Company Reports

Auckland Airport is the largest airport in New Zealand. We expect air travel in New Zealand to rise more than 50% over the next decade, and no other airport in the country is likely to outdo Auckland as an international hub. That combined with a favorable regulatory environment justifies a wide economic moat. Aeronautical and nonaeronautical operations each contribute about half of revenue. Retail is the biggest part of the nonaeronautical business, and relies on international passenger traffic. The property business is about half the size of retail, but has grown faster, driven by new developments and rent reviews. On the aeronautical side of the business, landing fees and per-passenger charges are reviewed every five years in consultation with the airlines, and have historically increased at or above inflation. Apart from the downward reset in fiscal 2020 due to covid-19, we expect this upward trend to prevail over the long term.

The ongoing passenger recovery for wide-moat Auckland International Airport and higher regulated aeronautical pricing contributed to revenue uplifts for the December half across all segments including airfield income passenger service charges, retail income, car parking, and investment property-related income. Revenue rose 53% against the first half of fiscal 2023. While increased activity pushed up operating expenses, these rose a lesser 32%, resulting in earnings up 64% (before interest, tax, depreciation, fair value movements, and investments in associates).

Auckland Airport is the largest airport in New Zealand. We expect air travel in New Zealand to rise more than 50% over the next decade, and no other airport in the country is likely to outdo Auckland as an international hub. That combined with a favorable regulatory environment justifies a wide economic moat. Aeronautical and nonaeronautical operations each contribute about half of revenue. Retail is the biggest part of the nonaeronautical business, and relies on international passenger traffic. The property business is about half the size of retail, but has grown faster, driven by new and rent reviews. On the aeronautical side of the business, landing fees and per-passenger charges are reviewed every five years in consultation with the airlines, and have historically increased at or above inflation. After a downward reset in fiscal 2020 due to COVID-19, we expect this upward trend to resume over the long term.

A feature of the COVID-19 aftermath was that the recovery in New Zealand’s international air passenger numbers had lagged the domestic passenger recovery. In fiscal 2023, wide-moat Auckland Airport’s international passengers were at 67% of pre-COVID-19 levels compared with domestic passengers at 84%.

Auckland International Airport’s fiscal 2023 underlying profit of NZD 148 million or NZD 10.1 cents per share, marked a return to profit but is still 46% below 2019. Passenger numbers nearly tripled from 2022, though the rebound slowed in the June half. Full-year international passengers were 67% of 2019 levels, and domestic passengers 84%. We expect passenger numbers at 2019 levels by 2025. We estimate underlying earnings of NZD 278 million in fiscal 2024, near the upper end of guidance for NZD 260 million to NZD 280 million, and we think earnings can double in the next decade. The airport restarted dividends with a NZD 4.0 cent second-half payment, and we estimate NZD 13 cents in total for fiscal 2024, at the low end of the target 70%-90% payout ratio.

Auckland Airport is the largest airport in New Zealand. We believe the firm has carved a wide economic moat because it is a near-monopoly operating in a favourable regulatory environment, and we expect good medium-term growth from further airline capacity growth.

Vaccines don’t end pandemics; vaccinations do. This fact has hampered the recovery expectations of many businesses, perhaps none more so than international travel. Despite the encouraging availability of several COVID-19 vaccines, which have largely tracked our expectations, the slow pace of vaccinations globally has kept the borders of Australia and New Zealand mostly closed to outside tourism. We still think there’s pent-up travel demand among consumers, which should result in rapid growth in lucrative international traffic at each airport once borders are open. But with Australia’s Health Department suggesting borders could remain closed through the better part of calendar 2021, and New Zealand likely following suit, we’ve pushed back our expected start to this rebound until late this year versus roughly March 2021 previously. Nonetheless, our fair value estimates for each company remain unchanged, at AUD 6.20 per security for Sydney Airport and NZD 6.50 (AUD 6.00) per share for Auckland, with Sydney screening as the more attractive of the two at present.

