The Board of Sydney Airport has granted due diligence access to the Sydney Aviation Alliance (the Consortium) following an increased cash bid of $8.75 per security for the company. The SYD Board has indicated it is likely to recommend the offer subject to various conditions being met and no other offer.
In the real world of corporate finance, the sale of SYD to a group of institutional investors for about $31 billion, a price representing approximately 23x CY19 EV/EBITDA, is in line with other international airport trading valuations.
Investment view
The current operating conditions for the company are clearly hugely distorted by the lack of aviation activity, both domestically and internationally so the recent share price performance has reflected that disruption.
However, it is very likely that SYD will eventually return to its normal status as Australia’s main gateway to the world and the country’s largest domestic airport. In the context of its 99-year lease on the 907 hectare site, with plenty of potential for future development, the few years of pandemic earnings crunch will pale into insignificance across the long time frame that this asset will exist.
SYD will face some competitive risks once the Western Sydney Airport is open sometime around 2026 and regulatory risks are a prominent feature of assets that appear to be monopolistic in nature. SYD’s main customers are the airlines and negotiating on-going agreements with them is a delicate process where neither party can exist without the other.
Our view of the return to international travel is that it will not occur smoothly, nor quickly, regardless of how much Qantas would wish it to. The main sticking point will be the subjects of mandatory quarantine and vaccine passports that could affect the initial demand for travellers.
Not all destinations will be immediately available to airlines so the ramp up to pre-COVID volumes of international passengers will take time.
Recurrences of CV19 or new variants might repeat the border closures for some destinations, noting particularly that New Zealand’s stance of virus elimination is predisposed to sudden border reactions.
There is undoubtedly huge pent up demand for international travel so we would expect a period of peak demand before more normal levels of demand reappear. It is possible that many Australian travellers may still prefer to avoid the complications of international travel, including the risk of getting stranded overseas, and will prefer to stay within Australia for recreational purposes.
It may also be stretching a point, but Australia’s political relationship with China may constrain the volume of Chinese passengers or students wanting (or allowed) to visit Australia. Before the pandemic, Chinese travellers were among the largest spenders of visitors to Australia and also one of the largest inbound (volume) markets.
The SYD Board may be taking the right fiduciary approach to its duties when considering the offer from the Consortium, but small investors in SYD may see other elements to this approach. SYD is arguably more than just an airport. It is Australia’s physical window to the world. It has an important place in the country’s history and will remain a critical piece of its infrastructure future for decades.
We think we know what Darryl Kerrigan would have said to the offer.
