AIR - Air NZ.

[allfromacell]

I think the whole airline industry is worth a lot more theses days then the multiples they have traded on in the past. Oil is looking more likely to stay low, not only because of the glut but also as more countries look start embracing cleaner technology. Planes aren't 'green' in the slightest but it's pretty hard to get around that, the global middle class is growing (with the bulk of this growth coming from Asia) the amount of people flying is growing, cargo is growing. NZ is also in an awesome place to take advantage of theses factors via tourism and a huge population increase now running at around 1.5% P.A! All of this bundled with superb management... What's not to love?

I think the people who believe this company to be overpriced are mislead by the past trading history, looking at the fundamentals, why is it overpriced? I don't see why this company can't trade at $5 as we approach 2020. As MOD and Beagle have pointed out as much as $1.50 worth of potential imputed dividends can be priced in.

I can see an argument for the industry being cyclical and the inherit risk of aviation but I still don't see why this stock should trade at any less than a PE of 10 minus the priced in free cash flow of the early 2020s.

[GTI]

I think the whole airline industry is worth a lot more theses days then the multiples they have traded on in the past. Oil is looking more likely to stay low, not only because of the glut but also as more countries look start embracing cleaner technology. Planes aren't 'green' in the slightest but it's pretty hard to get around that, the global middle class is growing (with the bulk of this growth coming from Asia) the amount of people flying is growing, cargo is growing. NZ is also in an awesome place to take advantage of theses factors via tourism and a huge population increase now running at around 1.5% P.A! All of this bundled with superb management... What's not to love?

I think the people who believe this company to be overpriced are mislead by the past trading history, looking at the fundamentals, why is it overpriced? I don't see why this company can't trade at $5 as we approach 2020. As MOD and Beagle have pointed out as much as $1.50 worth of potential imputed dividends can be priced in.

I can see an argument for the industry being cyclical and the inherit risk of aviation but I still don't see why this stock should trade at any less than a PE of 10 minus the priced in free cash flow of the early 2020s.

Like!👍👍👍👍👍

[Beagle]

Nice post allfromacell. I got to pontificating a little over the weekend about how the analysts with their fancy DCF models have got this so wrong. As recently as mid June 2017 average 12 month price target of analysts was $2.19
My first point of conjecture centers around the structure of their DCF model. All of them seem to make specific profit and cash flow forecasts for five years followed by a terminal growth rate. Their guesses beyond the company's own guidance for FY17 are just that, guesses based on a specific set of assumptions many of which can be badly wrong.
Issue 1. Five year specific cash flow forecasts current in the market encapsulate the 2017 - 2021 period and therefore specifically exclude two years 2022-2023 when AIR is ostensibly on a capex holiday and generating massive free cash flow, perhaps as much as $1 per share each year.
Issue 2. Most of these models have a terminal growth rate beyond the specific five year forecast and those I've seen use 2%. I think that terminal growth rate assumption is fundamentally flawed.
IATA are expecting growth in international travel to continue for the foreseeable future at ~ 5% per annum as it keeps getting cheaper in real terms with increasing fuel efficiency of high tech aircraft.

If broker DCF models encapsulated the tremendous free cash flow up to 2023 of AIR and used a different terminal growth rate assumption they'd kick out a completely different number. I think their models are flawed. Ten year average PE is 11 and my forecast is 37 cps this year.
Now that AIR are in a sustained and disciplined growth trajectory, (that continues to deliver CASK improvements as they leverage profit growth off their $600m fixed cost base) perhaps a slightly higher PE than the historic is warranted ? I don't think $5 at some stage in the years ahead is completely out of the question, not at all.

[BlackPeter]

Just allow me to add some observations to this thread. Booked over the weekend a trip to Europe / Singapore for later in the year.

1) Prices are as low (or actually lower) than what I used to pay 20 years ago for a trip to Europe ... no matter whether you go with Air New Zealand, Singapore Airlines, Qantas or Emirates (that's the carriers I checked); Must be a buyer's (travellers) market.

