Australia | Jan 21 2013
-Lack of clarity until tax resolved
-Traffic growth solid
-Stock still attractive
By Eva Brocklehurst
Sydney Airport ((SYD)) is unlikely to find clear air until its tax issues are resolved. According to CIMB this will overhang the stock in FY13 even though the outlook for traffic growth is solid. CIMB estimates the worst case scenario could cost the company up to 7c per share in annual cash flow. Other than that, forecasts are holding up and CIMB has kept a Hold rating with a price target of $3.47.
Macquarie believes the share price has already factored in the potential amended tax assessment and also maintains a Hold rating. Macquarie, however, finds domestic growth below expectations. The broker said growth of 4.8% for the month of December appears a little disappointing, given it was previously weak as well. Total traffic grew 5.2% in December with international up 5.8%. Macquarie notes scheduling data suggests capacity growth is likely to drop sharply in the first quarter of this year, with some rebound in the second, back to longer term trend levels of 3-4%. This broker is slightly more optimistic around the dividend in 2013 compared with consensus, because of the benefits flowing from car parking and retailing. Moreover, Macquarie does not expect any amended tax assessment to impact the 2013 dividend policy; rather the components of the dividend are what are likely to be affected.
CIMB notes the impact of the tax assessment ultimately depends on how SYD can adjust its operating structure to avoid cash drain going forward. The analysts say the quantum of liability is the key, should the ATO issue an assessment in the case of the deductibility of interest on Redeemable Preference Shares. CIMB calculates that, if upheld, it could cost SYD around 2c per share of operating cash flow, per annum. This would take 5% off valuation, to $3.29. Assuming a worst case where interest on all RPS is assessed as taxable, then CIMB sees a 6-7c impact and an 18% impact on valuation, to $2.84. For the worst-case scenario, assuming SYD restructures to manage the issue by FY16, CIMB's valuation comes back to $3.18.
Despite the tax gyrations, Macquarie sees SYD as increasingly attractive at current pricing, noting it has leverage to any improvement in the economy through better passenger volumes.
While these two brokers reiterated a Hold recommendation after the traffic statistics were released, earlier this month Deutsche Bank downgraded the stock to Hold from Buy on the FNArena database, claiming risks of an adverse ruling on tax created too many uncertainties for the time being. The stock has four Hold ratings, the fourth being UBS. There are two Sell ratings – BA-ML and JP Morgan. Target price ranges from $3.10 (BA-ML) to $3.47 (CIMB).
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