Why Sydney Airport Holdings is a top buy

Credit: deeplimo

What: Shares in Sydney Airport Holdings Ltd (ASX: SYD) are trading at an all-time high, reminding investors of the benefits of owning monopolistic, strategic infrastructure assets.

So What: According to the recently released annual Airport Monitoring Report for 2014-15 by the Australian Competition and Consumer Commission (ACCC), a lack of competitive pressure has facilitated high profit margins at airports across Australia.

This news won’t come as any surprise to anyone who has ever used an airport in Australia and nor should it come as a surprise to investors who follow the ASX-listed Sydney Airport.

Included amongst the findings of the ACCC were that:

  • Sydney Airport continues to enjoy high profit margins in both aeronautical and car parking activities
  • Sydney Airport enjoys the highest profit per dollar (50.1 cents) for aeronautical revenue of all the monitored airports
  • Return on assets from aeronautical services was also highest at Sydney Airport at 12.4%
  • Melbourne Airport earns more profit per dollar in car parking revenue than Sydney Airport

Now What: Commenting on the findings of the report, ACCC Chairman Mr Rod Sims noted that, “the high profit margins of the airports indicate that they do not face much competitive pressure”.

Sydney Airport can charge as much as $59.50 for parking your car in the P1 and P2 parking terminals for staying over 3 hours – or roughly $20 an hour. Stay 31 minutes and you’ll be looking at a $17 charge, more than double the $8 for between 0 and 30 mins. Melbourne Airport charges $5 for the first 15 mins, $10 for up to 30 mins, and $59 over 6 hours, while Brisbane charges $7 for up to 30 mins and $15 for an hour, or $55 for any time over 4 hours.

The findings of the ACCC are another reminder of why infrastructure assets can make superb long-term investments and are often favoured by superannuation funds.

Investors, including those with SMSFs, looking to implement a defensive buy-and-hold strategy could find it worthwhile taking a closer look at Sydney Airport as well as other infrastructure stocks such as Transurban Group (ASX: TCL) which operates numerous toll roads both domestically and overseas. Toll roads also tend to be monopolistic assets like airports.

However, it also pays to keep an eye on debt levels and whether the company has the cash flow to pay both interest and repayments when they fall due.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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