Sydney Airport: Interim result 2012

The operating leverage we’ve highlighted on numerous occasions as a major positive attribute for Sydney Airport securityholders—most completely in MAp: A classic Long Term Buy of 31 Jan 11 (Long Term Buy – $2.99)—was on display again in the recent interim result.

On a 100% ownership basis (Sydney Airport, the listed entity, owns 84.8% of the actual airport), the airport reported a 1.6% increase in passenger numbers for the 6 months to 30 June, consisting of a 5.0% increase in international passengers and a 0.2% reduction in domestic travellers. On this 1.6% passenger growth, underlying revenue rose 5.6% to $498.6m. And underlying earnings before interest, tax, depreciation and amortisation (EBITDA) rose a quicker 6.7% to $401.3m.

Management highlighted the factors behind this operating leverage, none of it new to Intelligent Investor members—passenger growth, inflation linking (or inflation-plus growth) for most of its revenue, economies of scale (costs rise less rapidly than passenger numbers or revenue) and the group’s canny capital investment execution (such as the recently completed second multi-story international car park).

Add in the airport’s financial leverage (although the listed entity has no debt, the airport has net debt of $6bn at the asset level—a number we remain comfortable with), and the cash flowing into the listed entity's coffers grew 24% compared with the same half last year. As highlighted in past reviews, this cash flow growth hasn’t resulted in distribution growth to ordinary securityholders in recent years. That’s because the listed entity used to pay out more than it earned in net operating cash flow but has since adjusted to a much more sensible policy. With 2012 distributions fully backed by operating cash flow, we expect healthy distribution growth in the years ahead as the airport continues to increase profits.

With the stock up 5% since Sydney Airport: Holding pattern? of 25 Jul 12 (Hold – $3.02), price is the main stumbling block to an upgrade. In recent years, we’ve been able to recommend this stock on a pre-tax starting yield of 8% or more (and more than 13% during the global financial crisis), with all future distribution growth thrown in for free. Today, that starting yield is 6.6% and the opportunity is less attractive as a result. But we're not in a rush to sell either, as highlighted in the attached recommendation guide. HOLD.

Note: Both the Income and Growth portfolios own Sydney Airport securities.