Air New Zealand held its first investor day in five years this week. Photo / Dean Purcell
Air New Zealand has clearer air ahead with analysts from Forsyth Barr upgrading its rating from underperform to neutral.
Following an investor day (the airline’s first in five years) when the airline was able to put meat on the bones of its plans, ForBarr says management is pursuing a wide range of “credible, value accretive revenue and cost-related initiatives,” aimed at lifting financial performance over the medium term.
The target share price has been lifted from 48c to 59c for Air NZ (AIR).
The investor day also revealed just how valuable its top tier of customers are. While the airline dropped its current half-year guidance to between $120-$160 million (compared to $185m for the previous period) analysts Andy Bowley and Hugh Lockwood say the airline is close to its low point in relation to demand environment (it suggested some green shoots are evident domestically), and the impact of engine maintenance requirements.
Problems with Rolls-Royce Trent engines for long-haul Dreamliners and Pratt&Whitney engines for its A320-21 fleet are now grounding up to 10 of the airline’s jet fleet (16%) at any one time.
Better-than-anticipated year-to-date underlying profitability (excluding engine-related compensation and sale/leaseback gains) profitability reflects lower fuel prices and around $10m of Covid credit breakage, the analysts say.
“While AIR warns about extrapolating first-half guidance into FY25, we expect underlying business performance to steadily improve as transformation initiatives deliver and the demand environment slowly recovers.”
The company is pursuing both revenue and cost-related transformation initiatives targeting earnings improvements of $300m-$400m by the 2028 financial year. About 70% of the increase relates to revenue benefits driving 4% to 6% revenue annual growth of which 3% to 4% relates to capacity.
The remainder, +1% to +2%, reflects Rask (revenue per available seat km) from various initiatives, including long-haul “premiumisation” with a higher proportion of business premier seats in refurbished and new Dreamliners, more advanced revenue management, greater ancillary revenue, and extracting more from loyalty.
Bowley and Lockwood say that is unlikely: “We believe it unlikely that AIR is able to deliver this full benefit over the next three to four years due to competitor behaviour and other dynamic variables in its operating environment. However, delivering some of this, together with a more normalised operating environment and full aircraft availability (once engine maintenance issues are resolved), provides scope for a meaningful earnings recovery over the medium term.”
Investors were reminded that the airline plans to introduce a new tier of loyalty above “elite” and how important the programme is. Elite flyers now spend an average 1.6 times more on airfares than those not in the loyalty scheme.
The NZ Shareholders Association has highlighted an incentive package, based on the appreciation of 2.4m performance rights, that will see Gentrack’s CEO paid around $10m over FY24, FY25 and FY26.
“Gary Miles will be the highest-paid CEO on the NZX for a company whose market capitalisation ranks 32nd,” NZSA CEO Oliver Mander said.
The overall executive incentive scheme would result in shareholder dilution of up to 8.5% – “creating a significant wealth transfer from shareholders to Gentrack’s executive”.
Miles said the scheme helped recruit and retain key talent like Mark Rees – the long-time Xero chief technology officer who became Gentrack CFO earlier this year.
“Shareholders in general are benefitting well from the share price appreciation,” he said.
“When I joined [in 2020, with the share price at $1.20], the market cap was about $100 million, and now it’s north of a billion.”
Gentrack shares closed up 24.4% to $12.61 on Tuesday after the maker of software for running airports and utilities reported a 25.5% jump in revenue to $213m and a 1.7% rise in ebitda to $23.6m.
Net profit dropped 5% to $9.5m, in part because of costs associated with the bonus scheme.
Craigs’ analyst Josh Dale maintained his overweight recommendation and hiked his 12-month target price from $10.50 to $13.20 (a mark Gentrack was already close to as it continued its bull run into Thursday, where it was at $13.00 in mid-morning trading.
The stock is now up 124% for the year – having regained all the ground it lost during the pandemic (when it crashed from $7.80 to $1.20) and then some.
While Gentrack did not provide FY2025 guidance – saying it did not have enough clarity on when new customer contracts would land – Dale said there was “energetic growth” and “tailwinds remain in place” for Gentrack to achieve its medium-term target of 15-20% ebitda margin growth as “utilities globally seek to transform away from legacy SAP and Oracle systems to modern technology stacks”.
Forsyth Barr’s James Lindsay and Will Twiss kept their neutral rating but said there was “plenty for bulls to cheer about” in the full-year result and raised their Gentrack target by 23% to $14.51.
Gentrack’s medium-term revenue guidance of 15% per year growth “may be conservative, if it converts on potential contracts. Major underway projects, including the Genesis g2 transformation, are also tracking well. Gentrack is ticking all of the boxes”.
How did the recent dry spell and gas shortage affect the big power companies?
Morningstar, in a report, said the events forced New Zealand utilities to scramble to secure enough power to supply customers.
Wholesale electricity prices spiked to reflect fuel scarcity.
The big losers were utilities heavily reliant on hydroelectricity – Meridian and Mercury – which were forced to buy electricity at high prices to cover shortfalls.
Genesis and Contact were the big winners because they were able to ramp up thermal power generation and provide expensive hedging to their peers.
“For the September quarter, we estimate Mercury’s gross profit was down about 10% on the same period a year ago, while Meridian’s gross profit looks to be down about 40% in the four months to the end of October, including payments to the aluminium smelter to reduce its electricity usage,” Morningstar said.
“In contrast, we estimate gross profit is up about 14% in the September quarter for Genesis and up 29% in the four months to October for Contact, the latter aided by the completion of the Tauhara geothermal power station,” it said.
Ramsay Health Care shareholders are pushing for change after an ill-fated overseas expansion by the Aussie hospital group.
The company, which held its annual meeting this week, has so far resisted repeated calls to divest. Robbie Urquhart, senior portfolio manager – Australian equities – at Fisher Funds says Ramsay is a classic case of a good company with a sound core franchise that has frittered away shareholders’ money by re-deploying the cash flow into multiple offshore jurisdictions.
Urquhart says Ramsay has acquired businesses in countries in which it doesn’t have a competitive advantage nor the “right to win”.
“Growth for growth’s sake in a business doesn’t create shareholder value and Ramsay shareholders unfortunately have borne the brunt of those poor decisions,” he says.
Ramsay has in recent times tried to unwind the pickle it finds itself in and “shrink the business to greatness” by exiting some of these investments.
It has been spurred on in this endeavour by frustrated (and increasingly vocal) institutional shareholders.
Ramsay is perennially touted by the market as being a takeover target, with potential suitors no doubt attracted by the high-quality Australian assets.
Shackled by the yoke of particularly a poor French business, this has not come to fruition yet.
At its heart, Ramsay has a jewel in the form of its Australian franchise. “That it hasn’t been acquired yet speaks volumes for the unattractiveness of its offshore businesses,” Urquhart says.
It highlights the folly of companies misunderstanding the source of their competitive moat when investing outside of their core markets, Urquhart said, adding shareholders would have been better served by having cash returned than by ambitious offshore expansion.
BGH's tilt at Tourism Holdings has sparked more merger and acquisition speculation.