AIR - Air NZ.

[mikeybycrikey]

After reading a post from Roger yesterday stating that the PE across the long-term cycle should be about 11 or 12, it got me thinking about what the longer-term profit estimates might be, given the current SP of 226.

That means I'm looking for a total discounted profit over ten years of 205 cps (average 20.5 cps or (226/11) per year). If we've got high profit now, we should be expecting lower profit in the future. But how much lower? This obviously assumes the market is correctly pricing things, of course. That's a big "if".

From 4-traders, the profit estimates for 2016-2018 are 56.0, 52.1 and 38.8, respectively.

After factoring in a little growth and a reasonable discount rate, the profit would need to be 16 cps for the 7 years after 2018 to justify the current SP.

I've only got profit figures going back to 2010 on me but 16 cps is higher than the profit for every year from 2010-2012. And only just lower than 2013.

To justify a SP of 300, we're looking at on-going profit from 2019-2025 of 30 cps. Correct me if I'm wrong but I think that is a higher profit than AIR have ever reported before (although this year is going to surpass that in a few weeks).

Based on this, I'd say that to justify a higher SP in the longer term, AIR needs to prove that they can keep profits up in the bad times as well as the good. It's really easy to say that "this time is different" when we're at the top of a boom. Only time will tell if they really are.

[Snow Leopard]

So here is the latest Tiger Take on the medium term future of AIR. Calculated value is based on a cash flow model.

NPAT for 2016 - 2020 is derived from EBITDA figures from the brokers, AIR Announcements & Investor Presentations and the holes are filled with Educated Guessing.

Post 2020 everything is normalised long-term assumptions including that gearing is 50%, that AIR maintains fleet size, the average average fleet age is 9 years and normalised capex exceeds normalised depreciation by 20% - that digs into the available cash to give away a bit.

Another assumption is that from 2016 a total ordinary dividend of $0.20 raising at 3% pa thereafter is paid.

I have ignored VAH completely: if it is sold it is a one off; if it is kept then it may be a benefit, or not.

As you can see, I am slightly currently above current broker consensus of $2.82, but my value actually drops over the next two years and then ends up at $2.92 in June 2020.



Obviously a lot of people are not going to like the above but that is how I see it at the moment.

Do Do Your Own Research.

Best Wishes
Paper Tiger

[Snow Leopard]

After reading a post from Roger yesterday stating that the PE across the long-term cycle should be about 11 or 12, it got me thinking about what the longer-term profit estimates might be, given the current SP of 226.

That means I'm looking for a total discounted profit over ten years of 205 cps (average 20.5 cps or (226/11) per year)....

I firmly believe that a PE ratio should never, ever be used as an input into a calculation of future value, profits etc.

Best Wishes
Paper Tiger

[Baa_Baa]

@PT that would seem to be a remarkable achievement, to basically flatline Value$ while almost halve NPAT?

[James108]

Not at all, why would a company be valued based on a $600M NPAT when 4 years later you know NPAT will almost half (for the purposes of his model).

On a per share basis $300M (half of $600M) is only 22 cents and not all of this will leave the business in the form of dividends. So you would expect the value of the company to drop by less than 20 cents/share over 4 years.

[Snow Leopard]

@PT that would seem to be a remarkable achievement, to basically flatline Value$ while almost halve NPAT?

Good spotting - Neat eh?
I did say that the valuation was based on a cash flow model but put up profits (the difference is related to the capex).

So for FY2016 to FY2020 the cash numbers go:
2016: $419;
2017: $453;
2018: $312
2019: $269;
2020: $498;
and then (with a change to normalised years)
2021: $313;
2022: $322;
2023: $332; etc.
(DO NOT READ the above numbers if you believe there is any possibility of being confused).

So with my model (as with lots of model) the value is based on the sum of the individually weighted values of future years cash flows (the actual details are secret, if I told you I would have to eat you ).
So simply this means that any one year does not cause a drastic jump in value.

Now the actual reason I settled on presenting the results of a cash flow model is that the results for a profit based model are a lot more scary and more in line with what you are obviously expecting.

Best Wishes
Paper Tiger

[Snow Leopard]

Not at all, why would a company be valued based on a $600M NPAT when 4 years later you know NPAT will almost half (for the purposes of his model).

On a per share basis $300M (half of $600M) is only 22 cents and not all of this will leave the business in the form of dividends. So you would expect the value of the company to drop by less than 20 cents/share over 4 years.

If $300M is $0.22 per share then that implies 1.364 billion shares as opposed to the current 1.123 billion and thus an increase of 240 million.

Is there really that much in management incentives kicking around?

Best Wishes
Paper Tiger

[James108]

You are right, that is the problem with using your mouse to operate a calculator.

[Snow Leopard]

You are right, that is the problem with using your mouse to operate a calculator.

Good, I can stop having a heart attack then !

Best Wishes
Paper Tiger

[Baa_Baa]

@PT sure is an interesting model, so the only thing propping up the value is the dividend? Like buying a property that doesn't increase in value but is fully leased, generating a modest (albeit desirable) yield with no capital growth despite underlying deterioration in earnings. Notwithstanding the incalculable cyclical gyrations in the share price, which clearly have little correlation to fundamental value, that will invariably screw any analysts FA model.