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
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
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
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.