Paradice Investment Management: Sydney Airport

The prospect of shut international and domestic borders, resulting in the effective grounding of the global population was unimaginable and unprecedented, until the onset of the highly contagious and unpredictable Covid-19.

We view this as a rare opportunity to invest in Sydney Airport (SYD) – a high quality, well run, near-monopolistic asset which is unregulated with a long-dated concession expiry in 2097.

We like SYD for the following key reasons:

1. Evidence of recovery in other geographies – Inherently the desire to travel the world is strong, with aviation demand bouncing back quickly post shock events such as 9/11 and SARs. We believe this time will be no different when borders reopen, and people feel safe to travel. In China where covid was brought under control quickly, there has been a swift recovery with domestic passenger numbers bouncing back from -95% in April to -5% in the last 2 weeks of September. Corporate travel has also rebounded quickly to pre-Covid levels, with businesses, especially SMEs keen to visit clients, suppliers, and team. In NZ where Covid was almost eliminated, domestic traffic recovered quickly to -37% vs pcp in July before the lockdowns resumed briefly in August. With Australia regaining control of the Covid outbreak, we believe there will be strong pent up demand once borders reopen as people seek to visit family and friends, and holiday interstate. The resumption of international traffic will likely take longer and be more uneven, however we are cautiously optimistic that effective diagnostic and treatment solutions, and potentially the development of a vaccine will see a recovery emerge faster than what has been priced in.
2. Strengthened balance sheet – Post the $2b equity raising in August, SYD has strengthened its balance sheet to weather an extended period of volatility. As of June 2020, it had access to $4.6b liquidity, sufficient for 4 years of minimal aviation activity. Credit agencies have adopted a pragmatic approach towards its credit rating and will look through the next 2-3 years as long as there are signs of recovery. With high EBITDA margins close to 80% and low maintenance capex, we believe it is well positioned to restore strong cashflows and distributions, particularly attractive in a low interest rate environment.
3. Valuation is attractive. We believe the SYD share price assumes 4-6 year recovery period, which we think more than adequately compensates investors for uncertainty in the timing and path of the recovery.

Key risks associated with an investment in SYD include:

Technology and structural changes in behaviour – the widespread adoption of video conferencing may replace a proportion of business-related travel (SYD has 15-20% exposure), however we would highlight that inventions such as email and cheaper roaming costs have done little to change travel habits.

This information has been prepared and provided by Paradice Investment Management. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.