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#COVID19 Impacts
Added a month ago

A lot of what I wrote in my previous straw has been confirmed:

  • March traffic was down 45%
  • April traffic down 97.5%
  • May will also be down ~97% (as borders aren't open
  • The 1h20 distribution was cancelled

In this time the stock (and the market) has rallied to over $7.00 and is now around my valuation of $7.08. 

Domestic traffic could start to improve with Jetstar going back to around 40% capacity from July. (I've personally booked a flight for Aug/Sep). Domestic could ramp up quickly as state borders open and travel-starved Aussies can't travel overseas yet. 

Speaking of, still no sign of international travel opening up, but anecdotally I have heard that in Feb Qantas pilots were stood down and told not to expect work for 12 months. 

Given that there is clearly still some time for SYD to recover to its pre-covid19 level of business and also given the impressive run to over $7.00, I am closing my trade as the risk/reward is not as attractive as it was 2 months ago. 

The stock could certainly run further, as I believe the market is increasingly looking through the gloomy economic outlook to a recovery, however, I am comfortable selling for a profit and deploying my capital elsewhere.

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#Impact from Virgin
Added 3 months ago

Sydney Airport may suffer in the short term from Virgin Australia: Morgan Stanley

By Sarah Turner in AFR

Morgan Stanley took a look at what Virgin Australia's decision to enter voluntary administration could mean for Sydney Airport.

"We estimate that in 2019, Virgin Australia carried 6 per cent of Sydney Airport's international passengers and 36 per cent of Sydney Airport's domestic passengers, contributing 15 per cent of Sydney Airport's overall revenues, including indirect retail revenues.

"Historically, the 2002 withdrawal of Ansett had a short-term (< 1 year) negative impact on Sydney Airport's domestic passenger growth, until new and incumbent airlines picked up the abandoned routes.

"Our Sydney Airport base case passenger recovery estimate incorporates a slow recovery from virtually no passengers currently, towards 2009 levels over financial years 2020-2022," the broker said.

"Should Virgin Australia leave the Australian market, we see modest downside risk to the near-term recovery pace, but not to the medium-term recovery."

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Last edited 4 months ago

To paraphrase an article in the AFR, which refers to a UBS report:

Chinese tourists represent a significant part of the international passenger mix, and has been growing strongly in recent years. However, Sydney is becoming less desirable for Chinese tourists (according to a recent survey), and in fact Chinese toursists are increasingly chooisng to travel more locally due to more economic uncertainty at home.

International tourists accound for a disproportionate amount of revenues, with the Chinese in particular spending ~3x as much as other tourists.

Despite this, UBS is still calling for 7% pa growth in cash flow for next couple years and is valuing SYD at $7 per share

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#COVID19 Impacts
Added 4 months ago

Event: No planes in the sky

The effective shut down of Sydney Airport has presented a unique opportunity to buy a quality asset at a discount. The immediate term for Sydney Airport is not good. Here are some data and information points that have come out recently:

  • February traffic was down 4.6% (international down 7.8% and domestic down 2.5%. of this, China travelers were down 72% for the month and 39% YTD.
  • March will be much, much worse. Expect the international movements to be down by 75-95% and domestic down less so but still drastic. (ScoMo said in his press conference today that yesterday was down 85% on a normal day).
  • April will be worse for domestic as states have now closed borders, probably same again for international.
  • After April the stats are anyone’s guess and obviously dependent on the progression of the virus worldwide.

Sydney Airport's funding position is fine. Loads of debt (6.6x EBITDA) but maturity profile is spread over the next 10 years+ (avg maturity 2025). SYD also has $1bn of undrawn bank facilities should they need to use it.

Capex guidance has been slashed from $350-450m, however no guidance on what they will now aim for, only saying they are “continuing with critical projects and deferring less critical projects until further clarity is gained regarding the persistence of the current travel impacts.”

My view
These impacts are clearly short term. CY20 will be a disaster. The market knows this but is not looking through it. When the skies open for business again this will be a sharp rebound. Maybe not in share price, but there will be pent up demand from business travelers who have postponed international travel and leisure travelers who canceled or postponed holidays.

My DCF valuation for SYD is $7.08. My model assumes Free cash recovers back to FY19 level to $984m in 2023, having halved in 2020. WACC used is 6% based on Risk free rate 3%, beta of 1 and risk premium of 5.2%. Cost of debt is 3.6% while cost of equity is 8.2%, roughly 50:50 weighted. TGR 2.5%.

While no comment has been made by the company, it is possible the dividend will be cut. Consensus is for a cut from 39cps to 27cps for the full year. It could even be postponed, such is the trend at the moment. Looking out to the FY21 dividend, if it recovers to 37cps (not unlikely) this is a yield of 6% based on today's price of $6.10 (even after a large rally).

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