Air NZ tipped for special dividend after $260m sale of Virgin

Analysts are tipping Air NZ to make a special dividend after the sale of its Virgin Australia stake.

Air New Zealand shares rose after its Virgin exit.

Analysts expect Air New Zealand to reward its shareholders with a special dividend following the Kiwi flag carrier’s sale of its ­majority stake in Virgin Australia to Chinese conglomerate Nan­shan Group for about $260 million.

Air New Zealand on Friday put an end to the 10-week sales process of its 19.98 per cent holding in Virgin by agreeing to sell to Nan­shan — a privately owned Chinese conglomerate with interests in aluminium and property as well as its own Qingdao Airlines — about 800 million shares at 33c a share.

The sale price represented a loss for Air New Zealand which bought its stake in Virgin for around $NZ480m ($459m), according to calculations by Deutsche Bank.

With the transaction now just awaiting final regulatory approval, analysts have already begun running a ruler over Air New Zealand’s books to see how the airline could spend its sales proceeds.

According to UBS analyst Marcus Curley, the proceeds of the sale plus the repayment of a $131m loan to Virgin Australia will give Air New Zealand enough excess capital to reward shareholders with a special dividend.

“After both events we believe Air New Zealand will most likely return net proceeds from the Virgin shareholding sale to its shareholders via a special dividend,” Mr Curley said.

“While exact timing is difficult to judge, we expect this to occur before the end of August.”

According to Deutsche analyst Matt Peek, the divestment of Air New Zealand’s Virgin shares will realise 25c cash per share for the Kiwi airline which will help reduce its gearing levels by about 4 per cent.

Air New Zealand has been operating with high gearing levels this year of about 54 per cent.

“We had forecast (about) 50 per cent at FY17, so the sale should reduce gearing to the lower half of the target range,” Mr Peek said.

However, Mr Peek said that with $2.3 billion of new aircraft expenses until 2019, a special dividend may have to wait.

“While there may be capacity for a special dividend we would not be surprised to see the board adopt a cautious approach to capital management for now,” he said.

News of the sale to Nanshan sent shares in Virgin up 3.6 per cent on Friday to 29c, while Air NZ rose 2.9 per cent to $2.12.

Nanshan became the second Chinese conglomerate in as many weeks to become a major shareholder in Virgin after HNA Group struck a $159m deal to take a 13 per cent stake in the airline.