Sydney Airport

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
22 January 2018, 10:04 AM
Sectors Covered:
Infrastructure, Utilities

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.

Investment view

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:

  1. trading ex-distribution in late December, and
  2. 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.

More information

Morgans clients can login to view our detailed report and share price target for Sydney Airport (SYD). Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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