Are Sydney Airport Holdings Ltd shares set to soar?

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.


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.

As the ASX flirts with 5,000, some experts are predicting a market crash...

Is a share-market crash coming? Get our analysts' exclusive inside take now, in The Motley Fool's newly updated report, "What to Do When the Sharemarket Crashes" -- including expert tips on how to protect YOUR portfolio. Click here for your FREE copy now.

Motley Fool contributor Rachit Dudhwala 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.