Downgrade over likely duty-free cut

A potential reduction in duty-free tobacco allowances for inbound arrivals is material to both the earnings and valuation of Auckland International Airport, Forsyth Barr broker Andrew Rooney says.

Forsyth Barr has reduced its earnings forecast by 2% and downgraded its target price to $3.20 a share from $3.35. The company has also been downgraded to reduce from hold.

''We expect Maori Party policy ahead of next year's election to propose changes to the current 200-cigarette allowance.

"We calculate a reduction in the current allowance to 50 cigarettes will hit Auckland airport earnings by 5% and valuation by 14c per share.''

The growing presence of online retail was structurally changing buying habits of consumers, he said.

The business model of traditional bricks and mortar was being challenged and airport duty free was not immune.

Consumers could now access products more cheaply than at duty free shops, particularly in the fragrance and cosmetics categories, on the internet.

Moreover, the increased price competition in the industry might affect duty-free retailer profitability and therefore Auckland airport's yields, Mr Rooney said.

''Auckland airport owns the most attractive shopping mall in New Zealand, which enjoys heavy and growing footfall, competitive pricing and extended trading hours.

"The dual-till nature of airport regulation means the airport can earn a high return on retail activities.

"But several pressure points, including tobacco and online, may dampen the outlook for the company's retail operations.''

It was understood the immediate priority for the Government and Ministry of Health was to introduce plain packing legislation for tobacco.

That meant the timing of any duty-free changes was uncertain in the near term.

Auckland airport was expected to lobby against such a move given duty free only amounted to a small proportion of overall tobacco consumption in New Zealand, he said.

The airport company could argue a cut to its concession income from duty-free tobacco would affect its ability to market New Zealand tourism as part of its route development programme.

Auckland airport's landlord business model is reliant on its customers' profitability. Retail concessions were reliant on the retailers' ability to make a profit.

The profitability generated by duty-free concession operators was important as ultimately it dictated the yield the airport could achieve.

A more competitive pricing environment for duty-free operators would lower the retailers' profitability and the yield to the airport, Mr Rooney said.

A common border between Australia and New Zealand would likely remove the ability of airports and airlines to offer duty-free shopping for transtasman travellers.

Airlines were keen to introduce a common border between Australia and New Zealand as it would materially lower their costs.

Former Australian prime minister Kevin Rudd and New Zealand Prime Minister John Key agreed in 2009 to make the creation of a common border between the two countries a priority.

Mr Rooney said the common border would lower retail spending at Auckland airport as domestic passengers were not able to access duty-free shopping and would spend considerably less than international passengers.

However, the introduction of a common border was not likely in the foreseeable future.


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