Sydney Airport. Attractive fundamentals, but fully priced

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1 Asia Pacific/Australia Equity Research Airport Services Rating NEUTRAL* Price (17 Mar 14, A$) 4.1 Target price (A$) 4.2¹ Market cap. (A$mn) 9,86.49 Yr avg. mthly trading (A$mn) 511 Last month's trading (A$mn) 441 Projected return: Capital gain (%) 2.4 Dividend yield (net %) 5.8 Total return (%) week price range * Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Total return forecast in perspective 3% 2% 1% % -1% -2% -3% CS tgt^ Research Analysts David Bailey david.bailey@credit-suisse.com Sandra McCullagh sandra.mccullagh@credit-suisse.com Nicholas Markiewicz nicholas.markiewicz@credit-suisse.com Sh Prc Mean^ 12mth Volatility* 52wk Hi-Lo IBES Consensus target return^ Performance over 1M 3M 12M Absolute (%) Relative (%) Relative performance versus S&P ASX 2.See Reference Appendix for a description of the chart. Source: Credit Suisse estimates, * Consensus, mean range from Thomson Reuters (SYD.AX) INITIATION Attractive fundamentals, but fully priced Initiate on (SYD.AX) with $4.2 TP and NEUTRAL rating. A solid business model: Airports are an attractive asset class, generally characterised by high barriers to entry, limited effective substitutes and a captive market. On this basis, and with no major competing airport, we assess the current competitive threat for to be low. Growth in distributable cash is delivered via passengers and increased charges which, coupled with leverage (both operational and financial), underpin distribution growth. On our estimates, passenger growth of 3% p.a. should translate to distribution growth of 7% p.a. to 22. Short-term outlook positive : The utilisation of larger aircraft and increased penetration of low-cost carriers should facilitate passenger growth in the near term. Capex to release capacity is recoverable via passenger service charges, supportive of aeronautical revenue. Retail is positively leveraged to rising international traffic, with increased capacity from Asian carriers positive for growth given a higher propensity to spend among Asian passengers. On our estimates, the early reversion of Qantas' terminal leases would present a positive near-term opportunity for. but with medium-longer term risks: Capacity constraints are likely to inhibit passenger growth over the longer term. Demand for existing infrastructure in peak hours is currently heavily utilised, with constraints on hourly movements and curfews potentially leading to unmet demand. The expiry of the current duty-free contract and airline pricing arrangements in 215 present more immediate risks. Valuation appears full: Our $4.2 target price reflects our DCF valuation. SYD currently trades at 16.3x 12-month forward EBITDA relative to a nearterm average of 14.1x. While we see a 5.8% yield as attractive with nearterm growth opportunities likely to outweigh downside risks, the stock appears fully valued, in our view. Initiate with a NEUTRAL rating. Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Revenue (A$mn) 1, , , ,35. EBITDA (A$mn) ,7.3 1,65. EBIT (A$mn) Net income (A$mn) EPS (CS adj.) (Ac) Change from previous EPS (%) n.a. Consensus EPS (Ac) n.a EPS growth (%) P/E (x) Dividend (Ac) Dividend yield (%) P/B (x) Net debt/equity (%) Source: Company data, ASX, Credit Suisse estimates, * Adj. for goodwill, notional interest and unusual items. Relative P/E against ASX/S&P2 based on pre GW in AUD. Company PE calculation is based on displayed EPS Currency DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Figure 1: Financial summary (SYD) Year ending 31 Dec In AUDmn, unless otherwise stated Share Price: A$4.1 17/3/214 18:54 Earnings 12/12A 12/13A 12/14E 12/15E 12/16E Rating NEUTRAL c_epsequiv. FPO (period avg.) mn 1, , , , ,194.3 Target Price A$ 4.2 c_epseps (Normalised) c vs Share price % 2.44 c_ebi EBITDA Margin % operates the Kingsford Smith Airport in Sydney, Australia. The company develops and maintains airport infrastructure and leases terminal space to airlines and retailers. c_dpsdps c Franking %..... FRANKING*1 Valuation c_pe EV/EBIT x Profit & Loss 12/12A 12/13A 12/14E 12/15E 12/16E c_ebi EV/EBITDA x Sales revenue 1,31.1 1, , , ,35. c_ebi Dividend Yield % EBITDA ,7.3 1,65. c_divfcf Yield % Depr. & Amort. (3.1) (3.1) (32.5) (34.7) (36.7) c_fcfprice to Book x EBIT c_pb Associates..... Returns Net interest Exp. (442.2) (455.9) (451.4) (465.7) (478.8) c_roereturn on Equity % Other..... c_i_np Profit Margin % Profit before tax c_i_sa Asset Turnover x Income tax 67.2 (96.8) (59.1) (71.1) (83.8) c_ass Equity Multiplier x Profit after tax c_roareturn on Assets % Minorities (.) (.) (.) Return on Invested Cap. % Normalised NPAT Unusual item after tax..... c_roigearing Reported NPAT c_geanet Debt to Net debt + Equity % c_netnet Debt to EBITDA x Balance Sheet 12/12A 12/13A 12/14E 12/15E 12/16E c_i_ebint Cover (EBITDA/Net Int.) x Cash & equivalents c_i_ebint Cover (EBIT/Net Int.) x Inventories..... (c_c_ Capex to Sales % Receivables (c_c_ Capex to Depreciation % Other current assets Current assets MSCI IVA (ESG) Rating AA Credit Suisse View Property, plant & equip. 2,59.5 2, ,61.5 2, , TP ESG Risk (%): Intangibles 7,85.8 7, , , , Other non-current assets Non-current assets 1,45.9 1, , , , Total assets 1, ,94.6 1,97.4 1, , Payables Interest bearing debt 6, ,74.4 6,93.1 7, , MSCI IVA Risk: Neutral Other liabilities 2,41.4 1,866. 1,866. 1,866. 1, Total liabilities 8,847. 9,3. 9,2.2 9, ,724.6 Environment Social Governance Net assets 2, ,91.6 1,77.2 1,49.5 1,119.4 Ordinary equity 2,48.7 1, ,77.8 1,41.1 1,12. Minority interests Preferred capital..... Source: MSCI ESG Research Total shareholder funds 2, ,91.6 1,77.2 1,49.5 1,119.4 Net debt 6,5. 6, , , ,98.4 Share Price Performance Cashflow 12/12A 12/13A 12/14E 12/15E 12/16E EBIT Net interest Depr & Amort Tax paid Working capital Other Operating cashflow Capex Asset sale proceeds..... Other Investing cashflow Dividends paid Equity raised..... Net borrowings Other Financing cashflow TP Risk Comment: We have not currently factored in any specific ESG risk into out target price. Key risks that would potentially lead to an adjustment to forecasts and valuation would include environmental (land use) and regulatory (pricing) risks. MSCI IVA Risk Comment: We see the current rating as appropriate given the strong policies in place relating to the environmental impacts of its operations /3/213 5/5/213 5/7/213 5/9/213 5/11/213 5/1/214 5/3/214 Total cashflow Absolute 2.8% 5.1% 27.7% Adjustments..... Relative 3.5%.9% 23.9% Net change in cash Source: Reuters 52 week trading range: Stock Country Local Sector Global Sector SYD.AX XJO (SYD.AX) 2

