NEW ZEALAND AIA NZ Price (at 04:00, 27 Nov 2013 GMT) Neutral NZ$3.42 Valuation NZ$ 3.37 - DCF (WACC 8.0%, beta 0.9, ERP 7.0%, RFR 4.3%, TGR 3.0%) 12-month target NZ$ 3.37 12-month TSR % +2.6 Volatility Index Low GICS sector Transportation Market cap NZ$m 4,517 30-day avg turnover NZ$m 4.8 Number shares on issue m 1,323 Investment fundamentals Year end 30 Jun 2013A 2014E 2015E 2016E Revenue m 448.5 472.4 497.4 528.7 EBIT m 278.7 299.2 321.0 349.4 Reported profit m 178.0 169.9 183.8 203.3 Adjusted profit m 153.7 169.9 183.8 203.3 Gross cashflow m 215.8 234.6 249.5 270.0 CFPS 16.3 17.7 18.9 20.4 CFPS growth % 6.0 8.7 6.4 8.2 PGCFPS x 20.9 19.3 18.1 16.7 PGCFPS rel x 2.32 2.16 2.18 2.14 EPS adj 11.6 12.8 13.9 15.4 EPS adj growth % 10.6 10.5 8.1 10.6 PER adj x 29.4 26.6 24.6 22.2 PER rel x 1.64 1.59 1.55 1.51 Total DPS 12.0 12.8 13.9 15.4 Total div yield % 3.5 3.8 4.1 4.5 Franking 1 % 100 100 100 100 ROA % 7.1 7.5 8.0 8.6 ROE % 6.2 6.8 7.4 8.1 EV/EBITDA x 16.9 15.9 14.9 13.9 Net debt/equity % 42.9 45.7 46.7 47.7 P/BV x 1.8 1.8 1.8 1.8 1 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, November 2013 (all figures in NZD unless noted) 28 November 2013 Macquarie Securities (NZ) Limited Auckland International Airport Will shareholders sing a paean? Event AIA has announced its intention to seek shareholder and court approval to return $454m of capital to its shareholders by way of a scheme of arrangement. Impact AIA proposes a capital return to shareholders by way of a 1:10 share cancellation and a payment of $3.43 for each share cancelled (the share price on 27 November) equating to a total return of $454m. The final timing of the capital return is expected to be mid April and AIA does not intend to pay an interim FY14 dividend. The capital return will be debt funded with interim short-term funding to be replaced by longer duration debt once approvals are received. Tax implications: The IRD is satisfied that a capital return, in the manner proposed, is not in lieu of the payment of a dividend. Approximately $181.6m ($1.37 per share) of the return will fully utilise AIA's available subscribed capital and will be treated as a return of capital and not a dividend. Approximately $272.4m ($2.06 per share), being the amount in excess of AIA's available subscribed capital, will be deemed a dividend for NZ income tax purposes fully imputed at the 28% tax rate. Following the proposed capital return AIA's forecast debt will stand at circa $1,596m, an increase of $454m from FY13 s debt position of $1,142m. The EV remains at $5,679m with the Debt/EV ratio increasing from 20.1% to 28.1%. Earnings and target price revision No change. Forecasts will be formally changed once legal and shareholder approval is given. Price catalyst 12-month price target: NZ$3.37 based on a DCF methodology. Catalyst: Shareholder vote and 1H14 result Action and recommendation The announcement of the capital return, while unexpected, was not earth shattering and is relatively value neutral. It does however signal AIA s confidence in the medium-term operating and regulatory outlook, a desire to scrutinise and review all aspects of the AIA business and a culture of continuous improvement. While we don t expect shareholders to beat their chests and sing a victory song (a paean) at the news, we expect them to understand the signal. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
