Sydney Airport: Interim result 2016

Australia's gateway airport is enjoying a bumper year, with international traffic particularly strong.

Sydney Airport served more than 20 million passengers in the first six months of 2016, a record result. A 9% rise in international passengers and 5% rise in domestic passengers helped the company increase revenue 11% to $662m. That level of international passenger growth is exceptional given the average of the last 10 years is around 3.6%.

The major factors behind the sharp rise are capacity increases and new budget airlines, as well as rising incomes and urbanisation in China. More than 100,000 extra Chinese nationals moved through the gates over the past six months compared to the first half of 2015 – a 20% increase. China is now the largest international market for Sydney Airport, taking the top spot from New Zealand. Smaller Asian markets, such as Japan and Korea, also showed impressive passenger growth, rising 26% and 21% respectively.

Key Points

  • Strong international passenger growth

  • Aero and retail revenue up 17% and 10%

  • Second airport won't steal valuable international traffic

Aeronautical revenue, which accounts for around half the total, rose 17% thanks to the strong passenger growth and rising aeronautical fees.

Retail revenue (21% of the total) rose 10%, an impressive performance given that the major duty free contract was handed to a new operator late last year – German group Heinemann, the world’s third largest travel retailer – and this required significant refurbishments. Five of the six new stores are now complete with the final store due to open later this year. The excellent growth in international passengers also aids retail sales because international passengers have longer wait times for their flights, so tend to kill time around the retail precinct.

The airport’s two other divisions were relatively lacklustre. Property revenue rose 2%, while revenue from the airport’s infamous car parks increased 4%, which was attributed to space closures during construction works. The company expects to increase the total number of spaces by 10% in 2017 so we expect revenue growth to improve next year.

Second airport no threat

Management says it is still evaluating the investment merit of developing the proposed new Western Sydney Airport at Badgerys Creek. Sydney Airport has a first right of refusal to build and operate the new airport and expects to receive a formal offer from the Government later this year.

Table 1: SYD result
Six months to June 2016 2015 /–
(%)
Aero. rev. ($m) 337 288 17
Retail rev. ($m) 142 130 10
Property rev. ($m) 103 101 2
Parking rev. ($m) 75 72 4
Total rev. ($m) 662 595 11
EBITDA ($m) 536 488 10
FCF per share (cents) 14.9 12.6 18
Final dividend 15.0c (up 20%), unfranked,
ex date already passed

While breaking Sydney Airport's monopoly, the new airport doesn’t keep us awake at night. For one thing, the road and rail infrastructure to support the airport is expected to take around 10 years to construct.

Furthermore, we don’t expect the new airport to cannibalise much of Sydney Airport’s high-margin international traffic, which accounts for 70% of passenger-driven revenues.

Bilateral air services agreements typically cap the number of flights an airline can make between countries, so airlines naturally want to service the most popular airports. Badgerys Creek is a good 50km away from the city, so Sydney Airport will always be the main hub and the preference of international flights. Nonetheless, a second airport may increase competition for low-margin domestic passengers.

Management increased its guidance from 30 cents to 31 cents of dividends to be paid in 2016, an increase of 22% on last year (who ever said airports were low growth and boring?). The stock has risen 5% since Why Sydney Airport beats Transurban from 16 Jul 16 (Hold – $7.03) and trades on a forward yield of 4.2%.  With a formidable competitive position, long lease, decent growth prospects and a favourable regulatory environment, Sydney Airport remains one of Australia’s best assets. We’re increasing the price guide and continue to recommend that you HOLD.  

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Sydney Airport. You can find out about investing directly in Intelligent Investor portfolios by clicking here.

Disclosure: The author owns shares in Sydney Airport.

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