Sydney Airport Domestic on the recovery path

Sydney Airport Domestic pax is strengthening, with positive forward indications from domestic carriers. 

Timing of recovery of the more valuable international pax is uncertain. Forecast changes and valuation roll-forward lift our 12 month Target Price by 17 cps to $7.03ps. ADD retained, given 12 month potential TSR of c.17% and 5yr IRR of c.9% pa. In the next 12 months we expect line-of-sight to re-commencement of distributions, benefitting the share price as income-oriented investors return to the stock. 

March quarter 2021 pax data SYD’s Q1 pax was down 82% vs 2019 (ie pre-COVID), with international down 98% and domestic down 72%. 

However, it was encouraging to see the month of March have by far the highest domestic pax in 12 months (particularly given the month included the Sydney floods and a short Brisbane lockdown, and excluded Easter), up 88% on the Feb-2021 volume. It bodes well for a strong April performance. Key domestic airlines taking a more positive stance Qantas (~70% domestic market share) expects to lift group domestic capacity to 90% of pre-COVID levels in the June quarter. It notes strong leisure demand (stimulated by the Federal Govt’s half-price fare offer and we suspect a substitution of domestic travel for international) and corporate travel rebounding to ~65% of pre-COVID demand. 

It also expects to further increase capacity into its FY22. Virgin expects to be operating more than 80% of pre-COVID capacity by mid-June, and says that over 75% of tickets booked are for travel from May onwards. We have upgraded our FY21 domestic pax forecast, but moderated the recovery beyond FY21 in line with a more elongated international pax recovery profile (the historically high correlation between domestic and international pax suggests a full domestic recovery will be partly driven by recovery in international pax). 

Timing of international recovery still uncertain In CY19, Trans-Tasman (TT) travel contributed 12% of SYD’s international pax. The twoway TT bubble commenced 19 April, with Qantas noting strong demand since it was announced. 

We assume travel across the ditch lifts international pax through the airport to ~15% of pre-COVID levels by November. Full international pax recovery will depend on the timing of the Australian Government’s vaccination rollout and border re-openings. 

As discussed above, we now assume 100% of FY19 international pax is achieved by FY24. This approach assumes the trend growth that may otherwise have been achieved without COVID is not recovered. On the flipside, the c.12% contribution to international pax preCOVID from Sydney/mainland China travel may be at-risk given geopolitical tensions. 

Forecasts/valuation update We make a minor EBITDA upgrade to FY21F (upgrade to domestic pax outlook), material downgrades to FY22-23F (slower international pax recovery profile), and upgrades from FY24+ (as per higher CPI expectations implied in CPI swap curve). 

We forecast EBITDA surpassing FY19A in FY24F, and then growing at 5% pa CAGR until FY29F. Increased forward interest rates (as per uplift in swap rates) cause materially higher debt service from FY27+ (reflects fixed rate debt and swap maturities). We continue to assume no distribution until 2H22 (paid early CY23), when credit metrics return to those required of a BBB credit rating (albeit they could re-commence earlier given potentially excess capital).

Company description Sydney Airport (SYD) is a stapled security that holds a 100% economic interest in the lease for Sydney (Kingsford Smith) Airport. The lease runs until 2097. The airport processes the largest number of passengers of any airport in Australia.