Sydney Airport: Preparing for take-off

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
25 February 2021, 2:30 PM
Sectors Covered:
Infrastructure, Utilities

  • The FY20 result was broadly as expected, with limited cash burn and ample liquidity to be topped up by a Danish tax refund and Sydney Gateway proceeds.
  • Looking out next 12 months we are optimistic that pax will be in a sustained recovery phase. ADD retained with a revised price target (login to view).
  • Estimated 5-year investment IRR at current prices of c.9% pa, driven mostly by potential share price growth given we don’t expect distributions until 2H22/1H23.

How did the business perform in FY20?

There was no surprise that the pre-reported 92% decline in passenger volumes in 2H20 badly impacted earnings.

EBITDA declined 73%, although the result was distorted by accounting adjustments including those related to c.$150m of rental concessions.

Sydney Airport (ASX:SYD) did well in the period to enhance liquidity, reduce underlying opex (-34%), scale back capex, and reduce debt service.

The key surprise compared to our forecast was the relative resilience in aero revenues, which SYD says relates partly to the growth in freight aircraft movements (+124% YoY) during the period.

How does liquidity and cash burn look while revenues are low?

We estimate operating cash burn (post opex and debt service) averaged c.$6m/m in 2H20; post-capex (which is likely to be lumpy) the average burn increased to c.$21m/m.

Debt totalling $719m falls due in FY21, which we suspect SYD will refinance. Compared to this spend, SYD exited FY20 with $3.5bn of liquidity (cash and undrawn debt facilities).

Adding to this, it received a $40m refund from a legacy Danish tax dispute in 1H21 and will received $197m from the NSW Govt in 2H21 related to the Sydney Gateway project.

Liquidity will rapidly replenish with a ramp-up in revenues. SYD is lobbying for full opening of domestic borders when Phase 1b of the Federal Govt’s vaccine plan is undertaken, and international border opening with Phase 2b (targeted October).

What is the outlook for earnings and distributions?

Our short-term earnings forecasts are broadly unchanged. We forecast a 4% decline in EBITDA in FY21F, with traffic growing 13% YoY but still 65% below FY19A.

We assume pax lifts above FY19A by FY24F, with EBITDA materially surpassing FY19A in that year and growing at c.5% CAGR across FY25-29F.

In FY24, credit metrics look strong due to FY20’s capital raising and the Sydney Gateway proceeds, providing capacity for growth investment and/or capital management.

While we continue to assume distributions do not recommence until 2H22 (paid 1H23) pegged off recovery in credit metrics to those required of a BBB credit rating, this may prove conservative.

SYD may recommence distributions when it has confidence that travel restrictions are lifted and there is evidence of a recovery in traffic; both seem to require a successful vaccine roll-out.

What is the stock worth?

Our DCF-based 12 month target price is revised (login to view), down 9 cps due to a reduction in the long-term international aero price growth we assume. The current share price and our target price imply an EV/EBITDA of c.18x and c.19x pre-COVID-19 earnings respectively.

Both are below the c.21x EV/EBITDA (CY20F) that SYD was trading on in the months leading up to the commencement of the pandemic and the CY19 average of c.19.8x.

Given rising government bond yield concerns (now c.1.6% pa), note we assume a riskfree rate of 3% pa in our DCF valuation. A +/- 50 bps change in our cost of equity changes our valuation by -/+44 cps, holding all else constant.

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