Sydney Airport: Domestic on the recovery path
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 20 April 2021, 9:30 AM
- Sectors Covered:
- Infrastructure, Utilities
- Domestic pax is strengthening, with positive forward indications from domestic carriers. Timing of recovery of the more valuable international pax is uncertain.
- Forecast changes and valuation roll-forward lift our 12 month Target Price (login to view).
- Add retained, given 12 month potential TSR of c.17% and 5yr IRR of c.9% pa. In the next 12 months we expect line-of-sight to re-commencement of distributions, benefitting the share price as income-oriented investors return to the stock.
March quarter 2021 pax data
Sydney Airport's (ASX:SYD) Q1 pax was down 82% vs 2019 (ie pre-COVID-19), with international down 98% and domestic down 72%.
However, it was encouraging to see the month of March have by far the highest domestic pax in 12 months (particularly given the month included the Sydney floods and a short Brisbane lockdown, and excluded Easter), up 88% on the Feb-2021 volume. It bodes well for a strong April performance.
Key domestic airlines taking a more positive stance
Qantas (~70% domestic market share) expects to lift group domestic capacity to 90% of pre-COVID-19 levels in the June quarter.
It notes strong leisure demand (stimulated by the Federal Govt’s half-price fare offer and we suspect a substitution of domestic travel for international) and corporate travel rebounding to ~65% of pre-COVID-19 demand. It also expects to further increase capacity into its FY22.
Virgin expects to be operating more than 80% of pre-COVID-19 capacity by mid-June, and says that over 75% of tickets booked are for travel from May onwards.
We have upgraded our FY21 domestic pax forecast, but moderated the recovery beyond FY21 in line with a more elongated international pax recovery profile (the historically high correlation between domestic and international pax suggests a full domestic recovery will be partly driven by recovery in international pax).
Timing of international recovery still uncertain
In CY19, Trans-Tasman (TT) travel contributed 12% of SYD’s international pax. The two-way TT bubble commenced 19 April, with Qantas noting strong demand since it was announced.
We assume travel across the ditch lifts international pax through the airport to ~15% of pre-COVID-19 levels by November. Full international pax recovery will depend on the timing of the Australian Government’s vaccination rollout and border re-openings.
As discussed above, we now assume 100% of FY19 international pax is achieved by FY24. This approach assumes the trend growth that may otherwise have been achieved without COVID-19 is not recovered.
On the flipside, the c.12% contribution to international pax pre-COVID-19 from Sydney/mainland China travel may be at-risk given geopolitical tensions.
We make a minor EBITDA upgrade to FY21F (upgrade to domestic pax outlook), material downgrades to FY22-23F (slower international pax recovery profile), and upgrades from FY24+ (as per higher CPI expectations implied in CPI swap curve).
We forecast EBITDA surpassing FY19A in FY24F, and then growing at 5% pa CAGR until FY29F. Increased forward interest rates (as per uplift in swap rates) cause materially higher debt service from FY27+ (reflects fixed rate debt and swap maturities).
We continue to assume no distribution until 2H22 (paid early CY23), when credit metrics return to those required of a BBB credit rating (albeit they could re-commence earlier given potentially excess capital).
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