Auckland International Airport

Transcription

1 NEW ZEALAND AIA NZ Price (at 05:50, 17 Feb 2017 GMT) Outperform NZ$6.89 Valuation NZ$ DCF (WACC 7.1%, beta 0.6, ERP 7.0%, RFR 3.3%, TGR 2.0%) 12-month target NZ$ month TSR % Volatility Index Low GICS sector Transportation Market cap NZ$m 8, day avg turnover NZ$m 5.2 Number shares on issue m 1,191 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking 1 % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability. AIA NZ vs NZSE50, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 2017 (all figures in NZD unless noted) 17 February 2017 Macquarie Securities (NZ) Limited Yes, hmmm, yes and yes Event 1H17 result. EBITDA $235.9m (+10.5%) and adj NPAT $123.5m (+18.6%). Interim fully imputed dividend 10.0cps (8.5cps in 1H16). FY17 guidance updated from $ m to and increase on 13% on pcp at the mid-point. Impact Yes: Aeronautical revenue growth was strong (+15.4%). Int l pax +11.9%, domestic pax +11.7% underpinning strong growth in MCTOW (int l +16.6%). 2H17 outlook robust. Hmmm: Non-aeronautical revenue growth increased 7% with strong car park revenue (+11.2% and Rental revenue (+14%) but muted Retail revenue of $80.7m (growth 2.7% reported and 6.4% adjusted) and well below Macq forecast of $88m. The miss reflected the inclusion of a ~$3.0m one-off accrual release in the pcp and a greater than expected impact from construction activity. This will result in a rebasing for 2H17 expectations, but is a purely transitional impact and when washed through in 2H18 will provide a platform for significant Retail revenue growth. Yes: Increased regulatory certainty and flexibility for AIA s next 5 year aeronautical price reset following the completion of the CommComm input methodology review. We believe that the flexible regulatory framework provides scope for AIA to deliver a pricing outcome above current consensus expectation. Yes: We believe that earnings momentum will remain strong, underpinned by strong growth in passenger volume and from the leverage to that growth - particularly in Retail following the international terminal expansion. The balance sheet remains strong and able to support the current investment grade credit rating (A- stable). Earnings and target price revision A modest (~2%) increase in FY17 forecasts (lower net interest cost). Price target lifted from $7.60 to $7.70. Price catalyst 12-month price target: NZ$7.70 based on a DCF methodology. Catalyst: the announcement of the next aeronautical price path (expected in May) with potential to exceed current consensus forecast. Action and recommendation Outperform. Strong aeronautical revenue growth underpinning by strong pax growth expected to continue in 2H17. The softer than expected Retail revenue reflects construction activity impact and is transitory. Post the international terminal upgrade we see considerable scope for Retail revenue to surprise on the upside. Aero pricing announcement could also positive surprise. Please refer to page 17 for important disclosures and analyst certification, or on our website