Auckland Airport is the largest airport in New Zealand. We believe the firm has carved a wide economic moat because it is a near-monopoly operating in a favourable regulatory environment, and we expect good medium-term growth from further airline capacity growth.

Wide-moat Auckland Airport has taken sizable steps to manage through the coronavirus, but the near term will remain challenging. We’ve delayed our anticipated reopening of the New Zealand border to overseas passengers by about six months to early calendar 2021, leading us to cut our fair value estimate to NZD 6.50 (AUD 6.00) per share from NZD 6.65 (AUD 6.20). Even when opened, we don’t see international traffic surpassing 2019 levels again until fiscal 2024. Nonetheless, we expect New Zealand will remain an attractive tourism destination, and forecast 6% average annual traffic growth over the next decade.

Auckland Airport is the largest airport in New Zealand, and most visitors to the country pass through its doors. Before the COVID-19 pandemic, it handled more than 11 million international and 9 million domestic passenger movements on a yearly basis. We believe the firm has carved a wide economic moat because it is a near-monopoly operating in a favourable regulatory environment. Long-run risks to returns are minimal, but largely revolve around a slowdown in tourism and traffic, given the firm's substantial fixed asset base and plans for further sizable capital investments. On balance, Auckland Airport benefits from substantial competitive advantages, and we forecast solid returns on capital over the long run.

Uncertainty in the timing of a passenger rebound at Auckland and Sydney Airports continues to hang over the companies. Recent commentary from Qantas and government officials suggests international traffic to and from Australia (and by proxy, New Zealand) may not resume until June 2021. We're more optimistic, estimating a ramp up starting in late calendar 2020 based on potential travel “bubbles” like the proposed trans-Tasman route, further supported by a likely COVID-19 vaccine in first-half 2021. However, the exact timing of the recovery is less important to our valuation than the certainty of the eventual return. We continue to expect both airports will benefit from rising international tourism over the long term, and maintain our estimated AUD 6.80 fair value for narrow-moat Sydney and NZD 6.65 (AUD 6.20) fair value for wide-moat Auckland Airport.

April traffic for wide-moat Auckland and narrow-moat Sydney Airports has begun to fully reflect the coronavirus challenges, with passengers unsurprisingly down 97.5% from a year ago. Given both airports are open for essential travel only, we anticipate passenger movements will remain near zero for at least two more months, evidenced by Sydney Airport’s reported May month-to-date movements, down 98% versus the PCP.

The near-term operating environment for Auckland Airport has deteriorated over the past several weeks, with travel restrictions related to the COVID-19 pandemic driving a precipitous decline in passenger volumes. We again lower our fiscal 2020 traffic forecasts, to a 25% decline in fiscal 2020 from 15% previously, with a fall to nearly zero passengers from April to June 2020. We expect global travel to return to normal through 2021 and envision Auckland Airport traffic hitting fiscal 2019 levels in fiscal 2023, a year later than our prior assumption.

The COVID-19 pandemic is drastically dampening global air travel as people avoid flying or are restricted by government-imposed border controls. We have assessed our valuations for Auckland Airport and Sydney Airport amid the rapidly evolving global pandemic and have downgraded both stocks given their weaker short-term earnings outlook. However, we make minimal changes to our mid-cycle forecasts as we anticipate travel returning to normal by early calendar year 2021. We continue to expect growth in the Asian middle class to drive relatively strong passenger growth over the long term.

Auckland Airport’s passenger traffic in the first half of fiscal 2020 trails our full-year expectations, and coronavirus travel restrictions are likely to further weigh on results over the next six months. We’re encouraged that retail revenue per passenger continued to climb in the period, but rising operating expenses and the challenging near-term environment leads us to reduce our full-year NPAT forecast to NZD 263 million from NZD 275 million. This is at the low end of management’s updated guidance range of NZD 260-NZD 270 million, down from NZD 265-NZD 275 million. The group also declared an NZD 11 cents per share dividend, in line with our full-year forecast for NZD 22 cents and flat from the prior year. At the current price, the stock’s yield is only about 2.5%, and shares continue to screen as overvalued versus our unchanged NZD 7.40 fair value estimate (which rises to AUD 7.10 per share given the strengthening New Zealand dollar).

