First NZ Air NZ target price 19%, lowers rating to 'underperform'

Friday 2nd June 2017

First NZ Capital lifted its 12-month target price on Air New Zealand to $2.50 from $2.10 but lowered its rating to 'underperform' from 'neutral' based on its updated valuation and current share price.

The shares last traded down 2.3 percent at $2.95 but have gained 38 percent so far this year. On Thursday the company said it now expects its 2017 financial year earnings before taxation to exceed $525 million versus previous guidance of $475 million to $525 million.

First NZ Capital lifted its passenger booking total or PBT estimates by 10.5 percent in FY17, 31.4 percent in FY18 and 30 percent in FY19, reflecting the latest operating statistics, revised fuel cost assumptions, improved cargo revenue, modestly lower depreciation, the company's latest update and its operating leverage, said research analyst Andrew Steele in a note. He also said FNZC now assumes that Air New Zealand's pre-tax return on invested capital or ROIC reverts to 14.5 percent in the long term, versus its prior assumption of 14.0 percent.

However, despite the upgrades to its PBT forecasts "we estimate that the current share price of around NZ$3.00 implies a sustained through-cycle pre-tax ROIC of 16.5 percent," he said. Steele notes this is 200 basis points ahead of FNZC's revised long-run assumption and 150 bps about the company's targeted return.

Steele said the key risks to the target price include material changes in the competitive landscape, fuel costs as well as underlying demand.

(BusinessDesk)

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