Roy Davidson, 18 January 2018


Sydney (Kingsford Smith) Airport is located 8km from the Sydney city centre, has three runways, three passenger terminals, and is the busiest in Australasia.

SYD is a near monopoly asset with defensive qualities. With a high fixed cost base, it also has high leverage to increased passenger numbers. Passenger growth has been very strong over recent years as Australia has experienced a tourism boom and airlines have added significant capacity. This has seen it string together a number of superb results. We expect passenger growth to continue growing strongly, albeit moderating, which will continue to act as a tailwind. Interest rates have also fallen substantially over the past few years making higher yielding companies like SYD more attractive. However, higher interest rates now appear to be on the horizon, which tempers our view on the infrastructure sector, including SYD.

SYD delivered a very good result for the first half of 2017, with strong operating earnings growth again driven by continued strong growth in international visitors. FY17 distribution guidance was upgraded to 34.5 cents per security, up from 33.5 cents per security. This represents 11.3% growth on the FY16 distribution and reflects management’s confidence in the outlook.

The Australian Government recently outlined the terms for SYD to develop and operate a second airport in Sydney. However, the key feature of this is that there would be no Government subsidy or procurement protection (protecting SYD from escalating costs). This decreased the attractiveness of the opportunity and ultimately saw SYD decide against building the airport. This has obvious competition implications for SYD and decreases its attraction as a near monopoly asset. However, the airport will be operational on the mid 2020’s, and primarily be used for domestic services, freeing up more slots at Kingsford Smith for higher yielding international flights.

SYD is an irreplaceable asset and we see considerable long-term investor value in this high quality infrastructure vehicle with excellent management. We see SYD as an attractive complement to Auckland International Airport. The growth in passenger numbers is expected to continue, albeit should moderate after several strong years. At a macro level, rising interest rates will be a headwind to the share price.

Risks to SYD include; 1) rising interest rates, 2) regulatory change, and 3) technological change.