The China-based coronavirus outbreak has recently weighed on the share prices of both Sydney and Auckland Airports. China, excluding Hong Kong and Taiwan, represents roughly 7% of international passengers for each airport, the most substantial source of traffic outside of Australasia. The travel limitations we’ve seen in response to the illness will almost certainly have a negative short-term impact. But we don’t see substantial long-term ramifications from the virus. Revisiting the SARS outbreak of 2003 presents a comparable case that shows a strong near-term traffic decline but quick recovery. Moreover, while there is downside risk to our estimates if the coronavirus proves to be a longer-lasting outbreak than SARS, the impact to our valuations is more muted. We maintain our AUD 7.30 fair value estimate for narrow-moat Sydney Airport and NZD 7.40 (AUD 7.00) fair value for wide-moat Auckland Airport. However, given shares continue to screen as overvalued, we don’t see a margin of safety to account for this risk.

Wide-moat Auckland Airport’s first-quarter fiscal 2020 passenger movements trailed our full-year outlook, as strong U.S. passenger growth couldn’t offset further declines in Chinese travellers and weakening domestic traffic. We expect new international routes to close this gap in the near term, but also see downside cyclical risk should global economic conditions slow further. With lower passenger fees on the horizon following the recent push back from New Zealand’s Commerce Commission, and the potential for reduced international traffic to hamper near-term commercial retail revenue, we caution that securities in Auckland Airport screen as overvalued versus our unchanged NZD 7.40 (AUD 7.00) fair value estimate.

Wide-moat Auckland Airport saw its international traffic growth slow in fiscal 2019, owing to economic challenges in China, more-muted airline capacity additions, and lower growth in airport passenger numbers. While we remain positive on the firm’s long-term growth profile, fiscal 2020 looks challenged, owing to a slowing global economy, lower near-term passenger fees, and heightened capital spending requirements. We expect the airport to maintain tight cost control and enjoy higher retail spending, but guidance for underlying fiscal 2020 NPAT of NZD 265 and 275 million suggests a slight fall from fiscal 2019’s NZD 275 million. Nonetheless, this outlook tracks our forecast for NZD 275 million in profit, and we maintain our NZD 7.40 (AUD 7.00) per share fair value estimate. The name currently screens as overvalued, likely due to precipitously falling interest rates that we view as unsustainably low.

Publicly traded Australasian airports saw continued traffic challenges in the first calendar quarter of 2019, highlighted by declines in movements to and from China and weak domestic Australian performance. We continue to think both wide-moat Auckland Airport and narrow-moat Sydney Airport enjoy long-term competitive advantages, but see no margin of safety to account for near-term risk at current prices. We maintain our AUD 7.30 fair value estimate for Sydney and NZD 7.40 (AUD 7.00) estimate for Auckland.

First-half results for wide-moat Auckland Airport were in line our full-year projections, with underlying NPAT up 3% to NZD 137 million. Traffic growth moderated but retail revenue climbed rapidly on the back of newly opened stores and restaurants in the airport. Profitability should expand markedly in the second half of fiscal 2019, and the company remains on track to hit unchanged full-year NPAT guidance of NZD 265 million to NZD 275 million. We forecast NZD 275 million, representing growth of 5% on the prior year. While some regulatory risk has crept into the outlook given the airport’s decision to cut aeronautical pricing following pushback from New Zealand’s Commerce Commission, or ComCom, we maintain our NZD 7.40 per share fair value estimate, while our ASX-listed share valuation lifts 3% to AUD 7.10 due to a stronger New Zealand dollar.