The S&P/ASX 200 Index (ASX: XJO) has jumped more than 18% in half a year since the outbreak of the COVID-19 pandemic. This is partly due to the resources sector rally, which saw investors buying into companies such as Silver Lake Resources Limited (ASX: SLR) (+27% in 6 months), Fortescue Metals Group Limited (ASX: FMG) (+54% in 6 months) and Mineral Resources Limited (ASX: MIN) (+56% in 6 months). There has also been a moderate rebound in the infrastructure sector after the Australian Government announced a $1.5 billion infrastructure stimulus package in June.
Infrastructure assets such as Sydney Airport Holdings Pty Ltd (ASX: SYD) have historically delivered excellent returns. Since its inception, Sydney Airport shares have returned more than 300% in 20 years. But in 2020 the airport has underperformed the broader market, with the Sydney Airport share price falling by 27% over the last 12 months.
Let's look at the way COVID-19 has changed the game for Sydney Airport, and why I am slightly concerned about whether it can return to its former strength.
The nature of infrastructure assets
Pre-COVID, infrastructure assets were considered 'fortress assets' due to their strong market positions and high asset quality. These assets are available for use by the public and they usually generate great long-term returns.
However, the pandemic may prove investors wrong in terms of asset quality when we look at the Sydney Airport share price. Its performance has weakened over the past few months amid the pandemic-fuelled economic carnage.
Focusing on the fundamentals
Two important metrics when looking at Sydney Airport's valuation are its cash flow and the volume of air traffic.
Looking at Sydney Airport's financial position, it is clear that the management team has piled up some cash in FY20. The net cash flow of the airport as of June 2020 increased by 300% compared with June 2019, according to Sydney Airport's interim financial report for the half year ended 30 June 2020.
In the same period, the airport's overall cash position looked positive, but the cash flow cover ratio (an indicator of the ability of a company to pay interest and principal amounts when they become due) went down 33% to 2.4x. This means that its interest expenses went up as the company used extra debt financing to protect its balance sheet.
In addition, since late February, passenger traffic through Sydney Airport has been severely impacted due to the lockdown. In its 2020 half-year result Sydney Airport reported its international and domestic passenger traffic went down 57.3% and 56.1%, respectively, compared to the prior corresponding period.
Foolish takeaway
Amid the looming economic challenges, I have some concerns about the long-term investment return of Sydney Airport in the post-COVID era. Although the lifting of travel restrictions and recovery of business activities may help the Sydney Airport share price in the short run, in my view it has a long road to full recovery.
