Revealed: The bull and bear case for Sydney Airport Holdings Ltd

Credit: deeplimo

Sydney Airport Holdings Ltd (ASX: SYD) is the $14.9 billion operator of Sydney’s Kingsford-Smith airport. It’s important to note that it has a 99-year lease of the airport (which started in 2002) as it doesn’t actually own Sydney Airport.

Sydney Airport and Auckland International Airport Ltd (ASX: AIA) shares have had an amazing two years – rising 54% and 27% respectively. However, as every investor knows, past performance is not an indicator for future performance.

Sydney Airport’s September update revealed an 8.6% increase of international passengers compared to a year ago. So far, it has continued to grow its passenger numbers in every recent update.

But what’s the future for Sydney Airport shares?

The bull case

We are supposedly at the start of a tourism boom. In particular it’s predicted that the Asian middle class will want to travel the world and Australia is near the top of its bucket list (as well as New Zealand). Crown Resorts Ltd (ASX: CWN) should also be a beneficiary of this predicted tourism boom.

Most international visitors arrive into Australia via an airport. Sydney is the most popular tourist destination in Australia and has the largest proportion of international arrivals.

Sydney Airport is expected to become so busy in the future that a second airport is needed, which will be built at Badgerys Creek.

Sydney Airport holdings has first right of refusal to build, own, and operate a second airport. Having a second aiport could be a boost to its revenue and earnings.

All of these factors could be beneficial to Sydney airport’s bottom line and dividends.

Its current dividend yield is 4.17%, with an expected rise in dividends per share to $0.34 in FY17 (source: CommSec). This suggests that Sydney Airport is trading at a forward dividend yield of 5.1%.

The bear case

The short-term danger to Sydney Airport’s share price is if the Fed increases US interest rates. A lot of defensive assets like infrastructure, utilities and bonds could see their prices hit if there’s an interest rate increase in December.

There are potential long-term dangers too; roughly 11% of Sydney Airport’s revenue comes from car parking fees, although Uber and automated cars could become a threat. As driverless cars and pickup services become prevalent, a large percentage of people may decide not to park at the airport. Why pay a parking fee when a car can be called to pick you up on demand?

Sydney Airport is heavily indebted; it has $7.6 billion in net debt and rising interest rates could make this debt harder to service. Its interest cover was 2.61x at 30 June 2016.

The Australian newspaper recently reported that a hyperloop could be built between Melbourne and Sydney (and Canberra). This route is one of the busiest air routes in the world. If a hyperloop eventuates then a good portion of Sydney Airport’s passengers may use another form of transport. The hyperloop concept is still in the testing stages in the USA, but it is worth being aware of for the ultra-long term.

Is Sydney Airport a buy?

There is a compelling investment case for the underlying Sydney Airport business with its tourism tailwinds. However, its current valuation is far too high for my liking. I will be sitting on the sidelines until there’s a much cheaper entry price.

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Motley Fool contributor Tristan Harrison doesn’t own shares in any companies mentioned. 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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