Sydney Airport enjoys strong competitive advantages, stemming from its position as the only airport in Sydney capable of handling international aeroplanes at present. The airport, under lease through 2097, is Australia's busiest and currently the only regular passenger transport airport in Sydney. It has strong operating leverage and it is currently benefiting from low interest rates and zero tax bill. This combination is reflected in our nearly 8% per year distribution growth forecast through 2021. That said, longer-term interest rates will inevitably revert to more normal levels, and by 2024, we estimate that Sydney Airport will start paying tax. Furthermore, the second airport in Sydney is set to be operating by 2026, which may prove dilutive to current returns. As such, we estimate distribution growth will slow, ultimately growing at about 5% over the next 10 years.
Analyst Note
Auckland Airport's Wide Moat and Attractive Valuation Makes it Our Preferred Pick Versus Sydney
We reiterate our narrow moat rating for Sydney Airport and wide moat rating for Auckland Airport. We believe both enjoy strong competitive advantages, but have greater confidence in the sustainability of Auckland's excess economic profitability given its land ownership, lack of foreseeable competition, and track record as the main entrance point into New Zealand. Conversely, Sydney Airport will face competition from the new Western Sydney Airport that is slated to open in 2026, has ceded some international traffic share to Melbourne, and operates through a 99-year lease. Nonetheless, we expect both airports to enjoy robust gains in international traffic, supported by further middle-class development in emerging economies, particularly in Asia. We believe Auckland Airport's valuation is more attractive. We've bumped up our fair value estimates due to the time value of money and higher long-term passenger pricing, to NZD 7.10 per security (AUD 6.40) for Auckland from NZD 6.70 (AUD 6.10), and to AUD 7.10 for Sydney from AUD 6.80, suggesting Auckland Airport trades at a discount, and Sydney Airport at a slight premium. Sydney's securities offer a higher 4.8% distribution yield versus Auckland's 3.5%, but we caution that this comes with risk. Sydney opts to pay out 100% of its net operating receipts (net income plus depreciation and amortisation, and other non-cash items), whereas Auckland pays out 100% of its net income. This difference results in Auckland paying out about half of its net operating receipts, keeping some cash to fund capital expenditures. Instead, Sydney has taken on debt to support both its payout and capital spending programs, putting net debt/EBITDA at a relatively aggressive 7.5 times at the end of calendar 2016 versus a more conservative 4.3 times for Auckland at the end of fiscal 2017. We expect both firms to grow their distributions at about 5% annually over the next decade, but Sydney's higher gearing introduces greater balance sheet risk.
SYD Price at posting:
$7.27 Sentiment: None Disclosure: Not Held
