Sydney Airport: Updates ahead of result
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 11 January 2021, 3:46 PM
- Sectors Covered:
- Infrastructure, Utilities
- We make adjustments to our forecasts in advance of SYD’s FY20 result. ADD retained (login to view target price). Looking ahead for the next 12 months we are
optimistic that pax will be in a sustained recovery phase given vaccine roll-out
- Estimated 5-year investment IRR at current prices of 8% pa, driven mostly by
potential share price growth given we don’t expect distributions until CY23.
- Next key events are the monthly data releases and FY20 result on 24 February.
Reviewing pax forecasts
Passenger volumes are a key value driver for SYD. Since our last note, domestic pax has
been tracking below our forecast, thus we downgrade FY20F domestic pax by 13% to 7m.
The dribble of international pax through the airport is as assumed (annualised run rate
~450k/year). Pre-COVID there had been a high correlation between domestic and
international pax (97% R-squared). As such, we don’t think domestic pax can fully recover
without recovery in international pax.
We continue to assume international pax does not
surpass FY19 levels until FY24 (with a material downgrade to FY21F and minor
downgrade to FY22-23F). As a comparison, Brisbane Airport does not expect its domestic
and international volumes to recover to FY19 levels until FY23 and FY25, respectively. For FY25-29, we forecast total pax to grow at c.2% pa CAGR.
Updating earnings forecast ahead of FY20 result
SYD will report its FY20 result on 24 February. Earnings will be severely affected by the
pax slump as well as rental abatements. We have perhaps been too conservative in our
modelling of rental abatements (we’d assumed SYD’s conservative treatment in 2Q20
continued into 2H20).
Adjustments to this modelling, partly offset by the pax forecast
downgrade, lifts our FY20F EBITDA from $396m to $436m, still below current consensus
expectations of c.$445m. We don’t expect EBITDA to materially exceed the FY19 level
until FY24. Across FY25-29F, we forecast EBITDA to grow at c.5% pa CAGR.
What’s the DPS and balance sheet outlook?
Credit ratings are required for SYD to issue bonds into domestic and offshore markets.
SYD has historically said it targets a BBB equivalent rating, but the rating agencies in
recent years have rated it BBB+ equivalent (one notch higher than BBB).
While the rating
agencies have not (yet) cut SYD’s credit rating from BBB+, we don’t think SYD’s key credit
metrics will recover to the level typically required of at least BBB until 2022. Hence, in
order to protect its credit ratings we assume SYD does not declare a distribution until 2H22
Also worth noting is that our forecasts indicate that SYD will have significant
excess debt capacity when its earnings recover to pre-COVID levels, because of the
benefit of 2020’s capital raising and the Sydney Gateway proceeds due 2021.
What’s the stock worth?
SYD’s intrinsic value is not driven by month-to-month pax volatility, but where earnings
stabilise upon recovery from COVID-19 (and their long-term growth thereafter) as well as
the interest rate environment.
Our DCF-based target price has lifted (login to view target price), as
a result of forecast changes and valuation roll-forward to Dec-21.
The current share price
and our target price imply an EV/EBITDA of 18.5x and 19.5x on a CY19A basis
respectively. Both are below the c.21x EV/EBITDA (CY20F) that SYD was trading on in
the months leading up to the commencement of the pandemic (CY19 average c.19.8x).
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