Sydney Airport

Sydney Airport (SA) recorded strong performance in 1H16 with 6.7% YoY increase in passengers to 20.3m (increase of 9.3% in international and 5.3% in domestic), which saw 9.8% YoY increase in EBITDA to AUD536m. Operating margin was largely unchanged despite Terminal 3 (T3) costs and step-up in service standards. Their international passenger growth has exceeded the long-run average of 3-5% as it was driven by 7 new airlines coming to Sydney Airport (e.g. ANA, Qatar, American Airlines, Szechuan Airlines, Air Asia X). Load factors were largely maintained. Domestic passenger growth was also above the long-term average of 2-3%. The emergence of more Low Cost Carrier (LCC) has created new demand, making up 10% of international traffic currently. CAPA projected that there will be another 10 LCCs flying from Asia to Australia soon. SA will be courting these new LCCs via looking at their aircraft deliveries with direct need to the Sydney market. The demand is driven by the increasing population in Sydney and the education market. The group has been focusing on the retail segment which is a high margin space for the group. They have made significant improvements in Terminal 1 via a new Duty Free contract which includes a new layout plan which has helped to improve footfall traffic flow. They are also bringing in higher-end brands and are increasing their range of F&B services. The impact of these changes will be more significant in 2H16. The key driver of this segment’s growth is the demand from Chinese passengers. However, in terms of earnings segmentation, they expect the segment to remain the same as the said changes are meant to help maintain income and/or improve margins.

The development of the new airport in Western Sydney will be one of the largest infrastructure projects in Australia and would be the first major greenfield airport projects in decades. We gather this move by the Australian government is to drive job creation and diversion of population dynamics as it would require a lot of infrastructure. Note that the government has had this land for 40 years and the airport construction period could take 10years while ramp-up could take a while. SA currently is running on 70% capacity utilisation and thus, the sense of urgency to develop a new airport in Sydney is not overly high. CAPEX allocations have not been decided yet, but it is worth noting that the site clearance cost will be high (18,000ha greenfields with existing homes/schools) while the land is not entirely flat. The Australian government have indicated that they will be giving SA a proposal by year-end, although there have been several rounds of postponements.

The group has a CAPEX budget of AUD1.3b over the next 5 years on capacity, productivity improvement and product enhancements. 75-80% of CAPEX is expected to be still in aeronautics. They will be investing in: (i) more self-service checks, (ii) further upgrades for Terminal 1 including expansion of the runway space, (iii) increasing bus services, (iv) building of a hotel at the domestic airport (AUD20m) and SA intends to own the future 2-3 star hotel (previously leased) given the high occupancy rates, and (v) increasing carpark capacity by 10% over the next 18 months (a third for domestic and the remaining for international).

1H16 distributions improved by 20% YoY to 15.0 cent with expectations of full-year distribution of 31.0 cents (+21.6%). They enjoyed debt cost savings (by 40bps YoY) due to favourable hedging policies and expect the trend to continue in 2H16 with an expected effective interest rate of 5%. The next major debt maturity in in 2020. Note that their dividend pay-outs are based on cash-flow rather than profits. We have no coverage on SA. Bloomberg consensus CALL/TP is BUY and AUD6.88

Source: Kenanga Research - 2 Dec 2016