Sydney Airport: Result 2016

Rising incomes and urbanisation in Asia have worked wonders on Sydney Airport's profitability. Passenger growth was excellent for the year to December: up 18% from China; up 19% from Korea; up 15% from Indonesia; and up 31% from Japan. Overall, international passenger numbers grew 9% and domestic passengers increased 4%, which helped boost total revenue by 11% to $1.4bn.   

Sydney's remoteness relative to major markets means that flights are expensive (have you noticed?) so – to borrow a mining term – Sydney Airport sits high on the ‘cost curve'. However, as incomes rise in Asia, holidaymakers have more disposable income, which puts Sydney within financial reach.

This, combined with increasing seat capacity from more flights and larger aircraft, underpinned the strong international passenger growth this year. Nonetheless, the airport's own long-term projections for passenger growth are only around 5%, so this year is more a welcome anomaly than anything to get used to.   

Aeronautical revenue, which accounts for around half the total, rose an impressive 16%, while the increasing flow of Chinese passengers – who tend to spend more in the terminals – also benefited the airport's retailers, with retail revenue up 12%.

The transition to a new duty-free operator is largely complete, with the majority of stores in the new fashion precinct now open. The new dining precinct is also open and, in this analyst's opinion, a visit to Bridge Bar in Terminal 1 is a very good way to ensure your seatbelt is tightly fastened.

Parking and Property

Property revenue rose a lacklustre 2%, though management noted a 99% occupancy rate and a new hotel being constructed, which is expected to open in mid-2017. Revenue from the airport's car parks increased 4%, which was attributed to the growing popularity of new online booking system leading to higher utilisation rates.

Net debt increased from $7.4bn to $7.7bn, though net debt as a multiple of operating earnings improved from 7.4 to 6.9.

Sydney Airport's capital expenditure, which is funded entirely by debt, tends to grow more slowly than revenues due to the airport's operating leverage. This means that although net debt generally increases each year, the airport is deleveraging at the same time so debt becomes more manageable. 

Without too much surprise, management stayed mum regarding the new Western Sydney Airport. There was no material news and the company has until 8 May 2017 to accept or reject the Government's offer to build and operate the second airport.

Management expects 2017 distributions of 33.5 cents per share, an 8% increase on 2016. Sydney Airport's share price is hovering just above our Buy price of $6.00 and if the stock moves much below this level – as occurred in January – we're likely to upgrade. For now, though, with an unfranked distribution yield of 5.5% based on 2017 estimates, we're sticking with 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 and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Sydney Airport.