Company Overview - Sydney Airport Holdings Limited (SAHL) is engaged in the ownership of Sydney Airport. The Company is the responsible entity of Sydney Airport Trust 1 (SAT1) and Sydney Airport Trust 2 (SAT2). Its investment policy is to invest funds in accordance with the provisions of the governing documents of the individual entities within the Company. Southern Cross Airports Corporation Holdings Limited (SCACH) is a subsidiary of SAT1 and SAT2. Sydney Airport owns the lease to operator Sydney Airport, also known Kingsford – Smith airport until 2097. Sydney is the busiest airport in Australia handling around 38 Million passengers annually and connection close to 100 international and domestic destinations. While not explicitly regulated, aeronautical and car park operations are monitored to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight.

Analysis – SYD released its traffic statistics for December. International traffic grew by 5.2% in December and 3.7% in November while the Domestic traffic grew by 2.6% instead of -1.7% in November. Total traffic was up by 3.5%. International traffic strengthened as airlines stepped up capacity growth and Aussie outbound growth of 4.8% remained solid. The other markets which did really well were Singapore with a 24.6% growth, Malaysia with a 11.8% growth, France with a 11.4% growth and India with a 10.8% growth were the other major growth markets. China traffic remained robust with a 8% growth.

We continue to expect International growth to remain supported by aircraft upgauges and new services. With centre for aviation data indicating capacity growth due to the introduction of Air India services to Delhi and Sichuan Airline service to Chongqing.  Domestic traffic growth on the other hand is likely to remain subdued in FY14 with Qantas and Virgin Airlines talking about tough trading conditions.

On a full year basis the international traffic grew at 4.1% and domestic traffic grew at 1.9%. On the international front this compares well with the averages since 2001 the international average has been 3.5%. While growth across the Asian regions was the strongest with China growing at 14.9%, Malaysia at 12.9% and Singapore at 11.8%. More traditional markets like the US with 4.7% growth and UK with 5% growth also performed well.

The coming six months are likely to be an eventful period in SYD’s life. In the near term SYD will continue to benefit from the growing international traffic, particularly from china and India but also from more traditional locations like Europe and US which may provide some scope for upside. Any discipline from the airlines in domestic capacity will have only a minor effect.

The major excitement though is the scope for Qantas and SYD to finally cut a deal around acquiring T3 and the Jetbase ground lease. Acquiring the lease just does not replace the of the $25 Million ground lease with passenger based growth it creates an avenue for both near and long term growth across the airport. Importantly the initiative delivers cost savings for Qantas and low cost terminal expansions for Virgin.

With T3 transaction we expect SYD will negotiate at a very similar time the next access regime. We believe that this will be extended by 10 years instead of 5 years as the implementation of the airport re-organisation will take 5 years. In the past SYD provided an initial step down in pricing on renewal which is a risk but would be more than offset by the T3 income.

CY13 is a year of transition as was CY12, with Sydney moving to 100% ownership, restructuring the business and settling the tax dispute. CY14 dividend may grow reflecting better aeronautical pricing, solid international traffic and benefits from property and car parking. However higher refinancing and interest costs will slow the growth as well.

The growth of international passengers in fourth quarter was 4.2% down from 4.9% in Quarter 3. This was better than the first two quarters of 3.6% and 3.7% respectively. The difference was QANTAS family’s (Emirates, Jetstar and Qantas) capacity growing instead of contracting in the second half of 2013.
Within the customer mix Australian outbound passenger growth was  strong at 4.8% for the 12 months lifting its usage of the Airport to 51%. Within the numbers, the disappoints was NZ with traffic up only 1.7% with minimal growth in most months. NZ customers are 10% of the Airport’s volume. China traffic also slowed in the fourth quarter reflecting the regulatory changes. China passenger growth rebounded to +8% in December. Growth was supported by Sichuan airlines commencing a twice weekly service.


Source – Thomson Reuters

Price		Price % Change
Close:	3.89 (05-Feb-2014)	3M:	(3.23%)
52 Wk High:	4.20 (31-Oct-2013)	6M:	8.66%
52 Wk Low:	3.11 (21-Feb-2013)	1Y:	22.71%

 
 

Dividend
Yield	6.213018	FY
	7.787006	5yr Av
Payout Ratio	218.0804	FY
	117.4776	5yr Av

 
The outlook for CY14 international passenger growth is slowing. United Airlines will be switching from the 777’s Aircraft to 744’s resulting in 25-30% reduction in seating. We also expect that China southern will also be switching from A380 to A330 in the low season  which will cause some capacity reduction. Cathay changes from last year have another 6 months to run. Collectively these changes create a 1.5% drag on seat growth.
 
Given Macquarie was responsible for Sydney Airport’s aggressive financial leverage and dividend policy; its exit could be an opportune time for the airport to take a more conservative approach. We believe this is warranted given the substantial capital expenditure requirements in the coming decade. The recent reintroduction of a distribution reinvestment plan will help funding needs but the sustainability of the airport’s capital stricture remains a key concern.

Improving the car park offering has been a major focus recently with the fir substantially adding car spaces improving the value proposition and stepping up marketing efforts. Solid revenue growth should continue as new capacity is added, more short stay visitors are targeted and dynamic pricing is used to maximise utilisation in peak and non-peak periods. Ongoing advertising should help increase general awareness and reduce leakage to off airport parking providers.

With up gauges and new services to drive ongoing traffic growth and CAPA data indicating traffic growth to remain solid over the coming months, we remain positive on the outlook for SYD. We will be putting a BUY on the stock at the current closing price $3.89.
 
 
 

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