Sydney Airport: Domestic on the recovery path

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
20 April 2021, 9:30 AM
Sectors Covered:
Infrastructure, Utilities

  • Domestic pax is strengthening, with positive forward indications from domestic carriers. Timing of recovery of the more valuable international pax is uncertain.
  • Forecast changes and valuation roll-forward lift our 12 month Target Price (login to view).
  • Add retained, given 12 month potential TSR of c.17% and 5yr IRR of c.9% pa. In the next 12 months we expect line-of-sight to re-commencement of distributions, benefitting the share price as income-oriented investors return to the stock.

March quarter 2021 pax data

Sydney Airport's (ASX:SYD) Q1 pax was down 82% vs 2019 (ie pre-COVID-19), with international down 98% and domestic down 72%.

However, it was encouraging to see the month of March have by far the highest domestic pax in 12 months (particularly given the month included the Sydney floods and a short Brisbane lockdown, and excluded Easter), up 88% on the Feb-2021 volume. It bodes well for a strong April performance.

Key domestic airlines taking a more positive stance

Qantas (~70% domestic market share) expects to lift group domestic capacity to 90% of pre-COVID-19 levels in the June quarter.

It notes strong leisure demand (stimulated by the Federal Govt’s half-price fare offer and we suspect a substitution of domestic travel for international) and corporate travel rebounding to ~65% of pre-COVID-19 demand. It also expects to further increase capacity into its FY22.

Virgin expects to be operating more than 80% of pre-COVID-19 capacity by mid-June, and says that over 75% of tickets booked are for travel from May onwards.

We have upgraded our FY21 domestic pax forecast, but moderated the recovery beyond FY21 in line with a more elongated international pax recovery profile (the historically high correlation between domestic and international pax suggests a full domestic recovery will be partly driven by recovery in international pax).

Timing of international recovery still uncertain

In CY19, Trans-Tasman (TT) travel contributed 12% of SYD’s international pax. The two-way TT bubble commenced 19 April, with Qantas noting strong demand since it was announced.

We assume travel across the ditch lifts international pax through the airport to ~15% of pre-COVID-19 levels by November. Full international pax recovery will depend on the timing of the Australian Government’s vaccination rollout and border re-openings.

As discussed above, we now assume 100% of FY19 international pax is achieved by FY24. This approach assumes the trend growth that may otherwise have been achieved without COVID-19 is not recovered.

On the flipside, the c.12% contribution to international pax pre-COVID-19 from Sydney/mainland China travel may be at-risk given geopolitical tensions.

Forecasts/valuation update

We make a minor EBITDA upgrade to FY21F (upgrade to domestic pax outlook), material downgrades to FY22-23F (slower international pax recovery profile), and upgrades from FY24+ (as per higher CPI expectations implied in CPI swap curve).

We forecast EBITDA surpassing FY19A in FY24F, and then growing at 5% pa CAGR until FY29F. Increased forward interest rates (as per uplift in swap rates) cause materially higher debt service from FY27+ (reflects fixed rate debt and swap maturities).

We continue to assume no distribution until 2H22 (paid early CY23), when credit metrics return to those required of a BBB credit rating (albeit they could re-commence earlier given potentially excess capital).

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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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