Sydney Airport: Buying tickets in advance
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 24 February 2020, 12:30 PM
- Sectors Covered:
- Infrastructure, Utilities
- The 2H19 result was solid. Developments in commercial were positive. Delay in providing FY20 DPS guidance was a surprise (we ultimately expect 40 cps).
- Pay looks likely to be materially impacted over coming months by the Coronavirus, but history indicates pax should rebound strongly once the epidemic passes.
- We downgrade FY20 forecasts for the Coronavirus, but upgrade later years reflecting the FY19 information.
- While cheaper entry points may occur if sentiment to the stock weakens, we think there is sufficient value at current prices and upgrade from HOLD to ADD.
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Solid 2H19 result given trading conditions albeit no virus impacts
EBITDA increased 3.5% on pcp compared to pax growth of 0.4%. Retail (+6%) and property (+9%) growth and underlying cost decline (-2%) were the key drivers, while aeronautical (flat on pcp) was below forecast (we think average pricing for domestic fell). Cash conversion of EBITDA was 98%.
Net Operating Receipts (NOR) increased 5% and covered the 2H19 DPS by 107%.
The strong balance sheet continued to improve, with debt maturity extensions (issuing 15-30yr debt), mild decline in cost of debt, and increase in interest cover.
FY20 capex of $301m was at the bottom end of the guidance range.
SYD expects SARS-like impact from the Coronavirus
SYD says its most materially impacted months during the 2003 SARS outbreak saw 1520% international pax declines. However, we note its international pax declined only -2% across 2003.
SYD reports current month-to-date traffic indicates a SARS-like impact to international traffic and weakness in domestic traffic. Month-to-date domestic pax declines are estimated at 5-10%.
We now assume a 6-7% decline in international and 1-2% decline in domestic pax for FY20, with a strong rebound to trend growth from FY21.
We take confidence that SYD’s pax growth has historically rebounded from negative events.
Delay in FY20 distribution guidance a surprise
SYD has chosen to delay publishing its FY20 DPS guidance until it has greater certainty on the impact of the Coronavirus and its related travel restrictions.
We continue to believe that the diversification and resilience of SYD’s revenue streams (including >50% of revenues from commercial activities), relatively low dependency on mainland China pax (~12% of international pax in 2019, “re-baselined” costs, balance sheet strength, and DPS glide-pathing through the 2022 tax paying period means it can pay a 40 cps DPS in FY20.
Positive developments in commercial activities
SYD has agreed an early renewal and extension of its duty free contract until 2029. Under the deal, Heinemann will hand back 790sqm of retail space in mid-2020 for SYD to reposition for five new boutique shops by 1H21, with the duty free contract renegotiated on improved terms per sqm.
We factor in a $20m pa revenue uplift from this development. Also note Property revenue stepped-up in 2H19 by an annualised $21m, which we believe to be an upward reset with existing customers.
Car parking revenue was stable even though car spaces declined 20% on pcp, benefitting from the start of T3 valet parking.
EBITDA downgraded by 4% for FY20F (Coronavirus) and upgraded by 1-2% thereafter (downgrade of aero, upgrade of retail, property, and costs).
NOR downgraded by 4% in FY20F, but upgraded by 5-7% thereafter (EBITDA changes, lower debt service from declining cost of debt).
DPS growth across FY20-23F lifts to 3.5% pa CAGR.
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