About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 19 August 2016, 11:58 AM
- Sectors Covered:
- Infrastructure, Utilities
- Sydney Airport (SYD) upgraded its 2016 distribution guidance by 1cps to 31cps. This implies a 4.2% yield at current prices. We expect a compound annual growth rate (CAGR) of 8% pa in DPS across FY17-19F.
- 1H16 EBITDA growth of 10% was driven by strong passenger growth in the period. Cashflow growth of 18% benefited from the EBITDA growth and lower interest costs.
1H16 result summary
The EBITDA result was in-line with our forecast. Passenger growth of 6.7% drove an 11% increase in revenues. We expected that cost growth would be greater than revenue growth in the period (due to the increased service level requirements under the international aeronautical agreement and the T3 acquisition), but the front-ending of the guidance cost increase surprised us. EBITDA growth, combined with reduced interest costs on increased debt, resulted in cashflow growth of 18%, as we had expected.
Credit metrics continue to improve (and will improve further with the cash raised from the recent DRP), such that SYD may have its credit ratings lifted or will have capacity to fund a capital management or growth investment initiative (e.g. second Sydney airport).
2016 DPS guidance was lifted 1cps to 31cps, taking FY16 growth to a stellar 22%. We forecast FY17/18 DPS of 33.5/36.5cps. Distributions are based on ~100% payout of Net Operating Receipts. EBITDA growth and flat to declining interest costs are key drivers of this growth. The unresolved issue is whether SYD will continue with 100% payout or smooth the flight path of the DPS to account for the start of tax payments next decade. Our forecasts assume the former.
There was no real update on Badgerys Creek. The Federal election stalled development. We continue to expect that the project will be financed in a separate vehicle to Kingsford Smith Airport, and that the project will be at least net present value (NPV) neutral.
Other key points of interest
July traffic data shows international passenger growth continues to be very strong, while domestic growth has moderated somewhat. While dilutive, the August DRP raised $142m of cash that will help to improve the balance sheet and reduce interest costs. SYD is holding an institutional investor briefing on 17 October.
We continue to view Sydney Airport (SYD) as a core portfolio holding, with international traffic growth a key thematic driving its growth outlook. Strong distribution growth over coming years and a solid and improving balance sheet are further attractions.
SYD is currently one of our high conviction stock picks, and we retain our Add recommendation.
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