Taking Stock 25 September 2025

Edward Lee writes:

Auckland Airport is one of New Zealand’s most important infrastructure assets. It is the gateway to New Zealand with over 18.7 million passengers moving through the airport last year alone.

But for shareholders, it has been a frustrating share to own.

In 2020, when international passenger numbers were virtually nil, its share price was around $7.00. Five years later, after billions of dollars of capital expenditure and passenger numbers returning to 89% of pre-COVID levels, it trades at just $7.70.

Dividends over the 5-year period have struggled too. The current gross dividend yield is just 2.35%, and there were years during COVID when dividends stopped.

With passenger growth stalled, the real earnings uplift has come from its commercial property portfolio. Rental income has climbed to almost $200 million per year. Five years ago, that figure was closer to $100 million. Property is an essential part of Auckland Airport’s earnings story.

At the same time, the airport is in the middle of the largest capital programme in its history. The ten-year spend was originally estimated at $6.6 billion, with the centrepiece being the new domestic terminal, finally replacing the 57-year-old building and integrating it with the international terminal. 

This is due to be completed in four years’ time. 

Once finished, the focus will turn to the planned replacement of the main runway slabs. These projects will reshape the airport for decades, but shareholders are footing the bill now while the benefits will not flow through fully until several years down the track.

Given the scale of this investment, regulators are watching closely. 

The Commerce Commission has already challenged the airport’s targeted return on assets, concluding that its proposed price increase would result in roughly $200 million in “excess profit” over the current five-year regulatory period. 

In response to scrutiny, Auckland Airport adjusted its proposed passenger charge increase.

The way the airport depreciates its assets has also raised questions. Using straight-line depreciation means today’s passengers carry a heavier share of the cost for infrastructure that will last decades. 

A more gradual approach could spread the cost more evenly. These debates are technical, but they directly affect how much airlines and travellers pay, and how quickly the airport can recover its investment.

Guidance for FY26 earnings landed below market expectations, with underlying profit forecast at $280 to $320 million, about $20 million shy of what analysts had expected. 

The reasons are clear. Air New Zealand’s fleet and engine limitations are restricting seat supply, the domestic economy is weak, and construction across the airport is disruptive. 

Analysts expect a dip in FY26 before recovery in FY28 as new infrastructure comes online and more capacity is restored.

Traffic data tells the same story. 

In FY25, total passenger movements rose 1.1% to 18.7 million, with international passengers up 2.5% to 10.3 million and domestic slightly lower at 8.4 million. 

Monthly updates confirm the sluggish recovery. 

In August 2025, international passenger movements rose just 1% from the year before, despite seat capacity increasing 4%. 

Queenstown Airport, part-owned by Auckland Airport, was the standout, setting another record with 106,000 international passengers in a single month.

The global backdrop helps explain this. 

Airlines are still rationing scarce aircraft and deploying them on the most profitable routes. This is why new route announcements matter. 

China Eastern has announced a Shanghai to Auckland to Buenos Aires service starting in December 2025, restoring some of the missing connectivity to South America. 

Domestically, Jetstar has grown its Auckland capacity, helping offset Air New Zealand’s engine-related constraints. 

Even so, bottlenecks in aircraft supply and a weak economy will cap passenger growth in the short term.

Financially, Auckland Airport’s revenue climbed 12% to $1 billion in FY25, and underlying profit rose 12% to $310 million, with a slight reduction in debt following last year’s $1.4 billion equity raise. 

Capital expenditure is set to remain heavy, between $1 and $1.3 billion in FY26 which will lift debt significantly over the next 12 months as the investment programme accelerates. 

With the average cost of its debt at 5.50%, interest costs are about $72 million per year, but are expected to exceed $100 million as borrowings climb by billions over the coming years

However, the picture is not entirely one-sided. The airport also earns income from the cash it holds on deposit, meaning net interest costs are likely to be somewhat lower than the headline figures suggest. Even so, interest will remain a larger slice of the expense line than in the past.

One part of the business that deserves more attention is its investment property portfolio. 

This has now reached a valuation of $3.4 billion, generating $192 million in rent with 99% occupancy and a weighted average lease term of nearly nine years. 

These non-aeronautical earnings are significant. They diversify revenue and should grow as new developments are completed.

With flagship projects like Mānawa Bay and The Landing, property income is now a core contributor to Auckland Airport’s earnings profile.

The key question for investors is whether the payoff is worth the wait.

Over the past eight years, Auckland Airport has delivered little capital growth while spending enormous sums. That pattern is likely to continue until major projects are complete.

Once the new terminal is open, the airfield expanded, and international connections restored, the business will be able to process more passengers, charge more per traveller, and generate stronger returns. Investors may find more attractive entry points by waiting until earnings momentum improves and the benefits of this spend are clearer.

In my view, Auckland Airport remains an asset worth watching closely.

The capital programme is disruptive, dividends are modest, and regulatory scrutiny will not go away. 

But the airport is a scarce monopoly asset that New Zealand relies on, with a property arm that adds resilience and a balance sheet structured to handle the spend. Passenger demand is recovering, connectivity is broadening, and the transformation now underway will leave the airport in a stronger position for decades to come. 

