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Air New Zealand to double profit

Air New Zealand’s (ASX: AIZ) share price has risen almost 100% in the past year but it’s still flying under many investors’ radars — is it about to take off again?

The company recently said that it expects earnings before tax, to be at the upper end of its April forecasts for the 2013 year. It’s a guidance that would double its full-year profit. After reporting NPAT of $NZ100 million for the half-year ended 31 December 2012, the company now believes its full-year normalised earnings to be closer to $NZ260 million.

The company has risen from below $0.70 in June last year to open today at $1.27, yet it still operates at a healthy price-to-earnings ratio of only 8. Taking a look at its peers, Qantas (ASX: QAN) and Virgin Australia (ASX: VAH), both have P/E ratios above 20, yet have no massive growth prospects in the near future.

Air New Zealand has a larger market capitalisation than Virgin and offers a dividend of around 5.6%, something that its rivals cannot afford to do. The current debt-to-equity ratios of Virgin and Qantas are 180% and 110% respectively, whereas Air New Zealand’s is 100%.

Now, with stronger balance sheets and a history of returns for investors, Air New Zealand is focusing on growth through open market purchases and operating on routes it knows it will get the maximum amount of passengers. It has a codeshare arrangement with Virgin, enabling it to offer the best spread of trans-Tasman flights. In addition last week the company announced it upped its stake in Virgin to 23%.

Foolish takeaway

In the past couple of months I have been saying that Air New Zealand could be one undervalued high-yielding company that is worth a spot on your watchlist. If the company can deliver on its guidance, which it should, then the market could only react positively. However, airlines do inherently carry large amounts of risk but this one is by far the safest of our biggest three on offer.

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Motley Fool contributor Owen Raszkiewicz owns shares in Air New Zealand.

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