Originally Posted by
Robomo
Morningstar are completely unimpressed by AirNZ's claims and keep their target at $2.80. They write...
Air New Zealand upgraded its near-term earnings guidance, flagging profit before tax (excluding equity-accounted income from Virgin Australia) for the first half of fiscal 2016 as on track to exceed NZD 400 million. The outlook commentary was positive, and the company is well positioned to benefit from lower fuel prices, improved fleet efficiency and resilient inbound tourism. We raise our fiscal 2016 earnings estimate 18% to NZD 0.47 per share, a record profit for New Zealand's flagship carrier. Nevertheless, our more bearish long-term thesis remains, and we believe the subdued outlook for the New Zealand and Australian economies will weigh on passenger demand, driving our low-single-digit revenue growth projection for the foreseeable future. We forecast that Brent crude oil will normalise at USD 70 per barrel, well above current prices, which will inflate the cost base and create margin pressure from fiscal 2017 onwards.
Our NZD 2.80 (AUD 2.60) per share fair value estimate remains intact. Air New Zealand is slightly undervalued. Our no-moat and very high uncertainty ratings are unchanged, as the company's world-class performance and cosy monopoly make it an attractive target for future competition. Air travel is largely commodified, and consumers are price sensitive. Given inevitable new capacity and competition, the balance of power will shift from the airlines back to passengers. The lack of entry barriers and minimal switching costs imply that the potential for new carriers to enter the market is extremely high, and any excess returns on capital are likely to be short-lived. Airlines are notorious for making large capital injections amidst favourable market conditions, and given our subpar economic growth expectations, we remain sceptical of Air New Zealand's aggressive NZD 2.6 billion aircraft capital expenditure pipeline and ambitious 11% capacity expansion target. We think this is an early indication of a more competitive landscape in the future.
Positively, Morningstar do say they are "well positioned"!