Forsyth Barr analysts Andy Bowley and Rob Mercer said they viewed Air New Zealand as an attractive investment for investors seeking a higher risk/reward opportunity.
"We believe Air New Zealand will deliver sustainable profit growth over the medium term as the full benefits of fleet investments, changes made to long-haul routes, and strategic alliances are reaped," the pair said in a note.
"The company is outperforming its global peers, helped by strong management and an enviable structural position in the New Zealand market."
The pair said Air New Zealand's key risks were fuel prices and currency movements.
"A weaker New Zealand dollar will place upward pressure on the company's operating costs. Australia is New Zealand's largest source of international visitors, and with the New Zealand dollar appreciating versus the Australian dollar, this could see yield pressure on the Tasman."
They predict the company will make a net profit of $221.3 million in its 2014 financial year rising to $252.7 million in 2015.
But retail investors won't be big buyers of the Government's sell-down of Air New Zealand, one broker predicts.
Grant Williamson, a director at Christchurch broker Hamilton Hindin Greene, said most retail investors who wanted to own Air New Zealand shares already did so.
"We are expecting a limited response from retail investors."
Williamson said many investors had been put off by the performance of the airline industry.
"It's an industry quite a few investors are not overly keen on. Air New Zealand may be an exception as it has a huge domestic market share which does insulate it against a lot competition.
"It is very well managed - they have done well in the past but there are so many variables that could go wrong. It will only suit a limited number of retail investors."
Williamson said he expected demand to come from institutional investors.
"It gives them the opportunity to buy large chunks rather than buying on the market and it affecting the share price."
Air New Zealand is expected to come off a trading halt on Wednesday morning once the deal is completed.
Williamson said the Government's 20 per cent sell-down would improve the liquidity of Air New Zealand - boosting its trading.
Strong demand was expected for the Government's sell-down of its stake in Air New Zealand, but some analysts are warning of the key risks facing the airline industry - from rising fuel costs and currency pressure to terrorist attacks, aircraft accidents and disease pandemics.
Air NZ share sale - 12 things you need to know
Retail brokers are required to sell the shares to New Zealand clients and the Government says it wants at least 85 per cent Kiwi ownership following the transaction, which will be completed tomorrow evening and reduce the taxpayers' stake in the airline from 73 per cent to roughly 53 per cent.
At Friday's closing price of $1.65 for Air New Zealand shares, the Government's sell-down stake would be worth close to $400 million.
Craigs Investment Partners, Deutsche Bank and Goldman Sachs have been appointed to carry out the sell-down.
Milford Asset Management executive director Brian Gaynor said there had been strong demand a couple of years ago for defensive investments such as electricity companies like Mighty River Power and Meridian - the first two firms to be listed in the Government's partial privatisation programme.
Now, Gaynor said, there was more demand for stocks with growth prospects.
"The whole mood has changed," he said. "Investors are looking for growth because the world (economy) is improving and Air New Zealand is in the growth category."
Gaynor said there was "real upside potential if Air New Zealand continues to get it right" and the company was good value at its current share price.
"If you do a valuation of the top 50 New Zealand companies, they are the cheapest in terms of PE (price-to-earnings ratio)," he said.
Air New Zealand made a profit of $182 million for the 12 months to the end of June, a 156 per cent increase on the previous year.
But Gaynor also pointed out the dangers involved in airline investments.
"The risk is economic - it's fuel ... it's a crash, to be blunt about it," he said.
In 2002 Air New Zealand received a $885 million Government bailout, which gave the Crown an 82 per cent stake in the airline.
At that time its Ansett unit had collapsed in Australia and the airline industry had slumped in the wake of the September 11 terrorist attacks in the United States.
State Owned Enterprises Minister Tony Ryall said individual investors would make their own decisions around the risks facing airlines, and pointed out that Air New Zealand shares were trading at a five-year high. "We expect there will be significant and good interest in this sale," Ryall said.
Craigs Investment Partners head of private wealth research Mark Lister said the airline provided investors with valuable exposure to the "New Zealand tourism story".
Risks included the effect on tourism of a strengthening kiwi dollar (which also worked in the airline's favour when buying fuel), terrorist attacks and disease pandemics such as the SARS outbreak in Asia a decade ago, Lister said.
Forsyth Barr analyst Rob Mercer said the sell-down would be a "good liquidity event" for the Government.
Air New Zealand, which had benefited from investment in new aircraft, was one of the world's leading airlines in terms of profitability and product offer, Mercer said.
"That's really significant and it's for those reasons we would expect (the sell-down) to be well supported."
Air NZ sell-down
Today/tomorrow: Bookbuild
• NZX/ASX implement trading halt.
• NZ retail brokers, domestic and offshore institutional investors participate in a bookbuild to bid for shares at varying prices.
• Crown sets final share placement price.
• Allocation of shares between bidding groups (noting Government's objective of achieving 85-90% NZ ownership).
Tomorrow evening: Transaction completion
• Government announces completion details, including share sale price, allocation and remaining shareholding held by Crown.
• Retail brokers obliged to allocate shares to NZ clients.
Wednesday: Shares expected to resume trading on NZX and ASX when markets open
- (Timing may change if bookbuild completes sooner)
