Release of December passenger data completes the FY17 traffic picture
Sydney Airport (SYD) reported 3.6% growth in total passengers for FY17, with 7.2% growth in international passengers the standout (+1.9% for domestic), underpinned by airline capacity additions on Middle Eastern, Asian and US routes. China was the greatest driver of passenger growth (+17.3% year on year growth), with South Korea and India also generating double-digit growth rates.
Given the continuing strength in international growth rates (+6.1% for the December quarter), we have adjusted our forecasts by assuming international growth rates fade to our long-run average growth expectation of 3.7% pa from 2019. This results in immaterial changes to our short term forecasts and increases our 12 month target price by 3 cents per share.
FY17 financial result due to be released on 21 February
We forecast the 3.6% passenger growth in 2017 will contribute to 7.4% growth in operating revenue. Key drivers will be growth in aeronautical revenues (assisted by approximately 4.5% increase in average international pricing), further retail revenue growth in 2H17 from the double-digit growth seen in 1H17, and first time contributions from the Ibis and Mantra hotels. Sluggish car parking may continue to be a drag on revenue growth (passenger mix and modal shift vs additional parking capacity). A marked increase in power costs is likely to dull EBITDA leverage. With flat-to-declining interest costs, we expect +7.3% EBITDA growth to deliver +11% growth in Net Operating Receipts to 34.6 cents per share, fully covering the 34.5 cents per share distribution.
The market is likely to be interested in first-time FY18 DPS guidance (we forecast +7% growth to 37c), airline slot booking indications, power cost control initiatives, capex plans/budget and capital management.
Valuation support from unlisted domestic airport transaction
Auckland International Airport's A$370m sale price for its 24.6% stake in North Queensland Airport (owner of Mackay and Cairns airports) implies approximately 24 EV/EBITDA (FY17 basis). While difficult to directly compare the valuation of two airports, applying this historical multiple generates an equity valuation for SYD of $8.80 per share.
We have rated Sydney Airport (SYD) a Hold since August 2017, viewing the total return potential as too limited. SYD's share price has retreated since November due to:
- trading ex-distribution in late December, and
- rising global interest rates (eg. Australian 10 year sovereign bond rates lifting +35-40 bps).
The DCF valuation supporting our target price (implies 18.6 EV/EBITDA), which assumes further upward normalisation of interest rates, now indicates approximately 6% potential upside at current prices. Combined with our CY18 yield estimate of 5.5% at current prices, we estimate a total return of 12%. We view this return as reasonable for a relatively low risk business with growing earnings.
We upgrade our recommendation to Add.
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