Should you buy Sydney Airport Holdings Ltd shares after its impressive update?

Sydney Airport Holdings Ltd (ASX: SYD) has today reported another strong monthly increase in passenger numbers that confirms the Australian tourism boom continues to roll on.

The September update showed a 8.6% surge in international passenger numbers from this time last year, taking the year-to-date increase to 9.4%. Importantly, the 12-month rolling international passenger growth is 8.7%, comfortably exceeding historical growth trends.

The impressive growth continues to be driven by additional seat capacity, especially from Asian-based airlines. Chinese nationals continue to be the biggest foreign travellers through Sydney Airport’s doors, although travellers from Korea, Japan, India and the USA also showed strong growth in September.

Travellers out of China are expected to grow even more strongly during 2017 as Qantas Airways Limited (ASX: QAN) begins daily direct flights from Beijing to Sydney. China Eastern Airlines will also launch a new route from Kunming next month and these two new routes are expected to increase seat capacity by 244,000 per year.

Domestic passenger growth was also reasonably strong during September, with a 3.9% increase over this time last year. This takes the year-to-date increase to 4.5% and the rolling domestic passenger growth to 4.2%.

So is it a buy?

This was another great traffic performance from Sydney Airport, and while there is nothing to suggest that this level of growth is going to reverse anytime soon, I would be cautious buying shares today.

My hesitation arises from the point that Sydney Airport shares are very sensitive to interest rate movements. The shares have enjoyed especially strong support over the past few years as lower interest rates have made its ‘defensive’ yield more attractive to income-hungry investors. Lower interest rates have also helped to lower the finance costs associated with servicing around $8.4 billion worth of debt.

The shares have already had a minor correction over the past few weeks in anticipation of higher US interest rates, but I still think the shares could suffer more turbulence over the coming months.

Alternative Options?

While I would consider buying shares if they dropped below $6 a piece, I think investors should consider other tourism shares in the meantime.

Some of the best options that could be worth further consideration include Mantra Group Ltd (ASX: MTR), Sealink Travel Group Ltd (ASX: SLK) and Star Entertainment Group Ltd (ASX: SGR).

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Motley Fool contributor Christopher Georges owns shares of MANTRA GRP FPO. 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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