2 Fig 1 1H17 AIA result wrap The good The not so good The interesting Adj NPAT $123.5m, 18.6% above pcp, and in line with Macq ($123.6m). A final, fully imputed dividend of 10.0cps was declared (8.5cps in 1H16). This represented a payout ratio of 97% (annual dividend policy equal to 100% adjusted NPAT). Total revenue growth of 10.8% to $311m (Aeronautical +15.4% - $145.1m and nonaeronautical $165.8m). Aeronautical revenue was underpinned by: 11.9% growth in International Pax volumes 11.7% growth in Domestic Pax volumes 14.7% in total MCTOW And the prescribed ~ % increase in aeronautical pricing. Non-aeronautical revenue growth was underpinned by: 11.2% growth in car park revenue 14.3% growth in Rental revenue Unexpectedly low 6.4% growth in Retail revenue (see not so good column) AIA lifted FY17 NPAT guidance from $ to $235-$243m, 13% above pcp at the midpoint. Macq FY17 forecast adj NAT of $246.5m is above the top of this guidance range. Source: Company data, Macquarie Research, August 2016 Retail revenue of $80.7m was a muted 2.7% above pcp and well below Macq forecast of $88m (noting int l pax growth of 11.9%). If the reported 1H16 retail revenue of $78.6m is adjusted to reflect a $2.8m one off accrual release, 1H17 retail revenue growth is 6.4%. ON an adjusted basis there is a ~$4m shortfall between 1H17 Retail revenue and the adjusted Macq forecast. So what caused the ~$4m shortfall? AIA noted that duty-free revenue was strong (albeit we understand below the int l pax growth rate). Food & Beverage revenue increased 18% as customer experiences AIA reintroduced a dividend reinvestment improve through greater choice. plan and reiterated that it was very Therefore the only explanation for the comfortable that it would retail its current retail shortfall is the impact of S&P investment grade rating over the heavy construction activity. capex next price reset period. Road construction activity in Auckland s CBD negatively impacted off airport retail sales, while the international terminal upgrade/expansion project clearly had a higher than expected impact on Specialty and Destination categories. 6 stores were closed during the period and 8 other trading from reduced footprint. Retail spend per international pax (using the AIA methodology) decreased 5.04% to $16.29 and AIA guided to a similar spend in 2h17. AIA also noted that the construction impact was transitional and would washout by late FY18. We see the potential upside to Retail revenue from 2H18 and particularly FY19 as being significant. Quote of the day Whatever you do always give 100%. Unless you are giving blood. Following the conclusion of the Commerce Commission Input Methodology Review, AIA now has a framework for its next 5-year aeronautical price reset effective 1 July 2017 (FY18). AIA is expected to announce the details of the next price reset in May AIA has upgraded FY17 capex guidance from $353m to $ m with the bulk of the upgrade relating to Investment property. Aeronautical capex has been only modestly upgraded from $232m to $240m. AIA remains committed to its dividend policy of paying ~100% of underlying NPAT despite the forecast increase in capex over the next few years. Investment property development momentum still strong. Costs increased 11.9% reflecting increased volumes 17 February

3 1H17 Result Analysis AIA released its 1H17 results: Revenue +10.8% to $310.9m (Macq $318m, with variance entirely due to Retail revenue). EBITDA % to $235.9m, again below Macq 9%242.6m for the same reason). Adjusted NPAT % to $123.5m, directly in line with Macq ($123.6m with lower net interest costs and higher profit from associates). An interim fully imputed dividend of 10.0cps (8.5cps in pcp), with AIA announcing its intention to reintroduce a Dividend reinvestment plan. The following table summarises the AIA result. Fig 2 AIA 1H17 result summary ($ m) 1H16 1H17 % change Macg 1H17 forecast Var on forecast Revenue Aeronautical Airfield % % Passenger Service Charge % % Total Aeronautical % % Non-Aeronautical Retail % % Rental % % Car parks % % Utilities and general % % Associated Companies/other Total Non-Aeronautical % % Total Revenue % % Costs % % Operating EBITDA % % margin 76.1% 75.9% -0.3% 76.2% -0.4% Property revaluations % 0.0 Other Costs % 0.0 Share of profit of Assoc % % Group EBITDA % % Depreciation % % Net interest % % Profit before Tax % % Taxation % % Other NPAT % % NPAT adjusted % % Number of shares (m) EPS (reported) -cps % % EPS (adjusted) -cps % % DPS (cps) % % Payout ratio 97.2% 96.4% 100.0% Passenger growth International (m) % Domestic (m) % MCTOW International (m tonnes) % Domestic (m tonnes) % Retail spend / Int'l pax $ $ % Capex % Net debt % Net debt/ebitda (x) Source: Company data, Macquarie Research, February February