3 Figure 2: Financial summary Southern Cross Airport Corporation Holdings (SCACH) Profit & Loss 12/12A 12/13A 12/14E 12/15E 12/16E Valuation 12/12A 12/13A 12/14E 12/15E 12/16E Sales revenue 1,39.7 1, , , ,35. Equiv. FPO (period avg.) mn 1, , , , ,194.3 EBITDA ,13.7 1,71.6 Net operating receipts $mn Depr. & Amort Cash available per security c EBIT DPS c Associates..... Distribution yield % 5.1% 5.5% 5.7% 6.2% 6.6% Net interest expense RPS interest expense Traffic 12/12A 12/13A 12/14E 12/15E 12/16E Profit before tax (98.) (54.7) (1.4) International Income tax (17.6) (6.) (3.1) Domestic Net profit after tax (8.4) 5.3 (7.3) Total Net profit after tax (ex RPS) International growth 5.6% 3.8% 3.8% 3.8% 3.7% Domestic growth 2.7% 2.% 2.7% 2.7% 2.7% Balance Sheet 12/12A 12/13A 12/14E 12/15E 12/16E Total growth 3.6% 2.6% 3.% 3.% 3.% Cash & equivalents Receivables Other current assets Current assets Property, plant & equip. 2, , , , ,659.5 Intangibles 3,319. 3, ,24.4 3,21.1 3,161.8 Goodwill Other non-current assets Non-current assets 6, ,98.6 6, , , % Total assets 7, ,413. 7, , ,475.5 Payables % Interest bearing debt 8, ,71.7 8,95.4 9,24. 9, Other liabilities International growth Domestic growth Total liabilities 8, , ,424. 9, ,957.3 Revenue 12/12A 12/13A 12/14E 12/15E 12/16E Net assets -1,6.3-1, , , ,481.8 Aeronautical Issued capital 1,314. 1,314. 1,314. 1,314. 1,314. Aeronautical security recovery Cash flow hedge reserve Retail Retained earnings -2, , , ,39. -3,648.5 Property, car rental Total shareholder funds -1,6.3-1, , , ,481.8 Commercial, ground transport Other Credit metrics 12/12A 12/13A 12/14E 12/15E 12/16E Total revenue 1,39.7 1, , , ,35. Net Debt 5, ,37.3 6, ,83. 7,64.4 Net Debt to EBITDA % 7.x 7.x 6.9x 6.7x 6.6x Net Debt to Net debt + Equity x 41.7% 42.% 41.6% 41.2% 4.8% Cashflow coverage x 2.1x 2.2x 2.3x 2.3x 2.4x Cashflow 12/12A 12/13A 12/14E 12/15E 12/16E Gross cashflow ,13.7 1,71.6 Net interest Tax paid..... OC_Tax Working capital OC_WC Operating cashflow Capex Other Investing cashflow Expenses 12/12A 12/13A 12/14E 12/15E 12/16E Net borrowings Labour Dividends paid Services and utilities Financing cashflow Other operational Total cashflow Property and maintenance Adjustments..... COGS Net change in cash Recoverable security Specific expenses Distributions 12/12A 12/13A 12/14E 12/15E 12/16E Total expenses PBT RPS interest Depr. & Amort PBT pre RPS interest, D&A Non-cash financial expenses Other cash movements Cash available to shareholders Ownership 84.8% 92.6% 1.% 1.% 1.% Equity distribution Corporate expenses Net operating receipts RPS paid Dividends paid % 5.% 4.% 3.% 2.% Property, car rental 17% COGS 2% Retail 22% Recoverable security 36% Property and maintenance 9% Commercial, Other ground transport % 12% Other operational 8% Aeronautical 42% Aeronautical security recovery 7% Labour 2% Services and utilities 25% (SYD.AX) 3

4 Table of contents Investment view 5 Investment positives 5 Investment risks 6 Airports: an attractive asset class 7 A solid business model 8 How generates cash 8 How are distributions received? 12 What will drive growth? 13 Passengers 13 Capex and aeronautical charges 17 Retail 2 Car-parking 22 Property 23 Long-term issues 24 Capacity constraints 24 Potential medium-term solutions 28 A second? 3 Financial Summary 33 Income statement 33 Balance sheet 34 Cash flow 35 Valuation 36 HOLT 37 Environment, Social and Governance (ESG) 39 Board of Directors and Management 43 Appendices 45 overview 45 Group structure 46 PEERS 48 (SYD.AX) 4

5 EV / EBITDA (x) Distribution yield (%) 18 March 214 Investment view We initiate with a $4.2 target price and a NEUTRAL investment rating. SYD currently trades at 16.3x 12-month forward EBITDA relative to a near-term average at 14.1x. Analysis of the current distribution yield relative to the historical relationship with bond rates indicates that upside on a total return basis is limited. While we see a 5.8% distribution yield as attractive with near term growth opportunities likely to outweigh downside risks, the stock appears fully valued, in our view. Figure 3: EBITDA multiple above near-term average EV/EBITDA (x) 18.x 17.x 16.x Figure 4: with recent yield compression distribution yield (%) 9.% 8.5% 8.% 15.x 14.x 13.x 12.x 7.5% 7.% 6.5% 6.% 5.5% 11.x Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 5.% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: IBES, Company data, Credit Suisse estimates Source: IBES, Company data, Credit Suisse estimates Investment positives Airports an attractive asset class: We assess the competitive threat for an airport to be low. Threats from new entrants and substitute products are likely to be limited. Both bargaining power of customers and competitive rivalry appears contingent on the existence of a competing airport. The scale of capex programs and potential for outsourcing of certain activities should place airports in relatively strong bargaining positions. Combined with a largely fixed cost base, we see this analysis as indicating that an airport should have significant leverage to rising passenger numbers. Defensive nature of cashflows: operates a solid business model. Cashflows are stable and have in-built protections. Growth is delivered via passengers and increased charges (generally at CPI+). This has enabled passenger growth of 3% and EBITDA growth of 7% to translate into cash available after debt service growth of 11% between 27 and 213. As an approximation of the sustainable distributions generated by, we see this as highlighting the strength of the operating model currently in place. Leverage, both operational and financial, should continue to support the distribution growth profile over the medium to longer term. Exposure to larger aircraft, low-cost carriers (LCC): Aircraft capacity at Sydney Airport, both domestic and international, has been rising over time. This has been a result of increased penetration of low cost carriers, aircraft alliances between Middle Eastern and Australian carriers and rising incomes in Asia, facilitating increased leisure travel. To satisfy demand for international travel, airlines have been increasingly utilising larger aircraft. Asian airlines and low-cost carriers are expected to account for a substantial proportion of future widebody orders. With LCCs generally operating with increased seat density relative to full-service airlines and given a relatively higher passenger service charge relative to domestic travel, we expect this thematic to support improved aeronautical revenues over the short to medium term. (SYD.AX) 5

