Air New Zealand's share price has rallied sharply since the Covid-19 market meltdown. Photo / NZ Herald
Will Air New Zealand be the next cab off the rank as the Covid-19-driven capital raisings keep coming thick and fast?
SkyCity this week embarked on a $230m capital raising, following in the footsteps of Auckland International Airport, Kathmandu and Infratil, to name but a few.
Air NZ says it is assessing its capital structure and the options available to it. However, the company's gravity-defying share price has the investment market scratching its head at the company being valued at more than $1.7 billion.
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Air NZ has a $900 million debt facility, courtesy of its 52 per cent Government state owner, which it has not yet dipped into.
The national flag carrier has a "survive, then revive and finally thrive" strategy as it works its way through the body blow it suffered because of the pandemic.
It has set August 2022 as the date when it will return to the black, even though it might be just 70 per cent of its pre-Covid size.
Despite all the uncertainty, Air NZ's share price has held up remarkably well, perhaps due to the unprecedented interest in the stock from retail investors.
Air NZ went into Covid-19 with a relatively highly geared balance sheet, followed by a period of "cash-burn" as it parked the bulk of its fleet when the border closed.
Devon Funds Management chief investment officer Mark Brown said a capital raising was on the cards, particularly given the relative strength of the share price.
"I think a capital raising is inevitable, but it has clearly rallied hard from those panic days," Brown said.
"Good on them for holding out, because clearly they will be able to raise capital at a much better price then they would have if they had when there was a lot more panic around.
"So the dilution will clearly be less, but I think the size of the capital raising will be significant," he said.
While the Government's $900m funding facility is clearly welcome, it's certainly not at mate's rates.
The facility will be provided in two tranches – one of $600m with an effective interest rate initially expected to be between 7 per cent and 8 per cent, and a second tranche of $300m with a rate expected to be in the order of 9 per cent.
Forsyth Barr analyst Andy Bowley said Air NZ remained severely challenged by Covid-19, given border closures and the adverse impact on passenger demand.
Bowley said in a research note that cash losses and asset impairment woud "materially deplete" its net asset value as at 30 June 2020, and likely further to 30 June 2021.
"Our demand/capacity assumptions are broadly consistent with management commentary that the airline will be about 70 per cent of its former size in two years time," Bowley said.
Air NZ management suggested that it will need to access the Government's debt facility over the coming months.
"This may not be necessary if it undertakes an equity recapitalisation," Bowley said.
"Air NZ entered Covid-19 at the top end of its target gearing range of 45 per cent - 55 per cent. In contrast, we expect net gearing to be well in excess of the range (about 78 per cent) at 30 June 2020," Bowley said.
The performance of Air NZ's share price has been nothing short of remarkable under the circumstances.
The stock last traded at $1.62 compared with just 80c in late March, in the middle of the Covid-19 market meltdown.
Analysts like to blame retail buying interest in stocks when a share goes up and they can't reconcile the rise with its underlying value, and it appears Air NZ is in that camp.
The stock has left a number of people scratching their heads, says JB Were's New Zealand equities manager Rickey Ward.
Ward said it is difficult to pin down exactly why Air NZ is seemingly defying the odds, but it is a stock that gets singled out for buying from the retail investment platform, Sharesies.
"Clearly, Sharesies is having an influential role."
Air NZ this month has dropped out of the JET ETF - an exchange traded fund that other retail platforms, like Robinhood in the US, like to target.
Harbour Asset Management portfolio manager Shane Solly said the capital raisings to date had been "incredibly well supported" and there was potential for more.
"There are a few more companies that should be taking the opportunity, with the markets being willing to look to the other side of the valley."
He said Air NZ will eventually tap tap the market.
"It's just a matter of when and how much."
Devon's Brown says that when raising capital, timing is of the essence.
In SkyCity's case, the company opted not to raise funds in the depths of the Covid-19 panic, when its share price was on the ropes at $1.30.
Now that the share price has recovered some ground, that meant it could raise funds without resorting to a deep discount and a greater share dilution.
Its last trade before the current placement and share purchase plan was $2.67.
The share placement is at $2.50 a share - so a better price and potentially less value dilution than would have been the case if it had gone earlier, Brown says.
It's been a tough week for Tourism Holdings.
The company's chief financial officer said Jennifer Bunbury resigned, along with chief operating officer, Jo Allison.
Chief executive Grant Webster said Bunbury had been with THL since January 2019 and had brought a wealth of knowledge to the role.
Allison was also well recognised for her dedication to the business over the five years she had been with the THL.
Webster said the changes would become effective around September, adding THL is in the process of reviewing its operational and financial management structures.
Castle Point Funds co-founder Stephen Bennie said having your CFO and COO announce their resignations at effectively the same time with similarly brief notice periods, presents "poor optics" to the market, especially at a time of significant operational upheaval due to the Covid-19 disruptions.
Likewise, comments by the Australian Tourism Minister Simon Birmingham that Aussie will most likely keep its borders closed until 2021 would not have been well-received, Bennie said. "Some weeks just do not come together."
THL shares last traded $1.98, down 16c.
Confession season
The Australian Government has temporarily loosened the rules around directors' liability to reduce the risk of opportunistic legal class actions, but it looks like New Zealand will not be following suit.
Australia has, for a period of six months, relaxed the liability threshold for assessing the materiality of information to be disclosed to the market from a "reasonable person" test to one of "knowledge, recklessness or negligence".
The move aims to encourage Australian listed issuers to provide guidance and forward-looking information to the market, and to reduce the risk of "opportunistic" class actions for potential breaches of continuous disclosure obligations while Covid-19 uncertainty persists.
On this side of the Tasman, the Financial Markets Authority (FMA) is happy with the current set-up.
"The FMA believes New Zealand's current legislative settings, and the manner in which they are applied, remain appropriate for the Covid-19 environment, and should already afford listed issuers and their officers sufficient protection to encourage disclosure," the FMA says.
"The FMA's view is that there has been very little evidence in New Zealand of an opportunistic class action culture developing in relation to director liability, but we will keep this position under review."
Chapman Tripp partner Roger Wallis says the FMA's statement is timely, given 'confession season', heightened this year by the number of issuers that have withdrawn June 30 guidance.
"Also, continuous disclosure remains the basis for 'low doc' capital raisings. Even though with Sky City, and a couple of others not far away, we are ending the first wave of that but I'm expecting a second wave in conjunction or following the June 30 results," Wallis says.
"There are a few other moving parts with heightened class action/litigation funded activity, and pressure on securities law insurance cover."
Shares in cancer diagnostics company Pacific Edge rocketed up after it said it had reached an agreement with US healthcare provider Kaiser Permanente for the commercial use of its "Cxbladder" tests.
Kaiser Permanente had approved the commercial use of Cxbladder by its urologists for patients being evaluated for bladder cancer.
The company is one of the largest non-profit healthcare providers in the US, with over 12 million members.
It operates 39 hospitals and employs 23,000 doctors.
Cxbladder urine sampling systems will be sent directly to Kaiser Permanente patients in their homes for onward delivery to Pacific Edge's US laboratory in Pennsylvania for analysis and reporting.
Shares in Pacific Edge last traded at 29c, having started the week at 13c.
Market newcomer Me Today rallied on the news that All Black Beauden Barrett had become a brand ambassador for the company, which specialises in skincare and healthcare products.
Chief executive and former Trilogy general manager Michael Kerr said Barrett was "a perfect fit" with the company's brand principles.
Barrett's wife Hannah, who has expertise in social media marketing, serves on the Me Today board.
The stock, the result of a backdoor listing, last traded at 15c - having started the week at 8.6c.
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