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."
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
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:
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.”
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).