SYD - Sydney Airport

[rederob]

All CEOs have the opportunity to request that all non-essential staff take leave as a first step, because that cost should have been reserved. Managing leave rosters for 7 day a week operations is a pain in the neck, so here's a chance to reduce their leave balances and tidy the slate.
The next step that any travel and tourism industries should be taking is to carry out essential maintenance as it can now be done without bothering guests.
In the case of SYD I would try to bring forward as much major refurbishing of the international terminal as is possible because the continuous traffic stream at airports make this both slow and costly in normal times.
It might sound a bit counterintuitive, but if I were their CEO I would be getting all staff together to brainstorm ideas for operational and systems enhancements in order to improve ongoing efficiency and reduce costs once the lockdown is lifted.
This is a chance for SYD, and similarly affected operators, to now get things done that were constrained by their actual business - ie, their customers got in the way of nimbly effecting change. So I would have everyone not directly involved in passenger services working flat out so that when things were back to normal the entire operation was running smoothly, and more profitably.

From a share price perspective SYD is like QAN and will most likely keep tumbling until the lockdown is lifted and international travel has resumed globally. It's mostly a case of watching this space rather than attempting to "value" SYD and punt on a buying price.

 

[So_Cynical]

Good discussion, thanks all.

Sub 3 is not out of the question, there is emerging evidence of seasonal influences with COVID19 thus our winter will be the infection peak
for us so a full shutdown is more likely than not and that will be the time to buy SYD, the world is not ending - just getting a little sick.

 

[Dona Ferentes]

Sydney Airport will raise $2 billion in equity to stay liquid through the COVID 19 pandemic after reporting a $51.8 million interim loss, and will not pay dividends in 2020. It made an interim profit of $199.8 million a year earlier.

Total revenue in the first half was $511 million, down 36 per cent. Its results include a $40.9 million doubtful debt provision, of which more than half was owed by Virgin Australia before it went into administration.

The airport's income was also hit by $52.9 million in rent relief for retail and property tenants (only one third of airport stores were open in July). Aeronautical revenues tumbled 52 per cent to $173 million, while parking revenues fell 51 per cent to $38.1 million.

Before rent abatements, retail revenues fell 20 per cent over the half to $147.2 million, and property and car rental revenues were down 9.5 per cent to $108.9 million. Occupancy of the airport's hotels was running at 44 per cent in the six months to June.

More than 44 million passengers passed through Sydney Airport in 2019, but in the six months to June, it had only 9.4 million passengers.

The airport plans to cut operating costs by one third by March 2021 and it has scrapped planned spending on some projects including bathroom upgrades.

The equity raising will slash the airports pro forma net debt to $7.1 billion at the end of June from $9.1 billion, giving it liquidity of $4.6 billion including $1 billion of cash. The fully renounceable 1 for 5.15 offer is priced at $4.56 per share, a 15 per cent discount to the closing price of $5.39 on Monday.

- there is a SydAir 2020 Inflation-linked Bond than matures this month. Can't remember how much needs to go towards this. I hold a 2030 ILB from them; nice little instrument with coupon plus growth running at 7% or so.. Am liking the idea of fresh equity underneath.

 

[IFocus]

Bought some SYD today (longer term outlook) for the super fund will be interesting to see how far out current pricing is.

 

[samuilk]

Bought some SYD today (longer term outlook) for the super fund will be interesting to see how far out current pricing is.

Also looking at buying some SYD soon, decent yield. But I need to look at their fundamentals first but I think might be a good position to add to my portfolio

 

[Value Collector]

Also looking at buying some SYD soon, decent yield.

The dividend is suspended at the moment, but I imagine it will be reinstated as soon as profitability returns.

 

[joeno]

Can someone explain how Syd airport can pay 6-7% dividends usually when they have a historical PE of around 40?

 

[Value Collector]

Can someone explain how Syd airport can pay 6-7% dividends usually when they have a historical PE of around 40?

The reported profit has always been much lower than actual free cash flows, for a number of reasons.

for example because they paid $5 Billion upfront to lease the airport on a 99 year lease from the government, they write down the value of that lease each year which reduces their reported profit, but is not a cash cost.

Same with all the buildings and equipment they have installed, they depreciate them on the books at a faster rate than they actually depreciate, which means they are being written down in value more each year than what it actually costs to maintain them which again means actual cashflow is higher than reported earnings.

The best figure to look at is operating income, but before the pandemic, SYD was basically paying out 100% of operating income as a dividend, if they continue this strategy once dividends resume, then you can use the dividend amount as its net profit figure.

 

[rederob]

The reported profit has always been much lower than actual free cash flows, for a number of reasons.

for example because they paid $5 Billion upfront to lease the airport on a 99 year lease from the government, they write down the value of that lease each year which reduces their reported profit, but is not a cash cost.

