New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Auckland Airport<br>1H22&nbsp;— Light at the End of the Runway</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Auckland Airport's (AIA) subdued 1H22 result was largely inconsequential to its medium term recovery with uncertainty prevailing over the passenger (pax) outlook, deferred aeronautical repricing, post COVID-19 retail concession backdrop, and profile of the capital development pipeline. Investment property remains the shining light with further strong growth reported. All near term balance sheet questions should now be removed by the renegotiated covenants through to June 2024, by which time a capital return should be on the agenda. After adjusting for the revaluation gains in AIA's property business, it is now trading at a ~-18% discount to its enterprise value (EV) as at 31 December 2019 (pre COVID-19), and an EV to peak historic EBITDA of ~19x. We believe these are fair and reasonable; NEUTRAL.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22 NPAT loss narrowed due to low quality reasons — depreciation, interest and tax; later years largely unchanged&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Lowered to NZ$7.10 from NZ$7.60 to reflect our revised WACC assumptions&nbsp;</li>
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<h3>Subdued second half outlook</h3>
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<p>First time FY22 NPAT loss guidance of -NZ$25m to -NZ$50m implies a softer second half as higher opex and depreciation more than offset a modest recovery in revenue. A more meaningful revenue recovery is reliant on border restrictions (in particular self-isolation) being removed. The long haul capacity outlook for FY23 will be largely subject to airline decision making over the next two to three months (i.e. allocation of aircraft and securing of airport slots). As a result it is important for AIA and the wider NZ aviation sector that the government sets a clear pathway for the removal of self-isolation requirements over the coming weeks rather than months.&nbsp;</p>
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<h3>Balance sheet&nbsp;</h3>
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<p>Revised EBITDA interest covenants remove any lingering balance sheet risk. Management has secured reductions through to June 2024 which should allow it to comfortably exceed the new hurdles. The next covenant test at June 2022 only requires an EBITDA interest cover of &gt;1.25x. Our updated forecasts imply EBITDA interest cover of ~2.2x. In return for more favourable covenants AIA will maintain its dividend holiday throughout FY22, with resumption only possible from 1H23.&nbsp;</p>
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<h3>Heavier&nbsp;opex&nbsp;burden, longer term EBITDA margins of ~75%</h3>
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<div id="m_5727380130817375723irawy">
<p>Opex&nbsp;guidance for 2H22 has been lowered by -NZ$5m to -NZ$10m. In contrast, the likely higher path of&nbsp;opex&nbsp;over the medium to longer term, as compliance around government health measures has increased (recoverable through aeronautical pricing),&nbsp;could dampen margins.&nbsp; Management has referenced&nbsp; EBITDA margin aspirations of ~75%, which our current longer term forecasts exceed.&nbsp;</p>
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Auckland Airport 1H22&nbsp;— Light at the End of the Runway

NEUTRAL
Auckland Airport's (AIA) subdued 1H22 result was largely inconsequential to its medium term recovery with uncertainty prevailing over the passenger (pax) outlook, deferred aeronautical repricing, post COVID-19 retail concession backdrop, and profile of the capital development pipeline. Investment property remains the shining light with further strong growth reported. All near term balance sheet questions should now be removed by the renegotiated covenants through to June 2024, by which time a capital return should be on the agenda. After adjusting for the revaluation gains in AIA's property business, it is now trading at a ~-18% discount to its enterprise value (EV) as at 31 December 2019 (pre COVID-19), and an EV to peak historic EBITDA of ~19x. We believe these are fair and reasonable; NEUTRAL.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY22 NPAT loss narrowed due to low quality reasons — depreciation, interest and tax; later years largely unchanged&nbsp;
Target price:&nbsp;Lowered to NZ$7.10 from NZ$7.60 to reflect our revised WACC assumptions&nbsp;



Subdued second half outlook


First time FY22 NPAT loss guidance of -NZ$25m to -NZ$50m implies a softer second half as higher opex and depreciation more than offset a modest recovery in revenue. A more meaningful revenue recovery is reliant on border restrictions (in particular self-isolation) being removed. The long haul capacity outlook for FY23 will be largely subject to airline decision making over the next two to three months (i.e. allocation of aircraft and securing of airport slots). As a result it is important for AIA and the wider NZ aviation sector that the government sets a clear pathway for the removal of self-isolation requirements over the coming weeks rather than months.&nbsp;


Balance sheet&nbsp;


Revised EBITDA interest covenants remove any lingering balance sheet risk. Management has secured reductions through to June 2024 which should allow it to comfortably exceed the new hurdles. The next covenant test at June 2022 only requires an EBITDA interest cover of &gt;1.25x. Our updated forecasts imply EBITDA interest cover of ~2.2x. In return for more favourable covenants AIA will maintain its dividend holiday throughout FY22, with resumption only possible from 1H23.&nbsp;


Heavier&nbsp;opex&nbsp;burden, longer term EBITDA margins of ~75%


Opex&nbsp;guidance for 2H22 has been lowered by -NZ$5m to -NZ$10m. In contrast, the likely higher path of&nbsp;opex&nbsp;over the medium to longer term, as compliance around government health measures has increased (recoverable through aeronautical pricing),&nbsp;could dampen margins.&nbsp; Management has referenced&nbsp; EBITDA margin aspirations of ~75%, which our current longer term forecasts exceed.&nbsp;


Auckland Airport: 1H22 — Light at the End of the Runway

Auckland Intl Airport

Auckland Airport: 1H22 — Light at the End of the Runway