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</h2>
Extreme Measures in&nbsp;Extreme Times
NEUTRAL
Auckland Airport (AIA) downgraded its guidance on Friday (13 March 2020) but in light of the new travel restrictions imposed by the government on Saturday (14 March 2020), this appears optimistic and removal of FY20 guidance is now likely. Our revised forecasts now assume a -78% reduction in 2H20&nbsp;NPAT&nbsp;against the prior year, on the assumption that international&nbsp;pax&nbsp;decline by -75% for the remainder of FY20. The global and domestic backdrop is so uncertain that we recognise our forecasting is a stab in the dark. We expect an ultimate recovery in air travel, as has been the case following other black swan events, but this depends on many factors that we (or anyone else) have little insight over, at this stage.&nbsp;AIA's&nbsp;market capitalisation has fallen by more than NZ$3bn since the COVID-19 outbreak took hold in China. This is many multiples of the ultimate cash flow impact, in our opinion. However, we retain a NEUTRAL rating at this stage, as (1) the share price is still above our view of intrinsic value, (2) a further near term de-rating is likely given further significant cuts to market earnings forecasts, (3) the dividend is likely to be cut in-line with earnings, given balance sheet pressures, and (4) earnings growth through the next aeronautical price setting period is likely to slow given the potential for deferred&nbsp;capex. There should be better buying opportunities ahead for investors.&nbsp;&nbsp;
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">AIA</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$6.60</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">274.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">162.6</td>
<td style="text-align: left; width: 43.2pt;">156.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">274.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">17.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">25.1</td>
<td style="text-align: left; width: 48pt;">25.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">17.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$7.10</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">22.8&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">13.4&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">12.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.2&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">21.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">34.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">35.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">22.9&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">Low</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">3.6</td>
<td style="text-align: left; width: 42.6pt;">-41.3</td>
<td style="text-align: left; width: 43.2pt;">-4.7</td>
<td style="text-align: left; width: 48pt;">74.7&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">29.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">49.4&nbsp;</td>
<td style="text-align: left; width: 48pt;">n/a</td>
<td style="text-align: left; width: 42.6pt;">29.7&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">1207.0m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">22.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">13.4&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">12.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.2&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.3</td>
<td style="text-align: left; width: 42.6pt;">1.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">1.3&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$7,966m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">3.4</td>
<td style="text-align: left; width: 42.6pt;">2.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">1,205k (NZ$10,472k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">4.7</td>
<td style="text-align: left; width: 42.6pt;">2.8</td>
<td style="text-align: left; width: 48pt;">2.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.7&nbsp;</td>
</tr>
</tbody>
</table>
New travel restrictions to have&nbsp;catastrophic&nbsp;impact on passenger numbers
The government's new travel restrictions for international arrivals into NZ will have an extreme impact on AIA's passenger (pax) numbers, in our opinion. International arrivals, including returning kiwis, now need to self-isolate for 14 days. We expect a significant reduction in offshore travel and a similar reduction in inbound visitation. The restrictions will be reviewed in two weeks, but are likely to be in place at least until the end of June, probably longer. Despite only updating its FY20 earnings guidance on Friday (13 March 2020), we now expect AIA will withdraw it entirely given the extreme level of uncertainty.&nbsp;
Retail relief provided
AIA&nbsp; is now providing relief to&nbsp;its retailers, given their&nbsp;challenges with (1) low pax numbers, (2) depressed passenger spend rates (PSR) and (3) contractual minimum annual guarantees (MAGs). We suspect the latter have been removed so that retailers are now on a percentage rental. This relief magnifies the impact of&nbsp;COVID-19 on AIA. We estimate that for every -20% decline in pax&nbsp;AIA loses -NZ$11m-NZ$12m of NPAT per month.&nbsp;&nbsp;
Earnings risk to FY21 also; strong recovery in FY22; capex will need to be deferred
While we expect a resumption of normality once COVID-19 has been controlled, this is unlikely for at least another six months.&nbsp;We, therefore, expect a material impact on FY21 earnings before a recovery in FY22. In the meantime,&nbsp;AIA's&nbsp;balance sheet will come&nbsp;under some pressure. We expect it to breach its 12%&nbsp;FFO&nbsp;(funds from operations)/debt key credit metric in FY20 and FY21. However, we expect credit rating agencies to look through this temporary set-back given the nature of the breach.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Auckland Airport
Extreme Measures in&nbsp;Extreme Times
NEUTRAL
Auckland Airport (AIA) downgraded its guidance on Friday (13 March 2020) but in light of the new travel restrictions imposed by the government on Saturday (14 March 2020), this appears optimistic and removal of FY20 guidance is now likely. Our revised forecasts now assume a -78% reduction in 2H20&nbsp;NPAT&nbsp;against the prior year, on the assumption that international&nbsp;pax&nbsp;decline by -75% for the remainder of FY20. The global and domestic backdrop is so uncertain that we recognise our forecasting is a stab in the dark. We expect an ultimate recovery in air travel, as has been the case following other black swan events, but this depends on many factors that we (or anyone else) have little insight over, at this stage.&nbsp;AIA's&nbsp;market capitalisation has fallen by more than NZ$3bn since the COVID-19 outbreak took hold in China. This is many multiples of the ultimate cash flow impact, in our opinion. However, we retain a NEUTRAL rating at this stage, as (1) the share price is still above our view of intrinsic value, (2) a further near term de-rating is likely given further significant cuts to market earnings forecasts, (3) the dividend is likely to be cut in-line with earnings, given balance sheet pressures, and (4) earnings growth through the next aeronautical price setting period is likely to slow given the potential for deferred&nbsp;capex. There should be better buying opportunities ahead for investors.&nbsp;&nbsp;
         


