Auckland Airport company in a holding pattern
Investors are banking on better times returning. But the big question is when, writes Oliver Mander
Auckland International Airport (AIA) is one of the largest infrastructure assets in the country, with its underlying profitability heavily correlated with both international tourism and business activity in New Zealand.
Given the context, it’s stretching credibility that AIA, and other companies in the tourism sector, have maintained their operations to any degree at all. It’s a credit to the mammoth effort made by all stakeholders. For investors, there has likely been a change in how they have viewed AIA as an investment over the past 12 months.
Airport’s response
Auckland International Airport had a distinct year of two halves in its last financial year (ending June 30). For the first half of the year it retained an aura of success — planning for new terminal and runway development, and encouraging passenger and airline growth, all amid increased rentals from its growing property portfolio.
For investors, that continued expectations for a steady stream of increasing dividends and rising capital returns from one of the NZX’s best-performing blue chips over the past decade. Then came the escalation in the global response to Covid-19. That escalating response was reflected in AIA’s investor updates to the market.
On February 20, AIA indicated only a slight reduction in 2020 underlying net profit estimates, to around $260m-$270m. On March 13, only three weeks later, this range was downgraded to $210m-$235m.
On March 16th, three days later, a further announcement suspended 2020 guidance completely.
And on March 17, AIA suspended its interim dividend.
Behind the scenes, the company was doing all it could to preserve cash. This included suspending work on its $2 billion capital programme, including the long-planned second runway and domestic jet hub. As demand plummeted, it began negotiating to reduce salaries and end contractor relationships.
In early April, AIA moved to boost its cash reserves, announcing a share placement and rights issue that together raised $1.2b to shore up its balance sheet. March can’t have been a good month for the sleep patterns of AIA’s executive team.
Where are they now?
Call me old-fashioned, but cash and debt are always the two key words to look at as a company begins to suffer.
If an organisation starts to lose money, but can ultimately recover, the amount of cash it has on hand is an indicator of how long it can survive. It can prolong this time by having a relatively low debt burden, meaning that it can borrow to extend this period if required. Higher debt may also cause risks as the organisation may fall on the wrong side of debt covenants imposed by lenders.
In AIA’s case, its relatively fast reaction to secure liquidity has helped the company, its lenders and its investors — but the timeframes involved are difficult for an investment market that has become used to increasing returns over a short timeframe.
The mammoth $1.2b equity raising was the largest secondary issue ever completed in New Zealand. Major shareholder Auckland City Council did not participate in the offer, diluting its holding from 22 per cent to 18 per cent in the process.
AIA also worked with its lenders to gain debt covenant waivers until the end of 2021 relating to profitability/ debt metrics and has refinanced debt to extend repayment dates.
In terms of AIA’s 2020 underlying net profit, the eventual outcome for the June 2020 year was $188.5m, well down on the March 13 guidance. This excludes the $117.5m one-off cost impact of halting capital projects, treated as an extraordinary item.
Notably AIA’s reported profitability is different to what it considers “underlying”; the main difference is the unrealised property gains associated with ongoing revaluation of its property portfolio.
Where to next?
AIA helpfully included a chart in its 2020 annual report (released last month) that summarises the scale of the recovery it requires: it is essentially operating a 2020s infrastructure asset at 1950 levels.
AIA is attempting to manage a fine line between preserving cash for as long as it can, while making sure it is ready to recover quickly if or when borders re-open.
That level of strategic agility is the same conundrum that faces all of New Zealand’s travel and tourism sector — including other listed entities like Air New Zealand, Tourism Holdings and Millennium & Copthorne Hotels. For now, the company is forecasting a recovery to 2019 passenger levels by 2024 — slightly longer than the timeframe the International Air Transport Association has expressed.
It has not set any expectations relating to its 2021 profitability forecast. Capital expenditure will be around $250m-$300m, well down on the nearly $400m spent during 2020 (in itself a reduction of around $50m-$150m on what was planned).
Market reaction
Broadly, the market has reacted favourably to the actions taken by the airport to date. The broad suite of work it has done has maximised cash and reduced the requirement for debt repayment to as far out as 2022-23.
On the flip side, the current share price means investors are paying about $7.10 per share for returns that are unlikely to materialise for at least two or three years. It is unlikely AIA will be able to pay dividends until at least 2022. This mirrors a downside view of AIA’s future profitability. Analyst consensus forecasts show some risk of a “break even” result for 2021, with profitability recovering somewhat during 2022.
The lack of immediately apparent investment returns is not an issue solely limited to Auckland International Airport. The fact that AIA’s share price is trading at relatively high valuations reflects the defensive position being adopted by most investors and the lack of returns available from other blue-chip options listed on the NZX.
Even if returns are low right now, investors still expect companies like AIA to be back in positive territory at some point in the future.
Over the past decade, the fortunes of Auckland Airport have moved in sync with the attractiveness of New Zealand for tourists, immigrants, and businesspeople. For now at least, that long-term strategic narrative remains intact. For investors, it’s only the definition of what constitutes “longterm” that has changed.
Oliver Mander is not an authorised
●
financial adviser (AFA), and nothing in this column should be construed as financial advice. Seek out the advice of an AFA to support your investment decision-making.