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>Transport and Tourism Sectors When Will Our Borders Reopen?</h2>
&nbsp;
"When it is safe to do so" has been the standard response to these types of questions by the New Zealand Government through COVID-19. We don't expect this approach to change materially regardless of the upcoming election. However, the nature of border restrictions could change as better track, trace and testing regimes are deployed. In the likely absence of a high efficacy vaccine, NZ's re-entry into the global travel market will be reliant on (1) its acceptance of a containment strategy, as opposed to elimination, and (2) superior technology based solutions for tracking, contact tracing and testing. NZ is not yet ready on many fronts, and it will take time for the government and the public to have confidence in the systems employed. The likelihood of NZ's borders reopening in the next six months is now very low, in our view. We're optimistic that it could be within the next 6–12 months, but recognise this will be reliant on a high efficacy vaccine, and/or superior transmission mitigation mechanisms. In the meantime, the risk to NZ's tourism industry is that as other destinations open up and we stay closed, the global flow of tourism may establish new routines and NZ could see damage to its share of wallet. This would be exacerbated if Australia opens its borders fully. Moreover, international business can only survive on zoom for so long, NZ may fall into the too hard basket if our border restrictions deviate too far from that of our trading partners.&nbsp;
<div class="content-highlight">
The elimination fallacy New Zealand closed its borders on 20 March 2020, and went into its first lockdown on 23 March 2020, when there were less than 350,000 known cases of COVID-19 globally. Today there are more than 7m known active cases. The US Food and Drug Administration has suggested that it would approve a COVID-19 vaccine that is shown to be safe and at least 50% effective.
To put this into context. The measles vaccine is readily available internationally, has been around for over 50 years, and has relatively high compliance and efficacy of 95%–99%. Yet in 2018 there were ~10m cases of measles globally, including some in New Zealand. The Case Fatality Rate (CFR) of measles is similar to that of COVID-19 (estimated to be 1%–2%). However, the CFR for measles is higher for younger people, in particular infants who can't be vaccinated. Compared to measles, a COVID-19 vaccine will have substantially lower efficacy, likely much lower uptake in young people, children in particular, will not have the same incentive as older to vaccinate, and for the first few years will be less readily available in all corners of the world.
New Zealand's strategy of elimination may have worked if the same strategy was adopted globally and the virus hadn't spread as widely as we now know it has. However, as a long term solution it is looking increasingly difficult to pull off.
</div>
<h3>Implications&nbsp;for companies&nbsp;</h3>
We make no changes to our earnings estimates in this report but acknowledge&nbsp;near term downside risk for companies with exposure to international travel including Auckland Airport (AIA), Air New&nbsp;Zealand&nbsp;(AIR),&nbsp;Tourism Holdings (THL), and&nbsp;Skycity&nbsp;(SKC).
<ul type="disc">
<li>AIR (UNDERPERFORM):&nbsp;The timing of borders reopening has the most impact on AIR, given its material cash burn situation in the absence of commercial international passenger services. At Alert Level 1, with borders closed, the company's cash burn is NZ$65m–NZ$85m per month. The company will likely require an equity&nbsp;recapitalisation&nbsp;in order to de-leverage its balance sheet.&nbsp;</li>
<li>AIA&nbsp;(NEUTRAL):&nbsp;While the impact of border closures is&nbsp;partly mitigated by its investment property business, we estimate&nbsp;AIA&nbsp;is&nbsp;NPAT&nbsp;loss-making&nbsp;in the absence of commercial international passenger services.&nbsp;</li>
<li>THL&nbsp;(NEUTRAL): A strong vehicle sales market is significantly boosting THL's New Zealand cashflows and reducing its exposure to border closures, as its fleet is wound down. Vehicle rental demand from higher yielding international visitors will ultimately be required to generate a return on capital recovery.​​​​​​​</li>
<li>SKC&nbsp;(OUTPERFORM):&nbsp;SKC&nbsp;has a modest exposure to border re-opening (international customers ~15% of earnings pre&nbsp;COVID-19), particularly China/Asia and Australia. We understand demand is there from its premium customers, and expect a quick return (and potentially even initial surge) when permitted.&nbsp;</li>
</ul>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Aaron Ibbotson CFA aaron.ibbotson@forsythbarr.co.nz +64 9 368 0024