6 Retail opportunity from Asian passengers: Duty free accounts for the largest proportion of retail revenue, at just over 55%. Globally, duty free sales have exhibited strong positive growth rates. Airports have accounted for an increasing share over time in line with an increased focus on retail as a key component of airport development strategies. The Asia-Pacific region has accounted for the majority of growth in recent years and represents the largest proportion of duty free retail sales globally. With increased airline capacity, and noting a higher propensity to spend relative to other regions, we expect growth from the Asia-Pacific (particularly China) to support duty free growth over the short-medium term. Early Qantas lease reversion: Terminal 3 (T3) is currently leased, operated and maintained by Qantas. It does not contribute to aeronautical or retail revenues for, but does contribute to property revenue. Following on from the divestment of its Brisbane terminal ($112mn for lease return and related assets), Qantas has indicated it is in discussions with both Sydney and Melbourne airports. While the T3 lease expires in 219, there is scope for early reversion. Assuming a fully debt funded acquisition, we estimate that lost property revenue and increased interest expenses would be more than offset by increased aeronautical and retail revenue. Investment risks Aeronautical pricing agreements with airlines: At Sydney airport, the agreement for aeronautical charges negotiated with airlines is for a fixed base fee and recovery of new investment by way of the Necessary New Investments (NNI) regime. Future passenger growth requires the release of new capacity. expects to invest $1.2bn over the next five years (214-18), an average of $24mn per annum. With recovery on NNI based on a building block WACC return mechanism, we expect further uplift in aeronautical charges which are expected to underpin aeronautical revenues to at least mid-215 when current pricing arrangements expire. While a key defensive attribute, we see the risk as push-back/disagreement from airlines in relation to future pricing of aeronautical investment. Nuance duty free re-contracting risk: In our view, the near-term risk for retail relates to the Nuance contract, which expires in February 215. We understand that the current concession (which became effective in November 26) was renewed on favourable terms for. Noting the exit from an unprofitable concession at Brisbane Airport in 213 (won by JR Duty Free), we see scope for some step down in concession fees should more rational pricing transpire. That said, management has noted strong interest from a number of parties, with the current re-tender allowing for one or more operators to trade at the airport. Capacity constraints over the long term: Over the long term, we see as facing capacity constraints. Demand for existing infrastructure in peak hours is currently heavily utilised, with constraints on hourly movements and curfews likely to lead to unmet demand. While upgrades may address some issues, the physical size of the airport means options for expansion are limited. Changes to current regulations (increased movements per hour, removal of protected regional slots) are expected to provide only limited benefit. Larger aircraft size and increased load factors may alleviate some pressure. However, on balance we see capacity constraints as restricting growth over the longer term. A second airport appears increasingly likely, albeit with substantial lead-time for design and construction. Debt funding of growth capex: Given the relatively high barriers to entry and defensive nature of cashflows, airports are considered low-risk and attractive to debt markets. Currently, growth capex is fully debt funded. While recent comparable bond issues have been completed at favourable rates and interest rates remain low, we see the key risk as rising interest rates in a period of elevated capex. (SYD.AX) 6

7 Airports: an attractive asset class Airports generally exhibit characteristics found across a broad range of asset classes such as regulated utility (aeronautical), retail (duty-free/other retail) and property trust (industrial, office, hotel). These operations are underpinned by passenger growth, overlaid with financial leverage to generate higher returns. Using a five forces framework, we assess the competitive threat for an airport to generally be low, with strong leverage to increased passenger throughput. Threat of new entrants: The capital requirements of an airport are generally high, providing a barrier to entry for any potential competitor. Capital expenditure is significant while also requiring detailed planning and regulatory processes on order for necessary approvals to be granted. Location is an important consideration, with competing sites needing to provide sufficient access to transport links and/or demonstrate its value proposition. A new airport is also likely to need to overcome significant community and environmental issues. Threat of substitute products: There are no effective substitutes to international air passenger travel. The growth in low-cost carriers (LCC) places road and rail at an increasing disadvantage. Other airport operations have advantages such as long dwell times (benefitting retail/duty free) and proximity (positive for aeronautical related, office and leisure facilities). An airport will typically face competition from other airports, however, passenger destinations will likely be more substantially influenced by residential/business location and tourism marketing. Bargaining power of customers: The relative strength of an airline can vary. This may influence pricing through either a regulated framework or informally via price monitoring. Airports can restrict passenger growth if capex is not managed to meet aircraft demand. Governments can also impose formal restrictions on aircraft movements or noise levels. However for an airline, the key bargaining position is the ability to switch to an alternative airport; albeit with a weaker position if no competing airport exists. Passenger spending for retail and commercial activities is driven by the value of duty free, retail offerings and car parking. Bargaining power of suppliers: The capital intensive nature of airports results in a predominantly fixed cost base, providing an airport with strong leverage to increased throughput. Margins are generally high, but will depend on the cost structure. The way in which services are delivered (internal, outsourced) can impact the competitive dynamic. The scale of capital expenditure programs should place airports in a strong negotiating position with contractors based on cost and quality of work. Competitive rivalry: The competitive rivalry for an airport will generally be limited at airports which have a high concentration of both short and long-haul services and which are most appealing for full-service carriers. However, proximity to a competing airport and overlap of catchment areas will likely provide increased competitive rivalry. Overall, we assess the competitive threat for an airport to be low. Threats from new entrants and substitute products are likely to be limited. Both bargaining power of customers and competitive rivalry appears contingent on the existence on a competing airports. The scale of capex programs and potential for outsourcing should place airports in relatively strong bargaining positions. Coupled with a largely fixed cost base, we see this analysis as indicating that an airport should have significant leverage to rising passenger numbers. Subsequent sections focus on 's business model, growth avenues and longer-term issues. (SYD.AX) 7

8 A solid business model operates a solid business model. Cashflows are stable and have in-built protections. Growth is delivered via passengers and increased charges (generally at CPI+). Leverage, both operational and financial, should continue to support the distribution growth profile over the medium to longer term. How generates cash Revenue generates revenue from two main sources: aeronautical and nonaeronautical activities. Aeronautical represents services provided to airlines including the provision of runways, taxiways aprons and airport terminal buildings as well as airport security and passenger screening. Non-aeronautical activities include retailing, car parking and the provision of property for aeronautical-related and other purposes. earned just over $1.1bn in revenue in 213, of which ~85% was derived from contracts with inflation protection and either a return on capital mechanism or minimum guarantees. Figure 5: 213 revenue overview In A$mn, unless otherwise stated Item Revenue % of revenue Description Aeronautical charges % Subject to negotiation with airlines under a shadow dual till return on capital structure. Security recovery % Recovery of security operational and capital costs. Retail revenue % Revenue earned from advertising and rent from retail operators at T1 and T2. Generally earned as a percentage of sales, with contracts largely underpinned by CPI increases and minimum guaranteed rent plus space expansion. Property, car rental % Lease rental review from aviation and non-aviation used, with revenue contracts underpinned by CPI links and rent review plus space expansion. Car rental revenues charged as a percentage of turnover. Car-parking % Earnings from short-term valet and other parking, long-term parking and ground access fees. Other 5.8 1% Total 1, % Aeronautical revenue Aeronautical revenue is generated mainly from charges to recover the capital invested in aeronautical assets. At Sydney airport, the agreement for aeronautical charges is for a fixed base fee and recovery of new investment by way of the Necessary New Investments (NNI) regime. NNI pricing allows for recovery of completed capital expenditure at sixmonthly intervals based on incremental capital expenditure above the underlying base charge asset base. This is captured through a passenger service charge (PSC). Pricing agreed between and airlines is monitored by the Australian Competition and Consumer Commission (ACCC). International charges account for just over 5% of aeronautical revenue with domestic/regional just over 25%. However, international revenue is derived from around a third of total passengers, reflecting a higher PSC. Figure 6: Aeronautical revenue drivers Service Driver International Domestic Terminal 2 International passengers, base fee, international NNI T2 passengers, base fee, domestic NNI, security Other, Freight / General Landing fees, apron/parking fees, freight/general NNI Domestic Terminal 3 Long-term leasehold, included in property revenues, airfield charges (SYD.AX) 8

