In Ord Minnett’s view, Sydney Airport offers exposure to an attractive asset class with high barriers to entry, limited effective substitutes and an end-market that has demonstrated resilient growth in the face of numerous exogenous shocks. We initiate coverage with a Buy recommendation and a target price of $8.45.
We note the following key factors contributing to our positive investment view:
- International passenger growth – An international passenger is expected to generate at least three times the revenue of a domestic one, when non-aeronautical revenue is included. Importantly, we forecast international passenger growth of 7.1% in CY17, 6.7% in CY18 and 6.4% in CY19. This is a key contributor to our group net profit compound annual growth rate of 10.7% for the three years to CY19E.
- Retail precinct – We estimate Terminal 1 (International) achieves average sales per square metre of $25,000–50,000, depending on whether we include non-duty-free or duty-free stores. We believe this enables Sydney Airport to charge rents four to five times higher than specialty store tenants might pay in leading retail centres throughout Australia.
- Car parking – Sydney Airport’s estimated car park operating margins of 70–75% are above the 56–66% achieved by other airports and 40–45% for non-airport operators. In addition, we calculate capacity expansions have generated returns on investment of 35–65%, so further investment should be accretive.
- Property revenue – Estimated average annual rental growth of 4.7% per annum reflects the high tenant demand for on-airport facilities. This should be boosted by the recent addition of the airport’s new hotels.
- Western Sydney Airport – It is not clear that increased competition from a second Sydney airport will result in a significant drag on Sydney Airport’s earnings growth, let alone an earnings reduction over the foreseeable future. In our view, the impact has probably been overstated.
The key risks relate to material changes in forecast passenger and aircraft movements; external events such as acts of terrorism, war or strikes; regulatory constraints including licensing, security, immigration, safety; competition (for example, Western Sydney Airport is expected to become operational in CY26); and Sydney Airport’s ability to refinance debt at a reasonable cost on a regular basis.