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Date : 24/09/2020

Auckland International Airport Limited

NZE :

24/09/2020

Market Cap : $10.21 Billion

Buy

52 Week Range : $4.26 - $9.48

Share Price : $7.04

A distressed firm due to the pandemic. The balance sheet is a show of strenght in the near term. However, the impacts of travel restrictions may continue to hinder performance. We recommend to "Hold" for now.

Company Analysis

 

Auckland International Airport Limited (NZSE: AIA) as the name suggests provides airport facilities and other supporting services in Auckland. Its services are centred around Aeronautical, Retail, and Property segments. Any industry that is dependent on travel and tourism has been hit hard by the pandemic in 2020. Granted, New Zealand is one of the first countries to recover from the pandemic but there is still a lot of uncertainty around when international travel can and will resume. Experts such as Airbnb’s founder and CEO says that we may never see the heights of the travel and tourism industry again. This is especially true when we take business travel into consideration.

AIA has been hit hard by Covid19, but not as hard as the aviation industry itself. The below chart gives us an idea of the performances of its segments.

The property segment has been the least affected since airlines still have to pay leases for using hangers, etc. Retail has taken the major hit, followed by Aeronautical.

Below is a list of all the operations that make up AIA. This will help us understand just how many of them are affected due to the current state of the world.

  • Passenger and Cargo service
  • Leasing of facilities such as terminal space
  • Retail services to passengers
  • Car parking facilities
  • Leasing of cargo buildings, hangers

Company Updates

AIA reported that it saw 7m domestic passengers, 7.7m international passengers, and 0.7m international transits in its FY2020 annual report. All three segments saw declines around 26%-27%.

The stock was on a downward trend since the beginning of the year, prior to travel restrictions being imposed. This was due to investor confidence decreasing around the travel and tourism industry as China dealt with the pandemic.


Source: Tradingview.com

Since the crash in March, the stock has recovered quite well on the news of New Zealand effective handling of the pandemic. Recently, the stock has surged on the back of its annual result that was not as bad as it was expected to be, and also on the back of New Zealand riding out the second wave effectively.

Volatility looks to have stabilised over the past month and the stock is trading close to the middle of its 52-week range.

AIA’s strategic response to Covid19 includes – securing liquidity and repositioning the business. The firm extended its debt maturity period to 2022 and 2023. The firm has managed to also obtain waivers from its lenders. AIA raised $1.2 billion in equity and also suspended dividends.

The firm holds a credit rating of A-, suggesting that it is in a position of low risk when it comes to credit default.

The repositioning of the business is basically changing the business model to reduce operating expenses and halting services until the country and the world recovers from the pandemic. A staged comeback of the global & domestic economy will determine how AIA handles its business model.

Industry Analysis

The transportation industry, especially airports will see a dramatic shift in the coming years. Business travel is set to be the most impacted, while leisure/vacation travel is set to decline as well as international travel takes a major hit. Airports will turn its dependency towards non-passenger revenues as air-traffic will continue to be low over the next few years. Revenue, profitability, and margins are all set to decrease for a sustained period of time. In order to accommodate for this change, the business models of airports globally have to be changed. New investments would have to be made in search of new avenues to generate revenues. These new investments will bring its own micro-economic risks along with it.

Airports that depend on local travel will come out better than those who depend on international travel. Airports that serve as connecting destinations (such as Changi Airport) will be impacted the most.

The strengths of the industry are its low competition. High barriers to entry are present in the industry as firms would require government approvals and very big amounts of capital to enter the market.

Auckland International airport may not be as affected as some of its peers in the rest of Asia due to it not being a transit destination. The low levels of travel and high restrictions on international flights will definitely put a cap on any growth projections the firm would have anticipated prior to the pandemic.

Investment Thesis

AIA suffered a 23.7% revenue loss from the previous year as it recorded just $567m. Total passenger movements decreased by 15.5m. The net income on the other hand was just 193.9m for FY2020 – a 63% decline.

Segmented revenue declines were as follows:

  • Aeronautical – 25.3% decline
  • Retail – 37.3% decline
  • Transport – 21.7% decline
  • Property – 2.2% decline
  • Hotels – 2.8% decline

The negativity surrounding earnings reports are a cause for concern. These numbers are forecasted to further fall as international travel does not look like it will pick up any time soon. Resumption in domestic travel will not be as profitable to the firm since retail revenues and hotels and the majority of the aeronautical revenues are all driven by international passengers.

Prior to the pandemic, AIA was in a good position on the earnings front. The firm was delivering steady growth rates of 8%-9% over the past 5 years. AIA was also maintaining a steady EBITDA margin of 75% over the same period. We do expect the margins to bounce back to previous levels in the future as the firm changes its business model. However, how long the decline in revenues will last is the biggest uncertainty.

The cash position of AIA has been increased to mitigate any impacts Covid19 may bring to its debt levels. Current cash position is $780.7m – enough of a contingency to cover any short-term debt obligations that AIA may face.

The current debt levels of the firm are a staggering $2.2 billion. However, total assets exceed total liabilities by 3.5x. This indicates good financial health for any firm that is not operating under adverse turbulence. Given the nature of what the future may bring, AIA looks to be in a position of strength to mitigate risks in the short-term. However, the damages to its earnings and the new post-pandemic world may be permanent.

The stark decline in revenues can also be observed by looking at the returns it has generated on its assets, capital, and equity. These charts indicate the impacts covid19 has had to investors of AIA, investments of AIA, to an otherwise stable business.

Earnings per share in FY2019 was $0.43 per share. This has decreased to $0.15 per share in FY2020. The firm had a stable dividend payout of 0.22 cents for the last two years. However, in light of the current economic climate, AIA has decided to not issue any dividends this year.

Recommendation

AIA is a distressed firm in one of the most severely impacted sectors due to the pandemic. Recent earnings are abysmal, the balance sheet is strong in the near future, however the long-term outlook given the nature of the tourism industry is not positive. We recommend investors already exposed to “Hold” for now as developments over the management or mismanagement of the pandemic becomes clearer.

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