Analysis AIA has announced its intention to seek shareholder and court approval to return $454m of capital to its shareholders by way of a scheme of arrangement. The proposed capital return is by way of a 1:10 share cancellation and a payment of $3.43 for each share cancelled. This equates to a total return of $454m. Following the proposed capital return, AIA expects to retain its Standard & Poor s rating of A- (with outlook perhaps downgraded slightly from positive to stable). AIA will NOT pay an interim FY14 dividend, and will renew its dividend payments in October, consistent with its existing dividend policy (for the 2H14 period). The capital return will be debt funded, with AIA moving immediately to put short-term funding in place, before replacing with long-term (7 years) facilities once shareholder approval is received. AIA s investment in the business coupled with strong execution has significantly improved corporate profitability and led to strong share price performance. This has seen AIA s debt to EV ratio decline from 35.7% in FY09 to 22.8% in FY13 and 20.1% currently. Fig 1 AIA Debt Summary (FY09-FY13) FY09 FY10 FY11 FY12 FY13 Market capitalisation ($m) 1972 2450 2935 3240 3925 Debt ($m) 1077 1092 1085 1109 1142 Enterprise value ($m) 3049 3542 4020 4349 5067 Debt to Enterprise Value 35.3% 30.8% 27.0% 25.5% 22.5% Debt/Debt + Equity 36.9% 36.3% 30.5% 31.0% 31.4% Standard & Poor s rating A- /stable/a-2 A-/ stable/a-2 A- /stable/a-2 A- /stable/a-2 A-/positive/A-2 FFO (Funds from 15.0% 15.0% 17.1% 17.9% 18.4% Operations)/Debt FFO Interest cover ratio 3.1 3.3 3.6 3.9 4.2 Debt/EBITDA 3.9 4 3.6 3.5 3.5 Source: Company data, Macquarie Research, November 2013 Structure of capital return The proposed capital return will be by way of a Court approved arrangement. AIA will apply to the High Court of NZ to put the Arrangement to shareholders. If approved, shareholder approval by special resolution (75% majority of voting shareholders) is required. Fig 2 Proposed Timetable Event Date Announcement of capital return 28/11/2103 Initial Application to High Court 29/11/2013 Initial court orders expected Mid December 2013 Send out notice of meeting to shareholders Late January 2014 Shareholder meeting Mid February 2014 File affidavits and memo in support of originating court application Mid February 2014 Final Order made by High Court Mid March 2014 Record date for capital return entitlement Early April 2014 Payment date for capital return Mid April 2014 The proposed capital return is by way of a 1:10 share cancellation and a payment of $3.43 for each share cancelled. This equates to a total return of $454m. 28 November 2013 2
Retain credit rating AIA believes that post the capital return of $454m, it will be able to retain its Standard & Poor s A- rating, with a stable outlook. In establishing the amount of the capital return, AIA considered: The newly released Standard & Poor s rating criteria, AIA s future capital needs, Financial flexibility, liquidity position and treasury policies to mitigate adverse business events. The retention of the A- credit rating is important as it enhances AIA s long-term funding flexibility. Funding and Future dividends The proposed capital return will be debt funded. AIA will immediately seek short-term bank facilities to provide funding certainty to the capital