Sell Sell Sell: KPG, AIA and more

9 June 2023

Kiwi Property Group (KPG.NZX)

Kiwi Property Group (KPG) revealed the conditional sale of the Aurora Centre for $143m, representing a -13.5% discount to its book value at its March 2023 valuation and presents a 6.65% cap rate. In line with market expectations that property valuations are under pressure from the higher interest rate environment.  

Asset recycling helps KPG strengthen its balance sheet and lower its debt levels to to fund its core assets. We see the sale having a neutral impact on net earnings and remain BUY rated as value REIT on the NZX.

Auckland International Airport (AIA.NZX)

Auckland International Airport (AIA) has been in the news frequently, Auckland Council discussing the possibility of selling about half of its 18.08% ownership stake. We think it makes no sense to sell the ‘family silver’…  

AIA revealed new aeronautical pricing for 2023 to 2027 (PSE4) to support major investments totaling $3.9 billion over the next 5 to 6 years, with the decision during covid to pause and cancel expansion which was a costly expense putting them behind schedule. This also opens the chance for another capital raise, which Auckland Council weren’t able to participate in during Covid. We remain Sell rated on AIA due to its full valuation in a high interest rate environment, high level of capital expenditure required.


There is strong reaction from Qantas and Air NZ opposing the steep price hikes, which will be passed onto passengers and could impact travel demand and impact Jetstar’s operations to Auckland.

Air New Zealand (AIR.NZX)
Separately Air NZ upgraded its full-year operating earnings to be no less than $580m from the previous guidance of $510m to $560m. The national airline told the market that demand was stronger than normal at this time of the year and jet fuel prices have fallen further to improve margins.
Air NZ have done well to take advantage of the pick up in travel demand and surprised airlines around the world are getting away with what we see as unattainably elevated air-fares.
We remain Neutral rated on Air NZ as we expect to see some normalisation in airfares would reduce margins and supply from competing airlines pick up.


US

Squinting at jobless claims data which is starting to look a little elevated – a very soft sign that rate hikes are working. Taking it with a pinch of salt: it’s a week of data, from a holiday week, and claims are still well below recession levels – it’s nothing to get excited about. We need to see more data before we call any “doom and gloom”. Noting also that the S&P 500 has crossed into bull market territory on the back of gains fuelled by NVDA, MSFT, etc – when does the ‘greater fool’ buy in and the big boys sell out? We’re upgrading Dominos Pizza (DPZ) as the stock has meaningfully derated from trading at ~30x fwd earnings to 20x earnings – the stock’s fundamentals remain in tact – last quarter EPS grew +17.2% to $2.93. Gross margin increased 900bps and net income increased 200 bps – we think this is impressive given the tough environment. It’s long been a business of our “wishlist” but has always felt expensive — it now sits meaningfully cheaper than that other “gold standard”, McDonald’s, which trades at ~24x earnings. We like the company’s low input costs and vertically integrated model, as well as the fact that it is nearly 100% franchised. Borrowing the following graph from Bill Ackman’s 2022 presentation – note that DPZ trades at $299 as of writing, well bellow any of the points indicated in Ackman’s position and graph.

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