Same with all the buildings and equipment they have installed, they depreciate them on the books at a faster rate than they actually depreciate, which means they are being written down in value more each year than what it actually costs to maintain them which again means actual cashflow is higher than reported earnings.

The best figure to look at is operating income, but before the pandemic, SYD was basically paying out 100% of operating income as a dividend, if they continue this strategy once dividends resume, then you can use the dividend amount as its net profit figure.

It will be interesting to see the FY21 results.
In 2026 Western Sydney Airport is going to open, and it clearly will impact on SYD thereafter. Maybe the feds will have sold it off by then, or beforehand, and SYD pick it up?
Anyhow, I too had looked at SYD for the superfund prior to covid, but added TCL and AMC instead.
I can't say any are better than the other, although without much international flying being done I can't see SYD's lot returning to pre-covid glory days until 2023. And when it does happen there is currently a strong case for flying to take tens of millions away from cruises, so the return to profit could have an extra bite.

 

[Value Collector]

It will be interesting to see the FY21 results.
In 2026 Western Sydney Airport is going to open, and it clearly will impact on SYD thereafter. Maybe the feds will have sold it off by then, or beforehand, and SYD pick it up?
Anyhow, I too had looked at SYD for the superfund prior to covid, but added TCL and AMC instead.
I can't say any are better than the other, although without much international flying being done I can't see SYD's lot returning to pre-covid glory days until 2023. And when it does happen there is currently a strong case for flying to take tens of millions away from cruises, so the return to profit could have an extra bite.

I am pretty Bullish on SYD, before Covid the Airport was already reaching its practical capacity, with all peak time slots fully booked, I expect by 2026 SYD airport will be busier than it was pre covid, so the Western Sydney airport will provide extra capacity and allow some of the low profit margin traffic to move there freeing up slots at SYD for more profitable traffic.

eg. A full flight of international passengers flying from the UK into SYD is more profitable than Fed ex freighter, so moving the fed ex flight and some lower margin domestic etc out to western Sydney is good.

Also, remember that 70% of traffic pre covid was domestic travel, that will make a full recovery even with the international travel restrictions.

secondly, a large number of the international travel was Australians holidaying overseas, a decent portion of this will still exist but just be redirected into the travel bubbles. (Eg I person that was planning to ski in Canada normally might now choose NZ)

thirdly, New Zealanders that would have normally traveled to the USA, UK etc might now choose to visit australia.

Keep an eye on the traffic numbers, they are recovering super fast, compare 2019, 2020 and 2021 when April figures are released shortly and I think you will be surprised at how fast traffic is returning.

I also think there will be long term benefit to the cost reduction this shock has caused, they will be a leaner more efficient organisation on the other side, and I think that will stay around for a while.

 

[galumay]

Some good 2nd level thinking there, VC!

 

[Dona Ferentes]

also Western Sydney airport is likely to be the major freight hub

 

[rederob]

also Western Sydney airport is likely to be the major freight hub

Curfews are a big issue at Kingsford Smith so while freight might be an initial focus, the longer term might see it a better fit for international passengers.

 

[Value Collector]

Curfews are a big issue at Kingsford Smith so while freight might be an initial focus, the longer term might see it a better fit for international passengers.

The convenient hours for international flight to arrive and depart Sydney for international flights based on the arrival and departure of their destinations fit inside the curfew pretty well, and many of the international carriers are probably not going to want to operate out of two airports, So I think SYD will still be the main destination for most of the high value international traffic.

I believe it will be a bit like London, where you have most of the High Value international traffic passing through Heathrow, and the other 5 airports.

This also means that a lot of the domestic travel will be through SYD also, because of connecting flights.

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Let me explain what I meant above above convenient flight times fitting inside the curfew.

If you want to fly to the USA, the most convenient times for planes to leave Sydney is around 10.30am, because that means you will arrive in LA at around 6am which is when the immigration opens, so there is no benefit to leaving earlier during curfew.

Also, on the return flight from LA to Sydney, the flights can't leave LA until night time anyway because about half of the passengers are connecting from other cities in the USA or South America , so the planes wait in LA until around 9pm - 11pm and will arrive back in Sydney between 7am - 9am, again no real benefit to an airport without a curfew.

and the same is true for various reasons on other routes

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This is how qantas runs the USA service, Planes work in groups of 3

eg. 3 planes depart Australia at around 10am, 1 from each city of Brisbane, Sydney and Melbourne, All three planes arrive in LA at around 6am, 1 of the planes is parked up and gets routine maintenance done for the day the other 2 get loaded up with all the connecting passengers of the 3 planes and 1 plane flies to Dallas and one New York, they then unload there and pick up passengers returning to Australia, the arrive back at LA at around 7pm all passengers shuffle back to the planes going back to Brisbane, Sydney Melbourne and the flights leave LA at 9am-11pm and return to their home city by 6 am ready to get reloaded and leave by 10am back to the USA.

