Sydney Airport: Interim result 2013

Sydney Airport has reported a solid half-year result, with revenue increasing 9% to $554m compared to the previous corresponding period and earnings before interest, tax, depreciation and amortisation (EBITDA) up 6% to $437m.

Net operating receipts per stapled security were unchanged at 11 cents, fully covering the unfranked interim dividend of 11 cents paid on 16 August. The company maintained its guidance for full-year distributions to rise 7% to 22.5 cents (unfranked), which amounts to a yield of 5.9%.

International traffic growth of 3.6% helped to offset below average domestic passenger growth of 2.8%, to give overall traffic growth of 3.0%. Significant inbound traffic from China and other parts of Asia was given a boost by a number of airlines increasing seat capacity.

The continued trend towards less restrictive international air rights was a net positive because it loosened the passenger caps in particular regions. Bilateral Air Service Agreements between Australia and other countries regulate the amount of traffic flying to the gateway airports – Sydney, Melbourne, Brisbane and Perth – but allow unlimited flights to regional airports as a means to encourage growth in those areas.

Qatar, for example, is only permitted 14 flights per week to any of the gateway airports. Qatar Airways, in effect, is made to choose which airport it wants to fly to (it chose Melbourne and Perth). Airports are not quite the monopolies they seem: they have to compete for airlines. However, as capacity restrictions loosen up, we expect the better (and more desirably located) airports – including Sydney Airport – to benefit disproportionately.

Aeronautical revenues rose 7% to $224m (40% of the total), while Retail revenues (21% of the total) rose 5% to $116m on a normalised basis (after adjusting for duty free changes) and Property revenues (16% of the total) rose 11%.

Expensive parking

The best-performing segment, however, was Car Parking, which saw a 12% revenue increase to $63m (11% of the total). While Sydney Airport is still among the most expensive places to park in the world, the airport has gone to great lengths to improve customer experience with online reservations, discounts and a further 900 spaces to be introduced over the next few months.

Net debt rose in the half from $6.1bn to $6.2bn due to capital expenditure in the period of $104m, but the operational growth meant that net debt as a multiple of EBITDA fell from 7.2 to 7.1 and interest coverage crept up from 2.15 to 2.19.

As we explained in Sydney Airport offloads baggage on 14 Aug 13 (Buy – $3.60), Sydney Airport is purchasing the 15% it doesn’t own of the underlying airport and simplifying its structure. One of the benefits of the simplification is that it has helped bring about a settlement with the ATO. The resolution of this case has lifted a cloud over the stock and, along with the simplified corporate structure, has gone a long way to addressing two of our major concerns.

The stock is up 6% since 14 Aug 13 and is up 20% since we upgraded the stock in The ‘high yield & safe’ mini-portfolio on 1 Feb 13 (Long Term Buy – $3.18). With stable traffic growth of a few percent per year, a vastly simplified corporate structure and a distribution yield of 5.9% (albeit unfranked), Sydney Airport remains a BUY.

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