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Market Price: $5.50
Market Cap: $12.4b
Business Overview
Sydney Airport (Kingsford Smith, SYD) is an international Airport located 5km south of the Sydney CBD and owned by the ASX listed Sydney Airport Group. It is the primary airport serving Sydney and the primary hub for Qantas Airways Limited as well as a secondary hub for Virgin Australia Holdings Limited. Situated next to Botany Bay, the airport has three runways and is the busiest airport in Australia handling just under 43 million passengers and approximately 350,000 aircraft annually.
Traffic Update & Aero Operations
Towards the end of May, the company reported total passenger numbers (PAX) declined 98% in April in both domestic and international travellers. These numbers are consistent with May PAX reported 19 June. Management has flagged a range of measures to position the business to come out the other side of the COVID 19 crisis including not paying the 1st half distribution, targeting 35% reduction in operating expense, lowering capex and increasing liquidity via new bank facilities.
We note all three terminals remain in operation for essential travel and freight. East-West runway is presently closed to allow for aircraft parking and airline agreements that have expired are coming due have been extended until conditions stabilise. SYD is reviewing and negotiating with non-aero tenants on a case by case basis, taking the position any outcome on measure affecting rent will be temporary and reflective of individual operating conditions.
Capital Position, Capex & Liquidity
SYD recently raised A$850m of bank debt supported by its syndicate of lenders, the CEO stating the company did not foresee the need to raise additional funds beyond this amount to secure the balance sheet. It was noted, however, management would be vigilant and test its assumptions as to capital structure as the world slowly came out of the health crisis. With standing liquidity at A$2.7b comprising cash, undrawn facilities and a recently closed A$600m US private placement bond - this being more than enough to cover the A$1.5b of debt maturing across 2020 and 2021. SYD’s balance sheet does not have any material additional debt piece due prior to 2025. The company has stated the A$1.2b of net liquidity is more than enough to sustain operations should existing conditions persist for some time. Guidance for capital expenditure came in at A$150m – A$200m being reduced by 50% and focused critical projects targeting safety and asset resilience. Non- critical projects that have been deferred include T2 Pier A retail development, a 3rd domestic hotel, bus expansion and various digital projects.
Outlook and Investment Thesis
Sydney Airport is a high-quality monopoly like infrastructure asset that will recover albeit facing extreme near term revenue headwinds. FY20 net operating receipts (NOR) are forecast to drop a little over 70% from FY19 coming in at 11.7c per share. Assuming no distribution is paid in FY20, we expect the cashflow coverage ratio (CFCR) to drop to approximately 1.7x. We view NOR (or DPS) recovering to 27c and 38c per share in 2021 and 2022. Domestic travel will recover well ahead of international led by opening up state borders and pent up demand in the form of domestic tourism. We assume domestic PAX to recover to 2019 levels by 2022 with international taking until 2024 to reach pre-covid levels.
| Revenue A$ (m) | 1,000 | 1,425 | 1,630 |
| EBITDA A$ (m) | 780 | 1,130 | 1,310 |
| Div yield (%) | 3 | 5.7 | 7 |
| Net Debt/EBITDA (x) | 12.5 | 9.0 | 8.0 |
| Franking (%) | 0% | 0% | 0% |