9 Non-aeronautical revenue Non-aeronautical revenue consists of retail, car-parking and property revenue. All largely have built-in protection through minimum guarantees and inflation linkages. Retail revenue is generally underpinned by minimum guarantee fees (MGF), with a turnover rent component (i.e. a percentage share of tenant sales) paid upon achievement of sales above a threshold level. Due to their high fixed fee component, retail revenues are less sensitive to passenger traffic relative to aeronautical, car parking and ground access revenues. The current duty free contract is structured as MGF (split by product) and a per passenger charge (with potential for a turnover component). Car-parking revenue is generated from short and long-term car parks and ground transport fees. Car-parking is subject to price reviews, with change in product mix and passenger penetration the key drivers. Ground transport fees are generated via taxi usage. Property revenue is generated from leases (aviation and non-aviation) and car rental. The majority of property leases increase annually by CPI, CPI plus a margin or market rent reviews. enters into both ground and premises leases for its tenancies. For ground leases, funds the capital expenditure required to develop the underlying land, including infrastructure and network services, with the design and construction (D&C) costs for the building/premises borne by the tenant. For premises leases, incurs both the underlying site preparation costs as well as the D&C costs for the building/premises. charges the tenant a higher rent under a premises lease to recover its larger capital investment. Car rental revenues are largely based on a fixed contract with car rental operators (similar to a MGF), allowing for CPI increases in each year of the contract. A variable revenue component is generated from car rental operators usage of car rental bays, which is largely dependent on traffic growth and passenger spending propensities. Figure 7: Non-aeronautical revenue drivers Service Driver Retail Car-parking Property, car rental T1 and T2 passengers, retail space/mix, yield per retailer/product Passengers (primarily domestic), proportion driving / penetration using car parking Leased space, rental yield, car rental penetration Passenger growth Over the past five years, has recorded 3% total passenger growth. Coupled with underlying fee increases of %, this has led to revenue growth of % for key revenue segments (excluding security recovery). Figure 8: : revenue growth CAGR Passengers (mn) % Aeronautical / pax ($) % Security / pax ($) % Retail / pax ($) % Car parking / pax ($) % Property / pax ($) % Aeronautical ($mn) % Security ($mn) % Retail ($mn) % Car parking ($mn) % Property ($mn) % (SYD.AX) 9

10 A$mn EBITDA margin (%) 18 March 214 Costs has a low, fixed cost base which has limited sensitivity to passenger growth. That is, increased volumes do not necessarily lead to increased costs. Key operating expenses include staff costs, services and utilities, property and maintenance and administration. Excluding security, costs have increased at 3.2% p.a. from 27, below both passenger growth and inflation; on a per passenger basis, costs have risen by.2% p.a. outsources the majority of its operations, including duty free and other retailing, contract cleaning and security which contribute to this outcome. Figure 9: : cost growth CAGR Labour ($mn) % Services / utilities ($mn) % Property / maintenance ($mn) % Other ($mn) % Total non-security ($mn) % Non-security / pax ($) % Recoverable security ($mn) % EBITDA With strong underlying revenue growth coupled with cost containment, has recorded EBITDA growth of 7% p.a. from 27. We see this as highlighting that despite an efficient operating structure (cost to income ratio of approximately 2%) the largely fixed nature of the cost base provides positive leverage to rising passenger growth. Figure 1: : EBITDA growth CAGR Revenue ($mn) ,4 1, % Costs ($mn) % EBITDA ($mn) % EBITDA margin (%) 79.9% 79.9% 8.8% 82.% 81.5% 82.% 81.6%.4% Figure 11: A low, fixed cost base revenue, costs, EBITDA (A$mn) 6 Figure 12: has supported positive operating leverage EBITDA margin (%) 84% 5 82% 4 8% % 76% 74% Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Revenue Costs EBITDA Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 72% Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 (SYD.AX) 1

11 A$mn Value (local currency mn) Margin (bps) 18 March 214 Net finance costs Given the relatively high barriers to entry and defensive nature of cashflows, airports are considered low-risk and attractive to debt markets. With the efficiency of debt financing (relative to equity), utilises substantial debt financing, with drawn debt facilities of $6.7bn at a weighted average cost of debt of around 6.4%. Currently, growth capex is fully debt funded, with $663mn of undrawn facilities to meet requirements to 216. Coupled with operational (fixed cost) leverage, the use of debt to fund growth capex enhances returns, providing further leverage to rising passenger growth. Figure 13: Average debt maturity 7 years+ Debt maturity profile (A$mn) 1, Drawn bank Undrawn bank Domestic bonds Offshore bonds Cash flow conversion Figure 14: recent comparable issues at favourable rates Recent comparable bond issues value (mn) and margin (bps) Brisbane Airport ConnectEast Port of Brisbane Perth Airport Incitec Pivot Melbourne Airport Origin Origin Domestic Euro US144A Value Margin (bps) 's operating model has enabled passenger growth of 2.9% and EBITDA growth of 7.% to translate into cash available after debt service (CAADS) growth of 11.2% between 27 and 213. As an approximation of the sustainable distributions generated by, we see this as highlighting the strength of the operating model currently in place. Figure 15: Cashflow available after debt service in A$ millions CAGR Passengers % EBITDA % Interest income Cash available for debt service % Interest - senior debt Interest - SKIES Cash available after debt service % (SYD.AX) 11

12 How are distributions received? The ASX listed is a stapled vehicle comprising of Limited (SAL; operating arm) and Trust 1 (SAT1; financing arm). Shares and units in the group are stapled and issued on the Australian Securities Exchange (ASX) as a single security. Security holders own one share in SAL and one unit in SAT1. In August 213, announced the acquisition of 15.2% in minority interests as well as a simplification program aimed at addressing concerns raised by the Australian Tax Office (ATO) in relation to Redeemable Preference Shares (RPS) issued by SAT1. Following the group restructure (completed in late 213 see Appendices) SAL held a 1% economic interest in at 31 December. As part of the restructure, redeemable preference shares (RPS) were replaced with a loan between SAT1 and SAL. Southern Cross Airport Corporation Holdings (SCACH) wholly owns Corporations Limited (SACL), which acts as lessee and operator. Distributable cashflows generated by received by SCACH are distributed to SAL dividends and RPS interest payments. A portion of these funds are then distributed to SAT1 as interest payments to satisfy the intra-group loan. The final FY13 distribution received by security holders was a combination of interest payment (9.5cps paid by SAT1) and unfranked dividend (2cps paid by SAL). Figure 16: Simplified business structure, distribution Interest SYD Investors Dividend Double stapled securities listed on ASX SAT1 (Finance arm) Interest Loan SAL (Operating arm) SCACH (Incorporated company) Dividends RPS interest SACL (Lessee and operator) (SYD.AX) 12

