Sydney Airport’s up for the fight
Sydney Airports (ASX:SYD) – As any investor would expect, the monopoly provider (and the nation’s major gateway) has had a challenging half-year, posting a widening loss, while a takeover offer hangs in the balance. Just days before its result, the board knocked back an $8.45-a-share takeover offer from a group of pension funds, saying it was “opportunistic.” The airport is in a strong position to do so; with some $2.9 billion in liquidity, it can weather the Covid-19 storm for some time.
Lockdowns and international border restrictions brought down operating receipts by 98% to a paltry $1.8 million with passenger numbers down 36.4%. This caused revenue to drop by 33.2% to $341.6 million. SYD’s interim loss widened to $197.6 million from $128.5 million: no dividend was declared.
The ClearBridge RARE Infrastructure Income Fund continues to like Sydney Airport and it is the fund’s largest holding, making up more than 5% of the portfolio at 31 July 2021.
Commenting on the company, portfolio manager Charles Hamieh says: “We believe Sydney Airport as an asset is being managed extremely well by the current management and that they have done an excellent job in containing costs in the current COVID environment. This asset is positioned to improve performance as mobility increases with vaccination rollouts here and abroad.”
With a cost base of around $5.80 to $6.10, the RARE team is “very comfortable” holding until the pandemic is over, especially given the large discount at which SYD trades compared to longer-term valuations.
Going forward, Sydney Airport says, “passenger traffic rebounded strongly every time borders were open,” which gives us confidence there will be a strong and fast recovery in the SYD share price once international borders are opened. It also shouldn’t take very long for pre-Covid traffic numbers to return.
CEO Geoff Culbert said: “From January to April, we recovered to 65% of our pre-COVID domestic passengers and in just over two months between late April and June, trans-Tasman traffic recovered to more than 40% of pre-COVID levels.”
The company has also taken three steps to ensure it will survive and recover strongly.
Firstly, it has a strong liquidity position. It has tightened costs and has re-prioritised capital expenditure. No guidance was provided, but it’s clear that “Governments at all levels are highly motivated to roll out the vaccine, which has now been tied to the lifting of restrictions. As border restrictions are eased, international and domestic travel will be back, and Sydney Airport will be ready to go,” says Culbert.
“Given concern in some quarters about the possibility of a significant rise in inflation in the near and medium-term, we note that based on our research, there appears to be little or no correlation between various listed infrastructure assets and movements in inflation over the past 30 years.
“On the bigger picture, we are constructive on a global recovery and see clear drivers for economically sensitive user-pays assets such as airports,” he noted.