Within investor portfolios, we have bought Sydney Airport Limited (SYD). Sydney Airport Limited has the concession to operate Australia’s largest airport, Sydney’s Kingsford Smith Airport until 2097. In 2019, the airport was used by 44 million passengers and connected Sydney to more than 90 destinations around the world. Revenue is generated by aeronautical charges largely based on a per passenger basis, rent from the hotel, logistics, office & retail tenants as well as parking and ground transport fees.
We are positive on the medium-term outlook for Sydney Airport Limited for the following reasons:
- The airport has a monopoly position for both domestic and international airline passengers in Sydney and is a key freight hub given its proximity to the city and major road networks;
- A weaker A$ makes Australia an attractive destination for international travellers which are more profitable for the airport. The pace of travel recovery across both international and domestic segments could be quicker than we anticipate;
- It owns some of the most productive retail space in the country underpinned by fixed escalating rental revenue streams and it’s logistics and office portfolios are almost fully let and deliver solid annual increases;
- Expiry of the Qantas Jetbase lease on 30 June 2020 (a 30 hectare site adjacent to the domestic airport with direct access to airside areas), gives SYD full operational control of the entire airport site for the first time and offers some attractive medium-term development opportunities.
Obviously the Covid-19 pandemic and associated travel restrictions present a significant short-term headwind. We are not expecting any real improvement in activity until the 2nd half of this year, and even then anticipate that it will be gradual. Furthermore, we expect the recovery in international travel to take longer than the domestic recovery as governments have to reopen borders which will likely be a staggered process and airlines assess existing routes – a recovery to pre-crisis levels is not expected until 2022. With the reduction in passengers, we also expect that the airport will have to provide some level of rent relief to its tenants such as retailers, car hire companies and hotels. This has been factored into our forecasts, but for long term investors, the current crises provide an opportunity to acquire a critical monopoly infrastructure asset at an attractive valuation.
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