If ‘sustainable competitive advantage’ had to be boiled down to just two words, we venture the phrase ‘Sydney Airport’ (ASX: SYD). The airport is a regulated monopoly and offers you a stable, growing dividend yield around the 4.4% mark. When it comes to high-quality infrastructure assets, they don’t get much better. Here's why.
1 – Friendly regulators
Sydney Airport is one of the main arteries of Australia’s largest city and, being a monopoly, has significant pricing power.
Although the company operates within guidelines, regulation is considered ‘light handed’ by world standards, as the Australian Competition and Consumer Commission (ACCC) doesn’t set prices directly or impose pricing caps, as in much of Europe and the USA. Aeronautical fees are negotiated directly with the airlines and non-aeronautical revenue – such as retail rents and the infamous car park fees – are subject to little more than monitoring.
In a nutshell, Sydney Airport has more opportunities than most infrastructure stocks to take advantage of its monopoly position.
2 – Solid growth prospects
The airport expects to serve twice as many passengers by 2030; an annual growth rate of a bit under 5%. Revenue growth, however, will almost certainly exceed this once you factor in rising aeronautical fees and retail rents.
Earnings and dividends should grow faster still, as a large proportion of the airport’s costs are fixed, so a little more of each incremental dollar of revenue will fall to the bottom line. It’s conceivable that Sydney Airport could increase earnings in the high single digits over the long term.
But there’s a catch: monopoly infrastructure assets like toll roads, airports and railways almost never come freehold. Sydney Airport doesn’t actually own the land it sits on, which is instead held under a long lease from the Government.
Thankfully, the concession expires in 2097 so there’s still plenty of time. Compare this to, say, Transurban (ASX: TCL), which only has a concession through to around 2050 on most of its key assets. In 34 years or so Transurban will cease to exist, at least in its current form – and you can bet your boots that investors will bail out of the stock far sooner. Sydney Airport’s lease expiry, on the other hand, is largely an issue for your grandkids.
3 – Improving balance sheet
With stable revenues, Sydney Airport – like most infrastructure assets – can handle a lot of debt. That’s doubly true while interest rates are low and the company has net debt of $7.6bn at last count.
The airport uses debt to fund its capital expenditure requirements, such as upgrading terminals and runways, so net debt has been increasing. Normally, this situation is to analysts what broccoli is to 5-year-olds. But not this time.
The airport’s operating leverage means that passenger numbers and earnings can grow faster than capital expenditure requirements. While the absolute level of net debt is rising, the company is actually deleveraging at the same time. Debt becomes less of an issue each year.
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Disclosure: The author owns shares in Sydney Airport.