Auckland Airport: Interim result 2018

Auckland Airport's interim report was titled ‘delivering infrastructure', but you could also add ‘as fast as the Concorde'. The airport is investing $1m a day in its core infrastructure, with 53 different projects currently underway. The border screening and security space was doubled this past half, Pier B increased passenger capacity by 50% and provides more space for large A380 aircraft, self-serve check-in capacity was increased by 33%, new retail stores were added and the first phase of the new international passenger lounge is complete. Various parking and ground transport improvements are also in the works.

The extra padding is needed. Total passengers increased 6% for the six months to December, cracking the 10 million mark for the first time. However, it was the local population on the move, bucking the trend of the past couple of years: domestic passengers rose 8%, while international passengers rose 6%.

The only blemish was a 2% decline in passengers transiting to Australia due to a new direct service from Santiago, though this was mitigated by an increase in direct flights from Santiago to Auckland, which contributed to the international passenger growth.

Price declines

Unfortunately, aeronautical revenue rose just 1% to $60m due to the growth in passenger volumes being offset by declines in aeronautical charges. The airport concluded a 17-month consultation with airlines mid last year and announced a surprise fall in charges for the next five years. After adjusting for inflation, average annual international passenger charges will fall by around 2% and domestic passenger charges will increase by 1%, though they will start off with a slight dip in 2018. The domestic charge is still below average for airports in New Zealand and Australia, with international charges about average.

Retail revenue rose 10% thanks to the passenger growth and new stores, while parking revenue was up 9% due to the addition of 1,000 new spaces.

The star performer of the ‘non-aeronautical' revenue streams, however, was the company's rental income from investment properties, which rose 16%. As we explained in Auckland Airport: a property developer's dream, the airport has more than 400 hectares of land available for development and the company has been busy filling it with business park tenants including Coca-Cola Amatil, DHL, as well as a few new hotels. Management singled out the Ibis budget hotel as being a lead contributor to this half's performance.

Overall, revenue rose 7% to NZ$332m. Costs unfortunately outpaced revenue growth, so underlying earnings before interest, tax, depreciation and amortisation (EBITDA) increased just 6% to NZ$250m. Underlying net profit rose 8% thanks to some help from the balance sheet – which we'll get to in a moment – and good performance at the company's partially owned airports, including Queenstown, Cairns and Mackay. Statutory net profit also got a NZ$42m boost from the revaluation of the airport's investment properties.  

Interest burden

The company currently has NZ$2.2bn of net debt, which is up 11% compared to this time last year. Auckland Airport's higher reliance on international passengers makes for more volatile earnings than Sydney Airport, so management is more conservative when it comes to borrowings. Net debt is roughly 4.4 times underlying EBITDA, whereas the equivalent figure for Sydney Airport is 6.8 times.

Nonetheless, interest expense consumes nearly a fifth of operating profits despite interest rates being at record lows. If interest rates stay low or fall further, Auckland Airport and other highly leveraged infrastructure assets will be among the biggest beneficiaries.

However, every 1% rise in interest rates would shave around 8% from net profit. If interest rates were to rise, shareholders would be hit with a double whammy – higher interest rates will reduce earnings growth and also lower the price investors are willing to pay for the company's earnings (see How rising interest rates affect Sydney Airport). What's more, a third of the airport's debt falls due in the next three years. The weighted average maturity is just under five years, compared to around six years for Sydney Airport, so refinancing is a bigger risk (though still a remote one given the business's quality). 

Management expects full-year net profit of NZ$250–257m, which would be an increase of 1–4% on 2017. With an unfranked dividend yield of 3.3%, plenty of competitive advantages and decent growth prospects, we're sticking with HOLD.