Morningstar | Rising Fuel Bill Continues to Weigh on Air New Zealand’s Near-Term Earnings
No-moat-rated Air New Zealand guided to fiscal 2019 profit before tax of above NZD 340 million, compared with prior guidance of between NZD 340 and NZD 400 million. This reflects an additional NZD 25 million headwind from increased jet fuel prices, assuming an average price of USD 78 per barrel in the second half. As such, we have downgraded our fiscal 2019 EPS forecast by 5% to NZD 24 cents per share.Despite softer near-term earnings, our NZD 2.60 (AUD 2.50) per share fair value estimate is unchanged, which sees the shares fairly valued at current levels. This change has minimal impact on our long-term earnings projections, and we continue to expect low-single-digit EPS growth on average during the next five years. We forecast the Brent crude oil price to decline modestly from current levels, reaching our midcycle forecast of USD 60 per barrel by fiscal 2021.
The firm reiterated its goal of achieving NZD 60 million in cost savings by the end of 2021 through: (1) removal of inefficiencies incurred in 2019 to mitigate network disruption related to the Rolls-Royce engine issues; (2) reduction of overheads by 5% through increased efficiency and automation, and (3) a targeted review of the operating cost base. These initiatives will help offset the impact of softer revenue growth and higher fuel costs, and help the group EBITDA margin to increase by around 300 basis points to 20% from fiscal 2021 onwards.
Capital expenditure is expected to decline during fiscal 2020, before ramping up during fiscal 2023 onwards, roughly when the company starts taking delivery of the Boeing 787-10 Dreamliners. The new long-haul aircrafts will replace Air New Zealand’s fleet of 777-2000s which will be phased out by fiscal 2025. The replacements are expected to be 25% more fuel efficient, which should justify the additional capital cost.
The balance sheet is in good shape, despite the earnings softness. The company is targeting gearing of between 45%-55% and gross debt of 2.0–3.3 times EBITDA. These targets are consistent with our projections and support a dividend payout ratio of 50%-60% of earnings during the next five years.
Air New Zealand is engaged in the transportation of passengers and cargo on an integrated network of scheduled airline services to, from and within New Zealand. Through its subsidiaries, Co. is also engaged in aviation, aircraft leasing and financing, investments, and engineering services. Co.'s geographical segments are New Zealand, Australia and Pacific Islands, United Kingdom and Europe, Asia, and America.
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