Our 12-month target price of NZ$9.80 is based on our discounted cash flow valuation. For our discounted cash flow valuation, we model the cash flows out to 2032E and use a terminal growth rate of 4.4%, with the cash flows discounted at a variable WACC (adjusted annually, average WACC of 8.0%) to give a group valuation net of corporate debt.

A number of variables may impact our valuation of the company. One of the major near-term sources of risk for AIA is the timing of PAX recovery after significant Covid-19-related declines. Another source of risk is regulation. The Commerce Commission monitors the basis of aeronautical price setting and targeted returns achieved by AIA's aeronautical division. An unfavourable regulatory outcome could lead to lower revenues for AIA. General risks include lower passenger growth than we forecast, higher debt refinancing costs, rising bond yields, external shocks impacting airline customers, and foreign exchange risk.

Should the impact of these factors be greater than expected, the stock may have difficulty in achieving our earnings estimates and valuation. Conversely, should any of these factors prove to have less of an effect than we anticipate, the stock may outperform our target price.