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>Omicron 2H22 Dent, but More Rapid Recovery</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Auckland Airport's&nbsp;(AIA) near term outlook remains challenged by heavy border restrictions and the impending community Omicron outbreak that will likely hit New Zealand. The deferral of the phased border reopening (currently set to commence in late February 2022) could be extended further. The near term outlook for international passengers (pax) remains constrained, however, assuming that an Omicron outbreak envelops New Zealand over the next few months, the medium term recovery outlook will likely improve. Our revised FY22 estimate has AIA breaching its EBITDA interest cover covenant (&gt;2.0x). Though given a supportive banking group, the nature of the breach (government policy rather than company driven) and it likely significantly exceeding future year covenants, we suspect little recourse for AIA. We retain a NEUTRAL rating.&nbsp;</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings</strong>:&nbsp;FY22 lowered due to border reopening pause and Omicron threat, but FY23 and FY24 upgraded in anticipation of more rapid&nbsp;recovery as NZ and the world begins to learn to live with COVID-19</li>
<li><strong>Target price</strong>:&nbsp;Increased by 40c to NZ$7.60&nbsp;to reflect more optimistic medium/long-term demand recovery outlook</li>
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<h3>Border reopening deferral could be extended; but faster recovery over medium term</h3>
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<p>In late November the government announced that a staged border re-opening would commence on 17 January 2022. That decision was deferred late last month to late February 2022 in light of the emerging Omicron outbreaks in various countries. This remains the government's stated timeframe albeit we see reasonable risk that it is deferred further. While the near term pax outlook is constrained, we are more optimistic that as result of a potential short and sharp Omicron outbreak in New Zealand, like those being observed in other countries, the recovery in international pax demand will be more rapid than previously anticipated.&nbsp;</p>
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<h3>Valuation in need of more creativity</h3>
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<p>AIA is currently trading at just a ~-4% discount to its pre COVID-19 enterprise value (EV), albeit the discount widens to ~-10% after adjusting for the investment property revaluations over the past two years. Alternatively, it trades at a ~22.5x EV to peak (CY19) EBITDA multiple. With Sydney Airport (<a href="http://syd.ax/" target="_blank" data-saferedirecturl="https://www.google.com/url?q=http://SYD.AX&amp;source=gmail&amp;ust=1642813587595000&amp;usg=AOvVaw21TR0umvh8lWjfAMd4OmjF" rel="noopener">SYD.AX</a>) no longer a viable valuation comparison, given its takeover and impending departure&nbsp;from the ASX, and no other similar assets in the region, valuing AIA will become more creative. We expect the near term share price to remain range bound, with bond rate pressure being broadly offset by the improving medium term earnings outlook. We now expect FY24 EBITDA to comfortably exceed the pre COVID-19 peak.&nbsp;</p>
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Auckland Airport Omicron 2H22 Dent, but More Rapid Recovery

NEUTRAL
Auckland Airport's&nbsp;(AIA) near term outlook remains challenged by heavy border restrictions and the impending community Omicron outbreak that will likely hit New Zealand. The deferral of the phased border reopening (currently set to commence in late February 2022) could be extended further. The near term outlook for international passengers (pax) remains constrained, however, assuming that an Omicron outbreak envelops New Zealand over the next few months, the medium term recovery outlook will likely improve. Our revised FY22 estimate has AIA breaching its EBITDA interest cover covenant (&gt;2.0x). Though given a supportive banking group, the nature of the breach (government policy rather than company driven) and it likely significantly exceeding future year covenants, we suspect little recourse for AIA. We retain a NEUTRAL rating.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;FY22 lowered due to border reopening pause and Omicron threat, but FY23 and FY24 upgraded in anticipation of more rapid&nbsp;recovery as NZ and the world begins to learn to live with COVID-19
Target price:&nbsp;Increased by 40c to NZ$7.60&nbsp;to reflect more optimistic medium/long-term demand recovery outlook



Border reopening deferral could be extended; but faster recovery over medium term


In late November the government announced that a staged border re-opening would commence on 17 January 2022. That decision was deferred late last month to late February 2022 in light of the emerging Omicron outbreaks in various countries. This remains the government's stated timeframe albeit we see reasonable risk that it is deferred further. While the near term pax outlook is constrained, we are more optimistic that as result of a potential short and sharp Omicron outbreak in New Zealand, like those being observed in other countries, the recovery in international pax demand will be more rapid than previously anticipated.&nbsp;


Valuation in need of more creativity


AIA is currently trading at just a ~-4% discount to its pre COVID-19 enterprise value (EV), albeit the discount widens to ~-10% after adjusting for the investment property revaluations over the past two years. Alternatively, it trades at a ~22.5x EV to peak (CY19) EBITDA multiple. With Sydney Airport (SYD.AX) no longer a viable valuation comparison, given its takeover and impending departure&nbsp;from the ASX, and no other similar assets in the region, valuing AIA will become more creative. We expect the near term share price to remain range bound, with bond rate pressure being broadly offset by the improving medium term earnings outlook. We now expect FY24 EBITDA to comfortably exceed the pre COVID-19 peak.&nbsp;


Auckland Airport: Omicron 2H22 Dent, but More Rapid Recovery

Auckland Intl Airport

Auckland Airport: Omicron 2H22 Dent, but More Rapid Recovery