Looks Expensive – Sydney Airport

May Traffic Highlights

As per the May Sydney Airport traffic highlights, total passenger numbers has improved by 1.6% on year over year terms. Average load factors have improved for both domestic as well as international markets, by 1.5% and 2.5% respectively, indicating continuous demand for air travel. Domestic and international passengers year to date performance increased by 1.7% and 2.8% respectively, as compared to the year to date performance in 2014. Asian markets have been driving the inbound passenger growth, wherein Philippines, China and Hong Kong delivered 33%, 22.7% and 14.8% YoY growth respectively. Korea and India passengers’ traffic witnessed a year over year increase of 11.4% and 7.4% respectively. 


Last twelve months data (Source: Company Reports)

Meanwhile, American Airlines will be starting a Sydney-Los Angeles service with a B777- 300ER from December 2015. This partnership will boost the capacity by 301,000 seats annually and will provide 29 services per week. Qantas has operation of over 20 frequencies per week to the United States mainland from and also starting a six weekly Sydney-San Francisco service by the end of the year through B747-400ER. However, Qantas is decreasing its Sydney-Las Angeles services to 10 per week from 14 per week. China Southern is expanding its Sydney-Guangzhou service for the entire norther winter season from October to March enhancing the seating capacity to over 33,000 per year, instead of operating only during Christmas. 


Top ten Nations traveling via Sydney Airport (Source: Company Reports)
 
 

Financial Performance

Distributions per stapled security has been improving since the last four years and the management expects the same even for 2015. Management estimates 25 cents per stapled security distribution for this year, which is 6.4% growth and subject to the aviation industry shocks and material forecast changes. This distribution will be totally covered by the net operating receipts.  Moreover, Sydney Airport’s growing passenger numbers as well as increasing rents might boost in the long term.


Distribution and Passenger Growth (Source: Company Reports)

During 2014, Sydney Airport delivered $3.1 billion of refinancing, which comprised of A$1 billion of European bond, bank debt facilities of A$1.5 billion as well as US private placement bonds of A$0.6 billion, The bond issuances were oversubscribed. The refinancing weighted average debt maturity increased by two years to mid-2022, while the next debt maturity is during the second half of 2015, representing just 6% of the overall debt outstanding. 


Debt Maturity Profile (Source: Company Reports)

With regards to the 2014 performance, Sydney Airport’s Aeronautical segment’s revenue contributes 49% to the overall revenues, and rose 4.9% on year over year terms to $568 million. The retail segment improved 5.6% during the year to $255 million, driven by the 8.2% and 13% growth in passenger spend rates and advertising respectively. The property segment increased by 3.6% on year over year terms to $194 million. In addition, the car spaces revenues also posted an increase of 5.7% to $140 million, as compared to 2013. Online bookings have also improved representing over 29% of the revenues among the car parking space.

Conclusion

On the other hand, the decreasing revenues and profit of Sydney Airports over the past few years have been among our key concerns, although it reported a decent year over year performance last year. Despite growing passenger traffic, Sydney Airport’s revenues reduced to $1.1 billion in 2014, against $1.4 billion in 2005, while the net profit plunged to $59 million in 2014 from $670 million in 2005. Above all, Net Debt surged to $6.4 million as of December 2014, due to $241.5 million capital expenditure in the year, raising our concerns on the stock’s performance in the future. Moreover, the company’s undrawn facilities and cash is over $1 billion, representing a huge gap between debt and cash. Sydney Airport estimates to incur $1.2 billion capital expenditure for 2015-2019, with no single project having more than 5% of the capital expenditure.

The shares of Sydney Airport Holdings Ltd (ASX: SYD) have delivered a year to date returns of 11.5% and over 20.4% over the last 52 weeks. Meanwhile, the stock has been under pressure over the past few months, posting a negative returns of 0.8% and 4.7% over the past three and one month respectively. Sydney Airport’s huge debts, concerns over funding for the highly capital intensive projects in Airports are among our key concerns on the group’s performance in the short term. Moreover SYD has a high P/E of over 195.9, making us more skeptical over the stock’s performance in the future.

Based on the foregoing, we give an “EXPENSIVE” recommendation to the stock at the current price of  $4.99.

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