For investors who think long term, it is hard not to see Auckland Airport being better placed in the future than it is today.

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ANOTHER core infrastructure business in New Zealand is EBOS. 

EBOS has grown since the early 1900s from a small Christchurch pharmacy supplier into Australasia’s largest healthcare and animal care distributor. 

More than a hundred years later it employs over 5,000 people, operates across New Zealand, Australia and Southeast Asia, and generates more than A$12 billion in annual revenue. 

That makes it one of the most significant New Zealand companies on both sides of the Tasman.

EBOS is not a speculative stock. It is the leading pharmaceutical wholesaler in Australia and New Zealand and one of the largest distributors of specialty medicines. 

It earns its revenue from distributing products to pharmacies and hospitals, from running a pharmacy chain in Australia, supplying specialty hospital medicines, and from selling pet food through Black Hawk and Vitapet. 

It is one of the few companies that straddles both healthcare and animal care. 

These are industries that keep growing regardless of whether the economy is booming or shrinking. That mix of resilience is what has allowed EBOS to keep compounding for over a century.

Its TerryWhite network has grown to more than 620 stores, filling over 1.2 million prescriptions online. 

On the animal care side, Black Hawk and Vitapet are entrenched brands in the pet specialty channel. SVS Veterinary Supplies, acquired earlier this year, strengthened its wholesale position in New Zealand. And the purchase of Next Generation Pet Foods gives EBOS an entry into the high-growth area of premium air-dried pet treats.

Looking back over the past decade, it was defined by consistent growth. FY22 and FY23 showed how fast EBOS can move when conditions line up, with revenue breaking A$10 billion for the first time.

Underlying earnings in FY23 lifted more than 30 percent, net profit by over 20 percent, and dividends by nearly 15 percent. 

Investors grew accustomed to that sort of acceleration.

Since then the pace has slowed. FY24 and FY25 were reset years. The Chemist Warehouse contract in Australia expired, taking out a big block of volume. At the same time EBOS was spending heavily on renewing its distribution centres.

The FY25 result was strong given those headwinds. Underlying revenue grew 12 percent once the Chemist Warehouse exit was taken out.

Community pharmacy delivered strong growth, adding 320 new wholesale customers and around A$385 million of revenue. 

Animal Care revenue increased 16 percent, while SVS and Next Generation added new channels.

The balance sheet remains conservative, with low net debt. 

Five acquisitions in FY25 cost A$210 million and are expected to add A$330 million in revenue on a full year basis. 

The distribution centre programme will be complete in FY26, expanding capacity by 20 percent, improving refrigeration for specialty medicines like GLP1s, while reducing costs. 

Despite this operational delivery, the share price fell significantly from $37.34 at the start of the year to now $29.50, down 20 percent. 

Over this same time period, the leadership changed, with long serving CEO John Cullity retiring in July. 

EBOS also raised equity to fund acquisitions, and these events, combined with slower growth, gave some investors reasons to sell and caused analysts to shift their tone. 

Earlier this year EBOS was being described as a growth company benefiting from strong pharmaceutical expenditure, favourable regulation and excellent bolt on acquisitions.

Commentary now describes EBOS as going sideways, not as a fault of the company, but as part of the cycle of a business that grows through acquisitions.

Instead of focusing on 20 percent growth, the company is aiming for 5 to 10 percent. 

That perspective helps explain the share price.

What I see is a company still doing all the right things. It is adding customers, expanding pharmacy networks, growing in most markets, broadening its animal care portfolio, and finishing its core infrastructure development programme.

It is producing strong cash flows, paying steady dividends, and keeping its balance sheet in check.

But the new CEO needs to prove himself. Competition in pharmacy is fierce, and consumer pressures are softening discretionary spending.

These are real, but manageable. They do not change the larger forces at play, but they are short term.

Populations are ageing. Specialty medicines are growing and community pharmacies are delivering more health services, all whilst pet spending continues to rise.

EBOS is well positioned in all of these areas.

It is true that the next year or two will not be exciting. Guidance for FY26 is for earnings growth of 5 to 10 percent which is steady rather than spectacular.

But in FY27 the distribution centre renewal will be completed and acquisitions like Transmedic, SVS and Next Generation will be fully embedded. 

That is when growth should pick up again.

Remember, buying quality companies is about owning businesses with long term demand, sound balance sheets, and the ability to keep growing.

EBOS ticks all those boxes.

The share price has fallen because expectations were too high and have now been reset. 

EBOS is not the sort of stock that will double in a hurry but what it will do is continue to distribute medicines and products, grow its pharmacy chain, sell pet food, generate cash, and pay dividends.

Long term investors interested in resilient, defensive businesses, should take note. For our business, quality and resilience are key words when we evaluate a portfolio.

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Travel Dates

30 September – Taupo – Johnny Lee (full)

1 October – Hamilton – Johnny Lee (full)

3 October – Tauranga – Johnny Lee (full)

7 October – PalmerstonNorth – David Colman

8 October – Christchurch – Johnny Lee (full)

21 October – Lower Hutt – David Colman

22 October – Wellington – Fraser Hunter

22 October – Blenheim – Edward Lee24 October – Nelson – Edward Lee

Edward Lee

Chris Lee & Partners Ltd