Even though inflation is low, Sydney Airport’s performance and the high real yield available on the inflation linked bonds means the bonds should be a core holding in most portfolios
Sydney Airport continues to deliver strong performance, with 1H16 highlighted by near double digit growth in international passenger traffic numbers.
A summary of the key points from the half year result are outlined below:
- Revenue was up 11.3% to $661.9m, while EBITDA grew 9.8% to $536.1m. Sydney Airport’s EBITDA margin was reasonably level at 81% – versus 82% in 1H16) – with the company expecting an improvement in margin over the second half of the year, reflecting the step up by international aeronautical prices by 4.8%. EBITDA to operating cashflow conversion was also at a solid 99% for the half year, compared to 1H15 which was at 102%
- Sydney Airport concurrently released its July traffic performance figures which are available here. It showed strong double digit international passenger growth of 12.3% for the month of July, versus the prior corresponding period. Year to date international passenger growth of 9.8% is closing in on double digit levels, and is well above the 10 year historical average growth rate of around 3.5%pa. Domestic passenger growth at 2.5% for the month was below year to date growth of 4.9%, partly a function of July being an election month
- Financial leverage, as measured by the net debt to EBITDA ratio, increased from 6.9x to 7.2x. Correspondingly, net debt is up from $6.8bn to $7.6bn. However, this increase is due to the Terminal 3 acquisition and is the ratio expected to improve. Note the ratio was 7.3x as at 31 December 2015 when the acquisition was made, so there has already been some improvement in financial leverage
- We note that Sydney Airport increased its distribution to shareholders by around 20%. This is expected to be covered out of higher cashflows generated from the business, with free cashflow up 19.1% to $332.9m. While the increase in distributions is seen as ‘shareholder friendly’, Sydney Airport has also seen improving interest coverage, which provides comfort to debtholders that company’s ability to service its interest obligations is also improving. We also note that the company’s distribution reinvestment plan allows a portion of distributions to be reinvested back into the business. For example, it is understood the next debt maturity in April 2017 – a bank facility which with $87m drawn at June 2016 – has been prefunded using distribution reinvestment plan proceeds
- There was no material update on the Western Sydney Airport, with the government expected to deliver to Notice of Intent in 2016. Sydney Airport will have 4 or 9 months to decide whether to exercise its right of first refusal to develop the Western Sydney Airport after the government issues it with a Notice of Intention.
On 18 August 2016, Moody's stated that Sydney Airport's 1H16 result was credit positive, but falls within the rating agency’s expectations and as such have no immediate impact on Sydney Airport Finance Company Pty Ltd's ("SAFC") investment grade senior secured ratings and stable outlook. Moody’s stated that Sydney Airport's capital structure could evolve over time depending on its role in the development of the Western Sydney Airport and any associated additional funding requirements. However, it expects Sydney Airport management will manage its funding mix and exposure to project execution risk in a manner consistent with the current investment grade rating. S&P hasn’t made a specific comment on the result.
The figure below highlights the growth in Sydney Airport’s cashflow cover ratio over the past five years, with the 1H16 ratio now up to 2.61x versus 2.37x times at 1H15. Source: Sydney Airport
The result reflects favourable macro conditions for Sydney Airport:
- A strong Australian and Sydney tourism market
- Proximity to Asia and growing Asia Pacific markets
- A weaker Australian dollar improving inbound tourism
We expect EBITDA margins and credit metrics to improve by FY16 end with the full integration of Terminal 3, organic earnings growth and contracted revenue increases. With favourable operating conditions for the airport, and delivering a rate of return above inflation over 3%, now may be a good opportunity to take a longer term exposure to Sydney Airport through the 2030 bond.
A link to the results is available here.
Please contact your FIIG representative for further information on the Sydney Airport bonds. Available to retail and wholesale investors at a minimum face value of AUD10,000.