13 Growth (%) Passenger / GDP growth (x) 18 March 214 What will drive growth? Passengers Competition and improvements in technology in the airline industry have led to reduced airline yields, stimulating growth in passenger traffic to multiples of GDP. For Australian air travel, passenger growth has averaged 6.7% growth p.a. and 1.9x GDP over the long-term ( ). However, despite a relatively strong growth profile, passenger traffic has experienced volatility. While passenger growth has tended to recover to trend levels, shocks to traffic have historically been significant. International air travel has been impacted by events such as the Gulf War in 1991, terrorist attacks in the US in 21 and SARS in 23. Domestic traffic has been impacted by events including a pilot's strike in 1989, the entry and exit of Compass and the collapse of Ansett. Figure 17: Australian Passenger vs GDP growth (%) Domestic International Total Real GDP Domestic International Total % 8.8% 9.8% 5.1% 3.6x 1.7x 1.9x % 6.6% 8.% 2.9% 4.8x 2.3x 2.8x % 1.8% 3.5% 3.3% 2.3x.6x 1.1x % 7.4% 7.1% 3.4% 2.x 2.2x 2.1x % 6.4% 5.9% 3.1% 1.7x 2.1x 1.9x Total ( ) 1.3% 6.1% 6.7% 3.6% 2.9x 1.7x 1.9x Source: BITRE, ABS, Credit Suisse estimates Figure 18: Volatility in passenger growth Australian GDP, passenger growth (%) 4% 3% 2% 1% % -1% -2% Figure 19: but generally a multiple of GDP growth Australian passenger growth / GDP growth (x), 5-year rolling 7.x 6.x 5.x 4.x 3.x 2.x 1.x.x -3% GDP Int Pax Dom Pax Total Pax Source: BITRE, ABS, Credit Suisse estimates -1.x Int Pax Dom Pax Total Pax Source: BITRE, ABS, Credit Suisse estimates At, passenger growth has exhibited similar trends, with total passenger growth of 4.5% p.a. over the past 2 years (4.2% for domestic and 5.% for international). Relative to GDP, passenger growth has been volatile, albeit with weaker multiples in more recent periods (average of 1.3x over the past five years) (SYD.AX) 13

14 Aircraft movements per hour Change in number of movements Passengers (') Passenger growth (%) 18 March 214 Figure 2: passenger trends positive passengers (', annual) 3, 25, Figure 21: but with volatility passenger growth (%) 2% 15% 2, 1% 15, 5% 1, 5, % -5% Domestic International Source: BITRE,, Credit Suisse estimates -1% Domestic International Total Source: BITRE,, Credit Suisse estimates Forecasting passenger growth The largely exogenous nature of significant events makes determining an underlying growth trend difficult. However, our approach to forecasting passenger growth takes into account both aircraft movements and the average number of passengers per flight. Broadly, we assume an increase in aircraft movements from current levels (subject to currently imposed restrictions), the utilisation and development of larger aircraft and seat utilisation factors in line with historical trends. 1. Aircraft movements operates under a number of restrictions which limit aircraft movements. These include: a curfew between 11pm and 6am; movements are restricted to 8 in an hour; and noise sharing, which requires an approximate number of movements across a number of directions (North 17%, South 55%, East 13%, West 15%). Movements are about 45 per hour across the 17-hour operating day, but are above 6 per hour in morning peaks. From 28, movements per hour have risen, with the most substantial increases to 213 during peak morning and afternoon periods Figure 22: Sydney has two pronounced peaks aircraft movements per hour (28-213) 9 8 Figure 23: which have been increasing in recent years change in aircraft movements per hour (28-13) : 22: 21: 2: 19: 18: 17: 16: 15: 14: 13: 12: 11: 1: 9: 8: 7: 6: : 6: 7: 8: 9: 1: 11: 12: 13: 14: 15: 16: 17: 18: 19: 2: 21: 22: Source: Air Services Australia, Credit Suisse estimates Source: Air Services Australia, Credit Suisse estimates (SYD.AX) 14

15 Seats (') Share of total capacity (%) Aircraft movement per hour Change in number of movements 18 March 214 Over time, movements are expected to increase in both peak and off-peak periods including a spreading of the peaks ("peak spreading"). expect the introduction of low-cost carriers (non-peak utilisation) and growth of Asian markets (different scheduling windows to traditional international transfers) to assist in maximising the use of the airport across off-peak periods. In its Preliminary Draft Master Plan (PDMP), indicates expectations for a 1.4% increase in passenger aircraft movements per annum from 212 to 233 (292,852 movements in 212 to 388,466 in 233). These forecasts sit 6% below the 29 Master Plan in line with weaker than expected passenger numbers in the period following the GFC. Increased "peak spreading" implicit in forecasts is evident by increased aircraft movements in non-peak hours. Figure 24: Increased movements expected by 233 aircraft movements per hour (213, 229F, 233F) Figure 25: with the greatest uplift outside peak hours change in aircraft movements per hour (213-33F) : 6: 7: 8: 9: 1: 11: 12: 13: 14: 15: 16: F 233F Source: Air Services Australia,, Credit Suisse estimates 2. Average passengers per flight 17: 18: 19: 2: 21: 22: 5 5: 6: 7: 8: 9: 1: 11: Source: Air Services Australia,, Credit Suisse estimates Aircraft capacity at, both domestic and international, has been rising over time. This has been a result of increased penetration of LCCs (who have stimulated demand and increased passenger traffic), aircraft alliances between Middle Eastern and Australian carriers and rising incomes in Asia, facilitating increased leisure travel. 12: 13: 14: 15: 16: 17: 18: 19: 2: 21: 22: Figure 26: International capacity has been increasing international airline capacity (' seats) 1,7 1,6 Figure 27: new carriers a larger % of capacity share of capacity by carrier type 14% 12% 1,5 1% 1,4 8% 1,3 1,2 1,1 6% 4% 2% % 1, Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Chinese Airlines Middle Eastern Airlines Low Cost Carriers Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: APGDat, Credit Suisse estimates Source: APGDat, Credit Suisse estimates (SYD.AX) 15

