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#Risks
stale
Last edited 4 years 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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#Impact from Virgin
stale
Added 4 years 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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#COVID19 Impacts
stale
Added 4 years ago

Virus hits Sydney Airport but shares attractive

by Prashant Mehra in Morningstar (11/08/20)

Sydney Airport is raising $2 billion through a share sale to bolster its financial position after swinging to a half-year loss as passenger volumes and flight traffic collapsed amid the coronavirus pandemic.

Australia’s biggest airport reported a net loss of $53.6 million for the six months to 30 June, compared to a net profit of $17.3 million a year earlier.

Revenue for the six months slumped 36 per cent to $511 million, with passenger volumes materially impacted by the covid-19-related traffic restrictions.

Morningstar’s regional director Adam Fleck says the result was along expected lines given the terrible traffic numbers in the June quarter, but this also presents a good opportunity to invest in a long-term business at an attractive price.

At Monday’s closing price of $5.39 a share, Sydney Airport (ASX: SYD) had been trading at a 21 per cent discount to Fleck’s fair value estimate of $6.80, which he argues reflects its potential to benefit from international tourism over the longer term.

Fleck has now slightly reduced his fair value estimate to $6.20 a share, cutting 20 cents on account of the near term challenges facing the airport, and another 40 cents due to the dilution in value following the hefty equity raising.

Share sale

Its shares are currently in a trading halt pending the share sale, after the company on Tuesday announced it would raise $2 billion by way of a 1-for-5.15 share entitlement offer to tide over the economic uncertainty.

“Six months into the pandemic, there remains uncertainty as to how long it will take for aviation markets to return to pre-covid-19 levels,” chief executive Geoff Culbert said.

The sale will comprise an institutional placement and a retail offering, with shares to be issued at $4.56 each, a 15.4 per cent discount to Monday’s closing price.

The fund raising will substantially reduce Sydney Airport’s net debt and help maintain a strong investment-grade credit rating, boost its financial resilience and further increase the liquidity available, Culbert said.

The company will not pay any dividends in 2020.

Covid cruels passenger numbers

Passenger traffic at the airport was down 18 per cent to 9.0 million in the first three months of the half-year.

However, passenger numbers plunged in the second quarter—which coincided with the covid lockdown, sliding 96.6 per cent to just 400,000 passengers.

Australia first barred entry for foreign nationals travelling from mainland China on 1 February in a bid to stem the spread of the coronavirus pandemic.

The incoming travel ban was gradually extended to several countries that became virus hotspots before borders were shut to all non-residents from 21 March.

Sydney Airport said revenue in its key aeronautical segment fell 58 per cent on the back of fewer flights and passengers. Car parking and ground transport revenue declined 51 per cent, while retail revenue sank 44 per cent.

The company also booked a $41 million impairment on account of the expected loss due to money owed by Virgin Australia, which went into administration, and nearly $60 million on account of temporary concessions or deferral of rents across its retail and property portfolio.

Despite this, Morningstar’s Fleck said there are encouraging signs in the retail business, which saw a sort of shared sacrifice during the troubled period.

“A lot of tenants are still paying a portion of their minimum guarantee to ensure there is still place for them post recovery,” he said.

“And it’s really encouraging to hear management talking about some new luxury tenants that are signing on even now for when they open, and hopefully post-recovery, for rents that are at pre-covid levels.”

Clipping costs

Fleck said the airport had also managed to cut costs, which are tracking towards management's goal of 35 per cent operating cost reduction by early-2021, despite the sharp decline in revenue.

The company in April raised $850 million in bank debt to weather the coronavirus crisis and its chairman had told shareholders in May the company would be able to meet its financial obligations even if the airport received no revenue through the end of next year.

The fund raising, albeit at a discount to the current market price, is an extra buffer for the airport, Fleck said.

“For those looking to continue to invest long term in the company it's an attractive price to invest in a business that has a pretty sizeable margin of safety and seems to be pricing in a pretty substantial delay in international borders opening.

“We think Australia is a really attractive place to visit for tourists and for business travellers. So, when we look out 10 years, even though there's some near-term disruption, we don't see a long-term impact at this point.”

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#ASX Announcements
stale
Added 2 years ago

Goodbye SYD.

I've held you since you were spun off by Macquarie in 2013. Its been fun. And I always enjoyed watching people spend money when I transit through and enjoyed the dividends.

Now the good news. I'll still own you! As my super fund is one of the buyers.

That nostalgia is to say that the vote today was in favour of the SYD being delisted and being sold back into private ownership.

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Valuation of $8.50
stale
Added 2 years ago

November 2021:

Takeover looks likely to proceed at $8.75 in 6 months time. If you discount this back at about 5% p.a the value is approx $8.50. Better than cash in the bank.

October 2021: I'm revising my valuation below. Obviously the market is using a discount rate below 8%. I am valuing SYD as though it will continue to trade on the ASX. If it gets taken over then that's a bonus. Starting Distribution: $0.38 in year 3 Growth rate: 3% per year until year 10. Terminal growth: 2.37% (30 year Aus Gov Bond as proxy for inflation) Estimated Market Discount Rate: 6.15% (won't disclose methdology) Implied Valuation: $9.18 My buy price = 10% MOS = $8.27 Upside to come from takeover, growth exceeding inflation. July 2021: The recent failed takeover offer was quite an interesting development. The consortium has some of deepest pockets going around and would have been taking a long term view that Sydney Airport is still a great long term infrastructure asset. Whether covid impacts operations for another 12 months or 24 months is probably besides the point to these guys. Below is a very simple DCF in which I have forecast distributions out over 10 years before getting a terminal value and discounting it back to todays value. I have assumed 4% growth into perpetuity (which is safely under the average growth rate pre 2020) and a starting distribution of $0.38 per share (equal to 2019 distribution which roughly equates to FCF). I have used a discount rate of 8%. If the distribution of 0.38 resumes in year 2 I get a valuation of $8.34 If the distribution of 0.38 is resumes in year 3 I get a valuation of $7.71 Obviously in reality it won't be as black and white as the above scenarios but I would be surprised if SYD isn't operating at close to pre covid levels in 24 months time. Will take roughly the midpoint of the two above. It will be interesting to see if the same consortium take another shot at this.

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Valuation of $5.63
stale
Added 4 years ago
Collapsed traffic numbers will destroy earnings over the coming year or so. Expect the distribution to be cut significantly. But this is a very long lived asset and total lifetime cash flows wont be impacted as much as the current collapse in share price infers. The debt is large, which isn't usual for companies with large fixed assets and (typically) highly reliable cash flows. Although I expect credit markets to tighten substantially, i think many lenders would be happy to roll over SYD's debt (especially with support and encouragement from central banks). Even if you say the distribution is still only 3/4 of what it was last year in FY22 (30c), and give that a yield of 4%, you get a target price of $7.5 or $5.63 if you discount that back by 10% per annum. I'm not a buyer as yet, but just recording some initial thoughts.
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