Wednesday 7th August 2019
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Air New Zealand’s solid dividend yield is likely to underpin its share price in the medium term but, with few upside catalysts for earnings outside of fuel prices, Jarden analysts are neutral on the stock.
The national carrier is due to report its full year result on Aug. 22 and Jarden analyst Andrew Steele said despite downgrading guidance on slowing domestic demand, the shares continue to trade at close to their recent price-per-earnings peak and at a premium to the airline sector.
In late May, Air New Zealand said it is targeting 2019 earnings before taxation to exceed $340 million versus prior guidance given in March of between $340 million and $400 million.
Steele said that Air New Zealand offers a net dividend yield of around 8.5 percent versus the S&P/NZX 50 Index’s 3.5 percent.
While there is potential downside risk related to long-haul pricing, decelerating tourism flows and soft cargo tends, “we believe that so long as AIR can maintain its current dividend profile, the shares will receive investment support.”
Air New Zealand shares recently traded up 1.1 percent at $2.70 and fallen 14 percent so far this year. Jarden has a 12-month target price of $2.70, up from $2.60.
Steele said long-haul yield change is one of the most significant uncertainties for Air New Zealand’s short-medium-term earnings. He pointed to generally soft Asian economy airfares and consistently lower airfares into North America.
Regarding demand, he said that while in-bound tourism growth has been an important tailwind for Air New Zealand, “this growth has consistently slowed from its peak in August 2016” and “given the softness in long-haul forward pricing data, we would not be surprised if this in-bound tourism remains lacklustre in the future.”
While the latest ANZ-Roy Morgan survey of consumer confidence fell 6 points in July to 116.4, the lowest reading so far this year and below the historic average of 120.0, Steel said “consumer confidence remains at a level that is supportive of AIR’s capacity growth.”
While he also pointed to declining cargo trends, he still expects a solid cargo result for the financial year that just ended but noted “the sector trend into FY20 is clearly weak.”
On the other side of the ledger, he said oil has been surprisingly stable and is offsetting the softening in underlying momentum.
He said improving fuel prices meant that he lifted his net profit forecast for the year to June 30, 2020 by 14.3 percent to $317 million and by 17 percent in the following year to $361 million.
However, he lowered his net profit forecast for the year that ended June 30 by 2.8 percent to $261 million.
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