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>FY21 — Frustratingly Slow Year Ahead</h2>
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<p><strong>NEUTRAL</strong></p>
<p>We upgrade our rating on Auckland Airport (AIA) to NEUTRAL from UNDERPERFORM given an investment property valuation boost, removal of covenant breach risk, and the share price back at the lower end of its 12-month trading range. While uncertainty persists around the passenger (pax) recovery and the shape of retail income, the regulated aeronautical framework and growing property business provide a solid valuation base. AIA is now trading at a -10% discount to its pre-COVID-19 enterprise value (EV); the discount widens to ~-16% after adjusting for investment property&nbsp;revaluations over the past 18 months. This discount, which reflects a higher percentage decline in the value of&nbsp;AIA's&nbsp;commercial activities,&nbsp; seems reasonable.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;Downgrades to outlook period to reflect slower pax recovery path</li>
<li><strong>Target price</strong>:&nbsp;Raised to NZ$7.20 as investment property revelations&nbsp; more than offset lower pax impact on commercial income&nbsp;</li>
<li><strong>Rating</strong>:&nbsp;Upgraded to NEUTRAL from UNDERPERFORM&nbsp;</li>
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<h3>Balance sheet risk mitigated&nbsp;entirely&nbsp;</h3>
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<p>The repayment of the USPP (US private placement) debt&nbsp;in June 2021 and the revised covenants in place for remaining debt facilities from 2022 removes any lingering concerns of balance sheet risk, given the slow earnings recovery path. We estimate EBITDAFI would need to fall another -30% in FY22 for AIA to breach the new covenant.&nbsp;&nbsp;</p>
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<h3>Uncertain pax recovery; latest&nbsp;lockdowns&nbsp;and government approach dampen optimism&nbsp;</h3>
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<p>The pax recovery outlook is unclear with a wide range of possibilities. In light of the rising case numbers in New South Wales and Victoria, which will mean a longer trans-Tasman bubble 'pause', together with our current national&nbsp;lockdown, slow vaccination progress, and the very conservative approach being taken to eliminate the delta variant, all in contrast to the reopening taking place elsewhere in the world, we expect FY22 will be a frustratingly slow year for AIA. &nbsp;</p>
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<h3>Investment property&nbsp;reval&nbsp;step-up</h3>
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<p>AIA's&nbsp;investment property business is its&nbsp;shining light. Strong underlying rental growth is accompanied by a material uplift in its balance sheet&nbsp; carrying value. Lower property capitalisation (cap) rates, higher land prices and recently completed developments have resulted in a +29% (or ~40c per share) increase in value. Rent roll has grown to NZ$117m pa, up +13% over the past 12 months, but only marginally higher than at the interim result in February 2021. A proposed fashion outlet centre with 100+ stores could materially add to the rent roll, but would take around four years to develop and would add risk to the&nbsp;portfolio.&nbsp;</p>
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Auckland Airport FY21 — Frustratingly Slow Year Ahead

NEUTRAL
We upgrade our rating on Auckland Airport (AIA) to NEUTRAL from UNDERPERFORM given an investment property valuation boost, removal of covenant breach risk, and the share price back at the lower end of its 12-month trading range. While uncertainty persists around the passenger (pax) recovery and the shape of retail income, the regulated aeronautical framework and growing property business provide a solid valuation base. AIA is now trading at a -10% discount to its pre-COVID-19 enterprise value (EV); the discount widens to ~-16% after adjusting for investment property&nbsp;revaluations over the past 18 months. This discount, which reflects a higher percentage decline in the value of&nbsp;AIA's&nbsp;commercial activities,&nbsp; seems reasonable.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;Downgrades to outlook period to reflect slower pax recovery path
Target price:&nbsp;Raised to NZ$7.20 as investment property revelations&nbsp; more than offset lower pax impact on commercial income&nbsp;
Rating:&nbsp;Upgraded to NEUTRAL from UNDERPERFORM&nbsp;



Balance sheet risk mitigated&nbsp;entirely&nbsp;


The repayment of the USPP (US private placement) debt&nbsp;in June 2021 and the revised covenants in place for remaining debt facilities from 2022 removes any lingering concerns of balance sheet risk, given the slow earnings recovery path. We estimate EBITDAFI would need to fall another -30% in FY22 for AIA to breach the new covenant.&nbsp;&nbsp;


Uncertain pax recovery; latest&nbsp;lockdowns&nbsp;and government approach dampen optimism&nbsp;


The pax recovery outlook is unclear with a wide range of possibilities. In light of the rising case numbers in New South Wales and Victoria, which will mean a longer trans-Tasman bubble 'pause', together with our current national&nbsp;lockdown, slow vaccination progress, and the very conservative approach being taken to eliminate the delta variant, all in contrast to the reopening taking place elsewhere in the world, we expect FY22 will be a frustratingly slow year for AIA. &nbsp;


Investment property&nbsp;reval&nbsp;step-up


AIA's&nbsp;investment property business is its&nbsp;shining light. Strong underlying rental growth is accompanied by a material uplift in its balance sheet&nbsp; carrying value. Lower property capitalisation (cap) rates, higher land prices and recently completed developments have resulted in a +29% (or ~40c per share) increase in value. Rent roll has grown to NZ$117m pa, up +13% over the past 12 months, but only marginally higher than at the interim result in February 2021. A proposed fashion outlet centre with 100+ stores could materially add to the rent roll, but would take around four years to develop and would add risk to the&nbsp;portfolio.&nbsp;


Auckland Airport: FY21 — Frustratingly Slow Year Ahead

Auckland Intl Airport

Auckland Airport: FY21 — Frustratingly Slow Year Ahead