4 Key areas of focus: Strong aeronautical revenue growth: Strong aeronautical revenue growth (+15.4%) to $145m (directly in line with Macq forecast) underpinned by strong pax growth (international +11.9%/ domestic +11.7%), strong growth in aircraft movements and MCTOW (+14.7%) and some modest aeronautical pricing growth. Non-aeronautical revenue below forecast due to more subdued retail revenue growth than forecast: Non-aeronautical revenue increased a more muted 7% to $165.8m and 4% below Macq forecast. The divergence was entirely due to lower Retail revenue that forecast. Retail revenue increased 2.7% to $80.7m, 8% below the Macq forecast of $88m (expected growth of 11% consistent with pax growth). AIA advised that the pcp included a one off accrual release of ~$2.8m (commercially sensitive at the time), and on an adjusted basis 1H17 retail revenue increased 6.4%. Adjusting the Macq forecast for the accrual in the pcp lowered the forecast to $85.2m, suggesting a ~$4m shortfall. Explaining the Retail revenue shortfall: AIA noted that Duty Free was performing well, reflecting the retailer s global expertise. A focus on core Duty Free products resulted in PSR (passenger spend rate) growth of 22% in Cosmetic and Skincare and 60% in Electronics. This was partially offset by modest PSR declines in liquor and tobacco. We estimate high-single-digit growth in Duty Free revenue in the period. Specialty and Destination revenue was impacted by planned store closures as part of the international terminal upgrade and general construction activity. In the period there were 6 fewer Specialty stores trading and another 6 were trading from reduced footprint. In addition CBD construction also negatively impacted Off Airport activity (we estimate a ~$ m revenue impact). The impact from construction activity was clearly more pronounced than we had expected. This resulted in retail spend per international passenger (using AIA s methodology) declining 5% to $ Fig 3 AIA half-year retail spend per international pax trend $ $17.50 $17.00 $17.16 $16.96 $16.50 $16.29 $16.00 $15.50 $15.71 $15.83 $15.00 $ H15 2H15 1H16 2H16 1H17 Source: Company data, February 2017 We note that while disappointing, and fully explains the shortfall versus forecast EBITDA, the construction impact on retail is transitional and will washout by late FY18 and provides a platform for significant growth (via both MAG growth initially for Duty Free and from a significant increase in new Specialty operators). We discuss this further in the outlook section. Car par revenue leverages 11.7% Domestic pax growth: Car park revenue leverages Domestic passenger growth and grew 11.2% in the period. 17 February

5 Operating costs increase reflecting volume growth and new route support: Operating costs increased 11.8% in the period (ahead of revenue growth of 10.8%) to $75m reflecting the investment in staff and the other costs associated with high volume growth, including marketing and promotion. Fig 4 AIA 1H17 cost summary $m) 1H16 1H17 % change Revenue % Costs Labour % Repairs/Maintenance % Rates and Insurance % Marketing and promotion % Professional services % Other % Total % EBITDA % margin 76.1% 75.9% Source: Macquarie Research, February 2017 EBITDA of $235.6m was 10.5% above pcp and 2.7% below Mac forecast (entirely due to the retail revenue difference). The EBITDA margin of 75.9% was marginally below pcp (76.1%) and represents a sustainable level. Net interest of $36.8m was below the Macq forecast and reflected the increase in capitalised interest in the period ($4.7m up from $2.5m). Capex guidance for FY17 lifted from $353m to $ m, with the bulk of the uplift capex associated with Investment Property development. Outlook for 2H17 AIA had previously provided adjusted NPAT guidance for FY17 of $ m, 10.5% above pcp at the mid-point. This guidance range was upgraded to $ m, 12.4% above pcp at the new mid-point. The Macq FY17 adj NPAT forecast stands at $246.5m, above the top of the guidance range We expect passenger growth to remain strong ~+10% underpinned by recent and planned capacity growth underpinning strong growth in aeronautical revenue. Non-aeronautical revenue growth is expected to remain robust, notwithstanding the construction activity impact on retail (international terminal expansion). AIA on track with FY17 capex guidance. AIA expected to release its next aeronautical price reset for the period FY18-22 in late May, with the regulatory framework allowing AIA some flexibility to target returns above a mid-point WACC and to introduce a levy on land held for future use that is outside the RAB. Passenger trends double-digit Pax growth forecast Both the near term and medium term passenger trends appear to be very strong, and while capacity growth will slow in 2H17, we remain comfortable with our 2H17 international pax growth forecast of 9% and 6% for Domestic (11.9%/11.7% in 1H17 respectively). International seat capacity growth at AIA is forecast to be strong in FY17, with actual growth of 17% in 1H17 and currently forecast at ~12% for 2H17. Given the quantum of the increased capacity, we would expect a measure of load factor slippage early in the heavy capacity growth period meaning that actual early period passenger growth could lag capacity growth, but the offset is that expected passenger volume growth will be stronger for longer. The following chart shows the historic capacity and passenger growth correlation by quarter. 17 February

