Lockdown survival tips from AIA to Z
Both raisings show solid fundamentals and clear plan for rebuilding are vital
Nothing focuses the mind like survival. In the past six weeks, Auckland International Airport and Z Energy have come to market with big, potentially dilutive capital raisings — and have been wellsupported by existing holders.
Z Energy is yet to complete the $60 million retail component of its raising, but institutional support for the first $290m was solid and it can probably take heart from Auckland Airport’s experience last month.
Businesses with strong fundamentals and a plan for getting through the current crisis appear likely to be supported.
If investors believed in a business and its management three months ago — and have cash to put in — why wouldn’t they back credible recapitalisation plans that also let them average down the cost of their holdings?
No shareholder wants to be in that position, but they’re all in the same (life)boat and will back a well thought out plan.
New Zealand’s biggest airport needed to raise $1.2 billion to push $840m of maturing debt out a couple of years and give it some breathing space in what has become a very uncertain global aviation market.
With the notable absence of major shareholder Auckland Council — which has its own issues with debt — the first $1b was raised comfortably in the institutional round at $4.66 a share, the top of the expected range and a 7.5 per cent discount to preraising prices. In the two weeks following, the stock would push through $6 and the $200m retail component of the offer was oversubscribed more than twice.
Forsyth Barr considered the stock overpriced pre-Covid and remained unconvinced. While the airport was an attractive long-term infrastructure asset, it was neutral on the stock given the current environment and last month placed a $5.50 12-month price target on it. Jarden is similarly neutral with a $5.75 target price.
The issues facing the airport and Z Energy are subtly different.
Both have had a large chunk of their turnover turned off by Covid19 and both have had to increase their stock on issue by about 20 per cent to buy breathing space from their bankers. Neither will pay dividends for the next 18 months as part of their shared packages of pain.
But where the airport’s shares fell off a cliff as travel restrictions bit in March, Z Energy’s shares have been in a steady decline since September, due to a now structural increase in retail competition, reduced refining margins and now an existential review of the Marsden Point oil refinery.
Yes, Covid-19 smashed retail fuel volumes, but they are bouncing back relatively quickly and the near-term outlook — other than for jet fuel — is better than many analysts had expected. Investors were also surprised by the extent of additional cost savings Z Energy has committed to deliver during the next two years.
Seeking capital when the move to level 2 restrictions was already in sight may have also helped Z Energy deliver the $2.90 a share pricing — above the expected range and only a 7.5 per cent discount to pre-raising prices. The country was in only the second week of its level 4 lockdown when Auckland Airport went to market. Auckland Airport is a different beast. It is a long-term solid asset as the country’s principal gateway with a regulated return guaranteed on much of its business. It was quick to cut dividends and capex not already under way. It reduced salaries by 20 per cent and let contractors go and has since brought forward its airport pavement upgrade to take advantage of the current light traffic.
But the outlook for air traffic remains very uncertain. Domestic services are rebuilding and transtasman services may resume before year-end, but at what volume? Last week, the International Air Travel Association said international flight volumes may not get back to 2019 levels until 2023-24.
Firms should always be open with shareholders, but in the current fastchanging environment more information can be a big plus — particularly if there is a potential need for extra capital down the track.
Lenders will be calling the shots on that and they, like investors, will want to see that firms are willing to act, have a good grasp on the changed suite of risks they face — or may face — and definite plans for how they will respond.
In that environment, monthly reporting by infrastructure firms like Auckland Airport and some of the power companies is an advantage that helps reduce uncertainty.
But plenty of other firms could have followed Z’s lead with its introduction of weekly reporting. That enabled investors to understand what was happening with fuel volumes as the country moved through successive alert levels.
Z Energy’s commitment to report quarterly on its cost-out programmes is another relatively simple initiative that reduces uncertainty. Importantly, it also demonstrates a resolve to deliver on pledges made.