New ASX share added to our best ideas list
This wide moat share is trading at a 17% discount to our fair value.
Mentioned: Auckland International Airport Ltd (AIA)
We add wide-moat Auckland International Airport AIA to our Best Ideas list for June. A massive major projects’ capital expenditure bill looms for Auckland Airport. Aeronautical charges are also set to drop from fiscal 2026, given a regulatory decision.
However, we believe the scale of the capital investment plan is reasonable, supported by the airport’s balance sheet. The plan is in line with other global airports and has appropriate cost rigor. We expect Auckland International to generate a reasonable return on capital investment, given that proposed airport charges are reasonable relative to other airports, globally and domestically.
We believe the market is unjustifiably pricing either lower returns on regulated expenditures or weakness in unregulated businesses, such as retail and car parks. This presents an attractive entry point into a rare, high-quality, essential infrastructure asset.
The shares are currently trading at a 17% discount to our $8.45 fair value and have been awarded a Wide Economic Moat Rating.
Business strategy and outlook
As the primary gateway to New Zealand, Auckland Airport is set to benefit from rising air travel to the island nation. Auckland Airport is the largest airport in New Zealand, and Auckland is by far New Zealand’s most populous city. No other airport in the country is likely to outdo Auckland as an international hub. We expect the airport to capture good medium-term growth from further airline capacity expansion to and from New Zealand. We forecast total passengers handled by Auckland to grow to more than 25% above pre-covid levels over the next decade.
Auckland Airport has carved a wide economic moat, thanks to its near-monopoly position in a stable regulatory environment. We don’t think a second major airport is likely to emerge anytime soon, given Auckland Airport’s expansion potential to accommodate continued growth in passenger numbers, protecting its position for decades to come.
Aeronautical and nonaeronautical operations each contribute about half of revenue, with profitability typically higher in the nonaeronautical business. The aeronautical business is regulated. The regulator allows Auckland Airport to earn a suitable return on its “regulated asset base”, which includes prior capital expenditures and some revaluations. Landing fees and per passenger charges are set with airlines every five years, and independently reviewed to ensure Auckland Airport isn’t abusing its monopolistic power. But this structure presents near-term earnings risk—passenger fees are set up to five years ahead, lower-than-expected traffic could weigh on returns on invested capital. Nevertheless, capital investments are typically structured with some flexibility should lower traffic eventuate, reducing the risk of extended overcapacity.
The nonaeronautical business is unregulated, but still principally driven by passenger traffic. Retail operations are the biggest part of the nonaeronautical business—notably duty-free, which relies heavily on international passengers, who far outspend domestic travelers. The property business is about half the size of retail, but has grown faster, driven by new developments and rent reviews. Car parking rounds out the bulk of unregulated earnings.
AIA bulls say
- Auckland Airport provides exposure to rising incomes in the region, and population growth in New Zealand.
- Auckland Airport has a wide range of attractive development projects on the horizon, with undeveloped land providing optionality.
- Auckland Airport should enjoy a meaningful increase in regulated passenger fees, to compensate the firm for its likely sizable capital spending over the next decade.
AIA bears say
- A slowdown in the global economy, a deterioration in international relations, or climate challenges could affect tourist inflow to New Zealand, limiting passenger fees and retail spending at the airport.
- A more onerous regulatory environment could curtail Auckland Airport’s ability to generate economic profit from its aeronautical business.
- The firm’s bottom line and expansion plans are sensitive to interest rates, which have increased substantially from their all-time lows during the pandemic.
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Terms used in this article
Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.
Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.
Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.
Uncertainty Rating: The Morningstar Uncertainty Rating assesses business risk and our analysts’ ability to gauge Fair Value. Mark LaMonica discussed business risk in more depth in this article.