6 Fig 5 AIA International passenger and capacity growth quarterly trends percentage 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 AIA Int'l Pax growth Seat capacity Source: SRS Analyser; Macquarie Research, Feb 2017 Capacity growth in 1Q17 and 2Q17 was strong (16.6%/16.3% respectively) and is expected to be strong (albeit slowing) at ~14.0% in 3Q17 and 9.6% in 4Q17 (implies ~11.8% international capacity growth for 2H17). We believe that this capacity growth, coupled with current passenger growth momentum is capable of supporting our forecast of ~10% international passenger growth in FY17. Fig 6 AIA FY17 international capacity and Pax growth forecast half yearly Percentage 18.0% 16.4% 16.0% 14.0% 12.8% 12.0% 11.9% 11.8% 10.0% 8.9% 9.5% 8.0% 7.4% 7.2% 6.0% 4.0% 4.2% 4.0% 3.3% 4.3% 2.0% 0.0% 1H15 2H15 1H16 2H16 1H17 2H17 Capacity growth Pax growth Source: SRS Analyser, Macquarie Research, Feb 2017 Domestic pax growth is also strong, also underpinned by significant capacity growth, but also by improving load factors. 17 February

7 Fig 7 AIA International pax trend and capacity forecast Fig 8 AIA Domestic pax trend and capacity forecast percentage 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% % change 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% AIA Int'l Pax growth Seat capacity AIA Domestic Pax growth Seat capacity Source: Company data, Feb 2017 Source: Company data, Feb 2017 Following our analysis of the key drivers of global and regional international passenger growth, we have confidence that AIA is well positioned to deliver on the ambitious targets outlines in the Ambitions 2025 document. AIA s ambitious passenger growth CAGR forecast though to 2025 was 5.5%, with a range (under different scenarios) of 3.6% - 5.5%. Fig 9 AIA International Pax trend and forecast from FY17 Percent 12.0% 10.7% 10.0% 8.0% 8.1% 6.0% 4.0% 4.2% 5.4% 5.1% 5.7% 6.0% 5.0% 5.0% 2.0% 1.7% 0.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Macquarie forecast Company data, Feb 2017 Strong Pax growth is expected to underpin equally strong growth in MCTOW (underpinning Landing Charge revenues). A combination of strong Pax and MCTOW growth coupled with a ~1.5% increase in aeronautical pricing underpins our forecast 13.3% growth in FY17 Aeronautical revenue. Non-Aeronautical Current Retail revenue trend a blip: After delivering 6.4% adj growth in 1H17, Retail revenue growth in 2H17 is expected to again be constrained by construction activity and forecast to grow 5.0%, with the forecast retail spend per international pax forecast to be flat on pcp and international pax growth forecast to slow slightly from 1H17 s lofty levels (9.5% vs 11.9%). However we continue to reiterate that the near term pressure on retail revenue is transitory and once construction activity is completed will provide a platform for Retail revenue growth potentially materially above current expectations (Macq and the market). 17 February

8 The current construction activity will result in a major upgrade of the international departure retail hub, both in terms of fitout and scale. AIA currently is tendering for ~45 new units and has generated very strong interest for international retailers and is getting strong rents. AIA is well positioned to be able to select globally recognised retailers (along with leading local brands) with compelling store concepts that will sell products representing the best of NZ and the world. Transformation of the duty free and tax free shopping experience will start to be visible from mid (providing increased MAG rental). We expect some solid growth in 2H18 and for a step change in retail revenue from FY19. Fig 10 AIA Retail revenue and PSR forecast $m $ $20.00 $15.00 $10.00 $ FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 $- Retail revenue Retail revenue per int'l pax (PSR) Source: Company data: Macquarie Research, Feb 2017 While Retail revenue is directly leveraged to International Pax growth, Car Park revenue growth is underpinned by Domestic Pax growth. Domestic Pax growth remained strong over 1H17 (as illustrated in the chart below) and is expected to remain strong in 2H17. Fig 11 AIA Domestic Pax growth by quarter % growth 16.0% 14.0% 13.4% 13.4% 12.5% 12.0% 10.9% 10.0% 8.1% 8.0% 5.6% 6.0% 5.0% 4.0% 3.5% 2.6% 4.3% 2.0% 0.1% 0.0% -2.0% -0.8% 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 AIA Domestic Pax growth Source: Macquarie Research, Feb 2017 Rental revenue is also expected to grow in 2H17 underpinned by rental growth and from the accelerated investment in development made over recent years. AIA upgraded investment property capex guidance for FY17 to reflect projects identified in the 1H17 period. 17 February