2) All of the carriers above (but Air New Zealand) offer now a 30kg luggage allowance in economy. AIR offers just meagre 23 kg;

3) Some of the carriers (well, certainly AIR) charge additional "hidden" fees for paying with credit cards (how else do you want to pay over the internet?). Others (like Singapore Airlines) don't.

4) Ah yes - and for my route was Singapore Airlines anyway offering the best connection (but admittedly a home game for them) AND the lowest price (without considering their better handling of credit cards and their better luggage allowance.

Guess which carrier I booked with?

Not writing this to annoy AIR share holders, but I think there are a couple of things to deduct from my experience:

1) AIR is falling back compared to the other carriers in terms of the quality of their offer AND
2) margins can't be that good (for all of them) if they have to drop their prices to 20 year lows ...

Maybe somebody wants to ask AIR management why they risk falling back behind the competition by annoying customers with hidden fees and meagre luggage allowance? It is very easy to damage a brand ... just imagine what might stick in the memories of travellers: AIR - the greedy Airline?

[Beagle]

AIR have a specific Pacific rim focus BP. I would be the first to agree their product offer pricing to Europe is not compelling and I wouldn't hesitate to book Emirates or Singapore airlines if I was travelling to Europe. What they're doing is working very well though and in my opinion FY17 is a watershed year for their business as they have shown the veracity of their business model is extremely robust notwithstanding a substantial amount of new competition.
Nine new super efficient dreamliners sipping fuel quietly with several more arriving in the years ahead...a real bean counters delight those aircraft are and customer satisfaction with them seems very high too from company reports...a classic win-win for shareholders and customers
Prices / demand to Europe is very modest at present...with all the terrorism any wonder why !

[couta1]

As the price rises, the dividend yield becomes less and less attractive, excluding specials, for a high risk stock. Like winner says, hype and euphoria rule the day. PS-Perhaps some punters are buying thinking the 13% dividend yield they see is normal, they might need to get their calculator out aye.

[Beagle]

I am forecasting 20 cps annual divvies and 75 cps in specials over FY20-FY22 all fully imputed so approx. $1.75 back / 0.72 $2.43 gross over the next five years.
2.43 / 3.44 = 70.63% = average annual dividend yield of 14.13%, therefore based on my assumptions on a five year view the dividend yield is still very compelling.
I do accept however that any attempt to forecast five years ahead in the aviation industry is subject to significant variation either to the downside or upside.
In my opinion however, superb management and governance goes a long way towards mitigating the risks in a notoriously risky industry.

[GTI]

Well into the 340s now, not long to cross that 350 mark, after that who knows...did someone call 400 is a real possibility as well.

The unstoppable...

[Beagle]

I think the whole airline industry is worth a lot more theses days then the multiples they have traded on in the past. Oil is looking more likely to stay low, not only because of the glut but also as more countries look start embracing cleaner technology. Planes aren't 'green' in the slightest but it's pretty hard to get around that, the global middle class is growing (with the bulk of this growth coming from Asia) the amount of people flying is growing, cargo is growing. NZ is also in an awesome place to take advantage of theses factors via tourism and a huge population increase now running at around 1.5% P.A! All of this bundled with superb management... What's not to love?

I think the people who believe this company to be overpriced are mislead by the past trading history, looking at the fundamentals, why is it overpriced? I don't see why this company can't trade at $5 as we approach 2020. As MOD and Beagle have pointed out as much as $1.50 worth of potential imputed dividends can be priced in.

I can see an argument for the industry being cyclical and the inherit risk of aviation but I still don't see why this stock should trade at any less than a PE of 10 minus the priced in free cash flow of the early 2020s.

I think that's an interesting point to ponder. Just because AIR has an average PE of 11 over the past decade perhaps given IATA expects travel to grow at ~5% for the foreseeable future this suggests its possible a slightly higher PE might be applicable going forward. a PE of 12 for instance on my estimated FY17 earnings of 37cps suggests as much as $4.44 is potentially possible this year giving potential upside in the short term of as much as another dollar per share.

[couta1]

The unstoppable...

This is the sharemarket your talking about, not the wind.