Air New Zealand’s share price has been remarkably resilient of late, despite temporary lockdown measures and travel restrictions across Australia and New Zealand.
Closing the travel bubble with Australia is a stark reminder that we’re not “out of the woods” and risks remain. Combine this with recent comments from Australia’s Prime Minister about the inability to commit to overseas travel by Christmas 2022, and the road to recovery for international travel out of Australasia could follow a very uncertain flight path.
Air NZ’s recent numbers show passenger volumes are down -40 per cent, with domestic numbers down just over -10 per cent, while international numbers have fallen more than -90 per cent.
For the 2021 financial year Air NZ expects a loss before tax no more than $450 million. The company's return to profitability may well take longer than many are anticipating. This is because the recovery in long haul travel is unlikely to be meaningful for some time yet.
Given the difficult backdrop, it’s no surprise that the company is losing huge amounts of money.
However, there have been several government support packages put in place - wage subsidies, airfreight scheme and air support packages, worth approximately $300m. These are only temporary measures, and even with a recovery in travel, higher fuel costs and a lack of support mechanisms could mean material losses are likely to continue.
Air NZ’s cash burn has also been temporarily halted as the government has allowed them to defer paying PAYE tax. However, when this deferral scheme ends in October it has been estimated Air NZ will have a bill of about $310m. Further, Air NZ have access to a Crown loan facility which has been drawn by NZ$350m to help cover Covid-19 related costs.
So, what does all this mean for the share price?
Before answering this question, let’s look at Air NZ’s peer group. Qantas undertook a $1.4 billion capital raise from shareholders in mid-2020 to fund the group's three-year recovery plan. Meanwhile, Virgin Australia went into voluntary administration in April 2020 before being acquired by private equity firm Bain Capital. It comes as no surprise that Air NZ management have reiterated an intention to raise capital before 30 September this year.
Many retail investors, who make up a disproportionately large proportion of Air NZ’s shareholder base, believe Air NZ stock looks “cheap” given it is trading at $1.57 a share versus $3.00 pre-Covid. In response to the lack of travel argument, a response usually goes along the lines of “they are 51 per cent owned by the Government, so it will always be bailed out”.
However, this view fails to consider the near-term implications of the much-needed capital raise, and its effect on shareholder value.
A capital raise, especially one which is used to repay debt (rather than invest in new growth) is not normally seen as a positive for a company’s share price and is usually at a discount to the current share price.
Air NZ’s current value is $1.75 billion based on its share price. In order to simply cover its PAYE tax bill ($310m) and Government loan ($350m), Air NZ needs $660m, which is 38 per cent of Air NZ’s current equity value. A major NZ based stockbroker estimates that Air NZ will have to raise $1.2 billion. It is questionable if this has been factored into the current share price. Assuming it’s not already factored in, then the share price could take a big hit in the months ahead as Air NZ’s delayed capital raise dilutes existing shareholders.
Hamesh Sharma is a portfolio manager at ethical fund manager and KiwiSaver provider Pathfinder Asset Management , which is part of Alvarium Wealth . This is not a recommendation to buy or sell Air NZ shares.
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