Sydney Airport: June pax data…but the takeover talk is the main game
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 20 July 2021, 10:00 AM
- Sectors Covered:
- Infrastructure, Utilities
- June pax data was weaker than we had anticipated, impacted by government movement restrictions as a result of the latest wave of COVID outbreaks.
- We downgrade our short-term forecasts, but acknowledge the takeover talks will be the main influence on the share price until the deal completes or ceases.
- HOLD. 12 month target price set in line with (login to view) indicative bid price.
Sydney Airport (ASX:SYD) released its pax data for the month of June, completing the 1H21 pax data set ahead of the 1H21 result due to be released on 20 August.
1H21 total pax was down -72.4% on the 2019 pcp, with domestic pax down -57.5% and international down -96.2%. Metrics for the month of June are similar, with domestic down -56.8% and international down -93.6%.
Pax had been improving in May and into June, but was impacted by new NSW Govt lockdown restrictions applied on 25 June limiting interstate travel. The quarantine-free trans-Tasman bubble was also suspended from 23 June.
July pax data is likely to be impacted by new lock-down restrictions imposed by the NSW and Victorian Governments in mid-July, and ongoing suspension of the quarantine-free trans-Tasman bubble.
Forecast and valuation update
We continue to assume FY/CY24 is the year when pax recovers to the FY19 level. We assume international grows at trend thereafter, while domestic growth in the Sydney catchment follows the historical correlation to international pax but SYD is impacted from 2027 by the opening of the Western Sydney Airport.
While our long-term outlook is unchanged, the June pax was weaker than we had assumed, requiring a downgrade to our 1H21 forecasts. We have also re-profiled the recovery shape across FY21-23 (now assuming a steeper recovery into FY24). FY21/22/23 pax downgrades are -6%/-3%/-2% causing cash-flow downgrades of - 8%/-5%/-2%, respectively.
On a stand-alone basis, our assumption is that SYD will recommence distributions when its key debt metric (FFO:debt) recovers to that required of a BBB credit rating. Based on our assumed recovery shape, we think this could occur by 2H22, thus first cash payment to investors in say February 2023. However, we think SYD has sufficient excess capital that it could recommence dividends ahead of this trigger if it sees a sustainable path to pax (and thus earnings) recovery, likely driven by the success of vaccination programs.
Stand-alone valuation $7.04ps (+1cps) vs pre-bid close of $5.81ps (note broader market is down c.1% since that time).
HOLD, given the takeover offer has pushed the share price beyond our stand-alone valuation. Upside to the (login to view) indicative bid is c.5% at current prices. Downside if the bid is withdrawn and the stock falls back to pre-bid levels is -26%.
We think the bid consortium is employing more aggressive assumptions than us regarding traffic recovery, long-term growth, target equity returns, and balance sheet utilisation. However, we think it unlikely that the bid consortium will walk away from the offer after the first rejection (or an alternative bidder emerges).
An increased takeover price, either from the Sydney Alliance consortium or a counter-bidder.
Recommencement of the distribution, which we expect will attract income-oriented investors back to the stock and thus help close the pre-bid gap between share price and fundamental value.
Bid not proceeding or extended delays in an agreed deal’s completion.
Extended pax recovery phase, with weakened growth thereafter.
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