October traffic data
October 2017 traffic growth for Sydney Airport (SYD) of +5.8% for international passengers and +2.8% for domestic and regional passengers was above trend (five year CAGR of +5.3% and +2.3% respectively). SYD cited both seat capacity increases and strong load factors as contributors to the growth. China (+18%) continued to be a strong driver of international passenger growth.
We lift our 2017 passenger forecasts to align with year-to-date growth rates (+7.4% for international and +1.4% for domestic and regional passengers). This results in immaterial changes to forecasts. FY18F dividends per share (DPS) increases 0.5 cps, as we assume SYD sets its DPS in 0.5 cps increments (and a 0.1 cps increase in cashflow sees the DPS lift up).
Over FY17-20, we expect approximately 3% per annum growth in total passengers, supported by inbound tourism growth, low real airfares, increasing affluence of the Asian middle class, penetration of low cost carriers, liberalisation of air routes, and improvements in aircraft design. We expect this volume growth to generate approximately 5% per annum growth in revenue and EBITDA (with growth in power costs reducing the natural operating leverage in the business).
Given we expect only a marginal lift in debt service over the period, this earnings growth leverages into approximately 7% per annum forecast growth in Net Operating Receipts (and broadly equivalent growth in DPS).
Valuation / target price
Our 12 month share price target increases by 11 cents per share, as a result of the forecast change and a six month valuation roll-forward. The multiples implied by our target price (18.4x EV/EBITDA, 5.5% yield) imply a minor contraction compared to those implied in the current share price (18.5x EV/EBITDA, 5.0% yield).
Key valuation sensitivities are international traffic growth and long-run required return on equity.
We think investors should be targeting a return (perhaps optimistically) of at least 10% for an investment in Sydney Airport. At the current share price, we estimate this criteria is unlikely to be achieved (approximately 2% potential capital growth, 5.0% estimated yield). While we have a positive view on the outlook for SYD's operational and financial performance, we are seeking a lower price entry point into the stock (which may occur if government bond rates edge upwards).
Key upcoming milestones include monthly traffic releases on approximately the 20th of each month, final FY17 distribution ex-date on 28 December (to be confirmed), the FY17 financial result in February, and the commencement of the new CEO prior to the end of January.
We maintain our Hold recommendation.
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