An airport is a great example of a monopoly. There is usually only one airport servicing a large area and only the government can approve another one to be built. That gives the business the reassurance that there won’t be any local competitors.
Having a monopoly means the airport can charge as much as it thinks it can get away with, or as much as it’s allowed to by market pressures.
There are two main airports listed on the ASX.
Which airport is the better investment?
Most people invest in infrastructure primarily for the income it produces.
Sydney Airport currently has a distribution yield of 4.57% based on its last two distributions. In its results to 31 December 2016 management disclosed that the distribution payout ratio for that six-month period was 100% of the net operating income.
Auckland Airport currently has a distribution yield of 2.82%. In the result to 31 December 2016 its distribution payout ratio was 96% of underlying earnings per share.
On the income side, it’s clear that Sydney Airport gives investors a bigger distribution.
It’s important to understand the growth prospects of every business that you consider.
There is a large tourism boom that’s helping Australia and New Zealand. Almost all tourists arrive through an airport.
In the latest Sydney Airport passenger update for March 2017 it disclosed that international passengers had increased by 2.3% compared to the same month a year ago. This growth is being replicated almost every month. The growth of passengers led to a 20.5% growth in net operating receipts in the six months to 31 December 2016.
Auckland Airport reported in its passenger update for February 2017 that international passenger numbers had increased by 6.8%. The growth in passengers helped the underlying profit grow by 18.6% in the six months to 31 December 2016.
It looks like Auckland Airport is managing to grow international passengers better out of the two, but Sydney Airport is managing to capitalise financially on the tourism boom better.
Debt is usually a big factor to be aware of for infrastructure businesses. In its December 2016 report Sydney Airport disclosed that its interest cover was 6.9x and it had $7.7 billion of net debt. Auckland Airport’s interest cover was 7.2x and it had $1.9 billion net debt.
When taking into account the size of each business, it still looks like Auckland Airport has a better debt situation on its balance sheet.
Both airports look like they have good prospects over the coming years and could be good investments. I think Auckland Airport looks like the better investment out of the two due to its better debt position, the upgrades it can make to the airport and the uncertainty surrounding the planned new airport in Western Sydney.
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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Sydney Airport Holdings Limited. Motley Fool contributor Tristan Harrison has no position in any stocks 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.