Air New Zealand's $2.2 billion recapitalisation: Verdict from Jarden analysts

Analysts at Jarden say that in spite of the Air New Zealand's recapitalisation being an important step in improving the investment appeal of the company, they still retain their sell rating.

Air New Zealand last night announced a $2.2bn recapitalisation, comprising $1.2bn of new equity, $600m of redeemable shares and a new NZ$400m four year Crown loan facility.

The funds will be used to pay back $850m of an existing Crown loan and provide $950m for the airline to rebuild its pandemic-ravaged international network and for continued growth of its domestic operations and other parts of its business, including its loyalty scheme.

The airline has to invest in new aircraft and remodel new and existing business class cabins with seats now undergoing regulatory checks in the US and according to reportss today look more like its competitors.

The undrawn $400m new Crown loan will be used as backup should it be needed before 2026.

The analysts Andrew Steele and Nick Yeo have reduced their 12-month target share price for the company from 80c to 65c, reflecting the greater level of dilution for existing shareholders from a heavily discounted rights offer.

A two-for-one rights offer at a price of 53c per share represents a 61 per cent discount on the share price yesterday when trading was halted, ahead of the announcement that just made the deadline of being in the first quarter of the year. Airline chair Dame Therese Walsh said the price was set to be as appealing to as many shareholders as possible and had taken into account other discount offers in the market.

Those shareholders who don't take up the rights offer face dilution to their stake of more than 60 per cent.

The recapitalisation was pitched largely in line with expectations but the market may struggle with its sheer size, Salt Funds managing director Matt Goodson said.

The rights offer gives Air NZ a theoretical ex-rights price of 81c.

"It will be interesting to see how the share price does trade," Goodson said.

The 53c offer price was a touch below expectations of one or two people "but we thought it was pitched about right".

"In terms of the forecasts, they line up with what we were thinking but, as always, airlines have massive operational and financial leverage, so very small changes can make a big difference to the bottom line," he said.

Jarden says there were still significant risks for the airline, with the shares
presenting a negatively skewed risk/reward profile.

''Risks include changes to the timing of border reopening, changes to competition, fuel costs, FX (foreign exchange) and underlying consumer demand.

They say the size of the re-capitalisation allows the airline to retain its investment grade credit rating -currently Moody's Baa2 stable outlook - by increasing available liquidity from $1.4b to around $1.8b.

The airline said last night its pre-tax loss for the full financial year would be less than $800m, not in excess of it.

The Jarden analysts forecast losses to fall to $791m from $809m. Forecasts for the 2023 and 2024 financial years are a loss of $54m and$171m.

They airline says did not expect to pay a dividend before 2026.

Air New Zealand chief executive Greg Foran and Air NZ chairwoman Dame Therese Walsh. Photo / Supplied

The airline's rebuild

In an investor presentation, the airline said while the operating environment will remain uncertain, by controlling what it can, its capacity based on available seat kilometres (ASKs) will reach 90 per cent of pre-Covid levels in the 2025 financial year.

Key assumptions for this are:

•Domestic flying continues uninterrupted and without restriction

• From the middle of 2022, international travel (excluding China and
Hong Kong where international borders are expected to remain closed) is uninterrupted,
with no self-isolation restrictions and testing requirements easing for inbound and
outbound customers on Air New Zealand's key routes.

•By 2025 aggregate passenger demand for domestic, Tasman and Pacific Islands travel will marginally exceed FY19 (financial year) levels, supported by network growth into those markets; and aggregate passenger demand for long haul will be slightly lower than FY19 levels (due to fewer ASKs flown overall), and have a more gradual pace of recovery relative to short-haul markets.

• No long-term structural changes in travel behaviour or trends post-pandemic, including resulting from environmental sustainability concerns, health concerns related to Covid19, technological changes, or changes in customer preference.

• Until March 2023, the Government freight scheme will support cargo flight revenue to assist targeted revenue recovery (noting the level of support will reduce as passenger demand returns).

• The competitors that were present in FY19 will progressively re-enter the market
through to FY25, with capacity at levels broadly similar to FY19 at that point .

• Otherwise, no major changes in the competitive environment or airfare pricing
on Air New Zealand's key domestic and international routes compared to FY19.

The presentation says the pandemic and conflict in the Ukraine have caused volatility in financial markets and added uncertainty to the outlook for the New Zealand and global economies.

Jet fuel prices are currently elevated due to the conflict in Ukraine and the airline says this is partially offset by the benefit of the hedging Air New Zealand has in place.

Fuel prices are assumed to progressively reduce to S$75 per barrel for the 2024 financial year.

Greg Smith, head of retail at Devon Funds said the oil prices had moderated form recent highs but had risen overnight and was a substantial cost to the airline.

He told RNZ that hedges would run out.

The border reopening was positive but it was uncertain how quickly old flying habits would return, how well off consumers were feeling and how intense competition would be as travel recovers.

The uncertainty accounted for the heavy rights offer discount on offer, Smith said.