16 Number of aircraft Number of aircraft Number of flights per month Proportion of widebody aircraft flights (%) 18 March 214 To satisfy demand for international travel, airlines have been increasingly utilising larger aircraft. From 25, the use of widebody aircraft (A33/38, B777/787) at has increased substantially, rising from an average of around 5 flights per month in 25 to an average of about 135 flights in 213. Notably, Asian airlines (including Chinese airlines) have accounted an increasing proportion. Figure 28: Utilisation of larger aircraft rising international widebody aircraft flights Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 A33 A38 B777 B787 Source: APGDat, Credit Suisse estimates Jul-12 Jan-13 Jul-13 Jan-14 Figure 29: notably among Asian airlines proportion of widebody aircraft flights by carrier type 45% 4% 35% 3% 25% 2% 15% 1% 5% % Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Asian Airlines Australian Airlines Chinese Airlines Middle Eastern Airlines Low-cost carriers Jan-1 Source: APGDat, Credit Suisse estimates Asian airlines and low-cost carriers are expected to account for a substantial proportion of future widebody orders. Further, Asian airlines are expected to account for over 9% of orders amongst low cost carriers. With low-cost carriers generally operating with increased seat density relative to full-service airlines (no premium cabins, less leg room for passengers) and given a relatively higher passenger service charge relative to domestic travel, we expect this thematic to support improved aeronautical revenues over the short to medium term. Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Figure 3: Asia-Pac largest forward widebody orders Widebody aircraft orders by geography Figure 31: with LCC orders primarily from Asian airlines Widebody orders after Jan-14 low-cost carriers Asia Pacific Europe Middle East North America Air Asia Scoot Jetstar Sky Lion Air Cebu Pacific Domestically, we expect longer-term trends in capacity growth to normalise, primarily in line with the final transformation of Virgin Australia as well as the maturation of Jetstar as its network approaches full scale and desired frequencies. That said, we note potential for upside through Tiger Airways, which on our estimates remains sub-scale, with potential to double its fleet over time. Overall, our passenger forecasts capture rising passenger movements overlaid with an increase in the average number of passengers per flight. To 22, we forecast international passenger growth of 3.7% per annum, with domestic passenger growth of 2.6%. In aggregate, this provides total passenger growth of 3.% per annum. (SYD.AX) 16

17 A$mn Proportion of total capex 18 March 214 Figure 32: passenger growth forecasts F 215F 216F 217F 218F 219F 22F Domestic Movements 226, , ,41 237, , ,88 25, , ,16 263, ,16 Passengers per movement Passengers Growth -1.% 2.7% 2.1% 2.7% 2.7% 2.7% 2.7% 2.6% 2.6% 2.6% International Movements 62,516 65,1 67,57 68,733 7,452 72,213 74,18 75,869 77,766 79,71 81,72 Passengers per movement Passengers Growth 3.% 5.3% 3.9% 3.8% 3.8% 3.7% 3.7% 3.7% 3.7% 3.7% Total Movements 288, ,326 3,467 36, ,13 318,93 324,21 33,43 336, , ,863 Passengers per movement Passengers Growth.3% 3.5% 2.7% 3.% 3.% 3.% 3.% 3.% 3.% 3.% Source: BITRE, Company data, Credit Suisse estimates Capex and aeronautical charges The capital intensity of airports underpins a key barrier to entry. However, this also presents a number of challenges given there are a number of stages to providing for growth. This may include improving frequency / slot usage; upgrading for larger aircraft, expanding existing facilities or a new airport. considers each of its capital investment projects with reference to its Investment Evaluation Framework. Aeronautical investments are generally either essential safety, security or maintenance requirements for regulatory or asset life cycle purposes; or capacity adding investments to meet incremental demand and are generally agreed with key airline customers. Non-aeronautical investments need to meet strict return criteria. Capital investment in commercial opportunities is higher yielding however, aeronautical and security investments have priority. Historically, aeronautical has accounted for the bulk of capex, accounting for around two-thirds of total expenditure from 27. Figure 33: Aeronautical the bulk of capex Figure 34: accounting for ~2/3 capex by type (A$mn) capex by type (%) Aeronautical Commercial 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % N.B. Average historic splits applied for 212, Aeronautical Commercial (SYD.AX) 17

18 Passenger service charge ($) Passenger service charge ($) 18 March 214 NNI pricing allows for recovery of completed capital expenditure at six-monthly intervals based on incremental capital expenditure above the underlying base charge asset base. This is recouped via the passenger service charge (PSC) which incorporates a base charge, fees for security measures as well as a cumulative NNI component. For international charges, cumulative NNI recovery is estimated at over 3% of the total PSC; for domestic, this is estimated at around 2%. Figure 35: International charges increased over time International Passenger Service Charge ($) 3. Figure 36: with NNI recovery an increasing component International Passenger Service Charge ($) Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-1 Jan-1 Jul-9 Jan-9 Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-1 Jan-1 Jul-9 Jan-9 Terminal Runway Security CUCI Base charge NNI Security CUCI Future passenger growth requires the release of new capacity. expects to invest $1.2bn over the next five years (214-18), an average of $24mn per annum in line with its historic average. With recovery on NNI based on a building block WACC return mechanism, we expect further uplift in aeronautical charges which, in conjunction with increased passenger growth, are expected to underpin aeronautical revenues to at least mid-215 when current pricing arrangements expire. Figure 37: capex timeline Aviation T2 Pier A gate extension Two new aprons Bay 76/77 New airport operating system Early bag store Reclaim baggage development Retail T2 Pier A Retail development Further T2 Retail development T1 Retail development Car parking Ground Transport Master Plan Domestic Car Park (P3) Ross Smith Ave slip lane precinct Signage refresh Car Park Lift Extension Over the medium-longer term, will look to execute on its development concept, aimed at ensuring sufficient capacity to meet long-term passenger growth. The primary features of the development concept include: integration of terminals (T1 and T2/3) for domestic, international and regional airlines; expansion of both T1 and T2/3 terminals, with the largest expansion to the north of T3; inclusion of swing gates in both precincts which can be used for either international or domestic/regional operations during different times of day; (SYD.AX) 18

19 development of the South East sector of the airport for additional apron parking and engineering facilities; and taxiway extensions, including the extension of Taxiway B which runs to the east of the main runway. These changes are expected to accommodate larger aircraft as well as improving airfield efficiency (given lower towed aircraft crossings across active runways due to the location of engineering facilities and reduced cross runway movements due to the extension of Taxiway B). Figure 38: Development Concept In addition, proposes to provide improved transport management and infrastructure, increased commercial land use and on-site parking. Ground Transport Plans (5-year and 2-year), which include roadworks around T2/3 and within T1 as well as public transport facilities, are aimed at improving traffic flows in and around the airport. The Commercial Development concept includes features such as the expansion of multistorey car parks, enhancements providing additional floor space and two additional hotels. (SYD.AX) 19

20 Retail revenue (A$mn) Retail revenue per passenger (A$) Growth (%) 18 March 214 Retail Retail is an important contributor to group revenues. Given a substantially larger footprint and with a greater number of higher margin shops, the bulk of retail revenue (~9%) is generated through international passengers. Figure 39: key retail data Space (m 2 ) # of shops Revenue / m 2 Revenue (A$mn) Proportion of total Terminal 1 21, , % Terminal 2 4, ,9 23 1% T1/T2 ratio 4.6x 3.x 2.x 9.3x Retail revenue has historically exhibited a strong positive correlation with passenger growth. However, revenue on a per passenger basis has exhibited periods of volatility. Recent revenue growth has been underpinned by developments in Terminal 1 completed in 21, providing an expansion of retail space and product offering. This included the completion of a 4,2m 2 airside retail precinct (2,m 2 of new retail space), development of a walkthrough duty free store and a 12% expansion in retail space. Domestic retail revenue has largely been driven by the expansion completed in 27, increasing space by 2,22m 2. Figure 4: Retail revenue correlated with passengers Retail revenue (A$mn), passenger (mn) 13 R² = Figure 41: but with volatility on a per pax basis Retail revenue per passenger (A$, growth % pcp) % 8% 6% 4% 2% % -2% Passengers (mn) 3.5 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-1 Jun-1 Dec-9 Jun-9 Dec-8 Jun-8 Dec-7 Jun-7 Dec-6 Jun-6 Dec-5 Jun-5 Dec-4 Jun-4 Dec-3 Jun-3 Duty free accounts for the largest proportion of retail revenue, at just over 55%. However, smaller segments such as food and beverage and specialty retail have accounted for an increased proportion in more recent years. While other revenue streams such as currency exchange, advertising and news and gifts make meaningful contributions, we expect duty free, food and beverage and specialty retail to account for the majority of growth over the short to medium term. -4% (SYD.AX) 2

