The Right Price For Sydney Airport?

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As Sydneysiders brace for another week of lockdowns a bidder has emerged for Sydney Airport, surprising the market and sparking speculation aplenty

-Highly conditional cash offer of $8.25 a share considered reasonable by brokers
-Timing of an earnings recovery for Sydney Airport remains highly uncertain
-Competing bids cannot be ruled out, given appeal of long-duration infrastructure assets
 

By Eva Brocklehurst

A bidder has rattled the cage of Sydney Airport ((SYD)), disturbing the solitude imposed by the pandemic, although it is unlikely to bring on a rush of international passengers.

Ord Minnett suspects the offer caught management off guard but at first glance it appears to be fair. Sydney Airport is an irreplaceable infrastructure asset and the broker points out the consortium comprises credible investors that have experience in owning airports and are likely to be well capitalised.

Since the onset of the pandemic, Citi assesses a wider-than-usual discount in the pricing of listed infrastructure assets, particularly airports, compared with the value of infrastructure assets held by unlisted vehicles.

The broker suspects the proposal is a reflection of this discount and believes it could help provide a base to value listed airports elsewhere, such as Auckland International Airport ((AIA)), which also closed higher on the news.

The bid comes from a consortium of unlisted infrastructure funds and is indicative, conditional and non-binding. Ord Minnett calculates the offer values equity at $22bn with an enterprise value of $29.7bn. Sydney Airport's board is assessing the proposal and has made no recommendation as yet. The share price lifted by 33.9% to $7.78 on the bid announcement which has an indicative price of $8.25 cash.

Morgan Stanley had a bull case valuation of $8.88 for Sydney Airport, but this was based on a faster recovery in aviation, allowing for favourable returns on investment along with a benign rates environment, and does not contemplate a control premium or corporate activity.

Citi assesses the bid price is "healthy and reasonable" and, while Sydney Airport management remarked the bid price is below the pre-pandemic share price, also points to the dilution from the capital raising in August 2020.

Yet, the broker flags the timing of an earnings recovery is uncertain because of international border closures, highlighting long-term consensus revisions have been negative since December 2019, potentially signalling expectations for structural impacts on travel.

While travel may recover from an exceptionally low base currently, revenue and earnings may not reach their pre-pandemic trajectory for some time.

It may be disappointing a high-quality asset could leave the ASX, yet Morgans points out the mix of aeronautical, property and car park earnings and defensive growth attributes are almost impossible to replicate.

Moreover, the immediate investment returns appear sufficiently attractive to entice investors to sell into the bid, compared to the uncertainty regarding a recommencement of international traffic needed to lift the share price.

Morgans suspects the share price could fall back to around the July 2 close of $ 5.81 a share if the deal does not eventuate, but assesses the market is applying a high probability the transaction will proceed and downgrades to Hold from Add.

For funds with a long-term investment horizon and low return hurdles, the broker suggests the current share price could look attractive, assuming travel recovers and capital could be released from what appears to be an under-geared balance sheet.

The broker assesses the offer is broadly in line with the pre-pandemic share price, adjusted for the 2020 $2bn capital raising. Hence, there is no takeover premium, although Morgans acknowledges the impact on international traffic from the pandemic remains a major uncertainty.

Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, upgrades to Neutral from Sell, believing the share price will be driven more by the potential for corporate activity now and less by operational challenges. The broker's target is raised to $8.25. Depending on the board's assessment, Jarden expects the stock can trade at these elevated levels.

Conditions/Restrictions

Morgans does not expect the Foreign Investment Review Board will have issues with the consortium. Airport ownership laws restrict foreign ownership to 49% and cross-ownership to 15%, so the structures of Melbourne, Brisbane and Perth airports can influence a decision.

This proposal is subject to conditions including UniSuper agreeing to reinvest its equity interest and a unanimous recommendation by the board.

The consortium comprises IFM Investors, QSuper and Global Infrastructure Management. IFM Investors owned stakes in major Australian airports (Melbourne, Brisbane) and QSuper owns a stake in Heathrow Airport while Global Infrastructure Management owns London's Gatwick and City airports.

Another Bidder?

Ord Minnett believes competing bids cannot be ruled out, particularly given the appeal of long-duration infrastructure assets. The broker moves its target to the indicative price, with some potential for a competing offer, although assesses the $30bn enterprise value makes it difficult as does the foreign ownership limit.

This also limits potential for Sydney Airport to squeeze more out of the bid, in Ord Minnett's view. Hence, conditions do not appear overly restrictive especially considering the comment from UniSuper that it does "in principle, see merit in Sydney Airport being converted from a publicly listed company to unlisted company".

Citi suggests a unique asset such as Sydney Airport will appeal to a range of infrastructure bidders and therefore there is potential for others to get involved in this process. Additionally, as the proposal is non-binding, this leaves room for potential engagement should another get involved.

On the other hand, Macquarie believes there are limited numbers of operators that would counter the bid, although there may be scope for a increase in the bid price to ensure scheme agreement and UniSuper support.

The main risk for investors is if the offer fails, although Sydney Airport could then need to make a case regarding the growth outlook beyond current expectations in order to provide some downside support.

Macquarie highlights, since 2019, there has been a deferral of the re-pricing of airport access fees for at least two years because of the pandemic, a collapse in international traffic such that it will take to 2025 to be back at 2019 levels, and domestic airlines grabbing peak slots in the absence of international traffic.

In response, Sydney Airport has scaled the business as well as capital expenditure and is likely to offer no dividend in 2021 or, in the broker's view, the first half of 2022 as well.

Still, the opportunity for any bidder is not dissimilar to 2019, just deferred to 2023 or 2024, Macquarie adds. This includes ongoing development around the airport, including consolidating Qantas' ((QAN)) terminals into one terminal and, by extension, re-pricing of access fees.

Jarden also suspects the development potential of the land bank may be a consideration for the Sydney Airport board when assessing the value of the bid. The airport has 128 hectares of land at a book cost of $200-250 per square metre which compares to market values of over $1,000 per square metre for land in south Sydney.

The database has one Buy rating (Morgan Stanley), five Hold and one Sell (Credit Suisse, yet to comment on the bid). The consensus target is $6.72, signalling -13.7% downside to the last share price, and compares with $5.84 ahead of the bid announcement. Targets range from $5.30 (Credit Suisse) to $8.50 (Macquarie).

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