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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Auckland Airport</h2>
Update Provides Some Capex Clarity
Auckland Airport (AIA) is substantially reducing its near term capex with a number of projects having been suspended including the domestic jet terminal, a multi-storey carpark, Park &amp; Ride South, a new Mercure hotel and the northern runway. Other projects are under review which include a major international arrivals project, a new Pullman hotel and northern taxi-ways. It will continue to progress with development property as the income from these will be largely unaffected by COVID-19.
Worst case cash burn
AIA is focussed on maintaining core aeronautical infrastructure, which will see the airport remain open but with reduced effective capacity. It has released 90 fixed term or independent contractors, which should create savings of ~NZ$10m pa. It is also pursuing a reduction of hours and salaries for a large number of staff of -20%. This is also likely to create savings of ~NZ$10m pa. &nbsp;These initiatives combined with the reduction in outsourced services are likely to lower AIA’s opex from ~NZ$190m to NZ$150m-NZ$160m pa.
During periods of lock-down AIA will generate little aeronautical or commercial income. It will though continue to generate property income of ~NZ$100m pa. Consequently its worst case operating cash burn is likely to be in the order of ~NZ$5m per month with additional monthly interest costs of ~NZ$6m.
Balance sheet headroom; covenants come into play in early 2021
The company’s balance sheet could therefore absorb a reasonable period of inactivity. However, its current preferential funding situation would still be reliant on it’s A- credit rating being retained. Earnings based debt covenants would also ultimately come into play particularly for USPP holders. These are typically applied on a rolling 12 months historic basis so wouldn’t be an issue until February 2021, by which time we will have a reasonable view as to how COVID-19 will play out over the medium term. In the mean-time AIA has ample liquidity and balance sheet headroom with existing debt facilities.
NEUTRAL
AIA’s business model is more leveraged to international than domestic passenger travel. While it is easy to envisage a return to some kind of normality for domestic aviation, it is more difficult to forecast the outlook for international aviation at this stage. Assuming that international aviation return to pre-COVID-19 levels reasonably quickly then AIA would appear good value at current levels. We’re not certain this will be the case, which will have implications on the returns AIA will be able to generate from its commercial activities. We’re NEUTRAL.
Andy Bowley&nbsp; Head of Research Forsyth Barr Limited&nbsp;
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Auckland Airport
Update Provides Some Capex Clarity
Auckland Airport (AIA) is substantially reducing its near term capex with a number of projects having been suspended including the domestic jet terminal, a multi-storey carpark, Park &amp; Ride South, a new Mercure hotel and the northern runway. Other projects are under review which include a major international arrivals project, a new Pullman hotel and northern taxi-ways. It will continue to progress with development property as the income from these will be largely unaffected by COVID-19.
Worst case cash burn
AIA is focussed on maintaining core aeronautical infrastructure, which will see the airport remain open but with reduced effective capacity. It has released 90 fixed term or independent contractors, which should create savings of ~NZ$10m pa. It is also pursuing a reduction of hours and salaries for a large number of staff of -20%. This is also likely to create savings of ~NZ$10m pa. &nbsp;These initiatives combined with the reduction in outsourced services are likely to lower AIA’s opex from ~NZ$190m to NZ$150m-NZ$160m pa.
During periods of lock-down AIA will generate little aeronautical or commercial income. It will though continue to generate property income of ~NZ$100m pa. Consequently its worst case operating cash burn is likely to be in the order of ~NZ$5m per month with additional monthly interest costs of ~NZ$6m.
Balance sheet headroom; covenants come into play in early 2021
The company’s balance sheet could therefore absorb a reasonable period of inactivity. However, its current preferential funding situation would still be reliant on it’s A- credit rating being retained. Earnings based debt covenants would also ultimately come into play particularly for USPP holders. These are typically applied on a rolling 12 months historic basis so wouldn’t be an issue until February 2021, by which time we will have a reasonable view as to how COVID-19 will play out over the medium term. In the mean-time AIA has ample liquidity and balance sheet headroom with existing debt facilities.
NEUTRAL
AIA’s business model is more leveraged to international than domestic passenger travel. While it is easy to envisage a return to some kind of normality for domestic aviation, it is more difficult to forecast the outlook for international aviation at this stage. Assuming that international aviation return to pre-COVID-19 levels reasonably quickly then AIA would appear good value at current levels. We’re not certain this will be the case, which will have implications on the returns AIA will be able to generate from its commercial activities. We’re NEUTRAL.
Andy Bowley&nbsp; Head of Research Forsyth Barr Limited&nbsp;
M: +64 21 338 941 |P: +64 4 495 8246 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

Auckland Airport: Update Provides Some Capex Clarity

Auckland Intl Airport

Auckland Airport: Update Provides Some Capex Clarity