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>
Not Immune But Well Protected&nbsp;
NEUTRAL
We upgrade Auckland Airport (AIA) to NEUTRAL from UNDERPERFORM to reflect recent share price weakness and its attractive longer term infrastructure characteristics.&nbsp;AIA's&nbsp;share price has fallen ~-20% over the past six months, and ~-14% since the coronavirus threat first emerged. Softening passenger (pax) statistics through 2019 have been exacerbated in recent weeks by the coronavirus impact on demand. We expect weak international&nbsp;pax&nbsp;data to remain a feature for the foreseeable future, which will remain a headwind to sentiment, however, we recognise that AIA is largely insulated through (1) minimum annual guarantees (MAGs) in its retail business, (2) underlying growth in its investment property operations, and (3) the regulatory model that re-bases&nbsp;aeronautical pricing every five years (should demand stay lower for longer). It now trades at a one-year forward&nbsp;EV/EBITDA&nbsp;multiple of ~19x, on par with Sydney Airport (SYD.AU).
<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$7.74</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">274.7&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">266.3</td>
<td style="text-align: left; width: 43.2pt;">268.2&nbsp;</td>
<td style="text-align: left; width: 48pt;">270.8&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">20.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">21.2</td>
<td style="text-align: left; width: 48pt;">20.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">19.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$8.10</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;">21.9&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">21.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.0&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">24.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">26.7&nbsp;</td>
<td style="text-align: left; width: 48pt;">26.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">25.8&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;">-3.8</td>
<td style="text-align: left; width: 43.2pt;">0.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">0.4&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">34.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">35.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">35.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">35.2&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;">22.3&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">22.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">22.3&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">1.5</td>
<td style="text-align: left; width: 42.6pt;">1.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">1.6</td>
<td style="text-align: left; width: 42.6pt;">1.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$9,342m</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;">2.9</td>
<td style="text-align: left; width: 42.6pt;">2.9</td>
<td style="text-align: left; width: 48pt;">2.9</td>
<td style="text-align: left; width: 42.6pt;">2.9</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">1,132k (NZ$9,926k)</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;">4.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">4.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">4.0&nbsp;</td>
</tr>
</tbody>
</table>
Leverage to lower pax limited&nbsp;
AIA has some, but not material, leverage to a sudden weakening of passenger throughput. At its recent 1H20 result, it suggested the coronavirus threat would have an after-tax earnings impact of ~-NZ$10m, or -3% of annual profits in 2H20. We estimate this implies&nbsp;an ~-8% reduction in 2H20 international passengers. The majority of the earnings hit reflects lower aeronautical revenue, and a reduction in off-airport retail and car parking income.&nbsp;&nbsp;
Retail concessions provide protection; but may need support&nbsp;
AIA's&nbsp;retail concessions provide some protection through minimum annual guarantees (MAGs) that are based on (1) agreed rents that ratchet&nbsp;with passenger growth, or (2) prior year income levels. The former is applicable to duty free retailers, while the latter tends to be applied to speciality and food/bev&nbsp;retailers.&nbsp;MAGs, therefore, guarantee airport income levels at least over the near term. However, should the trading backdrop of its retailers deteriorate materially, AIA may decide to provide some financial support to them as a number of Asian airports have already done in recent weeks, including Singapore&nbsp;Changi,&nbsp;Hong&nbsp;Kong, and Airports of Thailand. This may increase&nbsp;AIA's&nbsp;risk to the current demand downturn.&nbsp;
We believe duty free concession tender risk over the medium term is mitigated by the prospect of AIA&nbsp;shifting to a single duty free operator (refer to our recent report:&nbsp;Auckland Airport: Duty Free to Fly Solo, dated 29 January 2020).&nbsp;
Secondary risks to aviation sector
Any extended downturn in demand could create balance sheet problems for airlines, potentially leading to market structure changes. This may sound far fetched, but the airline consolidation theme that has been prevalent in Europe and North America in recent years&nbsp;could become more pronounced and feature more prevalently in Asia-Pacific, particularly if airline balance sheets come under pressure. This could have implications for less profitable carriers and reduce&nbsp;AIA's&nbsp;international capacity as a result.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Auckland Airport
Not Immune But Well Protected&nbsp;
NEUTRAL
We upgrade Auckland Airport (AIA) to NEUTRAL from UNDERPERFORM to reflect recent share price weakness and its attractive longer term infrastructure characteristics.&nbsp;AIA's&nbsp;share price has fallen ~-20% over the past six months, and ~-14% since the coronavirus threat first emerged. Softening passenger (pax) statistics through 2019 have been exacerbated in recent weeks by the coronavirus impact on demand. We expect weak international&nbsp;pax&nbsp;data to remain a feature for the foreseeable future, which will remain a headwind to sentiment, however, we recognise that AIA is largely insulated through (1) minimum annual guarantees (MAGs) in its retail business, (2) underlying growth in its investment property operations, and (3) the regulatory model that re-bases&nbsp;aeronautical pricing every five years (should demand stay lower for longer). It now trades at a one-year forward&nbsp;EV/EBITDA&nbsp;multiple of ~19x, on par with Sydney Airport (SYD.AU).
         