return. Once all approvals are received, AIA will refinance with long-term funding consistent with existing treasury policies. Final refinancing will be targeting an average debt maturity greater than 7 years, with an assumed interest rate of circa 6%. AIA will not pay an interim FY14 dividend but will reinstate the payment of dividends in 2H14 consistent with the existing policy. This has the effect of reducing the incremental increase in debt by the amount of the forecast 1H14 dividend ($84m). Fig 3 AIA FY15 Debt Forecast FY15e FY15e (post capital return) Notional Debt($m) 1237 1237 less: 1H14 dividend ($m) -82.7 plus: capital return ($m) 454 Notional Debt $m) 1608.7 Increase in Debt ($m) 371.3 Assumed interest rate 6% Increase in Net Interest ($m) 22.3 Based on our forecasts, the change in FY15 gearing is shown below. Fig 4 AIA Forecast FY15 Gearing FY15e FY15e (post capital return) Notional Debt ($m) 1237 1237 less: 1H14 dividend ($m) -82.7 plus: capital return ($m) 454 Notional Debt $m) 1237 1608.7 Increase in Debt ($m) 371.3 Assumed interest rate 6% Increase in Net Interest ($m) 22.3 Assumed share price $ 3.43 $ 3.43 Number shares 1322.8 1190.5 Market capitalisation $ 4,537.11 $ 4,083.40 Enterprise value $ 5,774.46 $ 5,692.08 Debt to EV 21.4% 28.3% Debt/Debt + Equity 33.1% 44% Using these assumptions, we estimate that the proposed capital return is circa 2% EPS accretive in FY15. 28 November 2013 3
Fig 5 AIA FY15 Proforma FY15e adjustments FY15e post capital return Group EBITDA 386.8 0 386.8 Depreciation 65.8 0 65.8 EBIT 321.0 0 321.0 Net interest 70.4 22.3 92.7 Profit before Tax 250.6 228.3 Taxation 66.8 60.5 NPAT 183.8 167.8 NPAT adjusted 183.8 167.8 Number shares 1322.772 1190.5 EPS (cps) 13.9 14.1 DPS (cps) 13.9 14.1 Notional Debt 1237 1237 less 1H14 dividend -82.7 plus capital return 454 Change in Debt 371.3 Total debt 1608 Assumed interest rate 6% Increase in net interest 22.3 Taxation implications Commensurate with the desire to return capital as efficiently as possible, AIA has looked to maximise the tax efficiency of the distribution. Firstly it has engaged with the IRD, which has been satisfied that the capital distribution in the manner proposed is not in lieu of the payment of a dividend, confirming the capital status of the return. Approximately $181.6m of the returned capital (or $1.37 of the cancelled share total of $3.43) will fully utilise AIA s available subscribed capital and will therefore be treated as a return of capital and not a dividend. The remainder, (approximately $272.4m, (or $2.06 per share) will be deemed a dividend for NZ income tax purposes. AIA will impute fully at the 28% tax rate. Fig 6 Tax Implications for Capital Return Amount ($m) Per share % of total Capital return 454 $3.43 Amount treated as capital return 181.6 $ 1.37 39.9% Amount treated as a dividend 272.4 $ 2.06 60.1% 28 November 2013 4
