Sydney Airport reported CY17 operating earnings (EBITDA) of $1.196.4bn, up 10.2% on the same period last year and 2% ahead of our forecast. Importantly, each segment reported good revenue growth, as expected, including aeronautical up 9.2%, retail up 12.7%, property and car rental up 8.4%, and parking and ground transport up 2.2%. A final unfranked distribution of 18.0cps was declared, as expected.
We were left perplexed by the initial negative share price reaction following the result. It may have been investors were disappointed by the dividend guidance of 37.5cps – 0.5c below CY18 estimates – or the additional $500m of capital expenditure towards the back end of CY18–21.
In our view, this was a strong set of numbers and we made the following key observations:
- Growth in passenger numbers (PAX) of 7.2% for the full-year and 6.5% for the second half demonstrated the resilience of this segment. Critically, management commented it had not seen any material decline in the rate of growth in the number of passengers from China. This is key, in our view, as we estimate Chinese visitors contributed almost one-quarter of last year's absolute growth in international PAX. Airlines continue to support this growth based on planned capacity additions – we forecast first-half CY18 capacity to increase by 6% for international and 4% for domestic.
- Retail revenue growth of 12.7% reflected the first full-year of operation of the new Terminal 1 (T1) luxury precinct and other developments. Importantly, management commented there had been no material change in visitors’ spending behaviour at T1.
- Adjusted net debt rose to $8.0bn, but the cash flow cover ratio increased from 2.7x to 3.0x and the net debt to EBITDA ratio fell from 6.9x to 6.7x.
Sydney Airport is our preferred stock in the infrastructure sector, and we maintain our Buy recommendation with a target price of $8.45.