9 Capex AIA had previously provided FY17 capex guidance of $352m, with aeronautical capex expected to be $232m, above the $120m spent in FY16. Its guidance was lifted to $ m, with the bulk of the upgrade pertaining to Investment Property capex, but with AIA highlighting its commitment to future aeronautical capex and the number of capex projects that it has either underway or ahead of it. We believe that this current aeronautical capex guidance of ~$240m is a good indicator of the annual aeronautical capex level likely to be incorporated into the next price reset period considerations. An Australasian perspective AIA a profitable airport AIA is NZ s largest international airport, and the third-largest (measured by international passenger movements) in Australasia. Fig 12 Australasian airport summary (Annual passengers, 000s) International Domestic Total Brisbane Christchurch Melbourne Perth Sydney Auckland Source: ACI Statistics; Macquarie Research, Nov 2016 AIA lags Sydney in terms of international passenger movements and ranks virtually equal with Melbourne. Fig 13 Australian international airport ranked by international passenger movements Fig 14 Australasian airports total pax movements (000's) 's International Total Source: ACI Statistics; Macquarie Research, Nov 2016 Source: ACI Statistics, Macquarie Research, Nov 2016 AIA passenger breakdown AIA is by far the highest yielding Australasian airport (international pax movements as a percentage of total pax movements). 17 February

10 Fig 15 Comparison of International vs. Domestic passengers Percentage 120.0% 100.0% 80.0% 60.0% 77.0% 75.6% 74.0% 70.0% 65.7% 47.0% 40.0% 20.0% 0.0% 23.0% 24.4% 26.0% 30.0% 34.3% 53.0% Brisbane Christchurch Melbourne Perth Sydney Auckland International Domestic Source: Macquarie Research, November 2016 AIA is a high yielding airport with a high percentage (53%) of its total passenger volumes being international passengers. Given the relative strength of the forecast International passenger growth, we would expect this ratio to continue to skew in favour of International. Regulation With the Commerce Commission Input methodology review now completed, AIA has the regulatory framework against which its next 5-year aeronautical price reset will be reviewed. The outcome appears to provide AIA with the ability to target an ROI of above the mid-point WACC (with suitable justification) and the opportunity to introduce a special levy on assets (land held for future use) that sit outside the RAB. The key points from the final decision include: A new forward looking profitability measure using IRR over a 5-year period reflecting each airports bespoke pricing approaches. The CommComm s approach to assessing airport profitability indicates that it will take into account different contextual; factors when assessing airport performance, including airport specific returns, investment volumes and risk profile. Flexibility in approach to disclosing revenue on future use assets. We expect AIA to release its aeronautical pricing to the market sometime in May along with a 10 year capex plan. Based on our current forecasts, AIA would generate the following ROI for the FY18-22 period assuming status quo pricing (i.e. a 0% price increase in aeronautical pricing and no special levy). 17 February

11 Fig 16 Forecast status quo ROI FY e 2018e 2019e 2020e 2021e 2022e Assumptions Int'l pax growth 8.1% 11.0% 6.0% 5.0% 5.0% 5.0% 5.0% Domestic Pax growth 9.8% 8.8% 4.0% 3.0% 3.0% 3.0% 3.0% MCTOW growth 8.3% 11.4% 4.1% 3.3% 3.3% 3.3% 3.3% Aeronautical pricing growth 1.50% 0% 0% 0% 0% 0% Aeronautical Revenue ($m) International Domestic Transit Special Levy Total PSC Revenue and Levy Landing charge revenue Other Total Aeronautical revenue and levy ($m) e 2018e 2019e 2020e 2021e 2022e Aeronautical revenue (including levy) Gains and losses on sale -4 of assets Operating costs % revenue Depreciation % RAB Indexed revaluation 5 Allowance for long term 0 credit spread Profit before tax Tax (@29.5%) Regulatory Profit less Notional tax interest shield less: Indexed revaluation 5 Regulatory profit for ROI RAB ROI 8.9% 8.8% 7.8% 7.0% 6.4% 5.9% 5.6% Source: Company data, Macquarie Research, February 2017 AIA will consider: The target ROI. The extent to which it desires to smooth the ROI across the period (i.e. avoid over earning in the earlier years and under earning in the letter years), offset by the desire to continue an enviable track record of delivering NPAT, EPS and DPS growth. The quantum of a special levy. While the structure and quantum of AIA s next price reset is unknown, we believe that the regulatory framework provides scope for AIA to deliver an outcome above current consensus expectation. 17 February

