Sydney Airport
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 25 October 2016, 10:38 AM
- Sectors Covered:
- Infrastructure, Utilities, Banks
Underlying businesses tracking well
The recent investor briefing reaffirmed our view that Sydney Airport (SYD) is a high quality, well managed infrastructure asset. Growth prospects driven by broad-based international passenger growth and expansion of commercial activities are solid. The balance sheet is strong, with significant additional debt capacity within the current credit rating (may see a credit rating upgrade if this capacity is not utilised). Interest costs will likely decline into FY17 (due to expiry of expensive swaps) while refinancing risk is low due to long debt tenors and staggered debt maturities.
Two unknowns are the impact of autonomous vehicles on the car parking business (asset stranding risk in the long-term, offset by the ability to re-purpose assets and apply different pricing approaches) and the development of the second Sydney airport at Badgerys Creek (NOI from government expected in 2016).
Macro is currently overriding the underlying fundamentals
SYD's share price is down ~16% from its all-time high in late July. This coincided with the Government long bond rates rising ~50bps off all-time lows to ~2.3% pa, dragged higher by rising US Treasury bond rates. Our risk free assumption in our DCF discount rate is 3.5% pa, thus conservatively above the spot rate. For our valuation to equate to the current share price requires the risk free rate being increased to ~4.85% pa, holding all else constant.
This seems hard to comprehend given the current Australian economic environment with low CPI. The disconnect is that the bond rates are being driven by a strengthening US economy while the Australian economy remains relatively weak (delivering low CPI).
Investment view
The share price decline does not reflect deterioration in the performance of the underlying business. It is likely due to the change in direction and momentum of bond rates, thus impacting the yield trade that has been the driving force behind the positive share price performance in defensive equities. There is a risk that the unwind in this thematic may pull the share price down further in the short term, particularly as the next potential event for the US Federal Reserve to raise rates draws nearer (we expect in December). However, interest rates remain low compared to term deposits and money market rates. In such an environment, SYD's 5.1% yield with forecast high single/low double digit compound growth in cashflow and DPS remains attractive. We expect fundamentals will drive share price recovery over the medium term.
We retain our Add recommendation.
More information
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