Air New Zealand ($AIR.NZ) is an international and domestic airline based in New Zealand. $AIR.NZ is trading toward the bottom of their 52-week range. How is this in relation to the intrinsic value of the company’s shares?

Valuecruncher valuation model of $AIR.NZ with interactive assumptions

Valuecruncher produces a valuation of NZ$1.24 for $AIR.NZ. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 34.8% above the current share price of NZ$0.92.

Assumptions

• Revenue: Reuters aggregates seven analysts covering $AIR.NZ and the mean estimates of 2009 and 2010 revenues are NZ$4.8 billion and NZ$5.0 billion respectively. For our analysis we have used NZ$4.7 billion in 2009, NZ$4.85 billion in 2010 and NZ$5.15 billion in 2011.
• Profitability: We have used a flat EBITDA margin of 12.5% to 2011. Reuters has $AIR.NZ‘s EBITD margin at 14.5% last year and an average of 13.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of NZ$325.0 million in 2009 rising to NZ$565.0 million in 2011 then NZ$450.0 million per annum moving forward.
• Discount Rate: 9.5%. The PwC New Zealand cost of capital report has $AIR.NZ at a WACC of 9.1% with the wider NZ market at 9.5%.
• Terminal Growth Rate: 2.0%.

Our analysis incorporates the cash and debt on the $AIR.NZ balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

Valuecruncher has valued each Air New Zealand share at $1.92, with a range of $1.35 to $2.57. The share price closed at $2.25 on the 1 March 2007. 

Air New Zealand’s recently released interim result for the 6 months to December 31 highlighted the ongoing improvement in profit margins and continued expansion into new locations including a planned direct service to Vancouver. The interim result announcement was accompanied by news of an interim dividend of 3 cents per share up from 2.5 cents last year and a special dividend of 10 cents per share.

Over the last 3 months the Air New Zealand share price has increased steadily to the point where it has an enterprise value - EBIT multiple of 16.1. This multple is consistent with Qantas (16.7) which is in the process of being acquired. Valuecruncher’s valuation implies an enterprise value - EBIT multiple of 13.1 which is consistent with leading US operator Southwest Airlines (13.7). Given the large stake in Air New Zealand held by the Government Valuecruncher does not consider the airline a takeover target in the short to medium term.

Revenue Growth 

Revenue is forecast to grow at 8% per annum for the next 3 years as Air New Zealand continues to explore opportunities to expand into new markets.

EBIT Margins 

Valuecruncher has increased the forecast EBIT margin to 5% reflecting recent improvements in performance but acknowledge the value impact of any increase in core cost components such as fuel. If Air New Zealand can’t maintain the efficiency improvements made or external costs increased resulting in a drop in the EBIT margin to 4% the valuation would drop to $1.51.

The WACC used for this analysis is 11.5%. 

Terminal Growth 

Terminal growth has been set at 3%.  

Air New Zealand Valuation     

Valuecruncher has placed a value of $1.67 on Air New Zealand shares with a range between $0.88 and $2.51. This is slightly lower than the current share price of $1.74.

Revenue Growth

Revenue growth for Air New Zealand has been improving since 2003, recovering from -3.29% growth in the 03/04 period to growth of 4.59% in the 05/06 period. We assume that growth will continue to increase due to the introduction of new aircraft, an upgrade on existing aircraft, and the introduction of new short-haul flights. We forecast the growth rates to be 6%, 7%, and 8% for the next three periods, heading towards the growth currently seen in Qantas, the comparator.

EBIT Margin

The EBIT margin has declined since 2004 from 6.72% to 3.90% in 2006. In the 2006 analyst call it was stated that fuel prices were the main determinant in the profitability of the company, and with fuel prices only rising, it is unlikely that EBIT margins will improve by much in the near future even if cost saving strategies are put in place. We have estimate EBIT margins to be 4% for the next three years.

Terminal Growth

Terminal growth is assumed to be 3%.

Discount Rate (WACC)

The discount rate used is 11.7% (from the PwC cost of capital report).

Additional Note – The enterprise value of a company is the total market value of equity plus net debt. Net debt is equal to long-term liabilities minus any cash and/or short-term investments. In this analysis, the long-term liabilities not only included long-term borrowing, but also long-term finance lease liabilities.

Air NZ Valuation