Why analysts at Jarden have re-stated their ‘sell’ rating for Air New Zealand

Analysts from Jarden have revised down Air New Zealand’s target share price and re-stated their ‘sell’ rating for the company.

The analysts say the airline’s revenue has taken a hit from lockdowns and there is uncertainty about the recovery in flying.

Revenue forecasts have been revised down by 21 per cent which translates to a pre-tax loss of $764m in the 2022 financial year, compared to the analysts’ earlier forecast of
$578m and much bigger than the booked $430m pre-tax loss in the 2021 year.

The airline has got $500 more Government support – on top of a $1.5b loan – to give it more balance sheet flexibility ahead of a planned capital raise in the first quarter of next year.The raise has already been delayed twice and the extra support would be used to fund the airline if it is delayed again by Covid-19 fallout.

The analysts, Andrew Steele and Nick Yeo, say the 12-month target price of 80c – down from 85c in their last report – was based on negative near term earnings revisions.Shares began trading at $1.55 today.

”We retain our Sell rating, reflecting our view that given Air (NZ’s) requirement for what
we expect will likely be a highly dilutive capital raise, material ongoing near-term losses and lack of comfort on the timing and trajectory of any earnings recovery.”

Shares present a negatively skewed risk/reward profile. Risks include the timing of border reopening, changes to competition, fuel costs, foreign exchange and underlying consumer demand.

Under the revised Government package, total available liquidity increases from$1.5b to $2b.Composition of support has changed with the existing debt facility reducing from $1.5b to $1b.

The company now has the ability to issue up to $1b of non-voting redeemable preference shares to the Crown.

The analysts say importantly, preference shares can only be subscribed once at least $850mis drawn under the loan facility. Further, preference shares are not convertible to ordinary shares but are treated as equity for accounting purposes.

This gave the airline more balance sheet flexibility, with better gearing optics and provide necessary incremental liquidity to allow for a potential delay to the capital raise in what remains a highly uncertain operating environment.

”From a practical perspective, introducing redeemable preference shares into the funding mix does not meaningfully alter the economics of the funding package and this funding source still needs to be fully repaid on the capital raise.

Air New Zealand yesterday stated that it has drawn $505mof the existing loan facility -an increase of $50msince the end of October and this could reach $90m by February or March.

The current level of debt drawdown is net of the cash benefit of the recent financing of two A320-NEOs which the analysts estimate would have contributed at least $100m.

The analysts calculate an underlying monthly cash burn of around $90m.

Under that cash burn the analysts say they would expect modest (up to $50m) or no subscription of preference shares by February or March.

There is better news for Air New Zealand from the analysts for the 2023/2024 financial years.Pre-tax losses will arrow to $114m and the airline is forecast to return to profit in 2024 with a $165m surplus.


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