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Visitor growth drives solid Sydney Airport result

Glenn Freeman  |  23 Aug 2018Text size  Decrease  Increase  |  
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Australia's largest airport has posted great gains aeroplane aviation

Australia's busiest airport posted a $174 million post-tax profit for the first half of fiscal 2018. In addition to the solid profit result, revenue rose 7.9 per cent to $770.8 million on the back of passenger growth and the airport's four business areas: aeronautical, retail, property and car rental, and car parking and ground transport. 

Sydney Airport (ASX:SYD) management also announced an interim fully-franked distribution of 18.5 cents per stapled security, up 8.7 per cent from 16.5 cents a year ago. 

Earnings before interest, taxes, depreciation and amortisation across the company was up just over 8 per cent.

The result was largely in line with Morningstar's expectations. Domestic traffic growth of 2 per cent was on par with our expectation. The international passenger growth figure of 5.2 per cent was just slightly ahead of Morningstar's 4 per cent projection. 

"Although we expect further near-term slowing," says Adam Fleck, regional director of equity research, Morningstar Australia. "We expect the rising middle class in China and new airline routes will drive above-population gains" 

"In particular, travellers from China tend to spend more than other foreign tourists on duty-free and other retail options, and both Auckland and Sydney Airports enjoy continued solid gains in these passengers. 

International travellers from various emerging market countries outside China also contributed to the positive result.

Gains set to continue 

Fleck anticipates overseas traffic gains of nearly 4 per cent annually through calendar 2023, and domestic passenger growth of about 2 per cent. 

"This international growth is a core driver of further gains in high-margin, non-regulated retail revenue," he says. 

Outside of aeronautical, retail contributes around 23 per cent of Sydney Airport's revenue.  

"Retail revenue per passenger was up 5 per cent, slightly ahead of where we anticipated," Fleck says. This was attributed to updated retail lease agreements – in favour of Sydney Airport management – and duty free. 

Further lease-driven increases are expected in the year ahead, following Sydney Airport's re-acquisition of terminal three from Qantas last year.  

"Airport management will get slightly better lease terms than last year. It won't be as favourable an increase as last year, when leases jumped by 9 per cent in favour of Qantas, but they will achieve at least a 5 per cent increase this year," Fleck says. 

Unsustainable distribution growth

"In terms of the dividend, we forecast 35.5 cents per stapled security - management did a bit better than we expected, but only slightly," says Fleck. He sees some risks ahead in maintaining its current rate of distribution growth over the longer-term, given these are partially funded by debt. 

Airports tend to be highly capital intensive and often utilise substantial debt funding, "and Sydney Airport is more highly geared than many global airports," says Fleck. 

"Given debt funding of all capital expenditure and the very high distribution payout ratio, we are concerned that this may prove unsustainable, and assume distribution growth will slow over the next decade.” 

In the shorter term, low interest rates have benefited this part of Sydney Airport, but the reversion to "more normal levels," is a considerable threat, he concludes.

 

Glenn Freeman is senior editor, Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication. 

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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