Friday, July 16, 2010

Queenstown Airport: AIA purchase good Long-Term but to cost shareholders Short-Term

I wasn't going to comment on the purchase by Auckland International Airport Ltd [AIA.NZ] of nearly 25% of Queenstown International Airport last week until I read about the opposition to the purchase by Queenstown big noters this morning and it put it back on the raydar again.

Unlike the dubious merits of buying run down Australian Airport assets earlier this year, I see the Queenstown purchase as providing some long term benefit to AIA shareholders.

While I see little reason that there will be significant extra visitors to Auckland Airport as a result of the purchase, as AIA management do, I do see good growth in visitor numbers direct to Queenstown (why fly to Auckland to go to Queenstown?).

Direct flights to Queenstown will propel growth of that airport, in percentage growth terms, higher than that of AIA and that alone is a good reason to make the buy and increase their stake further to 35% as the purchase agreement allows.

The only negative part to this is the price paid. Does it add value to AIA shareholders by giving us a return after financing costs or does that return come for us on a longer term basis when that growth is achieved?

If you look at the latest results posted for Queenstown Airport, in 2009 revenue was $11.3 million, up 5.2%, with a profit of $1.65 million, up 42.3% on 2008. AIA's cut of that is $410,000.00. At a purchase price of $27.7 million, with financing costs of a modest 5% (the actual will be higher) the cost to borrow the money is $1.38 million, leaving AIA shareholders in the hole approximately $970,000.00 per annum.

It seems modus operandi for AIA to pay over market price for assets but at least this is a quality asset with good long term benefits for shareholders.

Disc I own AIA shares in the Share Investor Portfolio

Auckland International Airport @ Share Investor

Long Term View: Auckland International Airport

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