Shares in airport operator Sydney Airport Holdings Ltd (ASX: SYD) traded flat this morning after the business revealed strong international passenger growth for August 2016. For the month international passenger arrivals lifted 7.6% over the prior corresponding August, with US, Chinese and Japanese passenger growth especially strong.
The 29.3% year-on-year rise in US passenger numbers partly attributed to an increase in seat capacity on US routes. For North American and Asian holidaymakers Australia is an increasingly attractive destination due to the falling Australian dollar and generally cheaper long-haul airfares on the back of falling oil prices among other things.
Chinese tourist arrivals also provide a long growth runway for the Airport with direct routes to the regional cities of Hangzhou and Chengdu to soon start operating three times a week.
It’s estimated that the Chengdu route alone will bring an additional 23,000 visitors per year to NSW and $89 million in new visitor expenditure. In total six Chinese carriers now serve 12 mainland Chinese cities in a country with a still small but emerging middle class across a population of around 1.35 billion.
Evidently Sydney Airport and the Australian tourism sector in general looks to have a bright long-term future where economic growth in the sector heavily outpaces that of the wider economy.
However, given Sydney Airport’s shares currently trade on an enterprise value to earnings ratio of around 23x and trailing price to earnings ratio of 39 the stock looks expensive. This despite a strong dividend, the quality of the asset and some powerful tailwinds in the form of inbound Asian tourism.
Investors looking to gain exposure to the tourism theme may be better served having a look at the hospitality and entertainment providers such as Sydney-focused Star Entertainment Group Ltd (ASX: SGR) or Crown Resorts Limited (ASX: CWN), which is in the process of constructing a new casino and hotel at Sydney’s Barangaroo wharf. Both businesses trade on more reasonable valuations than Sydney Airport and are unlikely to be buffeted by the US Fed starting to raise cash rates in 2016.
However, if Sydney Airport’s share price does pull back significantly from its current level around $6.59 it’s certainly one stock I would be happy to own.