Sydney Airport: In hibernation but ready to defrost

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
23 August 2021, 9:30 AM
Sectors Covered:
Infrastructure, Utilities

  • The 1H21 result was evidence of an airport in hibernation, with management doing a good job of managing costs and capital during an awful period for pax.  
  • The takeover bid remains the key influence on the share price while it is active. HOLD retained given the spike in the share price this takeover activity has caused. 

Event

Sydney Airport (ASX:SYD) released its 1H21 result. Rental abatement accounting distorted earnings. We focus on cashflow generation and liquidity. 

There was nothing new on the takeover bid, with SYD willing to engage with the bid consortium if it lifts its offer price.

Analysis

1H21 operating cashflow was +$43m. After deducting capex, the average cash burn in the period was -$6m/month (albeit we expect capex to be lumpy month-to-month). To put this into context, we expect SYD to generate >$1bn of operating cashflow when pax and earnings surpass pre-COVID levels in CY24.

SYD exited 1H21 with $8bn of debt and $0.5bn of cash. On our forecasts, when earnings recover to pre-COVID levels SYD’s FFO-to-debt should lift to >12%. This is well above the end-FY19 FFO-to-debt of 10% (which itself was above that required of a BBB+ credit rating), indicating significant balance sheet capacity.

EBITDA (our definition) declined -39% to $197m (revenue -31%, margin down >7%), which was 4% below our forecast. However, this was distorted by COVIDrelated accounting adjustments. SYD’s control of its costs has been strong, butcosts ticked up higher than we expected in 1H21.

Forecast and valuation update

The monthly data release showed the brutal impact that the NSW COVID outbreak and subsequent movement restrictions had on pax in July (international and domestic were 2% and 3% of their 2019 pcp respectively). We have downgraded FY21 forecasts, while leaving FY22+ mostly unchanged. Our forecasts also take account of the additional interest rate swap resets undertaken by SYD.

12 month target price unchanged and remains aligned to the indicative bid price of $8.45/sh. This assumes the consortium does not withdraw from bidding. Standalone valuation increases 14 cps to $7.18/sh, as a result of forecast changes (-9 cps) and valuation roll-forward (+23 cps).

The pre-bid close was $5.81/sh. However, accounting for broader market movements since that time and SYD’s historical sensitivity to such movements puts the price closer to c.$5.90/sh.

At the end of 2019 (ie. pre-COVID) the stock was trading at say $8.66/sh. Once again adjusting for SYD’s historical sensitivity to broader market movements, we estimate SYD’s comparable price may have lifted to c.$9.40/sh. However, adjusting for 2020’s capital raising dilutes this estimate to c.$8.60/sh.

Scenario analysis

The bull case is the Sydney Aviation Alliance consortium (or a counter-bidder) comes back with a higher price. At current prices, the rejected $8.45/sh bid implies c.10% upside. If we assume bidding finalises at say $8.75 (6% higher than the latest bid, but <3% higher on an EV basis), that’s c.14% upside at current prices. The quality of the consortium suggests they won’t walk away at the 2nd rejection.

The bear case is the bid consortium pulls out of bidding (the 20cps uptick to the bid price is not reflective of high conviction bidding). At current prices, the share price could fall >20% to market movement-adjusted pre-bid prices. Alternatively, the share price could fall c.7% to our valuation of (login to view).

Price catalysts

An increased takeover price, either from the Sydney Aviation Alliance consortium or a counter-bidder.

Re-start of the distribution, which we expect will attract income-oriented investors back to the stock and help drive the share price to fundamental value.

Risks

Bid not proceeding or extended delays in an agreed deal’s completion.

Extended pax recovery phase, with below trend growth thereafter.

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