Analysts revise down Air NZ share price and earnings targets

Analysts have revised their earnings expectations and valuations for Air New Zealand [NZX: AIR] following a forecast profit drop in 2017, with Craigs Investment Partners analyst Matt Peek describing the 2016 financial year as a "nice take-off, bumpy landing".

The country's largest airline reported record financial results for the June year last Friday, with pre-tax profit before significant items up 70 percent to $806 million, in line with the effects of a tourism boom, fleet efficiencies, and lower fuel prices.

But it also indicated increased competition had softened earnings guidance for the current financial year to a range of $400 million to $600 million, which was well below analysts' previous consensus mid-point of $650 million. The mid-point of the range would equate to a drop of 38 percent on the previous year and Credit Suisse said the wide range indicated Air New Zealand's uncertainty about the outlook.

Analysts have now rated the stock a hold or neutral and revised their valuations for the airline's 12-month target price to a range from $2.17 to $2.35 per share. That compares to the current price of $2.28, which has increased five cents per share since the 2016 results came out last week.

Peek said the second half of the 2016 financial year was clearly impacted by pressure on passenger revenue per available seat kilometres (RASK), with competition in all segments continuing into this financial year. That pressure, plus fuel price rises, forex risks and $112 million of non-recurring hedging gains, has led to the lowered guidance for the current financial year, he said.

Air New Zealand had a pre-tax profit split of $442 million in the first half versus $367 million in the second half, when RASK fell, with that trend continuing in July.

The impact of American Airlines on the North American route is starting to come through in the July operating statistics and Air New Zealand has indicated Chinese carriers didn't reduce capacity through the shoulder periods. The last quarter of 2016 also saw increased weakness on routes across the Tasman, with Emirates wanting to fill its new direct flights from Auckland to Dubai rather than taking a stopover in Australia, said Macquarie's.

Management have said they don't see RASK deteriorating further and expect the second half of the current year to improve with the second half, the Macquarie report said.

"The lower guidance has been released meaning that earnings momentum could turn positive if conditions improved. The key negative remains the significant volatility."

UBS analyst Marcus Curley has increased the airline's overall passenger yield decline this financial year to 7 percent from 5 percent and revised pre-tax profit (before abnormals) guidance by 27 percent to $501 million. He put the revenue of additional competition this year to be around $180 million.

Macquarie has revised its guidance to $507 million from $756 million while Craigs has dropped its forecast by 30.9 percent to $493 million and Credit Suisse to $491 million from $542 million.

International long haul load factors remained higher in 2016, with load factors rising to 81.7 percent from 80 percent. Jetstar's entry on domestic regional routes pressured Air New Zealand's domestic load factors and yields, which both fell, Peek said. Macquarie said Air New Zealand will continue to benefit from additional domestic demand created by increased long-haul services offered by competitors. The airline has more than 80 percent market share on domestic routes.

Both Macquarie and UBS think the airline can sustain a 20 cents per share dividend despite the weaker outlook.

(BusinessDesk)

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