New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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Equity Bottom-Up

<h2>Auckland Airport</h2>
Lower Aero Flight Plan
The profile of Auckland Airport’s (AIA) aeronautical earnings through its next regulated pricing period has reduced due to lower bond rates, capex delays and an increasingly likely deferral of its runway land charge. While aeronautical prices will still be on an upwards curve from FY23, the slope of the curve will be far more gentle than previously expected. Moreover, international passenger growth will remain subdued through FY20, having declined -1% in July 2019. With consensus earnings risk weighted to the downside for FY21 and FY22, and valuation stretched at ~41x one year forward PE, ~23x EV/EBITDA, we reiterate an UNDERPERFORM rating.
What’s changed?
<ul>
<li>Earnings: FY20 unchanged. FY21 and FY22 EPS cut by -7% and -6% respectively to reflect deferral of runway land charge. EPS CAGR to FY22 of ~-1%</li>
<li>Target Price:&nbsp;Reduced to NZ$7.90 from NZ$8.25 to reflect lower aeronautical valuation</li>
</ul>
Aeronautical earnings outlook has weakened
AIA’s aeronautical earnings outlook is supported by a rising regulatory asset base. However, the rate of growth is slowing due to:
<ul>
<li>Lower bond yields — lower bond yields have provided a major benefit to AIA’s valuation but will also lower AIA’s future aeronautical pricing.</li>
<li>Northern runway deferral — the potential deferral of the delivery date for the Northern runway at the investor day in November 2019 may also mean a delay in the introduction of the runway land charge from FY21 to a later date, in our opinion.</li>
<li>Capex spend lower than intended — AIA’s recent FY19 result further highlighted its capex under-spend thus far through its current regulated pricing period (FY18–FY22) relative to the budget on which its current pricing was based (provided in 2017).</li>
<li>ComCom still to review other regulated services — in its review of AIA and Christchurch Airport’s PSE3 pricing the ComCom deferred its decision on non-pricing assets. These represent only 8% of AIA’s aeronautical revenues but generate a return materially in excess of WACC.</li>
</ul>
Balance sheet pressures ease
A deferral of the Northern runway construction and later delivery of the domestic jet terminal puts less stress on AIA’s balance sheet over the medium term. As a result AIA will now remain comfortably within its ‘A-’ S&amp;P credit rating parameters, on our estimates.&nbsp;
<div class="content-highlight">
Investment View
AIA is well positioned given its control of New Zealand’s major gateway, its hub positioning for Air New Zealand and the country’s positive longer term tourism outlook. It is a high quality infrastructure asset providing structural growth and sustainable dividends. The company is in the midst of a multi-year capex programme. AIA is sensitive to bond yield movements and international pax growth. In combination these no longer support current valuation levels and therefore our rating is UNDERPERFORM.
</div>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Auckland Airport
Lower Aero Flight Plan
The profile of Auckland Airport’s (AIA) aeronautical earnings through its next regulated pricing period has reduced due to lower bond rates, capex delays and an increasingly likely deferral of its runway land charge. While aeronautical prices will still be on an upwards curve from FY23, the slope of the curve will be far more gentle than previously expected. Moreover, international passenger growth will remain subdued through FY20, having declined -1% in July 2019. With consensus earnings risk weighted to the downside for FY21 and FY22, and valuation stretched at ~41x one year forward PE, ~23x EV/EBITDA, we reiterate an UNDERPERFORM rating.
What’s changed?

Earnings: FY20 unchanged. FY21 and FY22 EPS cut by -7% and -6% respectively to reflect deferral of runway land charge. EPS CAGR to FY22 of ~-1%
Target Price:&nbsp;Reduced to NZ$7.90 from NZ$8.25 to reflect lower aeronautical valuation

Aeronautical earnings outlook has weakened
AIA’s aeronautical earnings outlook is supported by a rising regulatory asset base. However, the rate of growth is slowing due to:

Lower bond yields — lower bond yields have provided a major benefit to AIA’s valuation but will also lower AIA’s future aeronautical pricing.
Northern runway deferral — the potential deferral of the delivery date for the Northern runway at the investor day in November 2019 may also mean a delay in the introduction of the runway land charge from FY21 to a later date, in our opinion.
Capex spend lower than intended — AIA’s recent FY19 result further highlighted its capex under-spend thus far through its current regulated pricing period (FY18–FY22) relative to the budget on which its current pricing was based (provided in 2017).
ComCom still to review other regulated services — in its review of AIA and Christchurch Airport’s PSE3 pricing the ComCom deferred its decision on non-pricing assets. These represent only 8% of AIA’s aeronautical revenues but generate a return materially in excess of WACC.

Balance sheet pressures ease
A deferral of the Northern runway construction and later delivery of the domestic jet terminal puts less stress on AIA’s balance sheet over the medium term. As a result AIA will now remain comfortably within its ‘A-’ S&amp;P credit rating parameters, on our estimates.&nbsp;

Investment View
AIA is well positioned given its control of New Zealand’s major gateway, its hub positioning for Air New Zealand and the country’s positive longer term tourism outlook. It is a high quality infrastructure asset providing structural growth and sustainable dividends. The company is in the midst of a multi-year capex programme. AIA is sensitive to bond yield movements and international pax growth. In combination these no longer support current valuation levels and therefore our rating is UNDERPERFORM.

Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

<h2>Transport Titbits — Reporting Season Themes</h2>
Over the past two weeks a number of NZX listed transport companies have reported their latest financial results including&nbsp;Air New Zealand,&nbsp;Auckland Airport,&nbsp;Freightways,&nbsp;Port of Tauranga,&nbsp;and&nbsp;TIL Logistics. While these companies operate in a wide spectrum of the broader transport market there are a number of common themes that are apparent:
<ul>
<li>&nbsp;Slowing demand&nbsp;–&nbsp;Auckland Airport experienced its lowest passenger growth rate in six years, while Air New Zealand (having already warned of a slowdown in January 2019) has further cut its capacity growth expectations. AIR will cut domestic capacity by -2% to -3% in FY20 given slower domestic leisure demand. TIL Logistics acknowledged that freight growth had slowed during the last six months,&nbsp;while Freightways highlighted the sequential slowdown through this calendar year to date with its parcel volumes declining on both May and June 2019. This doesn’t bode well for the broader economic backdrop given the early cycle nature of Freightways’ volume movements.</li>
<li>Price growth driving margin expansion&nbsp;–&nbsp;price growth has been a feature for several transport companies during FY19 and will continue to be a feature in FY20.&nbsp;Port of Tauranga has begun to pull the price lever, which has been helped by capacity constraints and congestion at Ports of Auckland. Freightways' pricing for effort initiative, which is targeted a +NZ$1.50 increase in B2C (business-to-consumer) parcel prices over the next two years, will significantly enhance B2C margins (which we estimate have been close to 0% historically) if successful.</li>
<li>Return on capital is falling&nbsp;–&nbsp;financial returns at Air New Zealand, Auckland Airport, Freightways and TIL Logistics all declined over the past 12 months, largely reflective of slowing profit growth and increasing capital investment. The one exception was Port of Tauranga, which has been able to leverage its capex bulge of recent years through accelerated cargo growth.</li>
<li>Lower forward earnings expectations&nbsp;–&nbsp;consensus forward earnings expectations have been cut for Air New Zealand, Auckland Airport, Freightways, and Port of Tauranga following their respective FY19 results. The deepest cut was for Air New Zealand reflective of first time earnings&nbsp; guidance for the year ahead. While the sector may be bracing for a more challenging volume environment with greater focus on cost control, market valuations remain at elevated levels and continue to be supported by lower bond rates.</li>
</ul>

Andy Bowley
Head of Research&nbsp;
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+64 4 495 8246
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+64 21 338 941
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0800 367 227
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+64 4 495 8193
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PO Box: 5266, Wellington 6145
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Transport Titbits — Reporting Season Themes
Over the past two weeks a number of NZX listed transport companies have reported their latest financial results including&nbsp;Air New Zealand,&nbsp;Auckland Airport,&nbsp;Freightways,&nbsp;Port of Tauranga,&nbsp;and&nbsp;TIL Logistics. While these companies operate in a wide spectrum of the broader transport market there are a number of common themes that are apparent:

&nbsp;Slowing demand&nbsp;–&nbsp;Auckland Airport experienced its lowest passenger growth rate in six years, while Air New Zealand (having already warned of a slowdown in January 2019) has further cut its capacity growth expectations. AIR will cut domestic capacity by -2% to -3% in FY20 given slower domestic leisure demand. TIL Logistics acknowledged that freight growth had slowed during the last six months,&nbsp;while Freightways highlighted the sequential slowdown through this calendar year to date with its parcel volumes declining on both May and June 2019. This doesn’t bode well for the broader economic backdrop given the early cycle nature of Freightways’ volume movements.
Price growth driving margin expansion&nbsp;–&nbsp;price growth has been a feature for several transport companies during FY19 and will continue to be a feature in FY20.&nbsp;Port of Tauranga has begun to pull the price lever, which has been helped by capacity constraints and congestion at Ports of Auckland. Freightways' pricing for effort initiative, which is targeted a +NZ$1.50 increase in B2C (business-to-consumer) parcel prices over the next two years, will significantly enhance B2C margins (which we estimate have been close to 0% historically) if successful.
Return on capital is falling&nbsp;–&nbsp;financial returns at Air New Zealand, Auckland Airport, Freightways and TIL Logistics all declined over the past 12 months, largely reflective of slowing profit growth and increasing capital investment. The one exception was Port of Tauranga, which has been able to leverage its capex bulge of recent years through accelerated cargo growth.
Lower forward earnings expectations&nbsp;–&nbsp;consensus forward earnings expectations have been cut for Air New Zealand, Auckland Airport, Freightways, and Port of Tauranga following their respective FY19 results. The deepest cut was for Air New Zealand reflective of first time earnings&nbsp; guidance for the year ahead. While the sector may be bracing for a more challenging volume environment with greater focus on cost control, market valuations remain at elevated levels and continue to be supported by lower bond rates.


Andy Bowley
Head of Research&nbsp;




T:


+64 4 495 8246




M:


+64 21 338 941




TF:


0800 367 227




F:


+64 4 495 8193




P:


PO Box: 5266, Wellington 6145








W:


www.forsythbarr.co.nz



Twitter:

@forsythbarr





Transport Titbits — Reporting Season Themes

New Zealand

Auckland International Airport Limited owns and operates the Auckland International Airport.  The Airport includes a single runway, an international terminal and two domestic terminals.  The Airport also has commercial facilities which includes airfreight operations, car rental services, commercial banking center and office buildings.

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Auckland International Airport (AIA AU)

Auckland Airport: Lower Aero Flight Plan

Auckland Airport Lower Aero Flight Plan The profile of Auckland Airport’s (AIA) aeronautical earnings through its next regulated pricing period has...

Forsyth Barr

Transport Titbits — Reporting Season Themes

Transport Titbits — Reporting Season Themes Over the past two weeks a number of NZX listed transport companies have reported their latest financial...

Forsyth Barr

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)