Analysts bullish on partial sale of Air NZ

Macquarie says further details about the Government's intentions could push up the airline's share price to the bank's target of $1.93. Photo / File

Analysts at Macquarie say further details in today's Budget of a possible government sell-down of Air New Zealand could help push the airline's share price to the investment bank's target of $1.93.

Macquarie says the airline's board has yet to hold any formal discussions with the government over the timing of any sell-down from 74 per cent to 51 per cent but the Budget "may provide further clarity on the Crown's intentions, which could materially increase liquidity in the stock".

Air New Zealand shares have risen sharply this year and yesterday closed down 0.5c at $1.525.

"We view current trading conditions as an opportune time to sell down given the positive earnings momentum in the business and the growth outlook."

That should ensure widespread investor interest, said analysts Russell Shaw and David McGregor.

"Regardless of the potential for increased liquidity on a fundamental basis Air [NZ] looks cheap, with strong near-term earnings growth prospects and an attractive dividend yield."

The research note issued after an investor day said the airline was "flying high" but even more was expected in the next financial year.

Under new chief executive Christopher Luxon the management structure had been reorganised to deliver on a strategy which embodied top line growth and aggressive cost management - including hiring new cabin crew at lower cost. The aim was to sustainably double the average earnings of the past 10 years or consistently achieving a pre-tax profit of about $340 million, up from the Macquarie estimate of $243 million in the 2013 year.

Air New Zealand continued to "nimbly" adjust its capacity to suit market demand, with the suspension of the Osaka-Auckland route a sensible approach to the falling value of the yen.

The analysts said the clear focus on China would also help growth and the first of the airline's Boeing 787s was targeted on the Shanghai route which would further improve its economics.

New 777-300s would allow the retirement of its remaining fuel-hungry Boeing 747s.

Competition risks on domestic networks were seen as low, as was the impact of Hawaiian Airlines on its transpacific routes. Medium risks came from competition from the Emirates-Qantas alliance across the Tasman and from British Airways on the Los Angeles-London route where the airline was to fly a A380 superjumbo.