More on BAA
BAA
Airport operator BAA has benefitted from a 6% increase in passenger numbers so far this year. BAA operates most of the UK’s major airports (running Heathrow, Gatwick, Stansted, Glasgow, Aberdeen, Southampton, and Edinburgh) and eight airports overseas. BAA also has retail management contracts with a further three US airports.
The company earns its revenue from charges paid by airlines (per passenger and per flight), commission on sales at shops/restaurants located in airports car park fees. The company also operates the World Duty Free shops.
The sales commissions on airport outlets usually have a minimum committment (effectively a rent). UK airports provide the bulk (97%) of the revenue with regulated airports (Heathrow, Gatwick and Stansted) earning almost half the UK revenue.
A 6.5% increase in passenger traffic and a 1.2% increase in net retail spend per passenger has seen group revenue for the nine months to December growing by 8.9% (to £1,655m) and operating profit by 9.6% to £548m.
UK airport revenue increased 8.3% to £1,529m in the nine month period, with airport charges growing by 12.3% to £637m. Revenue from the overseas businesses (including joint ventures) increased by 13% to £52m. Net retail income for the nine months grew 7.5% to £457m and net retail income per passenger for the nine months increased by 1.2% to £4.15.
Operating profit for the nine months for the UK airports grew by 9.4% to £524m. Operating costs grew by 7.7% to £72 million due to higher staff numbers (mainly security staff), wage inflation, pension costs, depreciation, utilities and maintenance.
While the overall results for the nine months are good, the figures for the quarter were less satisfying, although this is partly due to the comparison with a particularly bad first half. (The previous years performance was affected by the Gulf war and the SARS epidemic and the first two quarters showed strong growth compared to the poor performance a year ago ). Passenger numbers grew by 4.3% in the quarter to December compared to 5.7% in the second quarter and 9.7% in the first.
Net debt has grown by 37% to £3,451m and gearing to 65%, from 52% last year. The company has hedged a little over a third of its debt against interest rate risk. Interest cover is very healthy at 10× so this is not a major risk. The company does capitalise a large part of its interest - £91m in the the nine months to December, but even adding this back for the purpose of calculating interest cover gives a fairly healthy ratio of 3.9×. Cash generation is strong: after deducting all interest, tax and dividends paid in the nine months the company generated £385m (compared to £357m the previous year) in cash.
We beleive that there is relatively little downside risk in the short term and BAA should have no difficulty meeting market expectations. Trading at 618p, the prospective PE of 16.2× is on the high end of the sector but is justified by the stability of earnings, the yield of 3.3% looks reasonable.
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