New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Auckland Airport<br>FY20&nbsp;— COVID Flattens the&nbsp;Flight&nbsp;Path</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Auckland Airport (AIA) reported an FY20 result significantly challenged by the onset of COVID-19 through the second half. At an underlying level earnings were broadly in-line with our expectations, albeit a large number of one-off non-recurring items leaves scope for interpretation. The result doesn't tell us much about how the business will perform in future years in light of the unknown profile of the aviation recovery. Management suggests AIA's recovery could take longer than airline industry body, IATA's, view that international aviation recovers fully in CY24. We continue to assume that AIA returns to FY19 international passengers (pax) in FY25. Before then there are several key events that AIA will need to navigate in the form of (1) the FY22 five-year aeronautical price reset, and (2) the re-tender process for duty free concession(s). Along with the wide range of justifiable potential passenger recovery profiles, these add considerable uncertainty to the medium term outlook. In summary, it&nbsp; is difficult to have directional conviction on AIA currently. ​​​​​​We retain a NEUTRAL rating</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Material upgrades&nbsp;to FY21 and FY22&nbsp;EBITDAFI. Our earnings forecasts are likely to be volatile for the foreseeable future&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;Lifted to NZ$6.90&nbsp;to primarily reflect revised&nbsp;WACC&nbsp;inputs given lower risk free rate and market risk premiums</li>
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<h3>Defensive&nbsp;property operations help offset core-airport headwinds&nbsp;</h3>
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<p>AIA's&nbsp;property business (including its hotel JV) has been largely immune to COVID-19. In contrast, its passenger leveraged aeronautical and commercial operations have been hard hit. This will continue to be the case while&nbsp;border restrictions remain. Our modelling suggests that AIA will be NPAT loss-making in the absence of commercial international services. Moreover, it will require a&nbsp;trans-Tasman type-bubble to emerge by 1H22 in order to avoid a covenant breach when the current waivers end.&nbsp;</p>
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<h3>Opex&nbsp;cuts on track, though unlikely to get there given return of variable costs given domestic&nbsp;pax&nbsp;growth&nbsp;</h3>
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<p>AIA is on track to deliver a -35% cut in opex prior to the restarting of profitable domestic orientated commercial activities and the planned reopening of Pier B to process arrivals from higher risk countries. With these additional costs opex will remain within NZ$10m of the original target, representing a ~-30% reduction. This will assist cash flow, which pre-capex (i.e. EBITDA) was +NZ$10m in July 2020.&nbsp;</p>
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<h3>Balance sheet headroom provides scope for capex lift</h3>
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<p>Having reduced its forward capex expectations at the time of the equity raise in early April 2020, AIA has lifted its guidance to NZ$250m–NZ$300m for FY21, which includes ~NZ$105m of investment property development. Key projects including a new domestic jet terminal and the Northern Runway project are effectively on hold.&nbsp;</p>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
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Auckland Airport FY20&nbsp;— COVID Flattens the&nbsp;Flight&nbsp;Path

NEUTRAL
Auckland Airport (AIA) reported an FY20 result significantly challenged by the onset of COVID-19 through the second half. At an underlying level earnings were broadly in-line with our expectations, albeit a large number of one-off non-recurring items leaves scope for interpretation. The result doesn't tell us much about how the business will perform in future years in light of the unknown profile of the aviation recovery. Management suggests AIA's recovery could take longer than airline industry body, IATA's, view that international aviation recovers fully in CY24. We continue to assume that AIA returns to FY19 international passengers (pax) in FY25. Before then there are several key events that AIA will need to navigate in the form of (1) the FY22 five-year aeronautical price reset, and (2) the re-tender process for duty free concession(s). Along with the wide range of justifiable potential passenger recovery profiles, these add considerable uncertainty to the medium term outlook. In summary, it&nbsp; is difficult to have directional conviction on AIA currently. ​​​​​​We retain a NEUTRAL rating


What's changed?&nbsp;



Earnings:&nbsp;Material upgrades&nbsp;to FY21 and FY22&nbsp;EBITDAFI. Our earnings forecasts are likely to be volatile for the foreseeable future&nbsp;
Target price:&nbsp;Lifted to NZ$6.90&nbsp;to primarily reflect revised&nbsp;WACC&nbsp;inputs given lower risk free rate and market risk premiums



Defensive&nbsp;property operations help offset core-airport headwinds&nbsp;


AIA's&nbsp;property business (including its hotel JV) has been largely immune to COVID-19. In contrast, its passenger leveraged aeronautical and commercial operations have been hard hit. This will continue to be the case while&nbsp;border restrictions remain. Our modelling suggests that AIA will be NPAT loss-making in the absence of commercial international services. Moreover, it will require a&nbsp;trans-Tasman type-bubble to emerge by 1H22 in order to avoid a covenant breach when the current waivers end.&nbsp;


Opex&nbsp;cuts on track, though unlikely to get there given return of variable costs given domestic&nbsp;pax&nbsp;growth&nbsp;


AIA is on track to deliver a -35% cut in opex prior to the restarting of profitable domestic orientated commercial activities and the planned reopening of Pier B to process arrivals from higher risk countries. With these additional costs opex will remain within NZ$10m of the original target, representing a ~-30% reduction. This will assist cash flow, which pre-capex (i.e. EBITDA) was +NZ$10m in July 2020.&nbsp;


Balance sheet headroom provides scope for capex lift


Having reduced its forward capex expectations at the time of the equity raise in early April 2020, AIA has lifted its guidance to NZ$250m–NZ$300m for FY21, which includes ~NZ$105m of investment property development. Key projects including a new domestic jet terminal and the Northern Runway project are effectively on hold.&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Auckland Airport: FY20 — COVID Flattens the Flight Path

Auckland Intl Airport

Auckland Airport: FY20 — COVID Flattens the Flight Path