It fits perfectly in the curfew, there is very little benefit to extending the curfew hours except to be able to fit in more flights.

this cycle takes 2 days, so they have 2 sets of planes services the route for each flight code.

 

[rederob]

The convenient hours for international flight to arrive and depart Sydney for international flights based on the arrival and departure of their destinations fit inside the curfew pretty well, and many of the international carriers are probably not going to want to operate out of two airports, So I think SYD will still be the main destination for most of the high value international traffic.

I believe it will be a bit like London, where you have most of the High Value international traffic passing through Heathrow, and the other 5 airports.

This also means that a lot of the domestic travel will be through SYD also, because of connecting flights.

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Let me explain what I meant above above convenient flight times fitting inside the curfew.

If you want to fly to the USA, the most convenient times for planes to leave Sydney is around 10.30am, because that means you will arrive in LA at around 6am which is when the immigration opens, so there is no benefit to leaving earlier during curfew.

Also, on the return flight from LA to Sydney, the flights can't leave LA until night time anyway because about half of the passengers are connecting from other cities in the USA or South America , so the planes wait in LA until around 9pm - 11pm and will arrive back in Sydney between 7am - 9am, again no real benefit to an airport without a curfew.

and the same is true for various reasons on other routes

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This is how qantas runs the USA service, Planes work in groups of 3

eg. 3 planes depart Australia at around 10am, 1 from each city of Brisbane, Sydney and Melbourne, All three planes arrive in LA at around 6am, 1 of the planes is parked up and gets routine maintenance done for the day the other 2 get loaded up with all the connecting passengers of the 3 planes and 1 plane flies to Dallas and one New York, they then unload there and pick up passengers returning to Australia, the arrive back at LA at around 7pm all passengers shuffle back to the planes going back to Brisbane, Sydney Melbourne and the flights leave LA at 9am-11pm and return to their home city by 6 am ready to get reloaded and leave by 10am back to the USA.

It fits perfectly in the curfew, there is very little benefit to extending the curfew hours except to be able to fit in more flights.

this cycle takes 2 days, so they have 2 sets of planes services the route for each flight code.

Who and what type of aircraft fly out of Western Sydney won't be particularly clear for a good few years. They do answer a few questions though:

Given Qantas and Virgin are our principal domestic carriers, and domestic is a big slice of SYD's revenue stream, I am not going to be jumping to any conclusions about the extent that Western Sydney will impact SYD's profits.
As our super fund has long term stock in it, currently SYD is not the fit I would prefer. That might change down the track.

 

[Value Collector]

Who and what type of aircraft fly out of Western Sydney won't be particularly clear for a good few years. They do answer a few questions though:
View attachment 124081
Given Qantas and Virgin are our principal domestic carriers, and domestic is a big slice of SYD's revenue stream, I am not going to be jumping to any conclusions about the extent that Western Sydney will impact SYD's profits.
As our super fund has long term stock in it, currently SYD is not the fit I would prefer. That might change down the track.

You can look at many other examples around the world, and even in Australia, eg Melbourne has a second airport, its no big deal, London has 6, New York has at least 3.

Ofcourse Qantas and Virgin will operate out of both, it will take some Domestic market share but as I said thats not an overly bad thing, because SYD had no more slots anyway, Domestic travel makes up 70% of passengers, but a lot of that is low profit stuff, International travellers is where the big profits are international travellers produce almost 2.5 times more revenue, and that will be mainly through SYD.

I expect Western Sydney to take pretty much all the freighters, but significant amounts of freight travels in the belly of passenger aircraft, so SYD will still be moving a lot of freight.

 

[Value Collector]

Check out this video about Heathrow, I believe SYD will become Sydneys version of Heathrow, while Western Sydney will become more like the secondary London airports.

 

[Value Collector]

SYD's traffic numbers are growing strongly so far this year, today it was announced that 1.5 Million passengers passed through the airport in April, this up up from 1.1 Million in March, 623 Thousand in February, and only 230 Thousand in January.

This great result for April was also achieved with the NZ travel bubble only being open for a week of April, So I am expecting May numbers to be even better.

 

[sptrawler]

SYD's traffic numbers are growing strongly so far this year, today it was announced that 1.5 Million passengers passed through the airport in April, this up up from 1.1 Million in March, 623 Thousand in February, and only 230 Thousand in January.

This great result for April was also achieved with the NZ travel bubble only being open for a week of April, So I am expecting May numbers to be even better.

At the moment there is no compelling reason to buy, but as you say long term there is a case for income investors, the question is are there better opportunities at the moment?

 

[Value Collector]

At the moment there is no compelling reason to buy,

I disagree, I think that from todays share price we could easily be looking at a capital gain of 15% per year compounded for the next 3 year, and about 12 - 18 months from now dividends could easily be 30cents per share which is about a 5% return.

To me thats a pretty compelling reason to buy.