Sydney Airport Holdings Ltd (ASX: SYD) owns and operates Sydney's Kingsford Smith Airport. The group moved to 100% ownership of Sydney Airport Corporation (a private company which owns the assets) in 2013. It has since gone from strength to strength in a manner reminiscent to Transurban Group (ASX: TCL). Given that there's also scope for a second airport in Western Sydney, now might be a good time to buy shares in Sydney Airport Holdings for long-term growth.
Kingsford Smith Airport
Sydney's Kingsford Smith Airport is Australia's busiest airport, serving 38.5 million passengers last year, up 1.7% on the prior year. Sydney Airport Holdings directly benefits from increased passenger numbers by leveraging its monopoly position to generate solid earnings growth year on year. Indeed, since privatisation in 2002, Sydney Airport Holdings has generated an average 23% return per annum, easily outperforming the S&P/ASX 200 Index (ASX: XJO) over that time.
Financials
In its first half of 2015, Sydney Airport Holdings reported increased passenger numbers of 19 million for the half, up 2.1% on the prior corresponding period. Revenue was up strongly to $594.8 million and earnings (EBITDA) rose 6.4% in the half to $488.3 million. In turn, management rewarded security holders with an increased half-year distribution of 12.5 cents, and upped its full year distribution guidance by 8.5% to 25.5 cents.
Pleasingly, this will be Sydney Airport Holdings' third consecutive increase to distributions, placing it on a robust yield of 4% at current prices. Whilst materially lower than other 'yield plays' like Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Limited (ASX: WES), investors should note that Sydney Airport Holdings does not carry the same level of risk, given it's a utility-like business. In fact, the current yield of 4% compares favourably to fellow infrastructure/utility companies Transurban and AGL Energy Limited (ASX: AGL), making it a great stock to own in the current interest rate environment.
Second airport
The Federal and local government has announced plans to build a second airport at Badgerys Creek in Western Sydney. Obviously a second airport would detract from Sydney Airport Holdings' monopoly status, given travellers would have an alternative destination when visiting or departing Sydney. Ordinarily, this would be cause for concern and a reason not to invest in the company, if not for the Sydney airport sale agreement governing Kingsford Smith Airport.
Airport sale agreement
In 2002, the Federal government entered into an airport sale agreement with Sydney Airports Corporation Limited (SACL), a private company (which is now) ultimately owned by Sydney Airport Holdings. The airport sale agreement provided the then purchaser of Kingsford Smith Airport, SACL, with a right of first refusal whenever there was a second airport built within 100 kilometres of Kingsford Smith. Under the current proposal for Badgerys Creek's new airport, Sydney Airport Holdings would have this first right of refusal, given the proposed development site is 56 kilometres away from Kingsford Smith.
Accordingly, Sydney Airport Holdings is in the box seat for negotiating the terms of operating and owning a second airport. Whilst the choice to own and operate the airport would require significant capital spend, including the possibility of a capital raising, Sydney Airport Holdings will likely capitalise on its monopoly position and follow in the footsteps of Transurban Group to build an infrastructure empire of airports.
Foolish takeaway
With tourism regarded as Australia's growth engine over the next decade, it follows that a diversified portfolio should consist of stocks which benefit from this sector; none are more so primed for growth than Sydney Airport Holdings, which benefits from increased passenger numbers to Australia's largest capital city — a trend that has been growing over the last decade. These favourable tailwinds should therefore bode well for Sydney Airport Holdings' share price.
As Sydney Airport Holdings is also a prime candidate to build and operate a second Sydney airport, the group should be able to organically grow earnings and reward investors with consistent distributions over the long term.