12 Fig 17 AIA FY17 forecast summary ($ m) 1H16 2H16 FY16 1H17 2H17e FY17e 1H/1H 2H/2H FY/FY Revenue Aeronautical Airfield % 11.1% 14.4% Passenger Service % 11.2% 12.5% Charge Total Aeronautical % 11.2% 13.3% Non-Aeronautical Retail % 5.1% 3.9% Rental % 15.0% 14.7% Car parks % 12.2% 11.7% Utilities and general % 5.0% 5.2% Associated Companies/other Total Non % 8.6% 7.9% Aeronautical Total Revenue % 9.8% 10.3% Costs % 5.3% 8.4% Operating EBITDA % 11.4% 10.9% margin 76.1% 73.9% 75.0% 75.9% 75.0% 75.4% -0.3% 1.4% 0.6% Property revaluations % % -80.0% Other Costs % % % Share of profit of % % % Assoc Group EBITDA % -3.0% 4.9% Depreciation % 6.5% 4.4% Net interest % 3.5% -3.5% Profit before Tax % -6.3% 7.0% Taxation % 33.7% 28.2% Other NPAT % -16.1% 0.9% NPAT adjusted % 13.3% 15.9% EPS (reported) -cps % -16.1% 0.9% EPS (adjusted) -cps % 13.3% 15.9% DPS (cps) % 14.8% 16.2% Payout ratio 97.2% 98.7% 97.9% 96.4% 100.0% 98.2% Source: Company data, Macquarie Research, February 2017 AIA Valuation Our differentiated views on passenger volume growth and on regulatory outcome flow into our valuation and recommendation. Given the strength of the forecast passenger growth (especially international), and the leverage to that growth through non-aeronautical revenue streams (particularly through Retail and Rental), and the improved regulatory outlook, we have retained our price target of $7.70, supported by our roll-forward DCF valuation ($7.70) and equating to a forecast FY18 EV multiple of 21.4x. Fig 18 AIA valuation metrics FY17e FY18e At current share price $ 6.90 $ 6.90 EBITDA EV ($m) 10,049 10,049 EV/EBITDA (x) Implied multiple at target price ($7.70) EBITDA EV ($m) 11,001 11,001 EV/EBITDA (x) Source: Macquarie Research, February 2017 Valuation remains a vexing topic for AIA, trading on ritzy valuation multiples, but historically outperforming the broader market. This valuation challenge is not unique to AIA, but is a feature of both the airport listed sector and infrastructure stocks in general. 17 February

13 We believe however that AIA s superior near/medium term passenger growth outlook and the potential for a more favourable price reset outcome in PS3 than expected by the market will underpin consensus upgrades and support an Outperform recommendation. We expect AIA to outperform current consensus adjusted NPAT forecasts for FY17 and FY18 underpinned by stronger international passenger growth, and from FY18 onward due to our view on the likely aeronautical price reset outcome and then retail revenue upside from the international terminal redevelopment. With both earnings momentum and news flow momentum expect to be positive, we expect a further period of Outperformance over the next 12 months. Since Feb 2016, the AIA forward EV/EBITDA multiple has increased from 19.2x to 19.7x (having peaked at 22.4x in September 2016), and we would expect a combination of strong passenger growth and an acceptable regulatory outcome to be catalysts for further re-rating over the next 12 months. As the closest listed peer to AIA, SYD s valuation and share price performance are used as benchmarks to AIA, and the relative performances of both companies has been highly correlated. Fig 19 AIA vs SYD EV/EVITDA trend EV/EBITDA (x) AIA SYD Source: FactSet, Feb 2017 The following chart highlights the close correlation. Fig 20 AIA EV/EBITDA relative to SYD relative EV/EBITDA Relative EV/EBITDA vs SYD 2 yr average Source: FactSet, Feb February

