Broker sees turbulence ahead, reduces target for Air NZ
Air New Zealand's April operating statistics provided little reason for investors to take a breather following the recent sell-off of shares, Forsyth Barr broker Suzanne Kinnaird said yesterday.
Fuel hedging in place for the first half of the 2017 financial year was more favourable than the second half of 2016 but yield pressure was increasing.
In the short term, Air NZ appeared oversold and there was scope for a partial re-rating, particularly with a Virgin Australia disposal-driven potential for a special dividend, she said.
Air NZ reported it carried more than 1.2million passengers during April, 3.3% more than the previous corresponding period.
Revenue passenger kilometres were 6.6% higher on a capacity increase of 10.3%. Group load factors were down 2.9% to 82.6%.
Short-haul passenger numbers were up 2.6%. In the domestic market, demand and capacity increased by 6.2% and 10.2% respectively. Domestic loads were 82.9%, down 3%.
Long-haul passenger numbers increased 8.7% on the pcp. Demand was up 10.5% and capacity was up 13.8%.
Ms Kinnaird said the operating statistics highlighted several key trends affecting the near-term outlook.
"We often focus on yields, but 'Rask' - average passenger fare times load factor - is a better indication of underlying revenue trends. Any further significant decline in 'Rask' may prompt Air NZ to moderate its capacity expansion plans over the next 12 months.''
Air NZ was favourably positioned. Its 2017 fuel was hedged at levels much lower than the current spot price. That provided a benefit to short-term earnings but ultimately would lead to a margin squeeze, given the hedging lag to spot prices, she said.
Air NZ's level of hedging had increased in the past six months and strongly suggested management's more negative view on the oil price outlook.
Valuing airlines was not an exact science and Forsyth Barr had made a further cut to its target price to principally reflect its forecast downgrades and the declining forward earnings outlook, Ms Kinnaird said.
The target share price was $2.30 and Forsyth Barr rated Air NZ as neutral with a high risk assessment. The shares last traded at $2.14.
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