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>
Flight to Equity Defies Border Closures
NEUTRAL
Auckland Airport (AIA) is raising up to NZ$1.2bn of equity to placate its lenders and credit rating agency, S&amp;P, in an environment when passenger air travel is undergoing its biggest downturn since World War II. The new equity provides two years of funding certainty, which should see&nbsp;AIA&nbsp;through to at least the start of a recovery in passenger traffic and therefore earnings. Nonetheless, there remains a huge amount of uncertainty as to the short, medium and longer term trajectory for&nbsp;AIA. While its share price has almost halved since a 2019 peak, we believe that (1) it was over-priced to begin with, (2) it will take years rather than months for passenger travel to revert back to pre&nbsp;COVID-19 levels, and (3) the size of travel retail as an airport value bucket will be proportionally smaller in future. We recognise the attractive nature of&nbsp;AIA&nbsp;as a long term infrastructure asset, though trading at ~29x FY24 PE and ~2.8% FY24 dividend yield, the current price is not sufficiently compelling. We retain a NEUTRAL rating.&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/126/865/original/image_22048011241586221695548.png?1586221698" class="editor-image img-responsive" data-smartkarma-image-id="126865"></figure>
Big number but small discount
The scale of the AIA's capital raise reflects (1) the trade-off with lenders to waive covenants during the next two years given likely breaches, (2) the potential ~NZ$700m early repayment of US Private Placement (USPP) bonds plus any related penalties, and (3) to proactively manage its A- credit rating, which is now more secure, in our opinion. We believe the raise will be sufficient to see AIA's balance sheet through this crisis. However, AIA will emerge from COVID-19 with some serious battle scars. The asset beta implied by the market may need to be recalibrated higher as its earnings are less defensive than previously thought, its longer term passenger growth path may need to be moderated, and its dividend profile will likely be less attractive to investors.&nbsp;
Travel markets will recover but it could take years
Analysis of historical black swan events, including the GFC, 9/11, swine flu and SARS, suggests the recovery in air passenger travel can take years rather than months. AIA appears to accept this in obtaining a period for its funding covenants to December 2021. While the initial consumer apathy to air travel may subside within 12 months following the elimination of a pandemic, the lingering economic consequence has longer reaching implications.&nbsp;
Valuation appears fair-ish
Our revised estimates assume a return to ~90% of FY19 international passenger numbers by FY24. Our revised&nbsp;EPS&nbsp;estimate for the same year of&nbsp;17.4c implies a four year forward PE of ~29x. Alternatively, the dividend yield for the same year on a revised post&nbsp;COVID-19 ordinary payout of 80% is ~2.8%. Notwithstanding&nbsp;a structurally lower bond yield environment, neither of these relative valuation measures appear at odds with how AIA has traded historically, yet both are four years forward and reflect a higher risk profile than previously accepted.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219

Auckland Airport
Flight to Equity Defies Border Closures
NEUTRAL
Auckland Airport (AIA) is raising up to NZ$1.2bn of equity to placate its lenders and credit rating agency, S&amp;P, in an environment when passenger air travel is undergoing its biggest downturn since World War II. The new equity provides two years of funding certainty, which should see&nbsp;AIA&nbsp;through to at least the start of a recovery in passenger traffic and therefore earnings. Nonetheless, there remains a huge amount of uncertainty as to the short, medium and longer term trajectory for&nbsp;AIA. While its share price has almost halved since a 2019 peak, we believe that (1) it was over-priced to begin with, (2) it will take years rather than months for passenger travel to revert back to pre&nbsp;COVID-19 levels, and (3) the size of travel retail as an airport value bucket will be proportionally smaller in future. We recognise the attractive nature of&nbsp;AIA&nbsp;as a long term infrastructure asset, though trading at ~29x FY24 PE and ~2.8% FY24 dividend yield, the current price is not sufficiently compelling. We retain a NEUTRAL rating.&nbsp;

Big number but small discount
The scale of the AIA's capital raise reflects (1) the trade-off with lenders to waive covenants during the next two years given likely breaches, (2) the potential ~NZ$700m early repayment of US Private Placement (USPP) bonds plus any related penalties, and (3) to proactively manage its A- credit rating, which is now more secure, in our opinion. We believe the raise will be sufficient to see AIA's balance sheet through this crisis. However, AIA will emerge from COVID-19 with some serious battle scars. The asset beta implied by the market may need to be recalibrated higher as its earnings are less defensive than previously thought, its longer term passenger growth path may need to be moderated, and its dividend profile will likely be less attractive to investors.&nbsp;
Travel markets will recover but it could take years
Analysis of historical black swan events, including the GFC, 9/11, swine flu and SARS, suggests the recovery in air passenger travel can take years rather than months. AIA appears to accept this in obtaining a period for its funding covenants to December 2021. While the initial consumer apathy to air travel may subside within 12 months following the elimination of a pandemic, the lingering economic consequence has longer reaching implications.&nbsp;
Valuation appears fair-ish
Our revised estimates assume a return to ~90% of FY19 international passenger numbers by FY24. Our revised&nbsp;EPS&nbsp;estimate for the same year of&nbsp;17.4c implies a four year forward PE of ~29x. Alternatively, the dividend yield for the same year on a revised post&nbsp;COVID-19 ordinary payout of 80% is ~2.8%. Notwithstanding&nbsp;a structurally lower bond yield environment, neither of these relative valuation measures appear at odds with how AIA has traded historically, yet both are four years forward and reflect a higher risk profile than previously accepted.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Scott Anderson scott.anderson@forsythbarr.co.nz +64 4 914 2219


Auckland Airport: Flight to Equity Defies Border Closures

Auckland Intl Airport

Auckland Airport: Flight to Equity Defies Border Closures