Buy Air NZ say the experts
From an airline that was suffering hard times pretty recently, Air New Zealand is now rated as buy, because pundits say that the airline is expected to triple its pre-tax profits over the next four years as it reaps the benefits from new planes and passenger cabins, as well as route changes.
Forsyth Barr analyst Rob Mercer has upgraded his profit forecast for the national airline to $205.5 million before interest and tax for the year to June 30, up $50.3 million, with that rising to $497 million in 2010, which compares with $148 million last year.
Mr Mercer says that even those forecasts are conservative and he also expects Air New Zealand to pay an 8 cent per share dividend in 2008, up from 5c.
The key profit driver it appears is the perfectly timed fleet upgrade, which will give Air New Zealand a capital expenditure holiday for the next five years, allowing the airline to generate about $1.7 billion in free cashflow over the same period.
Forecast net debt of $182.7 million for 2007 is expected to turn into $120.2 million cash in 2008, and exceed $1 billion cash by 2011, with shareholders to expect special dividends in the next few years.
Air New Zealand is about 80% state-owned following a taxpayer-funded rescue in 2001 and Mr Mercer has increased his valuation for Air New Zealand shares from $1.52 to $2.20 and recommends investors buy the stock. The shares closed at $1.94 on Friday, up 2c.
He added, “While the airline industry has a history of inadequate returns, we believe Air New Zealand is heading into a sweet spot at the right time,” adding further that in the last year, the airline has bought new domestic and long-haul aircraft which are more fuel efficient and will need little capital expenditure and reduced maintenance costs for the next five years.
He said, “The timing of Air New Zealand’s fleet upgrade could not have been more perfect” at a time of high fuel costs.
Air New Zealand CEO Rob Fyfe expects online bookings to exceed $1 billion this year, about a quarter of forecast revenue and Mr Mercer says airlines globally are heading into a period of buoyant earnings growth as the ongoing delays of the 555-seat Airbus A380 creates a shortage of international seats in an expanding travel market.
Report by The Mole
John Alwyn-Jones
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