the operating environment is more benign but also that AIR are executing their business plan in a carefully organized and disciplined manner. Gone is the apparent rush of 2016 to grow as fast as possible and there's now the sense that they're growing in a carefully managed and more disciplined manner. The more they grow the more efficient their operation becomes as they leverage higher revenue off their fixed cost base of circa $600m per annum.
I am modeling $575m before tax this year for 37 cps which put them on a FY17 PE of 8.9. The ten year average is 11. My sense is the world economy is growing okay and there are encouraging signs from Europe that they're emerging from an extended period of very low economic growth. IATA are predicting worldwide air travel to increase by circa 5% per annum and this roughly matches AIR's more carefully measured growth ambitions.
My sense is the company is extremely well lead and managed by a highly capable leadership team and word on the ground I am hearing from AIR employees is morale within the company is very good and obviously their status as #1 employer in N.Z. of choice reflects people's belief they're a superb company to work for. I'd love a consulting job with them but they do almost everything so incredibly well. John Key joining the board is quite a feather in the company's cap and he'll bring excellent international contacts, leadership and business skills to the board and I think Chris Luxon will really enjoy working with him. Further, I believe international investors have a lot of respect for John Key and will be pleased to see him on the board, (remember they're the ones that hold the VAST majority of the shares not controlled by the N.Z. Govt).
From an operational perspective they have a very modern, streamlined and fuel efficient fleet and are within a couple of years of completing a major capex replacement program. From a dividend perspective even at $3.29 there's a compelling g investment case on a five year view as I believe we're looking at circa $1 in ordinary dividends and potentially close to another $1 in special dividends when they hit the three year period of 2020-2022 with minimal capex. They have "truck loads" of imputation credits.
For long term investors if you're looking at getting somewhere between $1.50 - $2.00 in fully imputed dividends back in the next five years what are you really paying now for your long term stake in the airline ? At $1.75 in total dividends inclusive of 3 x 25cent specials I have them on an average gross dividend yield of 14.8% on a five year investment view.
AIR are not expensive when compared to their most relevant measure the PE of QAN. By comparison to American carriers AIR however do look fully priced based on currently known information and based on $575m before tax.
Shareholders have enjoyed a stellar run this quarter so some consolidation around the current level shouldn't be a surprise to anyone while we wait for further clarity on progress from the company which will come from not only their monthly operating stat's but of course the annual result itself in August and management briefings around that followed by potentially a FY18 forecast at the Annual meeting.
The bottom line is actions speak louder than words so to the question are they good buying at this level I would simply say that I'm very happy to continue to hold all of my stake in the company which is my #1 investment position and will remain so for the foreseeable future. I have no intention of crystalizing any part of the significant unrealized profits I'm sitting on.
I have a lot of confidence in management's ability to run this company across the business cycles and there ability to grow the company throughout those cycles. They have admitted they are done for all time with acquisitions so we're extremely unlikely to see any other overseas fishing expeditions in the future
This in many ways has been a watershed year as they've proved the veracity of their business model in the face of a very competitive new environment. As we lap the latter part of this calendar year when at the same time of the year ten new international competitors were running crazy deeply discounted opening special's I believe we'll see some very satisfactory ongoing improvement in yields achieved.
To coin Percy's favorite saying, we are well positioned
Bookmarks