Impact and example The following table summarises the key impact on the enterprise value of AIA following the capital return. Fig 7 Impact of Capital Return on AIA Enterprise Value ($m) Before After AIA shares on issue (m) 1322.8 1190.5 Share price 27 November 2013 $ 3.43 Assumed share price post capital return $ 3.43 Market Capitalisation 4537.1 4083.4 Notional total debt as at 30 June 2013 1142 1142 Capital return cash payment funded through borrowings 454 Notional estimate of total debt after capital return 1142 1596 Enterprise value 5679.108 5679.398 Debt to Enterprise value 20.1% 28.1% The following table provides an example of the impact of the capital return on a shareholder with 10,000 shares. Fig 8 Example of Impact on a Shareholder Before After Shares held 10000 9000 Share price 27 November 2013 3.43 Assumed share price post capital return 3.43 Value of shares 34300 30870 Capital return cash payment 3430 Value of shares plus capital return 34300 34300 Percentage of ownership 0.000756% 0.000756% Why now? The key question: why now? There does not appear to be any specific reason for AIA to initiate capital management initiatives at the current time. The company has been examining all facets of its business over the past few years and has (in previous analyst briefings) stated that it was continually reviewing its capital management initiatives. The completion of two iterations of the company s master plans has obviously provided greater transparency into the company s future capital requirements in the medium term, and the successful conclusion of the review into the last pricing review clearly has given AIA management and the Board the confidence to embark on this strategy. The decision was not initiated by the Council shareholders and we believe clearly highlights AIA s confidence in the current regulatory environment as the capital return pushes AIA s gearing even higher above the CommComm target gearing of 17% used in its review on NZ Airports. We estimate that the transaction is very modestly (circa 2%) EPS positive in year 1 (FY15) but more importantly it is another sign that AIA continues to strive to maximise the return to all stakeholders from improvement in all aspects of its business. 28 November 2013 5
$m 1H12 2H12 1H13 2H13 FY12 FY13 FY14E FY15e Revenue m 215.8 211.0 223.6 224.9 426.8 448.5 472.4 497.4 Costs m 54.5 53.0 57.2 60.4 107.5 117.6 120.0 122.6 EBITDA m 161.3 158.0 166.4 164.5 319.3 330.8 352.4 374.8 Depreciaton/Amortisation m 31.8 32.7 31.4 30.6 64.5 62.1 64.6 65.8 Operating EBIT m 129.6 125.2 134.9 133.8 254.8 268.8 287.7 309.0 Property revaluations 0.0 1.4 0.0 23.1 1.4 23.1 0.0 0.0 Other Costs -2.1-0.1 1.1 0.3-2.1 1.5 0.0 0.0 Share of profit of Assoc 2.7 6.5 4.4 5.6 9.2 9.9 11.5 12.0 Reported EBIT 130.2 133.0 140.4 162.8 262.2 303.3 299.2 321.0 Net interest m 35.0 33.9 33.7 33.0 69.0 66.7 67.7 70.4 Profit before Tax m 95.2 99.1 106.7 129.8 194.3 236.6 231.5 250.6 Taxation m 26.1 25.9 29.8 28.8 52.0 58.6 61.6 66.8 Other 2.0 3.0 4.0 5.0 NPAT m 69.1 73.2 76.9 101.1 142.3 178.0 169.9 183.8 Adjusted NPAT 69.1 70.0 76.1 77.6 139.0 153.8 169.9 183.8 Ratios 1H12 2H12 1H13 2H13 FY12 FY13 FY14E FY15e Number of Shares m 1322.6 1322.6 1322.6 1322.6 1322.6 1322.8 1322.8 1322.8 EPS (adjusted) cps 5.2 5.5 5.8 7.6 10.5 11.6 12.8 13.9 DPS cps 4.4 6.1 5.8 6.3 10.5 12.0 12.8 13.9 Payout ratio % 84.3% 110.2% 98.9% 81.8% 99.9% 103.2% 100.0% 100.0% Dividend Yield % 1.3% 1.8% 1.7% 1.8% 3.1% 3.5% 3.8% 4.1% PE x 32.5 29.4 26.6 24.6 EBITDA margin x 74.7% 74.9% 74.4% 73.1% 74.8% 73.8% 74.6% 75.3% Enterprise Value m 5556.9 5556.9 5556.9 5556.9 EV/EBITDA x 17.4 16.8 15.8 14.8 Tax rate % 27.5% 26.1% 27.9% 22.2% 26.8% 24.8% 26.6% 26.7% Revenue grow th % 8.9% 5.8% 3.6% 6.6% 7.3% 5.1% 5.3% 5.3% EBITDA grow th % 6.8% 7.3% 3.1% 4.1% 7.1% 3.6% 6.5% 6.4% EBIT grow th % EPS grow th % 5.5% 