Sydney Airport upgraded to Buy

Along with my colleague James Carlisle, I recently attended the Sydney Airport investor day. While we couldn’t persuade management to open the $42,000 bottle of Château Mouton Rothschild on sale in Terminal 1, there was plenty to digest.

Shelly Roberts, head of Aviation Services, explained how low cost carriers (LCC) have been increasing the frequency of their services. Sydney is now the largest international low cost carrier airport in Australia, having overtaken Melbourne after tripling LCC seat volumes in just five years. Malaysia and Singapore have been important destinations, producing passenger growth of 60% and 40% respectively since the launch of AirAsia X and Scoot.

Most of the increase is attributable to larger aircraft rather than more routes. Sydney is the fifth largest A380 port in the world thanks to the construction of more wide-body spaces and an advanced guidance system that allows planes to park closer together.

This is important as international passengers are three to four times more valuable than domestic passengers because they spend significantly more. A domestic passenger averages 40 minutes in the domestic terminal, compared to nearly two hours for international passengers. While the lower Aussie dollar has had a neutral impact on total passenger numbers, it has had a positive impact on retail sales.

Duty free wine sales have been especially strong and more bottles of Penfolds Grange were sold at Sydney Airport than at any other store in the country. This has prompted the construction of Australia’s first Penfolds stand-alone boutique, soon to open in Terminal One.

Efficient parking

Management has also focused on improving the parking experience, with 4,464 spaces being added since mid-2012. Research also found the carparks were underutilised as drivers would give up trying to find a spot when the lots were 80% full, so parking guidance lights were added. A valet system was also introduced and now delivers 13% of parking revenues, despite being used by less than 4% of drivers.

Online bookings for car spaces now account for 25% of parking revenues, having grown from 4,000 to 23,000 per month in just two years. There are also plans to introduce flexible pricing for peak and off-peak times.

The company’s recent move to 100% ownership of the underlying airport (from 85%) and the subsequent resolution of a tax dispute with the ATO was only briefly mentioned, but these issues were covered in Sydney Airport offloads baggage on 14 Aug 13 (Buy – $3.60).

Management provided second half guidance and expects overall passenger growth of around 2.7% (4% for international passengers). Total distributions for the year are expected to be 22.5 cents per share for a yield of 5.9% (unfranked). Sydney Airport remains a unique asset and with the stock down 9% since Sydney Airport cut to Hold from 31 Oct 13 (Hold – $4.19) we’re upgrading to BUY.

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