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>
<p><strong>Twists and Turns on Runway to Recovery</strong></p>
<p><strong>NEUTRAL</strong></p>
<p>The outlook for Auckland Airport's (AIA) passenger and profit recovery remains uncertain, yet deconstructing the current share price relative to pre COVID-19 levels suggest our recovery profile is broadly consistent with implied market expectations. The rising number of domestic passengers (pax) represents the first recovery steps, which is positive for business momentum, yet profitability is more leveraged to international pax. It typically generates 4.5x the income from an international pax than a domestic pax. Apathy to travel, border closures, medical solutions, and the economic implications of COVID-19 will all influence the timing and slope of the recovery in international pax. We expect AIA to get back to FY19 international levels in FY25, though we recognise the high margin for error in this forecast. ​​​​​​Through COVID-19 AIA's share price has closely tracked those of its international airport peers. We expect it to continue to be influenced by aviation recovery sentiment in the absence of any certainty around the cash flow outlook. We raise our target price to NZ$5.70 to reflect ​a marginally more positive view on medium term retail concession yields and retain a NEUTRAL rating.</p>
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<h3>AIA is tracking global airports</h3>
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<div id="m_5160681947587765211ix6ch">
<p>Since the start of 2020,&nbsp;AIA's&nbsp;share price has exhibited&nbsp;a ~95% correlation (r-squared) to its global&nbsp;listed airport peers. This compares to a ~37% correlation for the prior two years. Airport share prices&nbsp;appear to be performing as a pack given the inherent difficulty in valuing them currently. Asset bases provide a valuation benchmark for some airports and some airport assets but in&nbsp;AIA's&nbsp;case are of limited use, given the valuation of its 'second till' commercial assets&nbsp;are linked to forward earnings potential. Earnings multiples and dividend yields have little relevance given the lack of earnings generation with reduced passenger flows.&nbsp;</p>
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<h3>Pax recovery and retail uncertainty; aeronautical and investment property stability</h3>
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<div id="m_5160681947587765211i82d6">
<p>The largest margin for error in assessing the longer term outlook for AIA&nbsp;is profiling the passenger recovery. The timing, slope and longer term passenger growth rate are all key uncertainties and have a material impact on value. In addition, concession yields in retailing will likely change (downwards) in light of the impact on the future risk appetite among travel retailers. In contrast, the&nbsp;cashflow/earnings from aeronautical (from FY23 when prices are reset) and investment property (stable cap rates) should be largely unchanged as a result of COVID-19.&nbsp;</p>
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<h3>COVID-19 valuation hit fair</h3>
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<div id="m_5160681947587765211ivmlj">
<p>COVID-19 has removed almost NZ$2.5bn from AIA's enterprise value (EV = market capitalisation + net debt). This value reduction is largely concentrated in its commercial activities. Our analysis suggests the company's commercial value has fallen by ~-30% since pre COVID-19. This is broadly consistent with the revisions over the same period to our modelling of AIA's commercial income stream.&nbsp;&nbsp;</p>
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<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
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<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
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Auckland Airport
Twists and Turns on Runway to Recovery
NEUTRAL
The outlook for Auckland Airport's (AIA) passenger and profit recovery remains uncertain, yet deconstructing the current share price relative to pre COVID-19 levels suggest our recovery profile is broadly consistent with implied market expectations. The rising number of domestic passengers (pax) represents the first recovery steps, which is positive for business momentum, yet profitability is more leveraged to international pax. It typically generates 4.5x the income from an international pax than a domestic pax. Apathy to travel, border closures, medical solutions, and the economic implications of COVID-19 will all influence the timing and slope of the recovery in international pax. We expect AIA to get back to FY19 international levels in FY25, though we recognise the high margin for error in this forecast. ​​​​​​Through COVID-19 AIA's share price has closely tracked those of its international airport peers. We expect it to continue to be influenced by aviation recovery sentiment in the absence of any certainty around the cash flow outlook. We raise our target price to NZ$5.70 to reflect ​a marginally more positive view on medium term retail concession yields and retain a NEUTRAL rating.


AIA is tracking global airports


Since the start of 2020,&nbsp;AIA's&nbsp;share price has exhibited&nbsp;a ~95% correlation (r-squared) to its global&nbsp;listed airport peers. This compares to a ~37% correlation for the prior two years. Airport share prices&nbsp;appear to be performing as a pack given the inherent difficulty in valuing them currently. Asset bases provide a valuation benchmark for some airports and some airport assets but in&nbsp;AIA's&nbsp;case are of limited use, given the valuation of its 'second till' commercial assets&nbsp;are linked to forward earnings potential. Earnings multiples and dividend yields have little relevance given the lack of earnings generation with reduced passenger flows.&nbsp;


Pax recovery and retail uncertainty; aeronautical and investment property stability


The largest margin for error in assessing the longer term outlook for AIA&nbsp;is profiling the passenger recovery. The timing, slope and longer term passenger growth rate are all key uncertainties and have a material impact on value. In addition, concession yields in retailing will likely change (downwards) in light of the impact on the future risk appetite among travel retailers. In contrast, the&nbsp;cashflow/earnings from aeronautical (from FY23 when prices are reset) and investment property (stable cap rates) should be largely unchanged as a result of COVID-19.&nbsp;


COVID-19 valuation hit fair


COVID-19 has removed almost NZ$2.5bn from AIA's enterprise value (EV = market capitalisation + net debt). This value reduction is largely concentrated in its commercial activities. Our analysis suggests the company's commercial value has fallen by ~-30% since pre COVID-19. This is broadly consistent with the revisions over the same period to our modelling of AIA's commercial income stream.&nbsp;&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Auckland Airport: Twists and Turns on Runway to Recovery

Auckland Intl Airport

Auckland Airport: Twists and Turns on Runway to Recovery