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>
Lower Aero Flight Plan
The profile of Auckland Airport’s (AIA) aeronautical earnings through its next regulated pricing period has reduced due to lower bond rates, capex delays and an increasingly likely deferral of its runway land charge. While aeronautical prices will still be on an upwards curve from FY23, the slope of the curve will be far more gentle than previously expected. Moreover, international passenger growth will remain subdued through FY20, having declined -1% in July 2019. With consensus earnings risk weighted to the downside for FY21 and FY22, and valuation stretched at ~41x one year forward PE, ~23x EV/EBITDA, we reiterate an UNDERPERFORM rating.
What’s changed?
<ul>
<li>Earnings: FY20 unchanged. FY21 and FY22 EPS cut by -7% and -6% respectively to reflect deferral of runway land charge. EPS CAGR to FY22 of ~-1%</li>
<li>Target Price:&nbsp;Reduced to NZ$7.90 from NZ$8.25 to reflect lower aeronautical valuation</li>
</ul>
Aeronautical earnings outlook has weakened
AIA’s aeronautical earnings outlook is supported by a rising regulatory asset base. However, the rate of growth is slowing due to:
<ul>
<li>Lower bond yields — lower bond yields have provided a major benefit to AIA’s valuation but will also lower AIA’s future aeronautical pricing.</li>
<li>Northern runway deferral — the potential deferral of the delivery date for the Northern runway at the investor day in November 2019 may also mean a delay in the introduction of the runway land charge from FY21 to a later date, in our opinion.</li>
<li>Capex spend lower than intended — AIA’s recent FY19 result further highlighted its capex under-spend thus far through its current regulated pricing period (FY18–FY22) relative to the budget on which its current pricing was based (provided in 2017).</li>
<li>ComCom still to review other regulated services — in its review of AIA and Christchurch Airport’s PSE3 pricing the ComCom deferred its decision on non-pricing assets. These represent only 8% of AIA’s aeronautical revenues but generate a return materially in excess of WACC.</li>
</ul>
Balance sheet pressures ease
A deferral of the Northern runway construction and later delivery of the domestic jet terminal puts less stress on AIA’s balance sheet over the medium term. As a result AIA will now remain comfortably within its ‘A-’ S&amp;P credit rating parameters, on our estimates.&nbsp;
<div class="content-highlight">
Investment View
AIA is well positioned given its control of New Zealand’s major gateway, its hub positioning for Air New Zealand and the country’s positive longer term tourism outlook. It is a high quality infrastructure asset providing structural growth and sustainable dividends. The company is in the midst of a multi-year capex programme. AIA is sensitive to bond yield movements and international pax growth. In combination these no longer support current valuation levels and therefore our rating is UNDERPERFORM.
</div>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Auckland Airport
Lower Aero Flight Plan
The profile of Auckland Airport’s (AIA) aeronautical earnings through its next regulated pricing period has reduced due to lower bond rates, capex delays and an increasingly likely deferral of its runway land charge. While aeronautical prices will still be on an upwards curve from FY23, the slope of the curve will be far more gentle than previously expected. Moreover, international passenger growth will remain subdued through FY20, having declined -1% in July 2019. With consensus earnings risk weighted to the downside for FY21 and FY22, and valuation stretched at ~41x one year forward PE, ~23x EV/EBITDA, we reiterate an UNDERPERFORM rating.
What’s changed?

Earnings: FY20 unchanged. FY21 and FY22 EPS cut by -7% and -6% respectively to reflect deferral of runway land charge. EPS CAGR to FY22 of ~-1%
Target Price:&nbsp;Reduced to NZ$7.90 from NZ$8.25 to reflect lower aeronautical valuation

Aeronautical earnings outlook has weakened
AIA’s aeronautical earnings outlook is supported by a rising regulatory asset base. However, the rate of growth is slowing due to:

Lower bond yields — lower bond yields have provided a major benefit to AIA’s valuation but will also lower AIA’s future aeronautical pricing.
Northern runway deferral — the potential deferral of the delivery date for the Northern runway at the investor day in November 2019 may also mean a delay in the introduction of the runway land charge from FY21 to a later date, in our opinion.
Capex spend lower than intended — AIA’s recent FY19 result further highlighted its capex under-spend thus far through its current regulated pricing period (FY18–FY22) relative to the budget on which its current pricing was based (provided in 2017).
ComCom still to review other regulated services — in its review of AIA and Christchurch Airport’s PSE3 pricing the ComCom deferred its decision on non-pricing assets. These represent only 8% of AIA’s aeronautical revenues but generate a return materially in excess of WACC.

Balance sheet pressures ease
A deferral of the Northern runway construction and later delivery of the domestic jet terminal puts less stress on AIA’s balance sheet over the medium term. As a result AIA will now remain comfortably within its ‘A-’ S&amp;P credit rating parameters, on our estimates.&nbsp;

Investment View
AIA is well positioned given its control of New Zealand’s major gateway, its hub positioning for Air New Zealand and the country’s positive longer term tourism outlook. It is a high quality infrastructure asset providing structural growth and sustainable dividends. The company is in the midst of a multi-year capex programme. AIA is sensitive to bond yield movements and international pax growth. In combination these no longer support current valuation levels and therefore our rating is UNDERPERFORM.

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

Auckland Intl Airport

Auckland Airport: Lower Aero Flight Plan