WEEKLY STOCK COMMENT: AUCKLAND INTERNATIONAL AIRPORT (AIA)
Roy Davidson, 10 August 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).
Following consultation with key stakeholders (e.g. airlines) AIA recently released its pricing for the next five years. There have been concerns over the past few years that changes to how AIA’s allowable return is calculated by the Commerce Commission would see a sharp fall in landing fees. However, this hasn’t transpired and AIA will see moderate increases, including a new charge for the future second runway to be built in the 2020’s. AIA also announced a significant capex spend to enable the airport to meet ongoing demand. This includes the new domestic terminal and, new taxiways, stands and aprons.
Continuing on from a strong of good results, AIA’s 1H17 result was very strong, with net profit after tax increasing 10.5% year on year, primarily driven by continued strength in international passenger numbers. However, profits from AIA’s retail operations were below expectations due to disruptions from developments. Management expect this to continue in the near-term. 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 installment approach to build positions over time.
Potential risks for AIA include 1) passenger volumes drop, 2) regulatory risk, and 3) capex risk.