In the state-owned enterprises (SOE) sector, it’s hard to find entities that are financially sustainable and largely delivering on their service delivery mandate. The Airports Company South Africa SOC Limited (ACSA) is one candidate which has, in large part, been able to do that. It has not been a completely smooth ride though.
Going back to the late 2000s, ACSA, spurred on by the excitement surrounding the 2010 Soccer World Cup, embarked on an ambitious capital expenditure (capex) programme to upgrade airport infrastructure. This saw capex of R16.4bn being spent in the three year period ending March 2010, resulting in elevated debt levels to fund the spending. Borrowings peaked in the March 2013 financial year at just under R17bn – modest numbers compared to other larger problem SOEs but still resulting in a meaningful weakening of credit metrics for ACSA.
ACSA is now looking to enter a new growth phase with significant capex projects in the pipeline. Capex, which has been in the order of R0.5bn per year in the last 3 years, is set to accelerate meaningfully, with R22bn to be spent over the next three years to March 2028 (see figure 2). Flagship projects will be focussed on the new R5.7bn Midfield Cargo Precinct phase 1 at OR Tambo International Airport (ORTIA), the R4.3bn redevelopment of Terminal 2 at Cape Town International Airport (CTIA), and the R1.5bn development of a new terminal in Gqeberha. Beyond this forecast period though, there is further capex to come. Major projects include the R15bn Midfield passenger terminal development at ORTIA with implementation between 2030 and 2034, and the new R6.1bn realigned runway project at CTIA to be implemented between 2028 and 2031.
As the capex ramps up, the spend will initially be funded from operating cash flow surpluses. However, in the 2028 financial year, the capex significantly exceeds the operating cash flow surpluses. As a result, ACSA will have to return to the debt markets to raise R10.5bn. This will see debt levels increasing significantly from R8bn to R18bn, exceeding the post-2010 Soccer World Cup peak. The impact of both additional depreciation on capex assets and interest on the additional borrowings will see a reduction in net profit levels forecast by ACSA of 33%. Balance sheet leverage levels is forecast by ACSA to deteriorate from 9% to 43% over the next three years ending March 2028. Earnings leverage levels is likewise expected by ACSA to deteriorate from 0.6x to 4.3x over the same period.
Our analysis suggests that ACSA’s forecast credit metrics at March 2028 would indicate a material weakening of the standalone credit profile. Relative to the current profile, we see a 4-notch deterioration in the credit profile, with an indicative rating, based on March 2028 forecasts, of A+ (local scale). The further capex spend beyond March 2028, highlighted above, will put further downward pressure on the rating in the medium term.
Besides the significant capex spending and borrowing to come, we are also focussed on the pressure that the airline sector faces from the need to decarbonise. Airlines will have to navigate this in coming years, but it will also indirectly impact ACSA if airline volumes are affected. The largest emissions reductions are expected to come from the shift from kerosene-based jet fuel to Sustainable Aviation Fuels (SAF). As broader industrial adoption leads to increased SAF availability, ACSA will need to invest in additional infrastructure and storage facilities to cater for both SAF and traditional jet fuel. Amsterdam Schiphol, San Francisco International and Los Angeles International have already implemented blending programmes.
We have exposure to ACSA across our funds, the bulk of which is in the form of an inflation-linked bond (ILB), AIRL01, which matures in April 2028. The balance is a fixed rate bond maturing in May 2030. The AIRL01 represents the next significant debt maturity for ACSA, expected to amount to R2.5bn in April 2028. Although we do not see an imminent risk of a default for ACSA, given our concerns around the likely deteriorating credit profile, the refinance of the AIRL01 may prove challenging. We have thus taken the decision to reduce our credit limits for ACSA. Going forward, we will continue to monitor ACSA’s traffic volume performance and the trajectory of capex in the short and medium term. For now, the captain has unfortunately turned on the ‘fasten seat belts’ sign.
