Weekly Report
Here’s your weekly update of news, analysis and research. The full reports can be read on the stock pages.
There have been a number of capital raise announcements lately, and we expect this trend to continue given global economic uncertainty. We provide our views on shareholder rights issues for AIA, NXT, and KMD below.
AUCKLAND AIRPORT (AIA:NZ / AIA:AX) BUY (High-Risk): Preparing for the Worst
Shares in AIA were higher after exiting their trading halt as they are raising $1.2 billion to strengthen the balance sheet, which prepares them for a worst-case scenario of almost two-years of virtually no revenue. We encourage existing shareholders to take part in the offer, with new shares offered at $4.66 priced at an attractive valuation, and place the business in a more robust position.
The base case is more upbeat, taking into account current lock-down measures and potential arrival of vaccine in 12 months, we anticipate local domestic passenger numbers could return to near-normal levels in circa 6 months, while international passenger routes start to open up in 12 months. Trans-Tasman routes are likely to open earlier, depending on covid-19 risks, with countries assessed on a case-by-case basis. AIA are implementing plenty of cost cutting, and a low level of anticipated cash burn ($10m a month operating expenses). We are now comfortable with a BUY rating based on AIA’s current valuation, robust balance sheet, and cost cutting initiatives to mitigate near-term cash burn while providing the flexibility to ramp up capital expenditure when required.
We continue to rate AIA as an important infrastructure asset with long-term growth potential, and the current share price represents an attractive entry point for medium-to long-term investors. While there is still near-term downside risk, we believe AIA offers a better risk adjusted exposure to a tourism turnaround than an airline, such as Air NZ.
NEXT DC (NXT:AX) BUY: Funding Expansion
Shares in data centre operator Next DC initially surged to new all-time highs after announcing a significant $672m capital raise. We recommend existing shareholders to participate in the share placement as we continue to maintain a positive view on Next DC, with applications opening on Tuesday 14th April 2020. Unlike other companies which have recently raised capital to strengthen their balance sheet ahead of economic uncertainty, NXT have been relatively unphased by the covid-19 pandemic – benefiting from increased demand for cloud-based services as workers are urged to work from home. The capital will provide greater balance sheet flexibility allowing them to expand their growth initiatives, as well as the construction of a third data centre in Sydney, as NXT believe demand will continue in the long-term for its premium data centre services. Management provided unchanged full year guidance.
Given the quality of the company, its resilience to economic uncertainty and strong thematic tailwind, we maintain our BUY rating and encourage shareholders to participate in the capital raise. The funds will be used to accelerate and bring forward planned capacity expansion to meet ever growing demand.
KATHMANDU (KMD:NZ / KMD:AX) HOLD: Another Capital Raise
KMD shares slumped after announcing a $207m capital raise to shore up their balance sheet and provide adequate liquidity over this challenging period, as well as cancelling its dividend until trading conditions improve. New shares are issued at $0.50 each, a significant discount to KMD’s share price prior to the announcement and still below its current share price. We have been HOLD rated on KMD and while the extra cash reduces risks, we would avoid the offer. KMD has been a strong performer under normal conditions, but we are held back due to our negative view towards the retail sector with too much uncertainty.
We believe the current share price reflects a lot of negativity – but market forces are still in play to create more downside risk over the near-term. KMD is severely impacted by the enforced lockdowns due to covid-19 and the economic cost, as it is excepted unemployment will rise significantly which puts the retail sector at risk from a drop in discretionary spending. While KMD now has a better chance to weather the storm, there will be a slow road to recovery in our view (dependent on improvements in consumer sentiment and employment levels).
