Long distances between major cities in Australasia means flying is a preferred mode of travel. Despite a rival airport scheduled to open in 2026, we expect Sydney Airport to remain the favoured terminal for business and long-haul leisure travellers for the next decade. This is due to existing infrastructure which is costly to replicate, and proximity to the CBD, affluent suburbs and tourist areas, and connections to roads and public transport.
Revenue is about evenly sourced from aeronautical and other operations. Aeronautical fees are mostly on a per-passenger basis, with base charges negotiated with airlines every five years. Retail is the largest non-aeronautical contributor, accounting for about 23% of pre-COVID-19 revenue. Duty-free and luxury shopping has threats, given the ability for e-commerce sites to offer lower prices than duty-free, and ESG risks given the reliance on tobacco and alcohol sales. However, in the long run, risks materialising in any particular sub-category should be offset by passenger growth boosting defensive categories such as food, car-rental, parking, souvenirs, and holiday items
Regulators have no power to intervene other than to recommend more regulation. Rather than pushing for more onerous regulation, government and regulators could foster more competition via the new Western Sydney Airport, though we believe this will take more than a decade.
Catering to the growing middle-class in neighbouring countries remains a growth opportunity. Population and passenger growth should aid Sydney Airport as it can increasingly allocate slots away from domestic and toward international flights. International flights account for about 40% of passengers, but about 70% of passenger revenue.
Sweetened Proposal for Sydney Airport Looks Like Enough; FVE Up to AUD 8.25, Shares Fairly Priced:
Sydney Aviation Alliance has sweetened its pitch for Sydney Airport, now proposing a deal at AUD 8.75 per share. While the new price is only 3.5% higher than the previously rejected AUD 8.45, this time Sydney Airport granted due diligence and said it would support a binding offer at that price. A conclusion is unlikely until 2022 given it will require 4 weeks of due diligence, a binding bid from the consortium, a shareholder vote, and regulatory investigations. A lot could happen between now and then; however, the most likely outcome is a takeover proceeding at the proposed price.
We raise our fair value estimate to AUD 8.25, ascribing a 75% probability a deal proceeds at AUD 8.75, and a 25% weighting to our underlying valuation in the absence of a bid, which is unchanged at AUD 6.70.
We understand the need for due diligence given the hefty price tag, however, we think it unlikely the due diligence process will uncover anything to disrupt the offer. Sydney Airport is well run, and its assets and books have been scrutinised closely by many parties, and its now public listing. It also has a huge debt load that attracted close scrutiny from creditors in 2020, as well as air safety and security bodies scrutinising its physical assets.
A more likely disruptor is economic or coronavirus news. We maintain our view that regulatory authorities are unlikely to throw up insurmountable concerns about aviation safety, national security, foreign investment, or competition. Competition is the most likely hurdle, if any, given consortium member stakes in other airports.
Bulls Say
- Sydney Airport’s convenience to the business district and coastal suburbs of Australia’s largest city makes it near impossible to replicate. Rising incomes in nearby nations, and Australia’s growing population bodes well for long-term passenger numbers.
- A light regulatory regime is unlikely to become significantly more onerous.
- Sydney Airport has spare landing slots, plus the ability to reallocate slots away from domestic and toward more lucrative long-haul international flights, as passenger traffic grows.
Financial Strength
Financial Strength Sydney Airport’s financial health is fair, with relatively defensive income offset by high debt.Net debt/EBITDA was a high 14 times in fiscal 2021, up from 7.2 in 2019.Management acknowledged the high debt and took appropriate actions to reduce leverage, including cancelling distributions in 2020, delaying capital expenditure, securing additional bank facilities, and raising AUD 2 billion in equity in the September quarter of 2020. We expect calendar 2021 to be the low point for EBITDA, with 2022 forecast to be significantly higher due to fewer and less strict lockdowns.
Company Profile
Sydney Airport has a lease to operate the facility until 2097. As Australia’s busiest airport, it connects close to 100 international and domestic destinations, and handled more than 40 million passenger movements annually until COVID-19 border restrictions in 2020. Regulation is light, with airports setting charges and terms with airlines, and the regulator monitoring the aeronautical and car park operations to ensure reasonable pricing and service. Retail and property operations are free from regulatory oversight, though political and commercial pressure limits Sydney Airport from overly flexing its pricing muscle, particularly as the government owns the rival Western Sydney Airport, set to open in 2026.
