Why Sydney Airport’s Geoff Culbert can still see blue sky ahead

Forget the $97m half-year Covid loss at Sydney Airport. The real question is how much value sits in Australia’s only listed airport, which is currently in play.

Sydney Airport CEO Geoff Culbert on the tarmac: ‘When you assess value you need to take a long-term view’. Picture: Sam Ruttyn

Forget the $97m half-year Covid loss at Sydney Airport’s results on Friday. The real question is how much value sits behind the kimono at Australia’s only listed airport, which is currently in play.

On Monday the airport’s board, led by chair David Gonski and CEO Geoff Culbert and advised by Barrenjoey and UBS, knocked back a $30bn bid from the IFM-led Sydney Aviation Alliance, people with very deep pockets. And they will not agree to open that kimono for due diligence until they get a better offer than $8.45 a share.

The analyst call for the half-year results, lasting nearly two hours, will at least have given the IFM camp, which includes industry funds QSuper and UniSuper and US Global Infrastructure Partners, new data on performance and the upside once Australians take to the skies again.

With airports deserted, it’s a great time to buy. It is Culbert’s job to remind everyone of the potential of an airport that pre-Covid contributed close to 7 per cent of state GDP with 330,000 jobs, handles 60 per cent of freight in and out of Australia and since 2014 has delivered over $4bn in dividends to shareholders.

“We have stayed close to all of our major shareholders throughout the process,” Culbert said. “They understand when you assess value you need to take a long-term view.”

On Friday some of those shareholders spoke out. AFIC’s CEO Mark Freeman said: “There’s 76 years left on the airport concession, so losing this asset at this time would be a real loss to investors. We want to own assets like this for the long term and so we’re not exactly looking to sell a high-quality airport during a pandemic.

“The timing of a bid for an airport concession that lasts until 2097 to coincide with the depths of a one-in-100-year pandemic is self-evidently opportunistic,” said Northcape Capital’s portfolio manager Paul Parsons. “Only an offer that fully reflects the true long-term value of Sydney Airport should be contemplated.”

Asked at the briefing whether the IFM consortium was aware of what the bid price would be to move forward, Culbert said: “I can’t answer it and I’m not going to engage in speculation.”

What became clear was not just the resilience of Sydney Airport’s position, but also the scale of opportunity in a property development pipeline around the airport.

The CEO offered three reasons that explain why the bid is too low.

First, the strong rebound in traffic during the first half of the year: back to 65 per cent of pre-Covid levels in the domestic market for the three months borders opened; and back to 40 per cent of pre-Covid level in the two months of the trans-Tasman bubble.

“Every time borders open and travellers have confidence that they will stay open, they pile back in and that’s in an environment where vaccination levels have been low. Once we get 80 per cent (vaccination) within the country you are going to see a significant amount of pent-up demand released.”

Culbert says vaccine targets gave a clearer view to recovery and international travel could start to open within six months of hitting the 80 per cent level. Overseas countries ahead on vaccination programs are flying again.

“Seats within Europe are back to 65 per cent of pre-Covid levels and international travel out of Israel has got back to close to 50 per cent. Today Singapore have announced they are opening up a travel bubble with Germany now that they are at the 80 per cent vaccination level.”

The second value-enhancer is the deals struck with both property and retail partners. Twelve new luxury brands will open at the international terminal on six-year leases including Louis Vuitton, and in six months the airport has closed 58 new property deals covering over 50,000sq m at rates more than 20 per cent higher than previously.

And third, Sydney Airport has $2.9bn in liquidity sitting on the balance sheet. Cash burn from the current low traffic is only $5m to $10m a month. “All the hard work we did last year around the $2bn equity raise, the $850m debt raise, the spending reductions, that put us in a really strong position,” Culbert said.

There are striking similarities between this tilt at Sydney Airport and the 2018 attempt to take over Healthscope. In both, an industry fund in the bidder camp also had a substantial holding on the target register. With Healthscope it was AustralianSuper. For Sydney Airport, it is UniSuper. Both see the advantages of taking a business private.

Asked how it is that UniSuper’s John Pierce could not have a conflict of interest in the deal, Culbert said: “UniSuper are in a unique position in that they are not being asked to sell. You’d have to speak to John about that individual question, but they are a long-term and loyal shareholder of ours. We listen to their views, we respect their views, but the board need to act in the interests of all shareholders.”

This week, AustralianSuper joined the IFM consortium, removing a possible counterbidder from the scene.

The other striking similarity is the value sitting in property development. With Healthscope, it was hospitals; for Sydney Airport it is land. “We’ve identified 107 hectares of revenue that is currently in our commercial pipeline for development, that covers freight logistics, office space and aviation capacity,” said Culbert.

The 107 hectares of development opportunity drew plenty of interest on Friday. The completion of the Gateway Road project will unlock the jet base. Sydney Airport shareholder Greencape Capital said: “The company has the ability to unlock significant latent value from the Qantas Jetbase. This is 25 hectares of prime real estate at the north of the airport, closest to the CBD, which has just recently been handed back to the company. We are more than happy to hold on to our shares in the event a transaction doesn’t eventuate.”

By 2039 Sydney Airport expects a million tonnes of airfreight business. There are also commercial development options and Culbert says demand from the e-commerce boom is a trend that can only build.

“E-commerce providers want to remove the middle mile, land the aircraft at the airport and have a distribution centre onsite so they can then deliver it to the end customers, rather than truck it 5km to 10km to somewhere else.”

Yes, it is easy to see the attraction of this prized infrastructure asset for big super. It even has a net zero emissions pathway by 2030. Culbert insists that the board is philosophically open to an offer. It comes down to the price, which the bidders lifted by 20c this week to $8.45 a share.

The price debate is complicated by the capital raising last year. The Sydney Airport board uses a price of $9.20 from December 2019. Culbert insists the board is applying the standard market convention used by the ASX and Bloomberg.

The Sydney Aviation Alliance says the correct price to take is from February 2020, just before Covid hit, at $8.40 and it uses a different rights price adjustment.