21 US$bn Airport share of total (%) A$mn Proportion of total (%) 18 March 214 Figure 42: Duty-free the largest retail segment Retail revenue by segment (A$mn) Duty free Currency exchange Advertising Specialty retail Food and beverage News and gifts Other Figure 43: at ~55% of total Retail revenue by segment proportion of total (%) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Duty free Currency exchange Advertising Specialty retail Food and beverage News and gifts Globally, duty free sales have exhibited strong positive growth rates in recent years. Airports have accounted for an increasing share over time in line with an increased focus on retail as a key component of airport development strategies. The Asia-Pacific has accounted for the majority of growth in recent years and represents the largest proportion of duty free retail sales globally. 212 Figure 44: Airport duty free sales rising Total, airport duty free retail sales (US$bn), airport share of total (%) 6 65% Figure 45: with Asia-Pacific the largest region Duty free and travel retail sales by geography (%) Middle East, 9% Africa, 2% 5 6% % 5% Americas, 19% Asia Pacific, 36% 2 45% 1 4% Total Airport Airport share of total [RHS] 35% Europe, 34% With increased airline capacity, and noting a higher propensity to spend relative to other regions, we expect growth from Asia Pacific (particularly China) to support duty free growth over the short-medium term. Noting Chinese passengers contribute 3-5x duty free revenue per average passenger but only about 6% of current capacity, simple back of the envelope calculations indicate that average duty free spend per Chinese passenger is approximately $35/passenger compared to around $9/passenger from other travellers (assuming consistent load factors). As such, the leverage to rising Chinese (and Asia Pacific passengers more generally) is clear. In our view, the major near-term risk relates to the Nuance contract, which expires in February 215. Effective from 1 November 26, we understand the concession was renewed on improved commercial terms for upon renewal. Noting the exit from an unprofitable concession at Brisbane Airport in 213 (won by JR Duty Free), we could expect some step down in concession fees should more rational pricing transpire. That said, management have noted strong interest from a number of parties, with the proposed re-tender allowing for one or more operators to trade at the airport. (SYD.AX) 21

22 A key driver for food and beverage sales has been the growth of low-cost carriers where food is not typically included in the price of a ticket and food quality and selection is low. Given a higher penetration of LCCs in the domestic market, we see the opportunity for food and beverage sales as higher for domestic travellers than international. In addition, we see the recent 5m 2 T2 expansion and enhanced retail offering as an additional growth avenue. Car-parking Car-parking revenues are derived from short-term valet and other parking, long-term parking and ground access fees, driven largely by passenger traffic and penetration rates. In more recent years, the focus has been four-fold: increasing capacity, improving customer experience, developing new products and enhancing marketing efforts. has increased available spaces to allow for additional product offerings. Since April 212, over 4,4 new car parking spaces have been opened (~2,15 shortterm, 1,2 long-term), increasing capacity by more than a third. Relative to other major airports, Sydney has a higher proportion of short-term parking with a relatively lower proportion of long-term parking. Figure 46: Australian Airports car park comparison Short-term Long-term Total Pax (mn) ST / Pax LT / Pax Total / Pax Sydney 1,922 5,694 16, Melbourne 7,469 12,1 19, Brisbane 2,853 4,41 7, Perth 2,432 12,277 14, ,16 Adelaide 72 1,132 1, Source: ACCC, Credit Suisse estimates A number of measures have been introduced to improve the overall customer experience. Legacy online booking software has been replaced by an off-the-shelf product, Advam Attendant, with enhanced functionality such as voucherless entry via credit card or barcode printout, reservation confirmation via SMS and activity reporting tools. While representing only 4% of capacity, Valet accounts for 13% of car parking revenue. An outsourced valet system developed by US-based STS (Service Tracking Systems) has been integrated with the upgraded online booking system. Parking guidance systems have been introduced, aimed at increasing overall utilisation to closer to 1%. The number of online products was expanded over 212 and 213, offering some substantial discounts to standard rates across a range of target markets. Figure 47: Online offerings (SYD.AX) 22

23 Online sales 18 March 214 Coupled with an enhanced marketing effort, the proportion of online bookings has increased substantially (Figure 48), accounting for 25% of revenues. Looking forward, key opportunities for car parking are increasing penetration among the approximately 27% of passengers who currently utilise taxis, extending online capabilities for short-term parking (7% of domestic parking is for three hours or less with international at 95%) and dynamic pricing (Figure 49) currently utilised globally within airline / hotel industries Figure 48: Online sales increasing Car parking online sales 25, Figure 49: with dynamic pricing an opportunity Car-parking dynamic pricing opportunity 2, 15, Fee ($) 1, 5, Low Shoulder Peak Shoulder Low Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Time period Property Property revenue has grown at around 8% p.a. from 27, driven by CPI increases and additional available space. Over half of revenue is sourced from rents in terminals and property developments, accounting for about 2% of lettable area. Key opportunities include development of additional car rental bays as car parking is expanded, earning additional lease revenue and further CPI or market lease rate reviews. Over the mediumlonger term, opportunities include the expiry of large aviation site leases including many of the jet base and freight leases in Terminal 3. Terminal 3 (T3) is currently leased, operated and maintained by Qantas. It does not contribute to aeronautical or retail revenues for, but does contribute to property revenue. Following on from the divestment of its Brisbane terminal ($112mn for lease return and related assets), Qantas has indicated it is in discussions with both Sydney and Melbourne airports. While the T3 lease expires in 219, there is scope for early reversion. Management has indicated a potential acquisition cost in the range of $2-6mn, likely funded by debt. From an earnings/cashflow perspective, there would be some loss in property revenue as well as increased interest costs but which we estimate would be more than offset by increased passenger service charges and retail revenues. Even at the upper end of the range (i.e. $6mn), our back of the envelope calculations put the uplift to distributable cashflow at approximately 5%. Further, key metrics would appear comfortable, with cashflow cover at reasonable levels under increased debt funding (remaining above 2x on our calculations). (SYD.AX) 23

