The outlook for New Zealand remains positive and the AIM Global High Conviction fund has three investments in New Zealand that all have leverage to arguably NZ’s greatest strength (excluding Rugby), tourism.
I have a real soft spot for New Zealand. I must have been “over the ditch” dozens of times, mostly to watch the Wallabies lose to the All Blacks. It is a country of great natural beauty with an entrepreneurial and ambitious drive (no capital gains tax helps that). Quite frankly, this country of 4.5 million people bats well above its weight.
For investors, one key attraction of New Zealand is steady, business friendly, pro-growth political leadership under Prime Minister John Key. While Key has led NZ I think Australia has had four Prime Ministers. It is one reason the NZ50 has outperformed the ASX200: low political risk.
The second reason is the steady hand of the Reserve Bank of New Zealand under Governor Graeme Wheeler. In a word of ZIRP (zero interest rate policy) and negative bond yields, the RBNZ still has 2.25% of cash rate bullets left to fire. Like the RBA, this is an enviable position in central banking right now. AIM forecasts the RBNZ to lower the overnight cash rate to 2.00% in August.
The third reason we are attracted to New Zealand is industry structure. The land of the long white cloud is really the land of the monopoly or duopoly. Most industries we analyse in New Zealand have one dominant player or two at best. This very high barrier to entry industry structure leads to higher than average ROE’s being generated by New Zealand companies.
As I mentioned above, AIM’s investments in NZ are all leveraged to the growth in inbound tourism. As you know, we are major global tourism bulls and NZ is superbly placed to capture a disproportionate share of the growth in global tourism particularly as direct international airline capacity increases to the gateway airport in Auckland.
To confirm the growth trend in inbound tourism into New Zealand we should first look at Auckland International Airport (AIM.NZ) traffic data. It paints a very clear growth picture.
Click here for a larger image.
AIA’s international passenger numbers (excluding transit passengers) increased by +10% to reach 662,998 in May 2016 compared with May 2015. This exceptional performance continues to be driven by seat capacity growth, both from existing airlines and the four new airline customers since September 2015.
AIA’s total passenger numbers exceeded 17 million in the 12 months to May 2016, up 1.3 million passengers on the previous 12 months. This 8.6% annual growth was shared evenly across international and domestic passengers (up 8.0% and 8.8% respectively) Transit passenger movements also increased in the 12 months to May 2016, +14% over the pcp.
Interestingly, passenger numbers in Queenstown were +24.5%. If you take nothing else from this note believe me when I tell you Queenstown is one of the great places of the world. Go and have lunch at the Amisfield Winery, drink a bottle of Central Otago Pinot Noir, and eat the freshest food on the planet while looking at the Southern Alps sitting beside an open outdoor fire. It’s almost impossible to beat.
AIM’s three investments in New Zealand are Sky City Casino (SKY), Air New Zealand (AIR) and Tourism Holdings (THL).
Sky City is the monopoly destination casino in Auckland. Air New Zealand is well known as the flag carrier.
Air New Zealand put out its traffic statistics yesterday and it is important to have a quick look at them as AIR has leverage to the tourism theme we believe in.
AIR NZ carried 1,215,000 passengers during the month of June, +4.8% vs pcp. Group load factor was a solid 80.8%.
In that AIR NZ group number long haul passenger numbers increased +6.5% on load factor of 80.7%. Interestingly, demand on America and UK routes demand increased by 9.4% and load factor increased to 86%.
Analysis of AIA and AIR NZ data confirms the international passenger growth into New Zealand, and that the structural macro tailwind is in place for NZ tourism operators.
Tourism Holdings (THL) is NZ’s largest motorhome rental operator and the second largest operator in Australia. You may recognise its two key brands “Maui” and “Britz”.
Before you say “you’re kidding me Charlie, could there be anything lower tech than motorhome rentals”, this is a GROWTH industry which is seeing returns improve due to strategic decisions made by management. Since THL concentrated on its core RV rental business we have seen the capital intensity of the business fall, margins improve and market shares increase. It’s our view and the view of analysts that cover THL that all these investment metrics have further to improve. Detailed below is the forecast from NZ broking firm Forsyth Barr.
THL financials
Our view on THL is it is a cheap growth + yield stock with structural tailwinds. On a price to growth (PEG) ratio of less than 1x and a grossed up yield of 9.5% there’s every chance THL delivers us a total return of +25% in the year ahead subject to our inbound tourism thesis being intact and THL management delivering on their return improvement drive.
THL is a classic example of why AIM invests in New Zealand. There are many well run growth companies in NZ trading on arguably “value” multiples. In a world where growth and yield are very hard to find, let alone together, both can be found in New Zealand.
However, the Key point (pardon the pun PM), is at AIM we are bullish on New Zealand. We are particularly bullish on NZ tourism and we will look to further increase our exposure to that structural growth theme in the weeks and months ahead.
I’ll finish today by quickly mentioning Sydney Airport (SYD) traffic statistics for June which again confirm the GROWTH in inbound international tourism.
Sydney: +5% on pcp (Domestic/regional: +3.7%; International: +7.5%)
Year-to-date: +6.7% on pcp (Domestic/regional: +5.3%; International: +9.3%)
SYD MD Kerrie Mather said, “We welcomed a record 20.3 million passengers through Sydney Airport in the first half of 2016, representing total and international growth of 6.7% and 9.3% respectively, an exceptional result. In June, passenger numbers continued to perform well compared to the prior corresponding period. International passenger growth (+7.5%) was driven by strong inbound demand (+11.7%), with Chinese (+16.3%), USA (+15.8%), Korean (+34.3%), Indian (+20.9%) and Japanese (+23.6%) nationalities performing well. Domestic passenger growth of 3.7% was driven primarily by load factor improvements.”
You can understand why I am bullish on tourism stocks and we continue to believe Star Group (SGR) is superbly positioned to capture a disproportionate level of that structural growth.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
