Sydney Airport
Recommendation
After peaking at $3.61 prior to Christmas, Sydney Airport securities have subsequently fallen 14% to $3.11. Understandably, some securityholders are nervous. A small part of the fall – 10 cents – can be explained by the stock trading ex distribution on 21 December. That same day, Sydney Airport announced the receipt of an ATO position paper which outlines a potential tax liability of $79m (plus interest and penalties) applying to 2010 and 2011. Sydney Airport believes its current treatment is correct, but if that proves false the subsequent tax bill might explain another 5 cents of the fall.
More likely the greater part of the fall has been prompted by two pieces of bank research. The first, from Commonwealth Bank Infrastructure analysts, claimed that Sydney Airport will be close to full capacity by 2025, without major investment in new terminals, runways or a second site in the Sydney area. Sydney Airport directly responded to the claims in a press release, reckoning it has ample capacity to meet forecast demand growth until 2045. The second piece of research came from Morgan Stanley, and noted that Sydney Airport might need to raise new equity to fund capital spending and to repurchase leases on terminal 3. Claims of $2bn of capital expenditure requirements shouldn't really shock investors, the airport has invested more than that amount over the past decade.
There are (always) things to be concerned about. But our investment case hasn’t been built on a flawed assumption that Sydney Airport can process infinite passenger growth through its existing site on the edge of Botany Bay. That there’s a natural ceiling to physical capacity (and thus growth) partly explains why we’re not terribly concerned about any second airport (over which Sydney Airport itself has the exclusive right to own and operate) stealing growth beyond that ceiling. We don’t need passenger numbers to ‘grow to the sky’ indefinitely to do well considering the prices we paid for the stock. And we also haven’t fallen for the fallacy that the airport can move closer to its natural capacity ceiling without substantial investment (to be funded with both debt and equity), although we do believe that such investment is likely to generate high returns, as has been past experience.
Another possible explanation for the recent fall was that the stock was simply getting ahead of itself. We downgraded to Hold in mid 2012 at around $3.00, and subsequent recommendation guides highlight $2.90 as the price at which we’ll look to upgrade again. That’s broadly unchanged. The recent fall puts the stock back firmly on our upgrade radar, but we’re not there yet and the stock is actually little changed since our last review, in Sydney Airport: Interim result 2012 of 24 Aug 12 (Hold – $3.18). HOLD.
Note: Both the Income and Growth portfolios own Sydney Airport securities.