Australian sale earns plaudits for AIA

Aerial view of Auckland International Airport. Photo: NZ Herald
Aerial view of Auckland International Airport. Photo: NZ Herald
Auckland International Airport has received applause for the sale of its minority ownership in North Queensland Airports (NQA) from Australian research firm Morningstar.

The sale was worth $A370million ($NZ407million).

Morningstar analyst Adam Fleck said the business, while enjoying attractive growth at the Cairns airport, was lower margin than the core Auckland Airport and faced some structural pressure at the Mackay airport, given the region’s reliance on mining.

The ownership stake in NQA was non-core and given it was only a 24.6% share,  Auckland Airport received a good price for those two Australian airports, he said.

The resulting cash flow would further strengthen the company’s balance sheet.

The 24.6% stake had been a highly lucrative investment. The company bought the share for $A132.8million in January 2010. Since then, the business’ net profits had growth to $37.5million from a slight loss, and made up about 3% of Auckland’s consolidated earnings in the 2017 financial year. The final price of $A370million suggested an eight-year compound annual growth rate on investment of 13.7%, a very productive investment, Mr Fleck said.

All NQA investors were entitled to maintain their current holdings.  Perron Investments and The Infrastructure Fund had already agreed to accept the entire offer, Auckland Airport chief executive Adrian Littlewood said in a statement.

"The sale will enable Auckland Airport to focus attention on growing its New Zealand travel, trade and tourism businesses and to recycle the proceeds into supporting the significant step up in aeronautical investment at Auckland Airport."

The Auckland company bought the stake in Australian airports in an effort to expand outside its core Auckland business, to develop connections with Cairns and build routes into Asia.

The asset sale came as Auckland Airport prepared for a $1.8billion infrastructure spending programme, introducing new contact gates for international aircraft, a new domestic jet terminal, expanded border processing and public arrivals spaces and upgraded international check-in areas.

The proposed price rises to pay for the capital spend would come under the scrutiny of the Commerce Commission in its semi-regular investigation of how airports set their prices under an information disclosure regime to discourage airport monopolies from price gouging. A draft report was expected in March.

Mr Fleck said outside the sale of NQA, November traffic for the core Auckland Airport remained positive.

Auckland Airport reported another increase in international passenger numbers in November as growth occurred across all regions.

International passenger numbers were up 6.3% in November, compared with the previous corresponding period. Auckland Airport said in a release to the NZX growth was particularly strong on Asian and Middle East routes, and Pacific Island services.

Total international passenger numbers rose to 901,830 in November, domestic passenger numbers rose 10.8% to 804,149. Total passenger numbers reached 1.7million in November, up 8% on November 2016.

Visitor arrivals from the United States to Auckland Airport were up 10.8% in November. The growth was driven by the increase in direct capacity from the US following the return of United Airlines’ San Francisco and American Airlines’ Los Angeles services.

Both holidaymakers and travellers visiting friends and family achieved double-digit growth in the month.

Morningstar believed the medium-term growth outlook for Auckland Airport was good, Mr Fleck said.

"In our view, management’s route development strategy will yield significant capacity growth from Asia over time, while passenger spend rates will continue to rise."

Auckland Airport’s investment in Queenstown Airport was also paying dividends through an "outstanding performance", he said.

Risks remained. Because Auckland Airport set its aeronautical passenger fees up to five years ahead, lower traffic than expected could negatively impact its return on invested capital for at least that five-year pricing period and even longer, if the company ended up overbuilding capacity substantially.

Higher oil prices, or slower macroeconomic growth, both of which had strongly supported the affordability of travelling to New Zealand from distant locations in recent years, could drive lower returns, Mr Fleck said.

"We’re encouraged management has generally opted to structure its capital investments in a way enabling flexibility should lower traffic eventuate — lowering the risk of medium-term overcapacity."

 

Inside word

THE BULLS SAY

• Auckland Airport is a good long-term play on the burgeoning Chinese market for outbound travel. Chinese tourists tend to spend more than their European counterparts, auguring well for the retail business.

• The outlook for the property business seemed promising and there was a good pipeline of prospects on the horizon.

• Past the next five years, Auckland Airport should enjoy a meaningful increase in passenger fees to compensate the company for its sizeable capital spending.

THE BEARS SAY

A slowdown in global economic conditions, particularly in China, could affect tourist inflow to New Zealand, limiting both per-passenger fees and retail spending at the airport.

• The New Zealand domestic market could face a prolonged period of tepid passenger growth, given high consumer debt levels.

• The firm’s bottom line is sensitive to interest rates, which could increase, considering they are at an all time low.

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