Auckland International Airport Financial Performance - Assignment Example

Contents Auckland International Airport - Introduction 2 Treatment of Selected Financial Information 2 Cash 2 2.Account Receivable 3 3.Accounts payable and accruals 3 4.Revenue recognition 3 5.Property, Plant and Equipment 4 6.Depreciation and Accumulated Depreciation 4 7.Investment Properties 5 8.Leases 5 9.Loans and Borrowings 5 10.Borrowing Costs 5 Trending of Select Financial Performance 7 Trend Analysis of Income Statement items 7 Trend Analysis of Balance Sheet Items 7 Cross-sectional Analysis 8 Selected recent news and implication on future financial performance 9 Appendix I 11 Bibliography 13 Auckland International Airport - Introduction Auckland International Airport Limited (Auckland Airport) was formed in 1988 as a result of corporatisation. In 1998, the Auckland Airport became the fifth airport company in the world to be publicly listed. Auckland International Airport is considered as one of best airports in the world in terms of service level and customer preference. It was voted two years in row as one of the 10 best airports in the world. In terms of economic and social impact, Auckland Airport generates billions of dollars for the economy, creating thousands of jobs, and making a vital contribution to New Zealand trade and tourism by strengthening connections with the world. Auckland Int’l Airport handles almost 70% of the international traffic or 13 million passengers annually for New Zealand. (Auckland International Airport, 2013). For this financial analysis, Annual Financial Filings for last three years (FY2012, 2011 and 2010) have been used. These are available on company website http://www.aucklandairport.co.nz. Summarized 3 year financial reports are provided in Appendix 1. The company’s financial years concludes on June 30 of each calendar year. Treatment of Selected Financial Information Deloitte is the independent auditor for Auckland International Airport. Deloitte in the Audit report mentions that they conduct these audits based on International Standards on Auditing and International Standards on Auditing (New Zealand) and that it is the responsibility of the Company (Auckland International Airport) to prepare and consolidate these reports. In the Annual report of 2012 (Auckland International Airport Ltd., 2012), The Company prepares its financial statements in accordance with NZ GAAP standards. However, the auditors certify that these reports comply with NZ IFRS and other applicable Financial Report Standards, such as IFRS, appropriate for profit-oriented entities. Following is selected financial information and its treatment in the accordance (or compliance) with NZ IFRS. 1. Cash The Company treats cash as Current Assets in accordance with generally accepted good accounting practices. Discussion on this item is relevant to Balance Sheet and Cash Flow statement. The company explains the definition of cash in Note 2h (Auckland International Airport Ltd., 2012, p. 49) as follows: “Cash in the balance sheet comprises cash on hand, on-call deposits held with banks and short-term highly liquid investments. For the purposes of the cash flow statement, cash consists of cash as defined above, net of outstanding bank overdrafts.” 2. Account Receivable The Company reports Account Receivable under current operating assets and are recognised at the original invoice including GST and net of Allowance for Bad Debts (Impairment of Uncollectible Amounts). According to Note 2j (2012, p. 49), an estimate of impairment for uncollectible amounts is made where there is objective evidence that collection of the full amount is no longer probable. Bad debts are written off when identified. Trade receivables that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. The judgment of impairment is based on Company’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past a credit period of 60 days, as well as observable changes in national or local economic conditions that correlate with a default on receivables. The carrying amount of trade receivables is reduced through the use of an allowance account. An uncollectible receivable, it is written off against the Allowance Account. Alternatively, any recoveries of amounts previously written off are credited against the same account. Changes in the carrying amount of the allowance account are recognised in profit or loss. 3. Accounts payable and accruals Accounts payable and accruals described under current operating liabilities as these are short-term and not interest bearing. These are initially stated at their fair value and subsequently carried at amortised cost. Additionally, due to their short-term nature these are not valued considering time-value of money. In sense of policy and ongoing operation, the company considers these as unsecured and are usually pays them within 30 days of recognition. 4. Revenue recognition Revenue is recognised when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity. (2012, p. 52) The Company derives its revenue from three distinct sources. Following discussion captures the treatment of each source of revenue: Rendering of services Airfield income, the passenger services charge and the terminal service charge are recognised as revenue when the airport facilities are used. Retail concession fees are recognised as revenue on an accrual basis based upon the turnover of the concessionaires and in accordance with the related agreements. Rental income is recognised as revenue on a straight-line basis over the lease term of the leases. Revenue from public car parks is recognised on a cash-received basis. Revenue from staff car parks is recognised as revenue when the airport facilities are used. Interest income Interest income is recognised as interest accrues using the effective interest method. Dividend income Dividends are recognised when the group’s right to receive payment is established. 5. Property, Plant and Equipment Property, Plant and Equipment consider long-term property and assets that are employed towards revenue generation through delivery of product or services. The PPE are generally recognized at the original cost of procurement and any charges that are borne to bring the asset in to beneficial use. Any land owned by the Company is carried at re-evaluated value and is not depreciated. The revaluation is done by through a recognized third-party evaluator. Adjustment to value over time is recognized as profit or loss in the Income Statement. Equipment and vehicles are recognized at their value less any accumulated depreciation or impairment losses. 