Why Sydney Airport Holdings Pty Ltd (ASX:SYD) is vulnerable to rising bond yields

The latest monthly passenger traffic data from our nation’s biggest airport will only reinforce what sceptics believe – that the solid pace of growth at Sydney Airport Holdings Pty Ltd (ASX: SYD) is decelerating.

Investors aren’t worried with the share price of Sydney Airport rising 0.4% to $7.15 in early trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 0.2%.

The company reported today that domestic passenger numbers in June were flat, while the number of international passengers going through its terminals increased 5% over the same time last year.

That is lower than the previous month when domestic traffic grew 1.1% and overseas visitors increased 5.6%.

While domestic passengers make up the bulk of travellers moving through Sydney Airport, international passengers have been the key growth engine for the company and growth in this category had been tracking closer to 6%-7% up till recently.

What’s more, the all-important Chinese visitor category “only” increased 10% last month over June 2017, when this category was tracking closer to 17% in the past.

The growth in international travellers in June has been driven by increasing airline capacity with the likes of Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) increasing the number of flights to and from the airport.

The slowing growth is not unexpected given the big increase in passengers at Sydney Airport in 2017 (it’s harder to achieve the same or higher percentage growth on a larger base), but it comes at an inopportune time for the airport.

The stock has been lagging the market recently as global bond yields jumped higher. Higher bond yields are a negative for infrastructure stocks as they are often compared to bonds. A higher yield means a lower price for the securities, and vice-versa.

What’s more, the Productivity Commission is undertaking a review of airport operations and there are signs that it is in favour of changing the light-touch that regulators have taken towards airports.

Further, Sydney Airport’s contracts with international airlines are coming up for renewal and the airline peak industry body is lobbying for lower fees.

The operating environment for Sydney Airport is becoming more turbulent and there’s a lack of positive catalysts for the stock over the short to medium-term.

It’s the same story for other infrastructure stocks like Transurban Group (ASX: TCL) with the stock caught in limbo for the next several weeks at least (see why Transurban is stuck in a rut ).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. 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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