EUR 850.00 For Business Accounts Only

Morningstar | Auckland Airport’s Regulator Push Back Immaterial to Overall Earnings; Shares Fairly Valued

We maintain our NZD 7.40 (AUD 6.90) per share fair value estimate for wide-moat Auckland Airport, despite continued pushback from its regulator, New Zealand’s Commerce Commission, or ComCom, on the airport’s proposed per-passenger fee pricing. As originally signalled in its April 2018 draft report, the ComCom continues to opine Auckland Airport’s proposed return on aeronautical assets in the fiscal 2018 through 2022 period is unjustifiably high. Auckland has targeted a return of 7.06%, slightly higher than the ComCom’s 6.41% midpoint rate estimated for airports in the country, with the premium arguably justified by the company’s substantial planned capital spending program over the next five years. Following additional evidence presented by Auckland after the draft ruling, the ComCom in its final report has recognised an appropriate target return on the airport’s assets might admittedly be above the 6.41% midpoint given the higher risk associated with these investments, but believes the magnitude of such a higher rate is smaller than the spread identified by Auckland’s management.

We expect Auckland could respond with lower pricing, but see little impact to our fair value estimate. While the ComCom estimates that the return premium would garner an additional NZD 37 million aftertax over the five-year pricing period, the commission’s opinion that some additional return is justified means not all of this amount should be considered “excess.” As such, although we expect Auckland Airport will slightly lower its target rate of return, we estimate the impact will prove largely immaterial to our cash flow projections. For instance, assuming an impact of half that estimated by the ComCom, or NZD 18.5 million of NPAT in the five years through fiscal 2022, amounts to an immaterial 1% of total forecast earnings. And importantly, the ComCom’s decision doesn’t impact Auckland’s high-margin nonregulated earnings streams, supporting our wide-moat rating for the firm.

Moreover, we’re encouraged the ComCom’s decision doesn’t seem likely to impact Auckland’s longer-term opportunities. The airport’s sizable capital investments will leave it with a much larger regulated asset base starting in fiscal 2023, which we expect will justify a substantial step-up in passenger charges at that time. In its report, the ComCom noted “Auckland Airport’s capital expenditure forecasts do not raise concerns that it would be expected to extract excessive profits,” and that the capital expenditure program doesn’t suggest planned under- or overinvestment. We think these opinions suggest Auckland should be able to capture a reasonable rate of return in its next five-year pricing plan, reinforcing our projections past the next five years.