(Source:Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
WiseTech Global was founded in 1994 as a software provider to the Australian logistics sector and has since grown organically to become a leading global provider of logistics software as a service, or SaaS. The company has over 6,000 customers, including 19 of the 20 largest third-party global logistics providers, and a customer retention rate of over 99%. WiseTech’s business model generates revenue based on the extent to which customers use its software rather than a traditional subscription model, which usually offers unlimited use within a set time frame. Despite strong revenue growth, WiseTech still comprises less than 5% of the global logistics software market, much of which is created in-house by logistics companies.
Although WiseTech lacks the scale of much larger enterprise resource planning, or ERP, software providers such as SAP and Oracle, the company’s niche focus and innovative culture have enabled it to outmanoeuvre larger peers. Descartes increased revenue at a CAGR of 14% over the five years to fiscal 2021 we forecast a CAGR of 14% over the next decade. WiseTech’s cloud-based platform is being adopted by logistics companies as a replacement for legacy and in-house developed systems, and we attribute client wins to the superior functionality and usability of the software and proven global SaaS platform.
Financial Strength
WiseTech is in good financial health thanks to its capital-light business model, highly recurring earnings, and narrow economic moat. The company is effectively equity-funded with no debt. Founder and CEO Richard White to remain reluctant to undertake large acquisitions and leverage the balance sheet. However, it’s not uncommon for technology companies to forgo short term profitability for long-term strategic benefits, and we are comfortable with management’s long-term focus.
WiseTech in a much more bullish light and have dramatically raised our earnings forecasts and fair value estimate to AUD 60.00 from AUD 9.00 per share. Our forecast revenue CAGR over the next decade, to 19% from 12% and our terminal EBIT margin to 37% from 32%, both of which add around AUD 14 to the fair value, or 28% of the total fair value increase. WiseTech’s cost of equity to 7.5% from 9.0% and increased the terminal growth rate to 4.9% from 2.2%, both of which add AUD 11 to our fair value or 22% of the total fair value increase.
WiseTech’s fair value increase is largely due to a higher terminal value, as 83% of our prior fair value was attributable to the terminal value. The terminal value increase is driven by the following four factors which have approximately equal impacts. The strong fiscal 2021 result, improved disclosure, and better than expected fiscal 2022 outlook, which increase our confidence in WiseTech’s global expansion strategy.
Bulls Say’s
- WiseTech has a narrow economic moat based on customer switching costs, as evidenced by a very high customer retention rate of over 99% for the past four years.
- WiseTech’s revenue is expected to continue growing strongly over the next decade as its logistics software platform replaces in-house and legacy software solutions. A high degree of operating leverage should create even stronger EPS growth.
- The capital-light business model should enable the balance sheet to remain debt-free, with operating cash flow covering research and development spending and dividend payments.
Company Profile
WiseTech is a leading global provider of logistics software, and 19 of the largest 20 third-party logistics companies are customers of the firm. The company has a very strong customer retention rate of over 99% per year, and is growing quickly as its global SaaS platform replaces legacy software. The company reinvests around 30% of revenue into research and development, but around 50% of this cost is capitalised, leading to poor cash conversion. Founder Richard White remains CEO and the largest shareholder.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Recently, WAM Global Growth provides 2.5 percent per share.
WCM Global Growth Limited ((WQG)) reported a net operating profit after tax of $48.4 million for fiscal year 21. For FY21, the investment portfolio returned 26.8 percent, with total shareholder returns of 35.6 percent.
The Company declared a final dividend of 2.5cps for FY21, fully franked, a 25% increase over the FY20 final dividend. This represents a 4.5cps full-year dividend, a 12.5 percent increase over the FY20 full-year dividend.
The Board has announced that the next two dividend payments will be increased, with an FY22 interim dividend of 2.75cps and a final FY22 dividend of 3.0cps. These dividends will most likely be fully franked. The increased dividends will be subject to corporate, legal, and regulatory considerations, as well as the Company having sufficient profit reserves and franking credits.
WQG issued Bonus Options on a one-for-three basis in February 2021. The options have an exercise price of $1.50, which represents a 7.4 percent discount to the closing share price on August 19, 2021. The exercise period for the options is until August 31, 2022.
Shareholders who exercise their options by COB 17 September 2021 and continue to hold the shares on the relevant record date will be eligible for all of the dividends listed above.
Company Profile
WCM Global Growth Limited (WQG or the Company) is a listed investment company investing in global equities. The Company provides investors with access to an actively managed portfolio of quality global companies found primarily in the high growth consumer, technology and healthcare sectors. The portfolio is managed by WCM Investment Management (WCM), a California-based specialist global equity firm with an outstanding long-term investment track record. WCM’s investment process is based on the belief that corporate culture is the biggest influence on a company’s ability to grow its competitive advantage or ‘moat’.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
