AIR - Air NZ.

[PartTimeTrader]

Airlines are reaping huge profits right now, almost doubling their profits compared to prior year. Even if oil prices stay low, competition will drive down those margins over time.
I would be real careful valuing a company based on short term abnormal earnings results. Even the crap airlines are making profits right now.

[winner69]

Okay some preliminary calculations. Key point is the company has stated they are on track to EXCEED $400m before tax in the first half and that's BEFORE the positive contribution expected from Virgin.
I have assumed $430m inclusive of the Virgin contribution which is up ~ 100% on last year's $216m.

Last year with the route expansion into Singapore in the second half AIR earned just 43% of its profit in the first half. This year we have two new routes and the company is extremely bullish on sales demand on those routes and is on record as saying they'll be profitable from day 1.

Further, in this first quarter they still had some residual fuel futures contracts to work through at historical and less favourable rates. This won't be repeated in this quarter or the second half.

Nobody can reliably predict where fuel costs and exchange rates will go but based on the current rates for same being maintained this year I see no reason why with the two new routes and greater demand in the peak summer and autum seasons why the company won't make a very similar percentage of its annual profit for FY16, (57%), in the second half as it did last year.

On this basis my preliminary estimate for FY16 net profit before tax is thus $1b ($430 / 0.43) translating after full provision for company tax at 28%, (they seldom pay the full tax rate for a range of taxation reasons) to net profit after tax of $720m and based on 1,121m shares on issue this gives 64.2 cps.

I know that figure seems outrageously high but that's what the company is implicitly guiding towards based on best known currently available information.

Further, in FY17 they'll enjoy a full 12 months of the new routes (7 months this year) both international and increased capacity and frequency on domestic and with low international economic growth I see the IMF predicting we'll still have oil at $55 barrel during calendar year 2017 so assuming the currency and oil are stable around their present level's I see no visible reason at this stage why we can't enjoy 60 cps + EPS in FY17.

Going forward from there and assuming oil reverts back to $80-$100 barrel and the currency around 70 cents I see EPS of 50 cps being sustainable. Apply whatever PE you like but I'll use 11 so I can see the stock over $5 within two years when the market finally wakes up to what a massive cash flow machine this company is. $1b cash flow last year, nearly $1 a share !!

On this basis I estimate the shares are trading on a forward PE of only 4.3 for FY16. In my experience when companies are trading on ludicrously low PE's a lot of money can be made. Sure there are risks to the downside and upside but this is my best estimate of EPS at this stage.

DYOR but for what its worth I have tripled the size of my shareholding since yesterday's meeting. I think this is the stand-out opportunity on the market and the opportunities for special divvies in the years ahead along with capital price appreciation make this a compelling investment opportunity. I think the stock should currently be trading at close to or in excess of where QAN is presently priced.

I've been investing for about 30 years now and by my reckoning you'd be doing well to find a company that's better managed than this one. Directors and senior management are doing a stellar job and we are extremely well served by them. Its a true mark of the directors professionalism that despite the company growing profits strongly over the last three years and looking to approximately double last year's record profit this year they refused to take any increase in directors fees, simply enlarged the pool slightly for additional directors in the future. This company didn't win the Deloiite company of the year last year without very sound reasons, likewise Tony Carter Chair person of the year.

The company is extremely bullish on their outlook and so am I.

I'll post the other questions and answers later when I have more time.

Sam - above is Rogers post

The 64 cents (is NPAT) doesn't include anything Virgin might contribute so likely to be higher

I hope (if he is lurking and notices) he doesn't mind me bringing it to your attention.

[samdaman]

Cheers winner, I'll keep it in mind PTT

[777]

Virgin

http://www.nzherald.co.nz/business/n...ectid=11574452

[Yeshiva]

I apologise in advance if this has been asked already, but why is such a profitable company trading at such a low P/E? Is the risk from terrorism or accident weighing heavily on all airline stocks, or is it simply that this industry demands a much cheaper P/E multiple?

[Baa_Baa]

I apologise in advance if this has been asked already, but why is such a profitable company trading at such a low P/E? Is the risk from terrorism or accident weighing heavily on all airline stocks, or is it simply that this industry demands a much cheaper P/E multiple?

Interesting article in NBR sheds some light on that question, of the low PE.

"Virgin's valuation is expensive compared with Qantas Airways and Air New Zealand, trading at a multiple of six times earnings before interest tax, amortisation and rent/restructuring costs (ebitdar), compared with the global average of 4.6 times." http://www.nbr.co.nz/article/brokers-first-analysis-sees-virgin-australia-fully-valued-b-183609

Going to be an interesting week with AIR impressively breaking UP through double top $3.02 resistance but stalling under the 10 year high @ $3.13 closing $3.08 on historically average volume (better if it had busted out on huge volume). Especially with the international markets taking a hammering, hopefully AIR continues to have antigravity tomorrow.

[Raz]

Price to me is attractive so partly sold down last week....not sure we will be granted a special dividend...even if they did... ironically I would not be spending it this year with AIR NZ. I'm finding their deals very limited of late ...personal experience tells me they are being greedy with their margins..all good if they are keeping their load factors up however i have for the first time this year found far superior offers from their competitors. As a result, will not being doing any serious international travel with them in 2016..first time in 20 years. If they can afford to lose a client like me one would hope they have serious demand that it simply doesn't matter...

[Jantar]

....As a result, will not being doing any serious international travel with them in 2016..first time in 20 years. If they can afford to lose a client like me one would hope they have serious demand that it simply doesn't matter...

I will probably be booking with Virgin for my next trip to Brisbane. They are considerably cheaper than AIR for the dates I want to travel, but would still be on exactly the same aircraft.
My Europe trip next year is likely to be with Lufthansa. Again it will be on the same aircraft (AirNZ to LAX, then DLH to Munich), but at a cheaper price.

[noodles]

I apologise in advance if this has been asked already, but why is such a profitable company trading at such a low P/E? Is the risk from terrorism or accident weighing heavily on all airline stocks, or is it simply that this industry demands a much cheaper P/E multiple?

A pe ratio is based on NPAT. Given the depreciation component of the NPAT calculation, the current pe is lower than it should be due to relative low depreciation charges vs capex charges. So I would ignore NPAT and focus on free cashflow. As an exercise, you should check out the historical free cashflow of AIR. You might be a bit shocked.

Broker analysts base their analysis on DCF (free cashflow). This is much more suitable to airlines given the capex required to run the business. Analysts have a price target of about 3. So according to analysts, the current price is about right. But analysts have not updated their DCF models since October last year and have not accounted for the massive drop in fuel price. I'm expecting price targets to increase when research is updated due to the fuel price.

[Snow Leopard]

The great thing about the current environment for airline operations is that you can be reasonably sure of certain things (there is no absolute certainty):

1) The current price of oil is regarded as unsustainable and will rise. But when and by how much is unknown, but if you are taking a longer term view then you use, say, US$80 a barrel as your guide. Of course the actual $/bbl price at any date is a complete guess.

2) When airlines are making good profits they expand their operations, new airlines and even new business models appear, competition intensifies, fares start to fall and profit margins get cut. This is already happening - factor it in.

3) The unexpected happens and it is usually not good - you should expect and allow for this.

4) It often ends in tears.

Best Wishes
Paper Tiger

Discs:
Buy the best fit of schedule and price - flying is a commodity and there is little brand loyalty.
Have flown with at least 9 different airlines in the last 12 months and am booked to fly with another 3 in the near future.