14 PROFIT & LOSS FY15 FY16 FY17e FY18e BALANCE SHEET FY15 FY16 FY17e FY18e Revenue Cash Operating Costs Other Current Assets Operating EBITDA Fixed Assets Property revaluations Investments Other Costs Other Share of profit of Assoc Total Assets Group EBITDA Depreciation Total Debt EBIT Other Liabilities Net interest Total Liabilities Profit before Tax Shareholders Equity Taxation Other Total Capital employed NPAT CAPITAL STRUCTURE FY15 FY16 FY17e FY18e NPAT adjusted Net debt Net debt/ operating EBITDA PER SHARE FY15 FY16 FY17e FY18e Net debt/total equity 55% 47% 55% 60% No Shares Net debt/(net debt + equity) 36% 32% 35% 38% EPS (reported) net debt/ev 17% 18% 20% 22% EPS (adjusted) EBIT/net interest DPS Dividend cover BV/share $ 2.56 $ 3.26 $ 3.18 $ 3.18 Dividend payout ratio 100% 100% 100% 100% ROA 7.4% 7.1% 7.1% VALUATION FY15 FY16 FY17e FY18e ROE 6.1% 6.4% 7.0% Share price $ 6.80 CASH FLOW FY15 FY16 FY17e FY18e PE (adjusted) EBDITA Dividend Yield 2.1% 2.6% 3.0% 3.3% Change in WC Equity FCF yield 3.0% 3.6% 3.7% Net interest paid P/BV Tax paid Market Capitalisation 8,095 8,095 8,095 8,095 Other Enterprise Value Net Cash in Op Activities EV/EBITDA Proceeds from sale GROWTH FY15 FY16 FY17e FY18e Capex Revenue 12.9% 10.3% 6.9% Other EBITDA 13.3% 10.9% 7.6% Net cash from investing EPS (adjusted) 20.6% 15.9% 7.1% Net DPS 19.9% 16.2% 9.0% Dividend paid Debt movements Price Target Net cash from Financing TARGET EV/EBITDA multiple $ 7.10 $ 7.70 Net change in net debt Source: Company data, Macquarie Research, February February

15 Macquarie Quant View The quant model currently holds a neutral view on Auckland International Airport. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 238/451 Global rank in Transportation % of BUY recommendations 12% (1/8) Number of Price Target downgrades 0 Number of Price Target upgrades 1 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Transportation) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Mainfreight Air New Zealand Freightways Mainfreight Air New Zealand Freightways Auckland International Ai 0.1 Auckland International Ai Sydney Airport -0.3 Sydney Airport Infratil -0.7 Infratil % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Mainfreight Air New Zealand Freightways Auckland International Ai Mainfreight Air New Zealand Freightways Auckland International Ai Sydney Airport 0.1 Sydney Airport Infratil -0.4 Infratil % -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Relative Turnover Earnings Certainty Non-current Assets Inc. Working Capital Inc. Volatility 250 Day Momentum 12 Month Momentum 3 Month Momentum 6 Month -27% -28% -30% Negatives Positives -12% -40% -20% 0% 20% 40% 22% 22% 22% 21% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/451) Percentile relative to market(/422) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 17 February

16 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) AIA NZ vs NZSE50, & rec history (all figures in NZD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology AIA NZ: NZ$7.60 based on a EV/EBITDA methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 22-Aug-2016 AIA NZ Outperform NZ$ May-2016 AIA NZ Outperform NZ$ Feb-2016 AIA NZ Outperform NZ$ Jan-2016 AIA NZ Outperform NZ$ Jul-2015 AIA NZ Outperform NZ$ Jun-2015 AIA NZ Outperform NZ$ Feb-2015 AIA NZ Outperform NZ$ Sep-2014 AIA NZ Outperform NZ$ Aug-2014 AIA NZ Outperform NZ$ Mar-2014 AIA NZ Neutral NZ$ Feb-2014 AIA NZ Neutral NZ$4.17 Target price risk disclosures: AIA NZ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views 17 February

17 This publication was disseminated on 17 February 2017 at 06:35 UTC. Macquarie Wealth Management expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 17 February