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


Share price
NZ$7.74
NPAT* (NZ$m)
274.7&nbsp;
266.3
268.2&nbsp;
270.8&nbsp;
EV/EBITDA
20.4&nbsp;
21.2
20.4&nbsp;
19.4&nbsp;


Target price
NZ$8.10
EPS* (NZc)
22.8&nbsp;
21.9&nbsp;
21.9&nbsp;
22.0&nbsp;
EV/EBIT
24.9&nbsp;
26.7&nbsp;
26.3&nbsp;
25.8&nbsp;


Risk rating
Low
EPS growth* (%)
3.6
-3.8
0.0&nbsp;
0.4&nbsp;
PE
34.0&nbsp;
35.3&nbsp;
35.3&nbsp;
35.2&nbsp;


Issued shares
1207.0m
DPS (NZc)
22.3&nbsp;
22.3&nbsp;
22.3&nbsp;
22.3&nbsp;
Price/NTA
1.5
1.6&nbsp;
1.6
1.5&nbsp;


Market cap
NZ$9,342m
Imputation (%)
100
100
100
100
Cash div yld (%)
2.9
2.9
2.9
2.9


Avg daily turnover
1,132k (NZ$9,926k)
*Based on normalised profits


Gross div yld (%)
4.0&nbsp;
4.0&nbsp;
4.0&nbsp;
4.0&nbsp;



Leverage to lower pax limited&nbsp;
AIA has some, but not material, leverage to a sudden weakening of passenger throughput. At its recent 1H20 result, it suggested the coronavirus threat would have an after-tax earnings impact of ~-NZ$10m, or -3% of annual profits in 2H20. We estimate this implies&nbsp;an ~-8% reduction in 2H20 international passengers. The majority of the earnings hit reflects lower aeronautical revenue, and a reduction in off-airport retail and car parking income.&nbsp;&nbsp;
Retail concessions provide protection; but may need support&nbsp;
AIA's&nbsp;retail concessions provide some protection through minimum annual guarantees (MAGs) that are based on (1) agreed rents that ratchet&nbsp;with passenger growth, or (2) prior year income levels. The former is applicable to duty free retailers, while the latter tends to be applied to speciality and food/bev&nbsp;retailers.&nbsp;MAGs, therefore, guarantee airport income levels at least over the near term. However, should the trading backdrop of its retailers deteriorate materially, AIA may decide to provide some financial support to them as a number of Asian airports have already done in recent weeks, including Singapore&nbsp;Changi,&nbsp;Hong&nbsp;Kong, and Airports of Thailand. This may increase&nbsp;AIA's&nbsp;risk to the current demand downturn.&nbsp;
We believe duty free concession tender risk over the medium term is mitigated by the prospect of AIA&nbsp;shifting to a single duty free operator (refer to our recent report:&nbsp;Auckland Airport: Duty Free to Fly Solo, dated 29 January 2020).&nbsp;
Secondary risks to aviation sector
Any extended downturn in demand could create balance sheet problems for airlines, potentially leading to market structure changes. This may sound far fetched, but the airline consolidation theme that has been prevalent in Europe and North America in recent years&nbsp;could become more pronounced and feature more prevalently in Asia-Pacific, particularly if airline balance sheets come under pressure. This could have implications for less profitable carriers and reduce&nbsp;AIA's&nbsp;international capacity as a result.&nbsp;
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246


Auckland Airport: Not Immune But Well Protected 

Auckland Intl Airport

Auckland Airport: Not Immune But Well Protected