By Bruce Williams

Sydney Airport (ASX: SYD) is a reasonably new portfolio acquisition that has been topical with clients given the current environment of partial domestic and full international travel restrictions.

Operating as Australia’s primary international gateway and largest domestic airport, we believe Sydney Airport is a high-quality monopolistic style asset.

At its core, Sydney Airport is a relatively simple business. Its revenue growth is linked to key operating segments like Aeronautical Services, Retail Property and Car Rental, plus Parking and Ground Transport. And these are all, to varying degrees, linked to increasing passenger volumes. Despite external factors such as the GFC, SARS and MERS, passenger numbers have historically grown at relatively stable rates thanks to tailwinds from domestic population and immigration growth, as well as increasing tourism demand from Asia’s rising middle class.

However, this is not currently the case with passenger volumes down in December 71.9% for domestic and 97.3% for international versus December 2019 (PCP). This is primarily due to government imposed travel restrictions. There remains uncertainty regarding the duration of these restrictions and trajectory of recovery. We do however believe that as time passes, passenger volumes will gradually return and the previously mentioned tailwinds will once again be applicable.

The recently strengthened balance sheet and cash flow management initiatives allows the business to work through the wide range of scenarios that may occur. Within our forecasts, we have conservative expectations around the recovery, with demand impacted through to calendar year 2024. At current levels, we believe Sydney Airport represents excellent value for long term investors.

Image source: Sydney Airport 2019 Full Year Investor Presentation, slide 5

If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.