NZX Code
AIA
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$6.60
NPAT* (NZ$m)
274.7&nbsp;
162.6
156.2&nbsp;
274.2&nbsp;
EV/EBITDA
17.9&nbsp;
25.1
25.2&nbsp;
17.6&nbsp;


Target price
NZ$7.10
EPS* (NZc)
22.8&nbsp;
13.4&nbsp;
12.7&nbsp;
22.2&nbsp;
EV/EBIT
21.9&nbsp;
34.8&nbsp;
35.9&nbsp;
22.9&nbsp;


Risk rating
Low
EPS growth* (%)
3.6
-41.3
-4.7
74.7&nbsp;
PE
29.0&nbsp;
49.4&nbsp;
n/a
29.7&nbsp;


Issued shares
1207.0m
DPS (NZc)
22.3&nbsp;
13.4&nbsp;
12.7&nbsp;
22.2&nbsp;
Price/NTA
1.3
1.3&nbsp;
1.3&nbsp;
1.3&nbsp;


Market cap
NZ$7,966m
Imputation (%)
100
100
100
100
Cash div yld (%)
3.4
2.0&nbsp;
1.9&nbsp;
3.4&nbsp;


Avg daily turnover
1,205k (NZ$10,472k)
*Based on normalised profits


Gross div yld (%)
4.7
2.8
2.7&nbsp;
4.7&nbsp;



New travel restrictions to have&nbsp;catastrophic&nbsp;impact on passenger numbers
The government's new travel restrictions for international arrivals into NZ will have an extreme impact on AIA's passenger (pax) numbers, in our opinion. International arrivals, including returning kiwis, now need to self-isolate for 14 days. We expect a significant reduction in offshore travel and a similar reduction in inbound visitation. The restrictions will be reviewed in two weeks, but are likely to be in place at least until the end of June, probably longer. Despite only updating its FY20 earnings guidance on Friday (13 March 2020), we now expect AIA will withdraw it entirely given the extreme level of uncertainty.&nbsp;
Retail relief provided
AIA&nbsp; is now providing relief to&nbsp;its retailers, given their&nbsp;challenges with (1) low pax numbers, (2) depressed passenger spend rates (PSR) and (3) contractual minimum annual guarantees (MAGs). We suspect the latter have been removed so that retailers are now on a percentage rental. This relief magnifies the impact of&nbsp;COVID-19 on AIA. We estimate that for every -20% decline in pax&nbsp;AIA loses -NZ$11m-NZ$12m of NPAT per month.&nbsp;&nbsp;
Earnings risk to FY21 also; strong recovery in FY22; capex will need to be deferred
While we expect a resumption of normality once COVID-19 has been controlled, this is unlikely for at least another six months.&nbsp;We, therefore, expect a material impact on FY21 earnings before a recovery in FY22. In the meantime,&nbsp;AIA's&nbsp;balance sheet will come&nbsp;under some pressure. We expect it to breach its 12%&nbsp;FFO&nbsp;(funds from operations)/debt key credit metric in FY20 and FY21. However, we expect credit rating agencies to look through this temporary set-back given the nature of the breach.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246


Auckland Airport: Extreme Measures in Extreme Times

Auckland Intl Airport

Auckland Airport: Extreme Measures in Extreme Times