Opinion: NZ a hot spot but not all tourist stocks sizzling

By Simon Louisson of NZPA

Friday 27th August 2004

New Zealand as a tourist destination is hot.

Conde Nast Traveler magazine, pitched at wealthy American tourists, this week rated New Zealand the world's third most desirable destination after Europe and Australia.

But despite tourist arrivals in the June year rising 10% to 2.2 million, the tourism sector of the sharemarket has lagged the overall market.

The tourism and leisure index, which curiously does not include Air New Zealand, rose 13.9% in the past 12 months against the top 50 index's 25% rise.

The main reason, Sky City Entertainment dominates the index and its share price has only risen 2.9% this year.

Sky and other key listed companies in the sector, including Air NZ, Auckland International Airport (AIA) and Tourism Holdings reported their results this week.

For the most part they were pretty solid.

Analyst Bruce McKay of Saffron Capital said this group is so diverse investors can't simply invest in the sector on the prospect of the projected 6% compound annual growth in tourist numbers and expect to reap the rewards.

"Tourism growth has been pretty strong and its pretty cyclical," he said.

"You'd expect to get gains as the absolute numbers increase but it's not so simple."

One company where that tends to be true is Auckland International Airport (AIA).

It clips the ticket of about 80% of the tourist arrivals into the country no matter whether they come for the weekend or stay for six months.

It has been a beneficiary of the massive increase in competition and capacity across the Tasman and of the sharply lower domestic air fares.

Its share price had run up early in the week to a record $7.35 in anticipation of a good result and it delivered with a 13% increase in net profit to $94.3 million.

Chairman Wayne Boyd promised 2005 would deliver at least $100m.

The company increased its final dividend to 17.3c per share (cps) against 12.5cps last year and Boyd said the company would lift its payout ratio to 90% of net profits from 80%.

"The growth that we are enjoying here is very much a reflection of the growth in the travel industry in New Zealand," chief executive Don Huse told analysts and media yesterday.

"Let me acknowledge the resilience of our business, indeed of the travel industry of New Zealand, that has been demonstrated not withstanding September 11, not withstanding Bali, not withstanding Iraq and not withstanding... Sars."

The company had over 10 million travellers go through its doors in the year with international numbers up 13.9%.

Rob Mercer, the head of research at Forsyth Barr Frater Williams said AIA was onto a good thing with a gross dividend yield of 6% on a stock that had delivered strong growth every year except 1998.

At 3pm today, AIA shares were up 11c at $7.39.

Conversely, Tourism Holdings, has perennially disappointed investors in the past with one wobbly wheel typically throwing the result off course.

However, Tuesday's $11.2m annual net profit, up from $8.7m, looked a largely solid effort.

Mercer said there were things it could do better, particularly in Australia, but the outlook for its New Zealand operations was very promising.

He said the perception based on its past record, that it was a stock that would disappoint, could be viewed as a positive as there was still "value left on the table".

Its shares have run up to $1.87 under $1 at the end of April.

But they have yo-yoed in past years, hitting $3.18 at the end of 1999 from 69c a year earlier, having slumped from $3.79 in May 1995.

Tourism Holdings' shares were down 4c at $1.84 at 3pm today.

While it is a more streamlined company with its tour operations, tourist attractions such as Kelly Tarlton's Underwater World and campervans, it may still need to put more runs on the board to convince some investors.

Air NZ should also be a direct beneficiary of higher tourist numbers, but it is not just a matter of clipping the ticket.

It has to juggle rising fuel costs against the strong New Zealand dollar, from which it is a net beneficiary.

Of course, the factor which may influence its direction more than any other, on the upside rather than downside, is whether the courts accept its appeal to overturn the regulators' prohibition of its proposed alliance with Qantas.

News on that front should not be far away.

Air NZ turned in a flat net profit of $166m which was commendable in an industry that lost billions in the year.

It shares were up 2c at $1.88 at 3pm.

Chairman John Palmer said it would be a challenge to equal 2004 in the current year.

"We haven't said we won't repeat it," he said.

"We have said the situation is challenging, it's early days. You just have to look at the situation in regard to fuel - we don't know whether... fuel prices have peaked."

Like AIA, Air NZ cracked the 10 million passenger mark, but because of its transformation to a low cost structure, that doesn't necessarily translate into higher profits.

Its yields were down as expected and labour costs were up 10 percent because of the large increase in the number of passengers it is carrying.

Chief executive Ralph Norris said the airline's focus on straightening out its international division.

Its $1.8 billion spend-up on new long-haul aircraft would lift it back to the front of world fleets in terms of technology.

Whether it can repeat the success of the transformation of its domestic and short haul units will be the challenge for management.

The good news for investors is that the airline's balance sheet is in much better shape and it is promising to pay a dividend of around 6cps in 2005.

That will welcome after three lean years.

And like Palmer, Air NZ investors await the outcome of the Air NZ-Qantas appeal "with great interest".

Meanwhile, Sky City's June year net profit fell to $100.2m from $107.5m was not particularly well received.

The result was weighted down by a $20m write-down in Internet betting company Canbet and some analysts said its big acquisition spree had failed to return its cost of capital.

Mercer noted that if the Canbet write-off was excluded, Sky's net earnings were up 13% to $121m and that's a pretty healthy profit.

What is hanging over it like a pall of smoke, is the Government's anti-smoking law due to come into force in October.

How much that affects gambling turnover remains to be seen although the Australian experience has been negative.

ABN Amro Craigs broker Matt Willis said Sky was one of the best stories in the market.

"I don't think anyone could argue with the quality of their core business," but he called the purchase of Canbet "an official disaster" and said it the write-down raised concerns about Sky's acquisition strategy in general.

"It's like it's been perceived as being a bit too aggressive."

While the Auckland casino remained "a gem", he said until management showed it could manage its new purchases, investors could hold back.

Sky's shares were down 7c at $4.46 this afternoon.

They have traded between $4.18 and $4.98 in the past year.

Sky is likely to remain a pretty consistent earner, although probably less so than AIA but the result of the sector is something of wager.

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