Anna Kassianos is a senior analyst – materials and energy – with Australian equities manager Platypus Asset Management.
How long have you held Sydney Airport Holdings (SYD)?
We initiated our position in November 2013 post Macquarie Bank’s distribution of its Sydney Airport position to its shareholders (we have maintained a Macquarie Bank position since April 2013), and associated Sydney Airport Trust restructure. We topped up our position in May 2014 in anticipation of further RBA cash rate cuts and expectation for relaxation of the China-Australia flight caps under the new bilateral agreement.
What do you like about it?
We like Sydney Airport for continued international passenger growth, particularly from the large scale emerging opportunities of China and India, and increased patronage from up-gauging of flights to A380s. For example, post the free-trade deal between the Chinese and Australian governments, the new aviation agreement signed in January will enable tripled capacity on routes between China and Australia over next three years. Sydney Airport management is guiding 6.4% growth in distributions, with 100% coverage by net operating receipts. We are expecting 30% growth in net operating receipts by end 2017. Furthermore, Sydney Airport has successfully taken advantage of the low interest rate environment globally, and completed the last portion of bank debt refinance last year, with debt now 100% covered by bonds.
Sydney Airport also takes a very low risk approach to investment; spending $1.2bn capex over the next five years, with no single project more than 5% of the capex program, and it can be deferred in line with demand, if required.
How is it better than its competitors?
Its ASX listed airport infrastructure peer, Auckland International Airport (AIA) fails to compete on commerciality metrics. Further, in Asia Pacific Sydney Airport stands out as the best, with 82% EBITDA margin in 2014, while its peers trail at 23-53%. It has a 14.4% ROCE (return on capital employed) in 2014 against its peers at 6.9 to 12.7%.
What do you like about its management?
Sydney Airport management have got the balance right, with a focus on delivering growth by offering an enhanced passenger experience, but not compromising shareholder distribution growth or balance sheet strength. Management is focussed on sustainable growth, and recently committed to the Global Reporting Initiative’s G4 guidelines, becoming the first Australian airport to commit to annual sustainability reporting, despite it not being a requirement.
What is your target price?
Our target price is $8.50 a share. However our valuation has the opportunity to be refreshed if Sydney Airport exercises its right to participate in Sydney’s second airport to be located in Western Sydney’s Badgerys Creek. Despite several iterations, bipartisan support is now clearer for a Western Sydney airport versus 10 years ago. We see management trying to add value during the current consultation phase with the government, and at the same time make sure there is no cannibalisation of Kingsford Smith Airport patronage; focusing on appropriate charges to ensure sufficient demand, but balanced out against cost recovery.
At what point would you sell?
Given Sydney Airport is committed to EBITDA growth ahead of passenger growth; a decline in EBITDA growth would be considered a reason to sell. We see downgrade risk as a low probability, with 2.1% year-on-year international growth in February 2015, and 1.7% International passenger growth to date in CY15. A further risk is participation in a sub economic development of Sydney’s second airport – which is low probability, given we don’t expect management to breach their internal ROI hurdles which has supported their historical growth and balance sheet strength. More importantly, we will continue to monitor the threat of rising cash rates globally, as we expect this will push investors to shift away from yield investments. We see this risk continues to be more skewed toward a standstill or easing bias globally, given the poor US payroll numbers out on 3 April 2015, but also RBA’s surprise easing in February 2015 and the strong likelihood for follow-up by a further cut or cuts, respectively.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
It has added 20 basis points performance over past 12 months, to end March 2015.
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