WEEKLY STOCK COMMENT: AUCKLAND INTERNATIONAL AIRPORT (AIA)
Roy Davidson, 19 January 2017
Auckland international Airport (AIA) owns and operates Auckland International Airport, New Zealand’s largest airport. The airport’s facilities include the international terminal, domestic terminals, freight facilities, car parking, warehousing, offices and hotels. In addition, AIA owns more than 1,500 hectares of freehold land, with over 400 hectares available for future property development. AIA also has 25% stakes in Queenstown Airport and North Queensland Airports.
As the gateway to New Zealand, AIA is well placed to benefit from the trends of New Zealand tourism, and increasing Asian travel. AIA has talked at length recently regarding its longer-term aspirations. The company strategy includes almost doubling Chinese arrivals to 400,000 by 2017, reaching 10 million international passengers by 2018, (more than a 30% increase), and reaching 20 million total passengers by 2020 (around a 40% increase).
AIA is monitored under an information disclosure regime by the Commerce Commission. This regime compares AIA’s targeted and actual return on investment (ROI) to the Commission’s estimate for AIA’s weighted average cost of capital (WACC). The rationale being that in a competitive market, a firm’s ROI will be equal to its WACC in the long-run as any excess return is competed away. The commission has recently published a new decision on how this comparison is to be done. This decision effectively lowers the WACC from prior decisions increasing the pressure to lower the prices for its aeronautical services, which comprise 50% of earnings. However, balancing this is that it provides more flexibility, requiring AIA to explain any deviation, while we note that AIA a range of options to offset a revenue drop and should be able to navigate the changes.
AIA’s FY16 result was very strong, with net profit after tax increasing by more than 20% year on year, primarily driven by continued strength in international passenger numbers, up 8.8%. Non-regulated revenue (retail, car parking and property) were all also strong, demonstrating the company’s broad-based execution. We expect passenger growth to remain strong as airlines continue to add capacity, and as New Zealand tourism grows further.
AIA is a very high quality strategic asset, with exposure to our largest city and growth in tourism markets across Australia, Asia and further afield. The company is not just about airlines, as it has a substantial property portfolio, as well as car parking and retail revenues. Like many of our best companies, AIA rarely looks cheap. We recommend investors look to add the stock on any weakness, and use an instalment approach to build positions over time.
Potential risks for AIA include 1) passenger volumes drop, 2) regulatory risk, and 3) capex risk.