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Is the Sydney Airport Holdings Ltd (ASX:SYD) share price in danger?

airport sunset
Credit: The GuWek

The Sydney Airport Holdings Ltd (ASX: SYD) share price could come under pressure this morning after the Productivity Commission indicated it will investigate whether airports are operating as monopolies.

In some ways it’s quite obvious that most airports have monopolies. There is a single main airport for domestic and international passengers in nearly every single Australian city. That sounds like the definition of a monopoly to me, that’s why they’re such good investments.

There will be a new airport in Sydney at some point in the next decade, which could increase competition for flights into and out of Sydney.

The main problem in the future is that price caps for all flights could be introduced again, which the Productivity Commission made reference to. Car parking fees will also be looked at. These are two of the major sources of earnings for Sydney Airport, so limiting the price growth will obviously limit profit growth.

Sydney Airport does have a tailwind from the surge of tourists arriving into Australia. However, this alone isn’t enough to justify its high price.

Low interest rates have been a huge reason for the strength of the airport operator’s share price. Many people call Sydney Airport a ‘bond proxy’.

However, interest rates are now rising around the world, particularly in the US. This is going to make the dividends paid out by Sydney Airport seem increasingly less attractive compared to the risk. Therefore, the share price is likely to fall, or at least stagnate, even though earnings will keep rising.

Foolish takeaway

Governments that ‘create’ a monopoly can very easily weaken the strength of that monopoly, that’s why I think a lot of investors need to pay more attention to government risk with their investments.

At 38x FY19’s estimated earnings I think I’d sell Sydney Airport shares if I owned them. I think a fair price would be around $6, but even then it would still be expensive.

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Returns as of 6th October 2020

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. 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 Scott Phillips.

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