6. Depreciation and Accumulated Depreciation For financial reporting purposes, the Company uses straight-line depreciation basis. The estimated useful life of different assets is as follows: Asset Estimated Useful life Land Indefinite Buildings and associated services 5-50 years Infrastructural assets 5-80 years Runways, taxiways and aprons 12-40 years Vehicle, Plant and Equipment 3-10 years 7. Investment Properties Investment Properties are defined as properties that are owned and held by the entity in the hope of collecting rent or capital appreciation in the event of disposal. These are not assets that contribute towards operational income of the entity. The assets are recognized at their fair market value. For this purpose, the Company employs third party evaluator who appraises the property at least every year. Gains and losses are described in the Annual Income Statement. 8. Leases The company describes those lease arrangement where the company is a lessor and substantially retains all the risk and benefits of the ownership as Operating Leases (2012, p. 51). Rental income is recognised on straight-lines basis over the term of the lease. 9. Loans and Borrowings Loans and borrowings are recognized by the company on the fair or market value net of any transaction costs. The Company categorizes all loans as short-term liabilities unless the arrangement is for more than 12 months (1 year). The loans are amortized using effective interest method. 10. Borrowing Costs As mentioned in item 9, the company recognizes directly attributable borrowing costs as separate line item. The cost attributed to a loan availed for the purposes of buying an asset is generally capitalized with that asset. Other borrowing costs are treated as expense items and considered in Income statement. Trending of Select Financial Performance As already described, for the purposes of this financial analysis last three years’ data was utilised. Trend Analysis of Income Statement items Following is a snapshot of income statement of FY2012, 2011 and 2010. Following trends are immediately recognizable from the above table: Growth in Revenue: The Company has demonstrated strong growth in revenue. Considering 2010 as base year, we see that growth in successive years has been 9.5% and 17.5% respectively. Growth in Earnings per Share (EPS): In 2012, the Company posted an EPS of 10.76 cents to a dollar. This is a 356% increase over 2010 EPS of 2.36 cents. It is also noticeable that in 2011, the Company posted a weak showing because of loss incurred on some of the Derivatives and Financial Investments made the Group. Trend Analysis of Balance Sheet Items Current Assets: With the reference to the following table, it is noticeable that the company’s holding of current assets on the whole has remained stable. However, some trends are noticeable. For one, the company has moved away from use of short-term financial derivatives as current asset. The current holding is 94% lower than 2010. This might be due to the heavy loss incurred on this account in 2011, when the company maintained $2.01m in financial derivative investments. Detailed Balance Sheets with trends are available in Appendix I. Cross-sectional Analysis In the following section, the cross-sectional analysis for the Company over last three years is presented. In order to get a better sense of these ratios, we require some standard to compare with. Usually analyst would refer to industry average as a benchmark. Unfortunately, no such industry numbers are available at resources like Yahoo Finance (Yahoo , 2013) or Bloomberg. a) Profitability Ratios Profit Margins: The Company’s Profit Margin has grown significantly over last 3 years. In 2010, the PM was at slightly more than 8%. However, in 2012 the company posted a strong 33% Net Profit Margin. Return on Asset: The ROA has also shown improvement. In 2012, ROA was 4% up from 1% in 2010. However, these ROA look pretty low on the first look. However, in the absence of industry numbers no judgment can be made. The airports require significant investment in Plant, Property and Equipment in order to generate revenues. Return on Equity: The ROE for the Company also seems to be on a lower side. In 2012, the ROE was merely 6%. b) Liquidity The following table captures the liquidity ratios for the Company. To begin with, it is noticeable that the Current and Quick ratio has same values. This is because of the fact the airport operations requires very little inventory. Secondly, the airport operations business can survive with less liquidity because the ongoing business and the liabilities are very predictable. Therefore, it requires fewer current assets to fund these stable liabilities. c) Asset management ratio As already described, the Inventory for Airport Operations is really low. Hence, Inventory Turn Ratio is not useful. Following table captures Fixed Asset and Total Asset Turnover ratio. From both these ratios, it is obvious that this business requires significant investment in assets for generating sales. For example, for every $1 of investment in fixed asset, the business generates 14 cents in sales. d) Solvency Based on last three years of financial reports, it seems that the business has very stable debt levels and its ability to cover the payments on its outstanding debt is reliable. e) Financial Structure / Capitalization Ratio / Investment The capitalization ratio for the firm in 2012 is around 27%. Similarly, P/E for the company was around 26. Selected recent news and implication on future financial performance Airport Operations is a relatively stable business and does not make much headlines. The only media coverage able on the internet in past few months has been the half-yearly and quarterly financial briefings made by the Company’s investor relations department. These briefs are available on the Company website in Media Release section (Auckland Internation Airport, 2013). The media briefing dated February 21, 2013 covered the financial performance of the company for the period ending on December 31, 2012. The company reported an 11% increase in the profit after tax and revenue increase of 3.6% for the period vs. same period last year. This means that the company is set to post 4th year of consecutive increase in revenue and net income. Appendix I Bibliography Auckland Internation Airport. (2013). Media Release. Retrieved from Auckland Airport: http://www.aucklandairport.co.nz/ Auckland International Airport. (2013, May 1). About Us. Retrieved from Auckland Airport: http://www.aucklandairport.co.nz/Corporate/AboutUs.aspx Auckland International Airport Ltd. (2012). 2012 Annual Report. Auckland. Yahoo . (2013, April 30). Yahoo Finance. Retrieved from http://finance.yahoo.com/q/h?s=AIA.NZ+Headlines Read More