107.6% 11.4% 38.0% 15.0% 10.6% -4.5% 8.1% Share price targets Target EV/EBITDA multiple x 15.8 15.8 Implied Share Price $ 3.35 $ 3.59 DCF Valuation $ 3.46 Balance Sheet 1H12 2H12 1H13 2H13 FY12 FY13 FY14E FY15e Cash $m 36.6 42.8 76.0 69.2 42.8 69.2 69.2 69.2 Receivables $m 18.4 17.7 22.2 21.7 17.7 21.7 22.8 24.0 Inventory $m 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 Other $m 6.8 8.7 7.1 8.8 8.7 8.8 11.0 14.3 Total Current Assets $m 61.8 69.3 105.3 99.7 69.3 99.7 103.0 107.5 Fixed Assets $m 3583.7 3601.6 3607.0 3656.1 3601.6 3656.1 3717.5 3741.7 Other $m 191.7 180.0 177.8 165.7 1872.8 1913.0 1974.4 1998.6 Total Assets $m 3865.1 3875.5 3906.1 3938.6 3875.5 3938.6 4010.2 4040.6 Term Debt $m 1113.3 1108.7 1151.8 1141.9 1108.7 1141.9 1210.3 1237.3 Other Liabilities $m 286.5 286.5 284.5 286.7 286.5 286.7 290.0 293.4 Total Liabilities $m 1402.7 1402.8 1440.4 1439.0 1402.8 1439.0 1510.7 1541.1 Share holders Funds $m 2462.3 2472.8 2465.7 2499.5 2472.8 2499.5 2499.5 2499.5 Net Debt $m 1076.7 1065.9 1075.8 1072.8 1065.9 1072.8 1141.2 1168.2 Leverage Ratio's 1H12 2H12 FY12 FY13 FY12 FY13 FY14E FY15e D:D+E % 31.1% 31.0% 31.0% 31.4% 31.0% 31.4% 32.6% 33.1% D:EV 19.2% 19.3% 20.5% 21.0% Net Debt:EBITDA x 6.7 6.7 6.4 6.5 3.3 3.2 3.2 3.1 Interest Cover x 3.7 3.7 4.0 4.1 3.7 4.0 4.3 4.4 EBITDA/Net Interest x 4.6 4.7 4.9 5.0 4.6 5.0 5.2 5.3 (EBITDA+Capex)/Net interest x 5.7 6.0 6.0 6.6 5.9 6.3 7.1 6.6 P:NAV x 1.83 1.83 1.83 1.81 1.83 1.81 1.81 1.81 RoA % 7.0% 7.5% 8.0% 8.0% RoE % 6.0% 6.6% 7.1% 7.1% Cashflow Analysis 1H12 2H12 FY12 FY13 FY12 FY13 FY14E FY15e EBITDA $m 161.3 158.0 166.4 164.5 319.3 330.8 352.4 374.8 - Inc. in Working Capital $m -1.1-3.5 4.5-8.1-4.5-3.7-2.1-2.2 - Net Interest Paid $m 33.3 33.2 32.6 32.0 66.6 64.6 67.7 70.4 - Tax Paid $m 38.1 21.3 34.3 23.0 59.5 57.3 61.6 66.8 - Other $m 3.3-4.4-1.8-3.0-1.1-4.8 0.0 0.0 Net Cash in Op Activities $m 94.2 102.5 93.2 114.6 196.7 207.8 225.2 239.8 + Proc. Fixed Asset Sale $m 0.101 0 0 0 0.1 0.0 0.0 0.0 - Capex $m 39.855 44.787 36.871 52.617 84.6 89.5 126.0 90.0 - Acquisitions & Inv + Other Net Cash in Investing $m -31.3-39.0-29.0-46.2-70.3-75.2-126.0-90.0 - Dividends Paid (before DRP) $m -62.2-58.2-80.7-76.1 120.3 156.8 167.6 176.8 - Other Equity Movements $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Debt Movements $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Other $m 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Cash in Financing $m -62.2-58.2-80.7-76.1-120.3-156.8-167.6-176.8 Source: Company data, Macquarie Research, November 2013 28 November 2013 6
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 First South - 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 60 100% 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 30 September 2013 AU/NZ Asia RSA USA CA EUR Outperform 50.56% 56.87% 48.78% 41.00% 61.75% 47.10% (for US coverage by MCUSA, 5.85% of stocks followed are investment banking clients) Neutral 38.95% 25.18% 42.68% 54.40% 34.43% 30.89% (for US coverage by MCUSA, 3.90% of stocks followed are investment banking clients) Underperform 10.49% 17.94% 8.54% 4.60% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("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. 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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 www.macquarie.com/disclosures. 28 November 2013 7