Why this top broker upgraded Sydney Airport to buy

More coronavirus related deaths isn't spooking Sydney Airport Holdings Pty Ltd (ASX: SYD) investors as a broker upgrades the stock. Here's why…

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News of more coronavirus related deaths isn't spooking Sydney Airport Holdings Pty Ltd (ASX: SYD) investors today. Shares in our largest airport operator jumped after the stock was upgraded by a leading broker.

The Sydney Airport share price gained 1.4% to $8.42 even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index slipped 0.2% as worries about the economic impact of the virus deepened.

Other travel related stocks were also down. The Qantas Airways Limited (ASX: QAN) share price dived 3.1% to $6.46 while the Flight Centre Travel Group Ltd (ASX: FLT) share price dipped 0.2% to $39.38.

Cleared for take-off

But the wind is under Sydney Airport's wing after Morgans upgraded the stock to "add" from "hold" following the release of the company's profit results.

The broker called Sydney Airports results for the six months to end December 2019 "solid" even though it acknowledged that the impact of the SARS-like outbreak hadn't kicked in.

Corona-revival

"SYD says its most materially impacted months during the 2003 SARS outbreak saw 15-20% international pax declines," said Morgans.

"However, we note its international pax declined only -2% across 2003. SYD reports current month-to-date traffic indicates a SARS-like impact to international traffic and weakness in domestic traffic.

"Month-to-date domestic pax declines are estimated at 5-10%. We now assume a 6-7% decline in international and 1-2% decline in domestic pax for FY20, with a strong rebound to trend growth from FY21."

Morgans is confident about the recovery as Sydney Airport's passenger growth has historically rebounded from negative events.

Are Sydney Airport's dividends safe?

However, management's decision not to give dividend guidance for 2020 (its financial year ends in December), shows Sydney Airport's lack of confidence in predicting the recovery. Some investors will use this as an excuse to sell the stock.

But Morgans remains convinced that the company's dividends are not only safe, but will increase by 1 cent a share this year.

"We continue to believe that the diversification and resilience of SYD's revenue streams (including >50% of revenues from commercial activities), relatively low dependency on mainland China pax (~12% of international pax in 2019, 're-baselined' costs, balance sheet strength, and DPS glide-pathing through the 2022 tax paying period means it can pay a 40 cps DPS in FY20," explained Morgans.

The broker lifted its price target on Sydney Airport to $9.10 from $8.98 a share.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited and 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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