Transport and Tourism Sectors When Will Our Borders Reopen?
&nbsp;
"When it is safe to do so" has been the standard response to these types of questions by the New Zealand Government through COVID-19. We don't expect this approach to change materially regardless of the upcoming election. However, the nature of border restrictions could change as better track, trace and testing regimes are deployed. In the likely absence of a high efficacy vaccine, NZ's re-entry into the global travel market will be reliant on (1) its acceptance of a containment strategy, as opposed to elimination, and (2) superior technology based solutions for tracking, contact tracing and testing. NZ is not yet ready on many fronts, and it will take time for the government and the public to have confidence in the systems employed. The likelihood of NZ's borders reopening in the next six months is now very low, in our view. We're optimistic that it could be within the next 6–12 months, but recognise this will be reliant on a high efficacy vaccine, and/or superior transmission mitigation mechanisms. In the meantime, the risk to NZ's tourism industry is that as other destinations open up and we stay closed, the global flow of tourism may establish new routines and NZ could see damage to its share of wallet. This would be exacerbated if Australia opens its borders fully. Moreover, international business can only survive on zoom for so long, NZ may fall into the too hard basket if our border restrictions deviate too far from that of our trading partners.&nbsp;

The elimination fallacy New Zealand closed its borders on 20 March 2020, and went into its first lockdown on 23 March 2020, when there were less than 350,000 known cases of COVID-19 globally. Today there are more than 7m known active cases. The US Food and Drug Administration has suggested that it would approve a COVID-19 vaccine that is shown to be safe and at least 50% effective.
To put this into context. The measles vaccine is readily available internationally, has been around for over 50 years, and has relatively high compliance and efficacy of 95%–99%. Yet in 2018 there were ~10m cases of measles globally, including some in New Zealand. The Case Fatality Rate (CFR) of measles is similar to that of COVID-19 (estimated to be 1%–2%). However, the CFR for measles is higher for younger people, in particular infants who can't be vaccinated. Compared to measles, a COVID-19 vaccine will have substantially lower efficacy, likely much lower uptake in young people, children in particular, will not have the same incentive as older to vaccinate, and for the first few years will be less readily available in all corners of the world.
New Zealand's strategy of elimination may have worked if the same strategy was adopted globally and the virus hadn't spread as widely as we now know it has. However, as a long term solution it is looking increasingly difficult to pull off.

Implications&nbsp;for companies&nbsp;
We make no changes to our earnings estimates in this report but acknowledge&nbsp;near term downside risk for companies with exposure to international travel including Auckland Airport (AIA), Air New&nbsp;Zealand&nbsp;(AIR),&nbsp;Tourism Holdings (THL), and&nbsp;Skycity&nbsp;(SKC).

AIR (UNDERPERFORM):&nbsp;The timing of borders reopening has the most impact on AIR, given its material cash burn situation in the absence of commercial international passenger services. At Alert Level 1, with borders closed, the company's cash burn is NZ$65m–NZ$85m per month. The company will likely require an equity&nbsp;recapitalisation&nbsp;in order to de-leverage its balance sheet.&nbsp;
AIA&nbsp;(NEUTRAL):&nbsp;While the impact of border closures is&nbsp;partly mitigated by its investment property business, we estimate&nbsp;AIA&nbsp;is&nbsp;NPAT&nbsp;loss-making&nbsp;in the absence of commercial international passenger services.&nbsp;
THL&nbsp;(NEUTRAL): A strong vehicle sales market is significantly boosting THL's New Zealand cashflows and reducing its exposure to border closures, as its fleet is wound down. Vehicle rental demand from higher yielding international visitors will ultimately be required to generate a return on capital recovery.​​​​​​​
SKC&nbsp;(OUTPERFORM):&nbsp;SKC&nbsp;has a modest exposure to border re-opening (international customers ~15% of earnings pre&nbsp;COVID-19), particularly China/Asia and Australia. We understand demand is there from its premium customers, and expect a quick return (and potentially even initial surge) when permitted.&nbsp;

Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246&nbsp;
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262&nbsp;
Aaron Ibbotson CFA aaron.ibbotson@forsythbarr.co.nz +64 9 368 0024

Transport and Tourism Sectors: When Will Our Borders Reopen?

Auckland Intl Airport

Transport and Tourism Sectors: When Will Our Borders Reopen?