Valuing and buying an airport can be a tricky business for investors, as they have to look to the ultra-long term – 20 years or more – to get an idea of where the business is really headed.
Of course, the further away from present day you get with your estimates, the more likely they are to be poor. This is why annual reports are so important, allowing investors to examine a business' progress and if necessary, be brought back to reality gently rather than in 10 years with a resounding crash.
Fortunately, Auckland International Airport Ltd's (ASX: AIA) strong performance continued in 2015:
- Income rose 6.9% to $508.5m
- Expenses rose 6.6% to $128.5m
- Reported profit after tax rose 3.5% to $223.5m
- Underlying* profit after tax rose 3.8% to $176.4m
- Earnings Per Share rose 6% to 18.78 cents per share
- Auckland International passenger numbers rose 5.7% and domestic passengers were up 4.2%
- Profit at North Queensland airports fell 9.8% on anaemic growth in passenger numbers (Mackay passengers fell 8.1%)
- Queenstown Airport reported 25.8% lift in profit on 29% growth in international passenger numbers
- $38.5m cash at bank
- $1,722.5m in debt; gearing of 36.1% (debt divided by debt + equity), average interest rates of 5.79%
- Outlook for 2016; underlying profit to be between $183m and $191m reflecting profit growth of 3.7% and 9.3%
*Excludes gains made on property revaluations
So What?
International passenger growth at flagship Auckland Airport continued more or less as forecast, buoyed by very strong growth in passengers from Southeast Asia. Visitors from India and China grew at 33% and 28% respectively, while Taiwan, Japan, Hong Kong and the USA all recorded growth rates of more than 10%.
It will be interesting to see if this kind of growth continues over the next couple of years, particularly if the Chinese economy does more than wobble. However, high visitor numbers from other nations such as Japan, India, and the US provide indications of where future passenger interest will come from.
Auckland's share of ownership in Queenstown continues to be an excellent investment, although the North Queensland airports are definitely lagging. Mackay is likely to be hit extremely hard by a slowdown in mining investment (and rise in mining-related unemployment) given the high relative costs of flights in and out of that regional centre.
I expect further weakness in Mackay, while Townsville is likely to continue stagnating as it will also experience fallout from the drop in mining investment. Cairns should remain an attractive destination for international visitors.
Now What?
Auckland Airport is starting to look a little pricy to me. Management's policy of paying out 100% of earnings in the form of dividends means investors should expect debt to continue to rise over time, which makes the company vulnerable to higher interest rates among other things.
While I do expect passenger growth and market out-performance at Auckland and competitor Sydney Airport Limited (ASX: SYD) to continue, the former's dividend of 2.2% is quite small and reflects just how much investors have bid the stock up in recent years. With mid-single digit growth likely to continue for the future, I'm looking elsewhere for my growth and dividend kicks.
