Sydney Airport: Interim result 2017

If there's any stock that teaches the virtues of buying high-quality businesses, it's Sydney Airport. We first recommended members buy the company when it listed in 2002 and have held on ever since. Investors have endured four 20% falls along the way, and one 60% seizure during the global financial crisis. These short-term price movements caused their share of anguish, but staying focused on long-term fundamentals has paid off in droves: the stock is up sevenfold since our original Buy recommendation.

The big picture continues to look good. For the six months to June, Sydney Airport's total revenue grew 8% to $714m, while earnings before interest, tax, depreciation and amortisation (EBITDA) was 8% higher at $577m.

Aeronautical revenue, which accounts for 51% of the total, rose 8% to $364m primarily due to a 4% increase in passenger numbers combined with a 5% increase in aeronautical charges. Sluggish growth in domestic passengers of only 1% was offset by an 8% increase in international passengers, mainly due to growing demand from Asian markets.

China alone increased passenger numbers 20% to 1.3 million and is now the airport's second-largest international market behind New Zealand (who ever said airports were boring and low growth?).

An 8% growth rate in international passengers is well above the 4% trend of the last decade and has a disproportionate effect on earnings due to international passengers being more valuable to the airport. It would be imprudent to expect this rate of growth to continue in the long term, but rising incomes in Asia should drive demand for some time yet – China's upper-middle class is expected to grow at over 20% a year through to 2022.

How many watches?

What's more, increases in bilateral air service agreements – which regulate how many flights can move between countries – has increased Sydney Airport's capacity. In the first eight months of the year, 15 airlines announced seat additions that total close to a million a year.

International passengers are the airport's biggest honeypot because they tend to linger in the retail precinct before flights and spend more. Retail revenue – 23% of the total – rose an impressive 14%.

The new duty free operator – German group Heinemann – recorded strong growth during the period and the International terminal's luxury precinct is now complete.

The airport is benefiting from the rise of 'daigou shoppers', which buy luxury goods in bulk and then sell them for a premium in China. I was stunned to see someone buy 14 Gucci watches when I passed through the airport last week, and I defy anyone to count the number of Blackmores jars on display; they're even for sale at the French delicatessen.

Car parks and Property

The airport's other divisions posted moderate gains. Property revenue rose 3% to $107m due to rent increases and new leases, and the airport-wide occupancy rate is 98.6% – the envy of any landlord. The airport bought the Ibis hotel for $35m during the period and a new Mantra hotel was opened, which added 136 rooms close to the Domestic terminal.

Revenue from the airport's car parks increased a modest 2% to $77m. The new online booking strategy is helping to improve utilisation rates, with online bookings now accounting for 41% of revenue, up from 29% just a few years ago.

Roughly 1,000 new car spaces were opened this month following the construction of four new floors on the T1 car park. The company is also working with the Government to improve access and relieve congestion surrounding the airport – a new exit from Marsh St is now complete, and new exits and lanes are being built in the east and north. Completion of ground works is expected before 2019.

Management increased its guidance to 34.5 cents of dividends to be paid in 2017, an increase of 11% on last year. The stock has risen 22% since we upgraded it to Buy in January and trades on a forward dividend yield of 4.8%. With an unmatched competitive position, decent growth prospects and a long lease, Sydney Airport is one of Australia's best assets. We're increasing our price guide and recommend 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.