Sydney Airport
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 23 May 2016, 10:02 AM
- Sectors Covered:
- Infrastructure, Utilities, Banks
Key points
- We continue to view Kingsford Smith Airport as a high quality infrastructure play, leveraging passenger growth through its aeronautical infrastructure into higher returning commercial activities.
- Traffic growth has been strong, running well above historical trend rates. We have upgraded our traffic forecasts to reflect this recent growth, but have reduced CPI for 2016 and 2017 reflecting the low inflation environment.
- We have upgraded our share price target. Our target price does not require expansion in valuation multiples to be achieved.
Continued strength in traffic growth
Calendar year-to-date international pax growth was reported as +10.1% on the previous corresponding period (PCP) and domestic growth +6.0% on the pcp, which are both above long-term trend growth rates. Sydney Airport (SYD) says the international growth in April was driven by Chinese (+27.9%), USA (+17.1%), Korean (+16.5%) and Japanese nationals (+41.8%), as well as strong growth from Australians (+9.9%).
The continuing strong Chinese growth is particularly important, given the size of that market and above average spending rates of Chinese passengers. Growth on trunk routes and load factor improvements drove domestic growth in April.
Recent bond issue shows debt market support for SYD
SYD issued a 10 year US$900m/A$1.2bn bond in April. The all-in cost of 4.9% pa implied a margin of ~210 bps over A$ bank bills, marginally ahead of the average rate we assume for new debt. The bond issue refinances bank debt earlier than we had expected (causing an increase in forecast borrowing costs across 2016-17), but extends the average term of SYD's debt and increases available capacity in its bank facilities.
Forecast changes
After re-running our pax forecast model to account for recent traffic data we lift our absolute international pax forecast across FY16-19F by 1% and domestic by 2%. We continue to assume normalisation of growth rates beyond 2016 back to long-term trend rates.
We have also reduced our CPI forecasts for 2016 (1.5% pa) and 2017 (2.0% pa) below our 2.5% pa long-run assumption, reflective of the low inflation environment. This does not affect international aeronautical charges given the fixed price path to 2020-21, but commercial revenues will be impacted by CPI-linked pricing. The net result is a ~1% increase in forecast EBITDA across FY16-19. Forecast DPS lifts 0.5cps in FY18.
Investment view
Life Transurban, SYD's share price is reflective of scarcity value, given the limited supply of high quality ASX-listed defensive growth alternatives, particularly given the backdrop of uncertain economic conditions and declining interest rates. We have upgraded our share price target, primarily as a result of reducing our cost of equity assumption by 50 bps (7.0% pa ungeared/~8.5% pa geared). This discount rate is ~75 bps higher than what we apply to Transurban, given we expect TCL's earnings to be less sensitive to economic conditions.
Like Transurban, SYD has a strong DPS growth outlook, and we retain our Add recommendation.
More information
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