24 Movements per hour Movements per hour 18 March 214 Long-term issues Over the long term (23 and beyond), we see as facing capacity constraints. Demand for existing infrastructure in peak hours is currently heavily utilised, with current constraints on hourly movements and curfews potentially leading to unmet demand. While upgrades may address some issues, the physical size of the airport means options for expansion are limited. Changes to current regulations (increased movements per hour, removal of protected regional slots) are expected to provide only limited benefit. Larger aircraft size and increased load factors may alleviate some pressure. However, on balance we see capacity constraints as restricting growth. To this end, the development of a second airport appears likely over the longer term. Capacity constraints Current demand Total available slots available at are federally regulated and capped at 8 slots per hour. Slot allocations are approaching capacity at certain times across morning peaks and are approaching maximum levels in the afternoon. The Joint Study on aviation capacity in the Sydney region estimated that capacity in peak hours is likely to be constrained by 215, increasing progressively over time, and by 235 there is unlikely to be any excess capacity. Unconstrained demand for slots is likely to exceed levels that can be allocated under the movement cap, resulting in the spreading/redistribution of slots to other hours. This may supress demand given airlines may be limited by restrictions at other airports and/or flight connections for transferring passengers. Figure 5: Unconstrained slot demand greatest at peaks unconstrained slot demand Source: Joint Study on aviation capacity in the Sydney region Figure 51: but limits likely to result in peak spreading constrained slot demand unconstrained Source: Joint Study on aviation capacity in the Sydney region (SYD.AX) 24

25 Demand for movements in peak hour Demand for passenger movements (mn) 18 March 214 The lack of capacity will mean an increasing proportion of peak demand is not met, with estimates suggesting that between 8:am and 9:am: 4 movements of peak hour demand (5%) will not be met by movements of peak hour demand (13%) will not be met by movements of peak hour demand (27%) will not be met by movements of peak hour demand (51%) will not be met by 26. In addition, demand at other hours will increase, approaching or exceeding the movement cap. By 235, it is estimated that there is unlikely to be any usable capacity. For additional services, passenger growth would only be met by increasing load factors and larger aircraft. Figure 52: Peak demand redistributed/suppressed Peak hour movement demand Figure 53: constraints on total demand from 235 Demand for passenger movements Demand met Redistributed or supressed demand Source: Joint Study on aviation capacity in the Sydney region Physical size Constrained Unconstrained Source: Joint Study on aviation capacity in the Sydney region The size and location of an airport will determine the types of services an airport can offer. While is the busiest in Australia, the airport occupies a relatively small area compared to other major Australian airports as well as those internationally. There is limited land to significantly extend terminal facilities and no opportunity to extend existing runways or build another. Figure 54: Land area key Australian airports Aeronautical Non-aeronautical Total Passengers Passengers / (Ha) (Ha) (Ha) (mn) Ha Adelaide ,33 Brisbane 1, ,7 21 7,815 Melbourne 1, , ,568 Perth 1, , ,318 Sydney ,22 Source: ACCC, Credit Suisse estimates (SYD.AX) 25

26 Figure 55: and immediate surrounds Source: Joint Study on aviation capacity in the Sydney region The limited size of poses a number of structural challenges to capacity including: larger/heavier aircraft can only land on one runway (the main North-South runway which has historically accounted for ~67% of runway movements with the shorter runway 33%); and the constrained landmass, including the runway limitations, physically limits the maximum number of plane movements; it also limits the total number of aircraft that can be accommodated with aprons, stands and gate provisions. Regulatory constraints There are three key polices that will affect 's ability to operate at full capacity: a limit on the maximum number of movements per hour, a curfew which limits take-offs and landings between 11:pm and 6:am and a regional ring-fence that protects the number of intrastate NSW movements into and out of the airport. Movement cap and slot allocation The Demand Management Act (1997) sets a cap of 8 movements per hour on the runway and requires that the slot management scheme is consistent with the runway movement cap. That is, 8 is the maximum for both runway movements and slot allocation. (SYD.AX) 26

27 Passengers per flight % of total 18 March 214 Analysis by Airservices Australia indicates that sustainable capacity would be around 85 movements per hour. Increasing slot allocations to 85 per hour across all hours of the noncurfew period would result in a 6% increase in available slots and an additional 2 slots in peak periods. However, this would likely be rapidly taken up, particularly in peak periods, providing only a short term benefit. Curfew settings Given Australia's location, international demand is generally characterised by early morning arrival peaks from Europe, Asia and the US. Flights cannot be spread throughout the day due to curfews in Asia and Europe, connections at hub airports and aircraft/crew rotations. A curfew has been in place at since 1963, with the current legislation passed in 1995 ( Curfew Act). The curfew regulates movements at Sydney Airport between 11:pm and 6:am each day and essentially prohibits the operation of large aircraft during this period. Under the Act, a small number of movements are allowed in shoulder periods: a maximum of 35 weekly arrivals between 5:am and 6:am and 14 movements between 11:pm and midnight. However, regulations limit this to 24 and movements, respectively. This means that while the Act permits 2,548 movements per year, regulations only allow 1,248. As such, there is scope for an additional 1,3 movements per annum which equates to 3.5 slots per day should regulations change to reflect movements allowed under the Act. Given the demand for international landings in the early morning peak, it is likely that the early morning shoulder would be in demand from international airlines. That said, the magnitude of the overall benefit would be relatively minor. Protected slots There are a number of specific provisions to protect slots for intrastate NSW air travel (regional ring fence). These provisions limit the scope for the holder of a protected slot to swap a service for a domestic or international service. The minimum number of seats for a new regional service is 18. In 213, the total slots allocated to intrastate services represented ~22% of movements at. However, given lower average passenger numbers per flight (regional at ~3, domestic at ~135), regional flights only accounted for ~5% of total passengers. Figure 56: Regional pax / flight low passengers per flight: domestic, regional Figure 57: contributing a small number of passengers regional % of total movements, passengers 45% 4% 35% 3% 25% 2% 15% 1% 5% Domestic Regional Source: BITRE, Credit Suisse estimates % Movements Passengers Source: BITRE, Credit Suisse estimates While peak hour slots are largely allocated, there are a number of slots unallocated slots available throughout the course of the day. The removal of the ring fence would allow the use of unallocated slots by other operators (domestic and international). However, existing operators would retain precedence for slots they operate. As such, we see the potential (SYD.AX) 27

28 Slots used by flight type Flights / day Average seats / flight 18 March 214 impact of any removal as limited. Further, an increase in the minimum number of seats would provide only incremental benefit. For example, a ten-seat increase in the minimum number of seats per flight (from ~3 to 4) would provide an increase in passenger numbers in the order of 1% (rising by the same magnitude for every ten-seat increase). Potential medium-term solutions While is expected to face capacity constraints over the longer term, increasing the number of passengers per flight may go some way to facilitate continued passenger growth over the medium to longer term. Increasing passengers per flight An increase in average passengers per flight can be achieved in two ways: increasing load factors on existing services in their current form or increasing the size of aircraft (or a combination of both). We have ranked 's busiest sectors by number of flights per day and average seats per flight. Sydney-Melbourne is the busiest daily sector, with around 145 flights per day followed by Sydney-Brisbane at around 85 flights per day. Figure 58: SYD-MEL the busiest sector busiest sectors (average flights per day) Figure 59: with an average of 185 seats per flight busiest sectors (average seats per flight) SYD-CNS SYD-DBO SYD-ABX SYD-PER SYD-AKL SYD-ADL SYD-OOL SYD-CBR SYD-BNE SYD-MEL SYD-CNS SYD-DBO SYD-ABX SYD-PER SYD-AKL SYD-ADL SYD-OOL SYD-CBR SYD-BNE SYD-MEL Source: APGDat, Credit Suisse estimates Source: APGDat, Credit Suisse estimates These sectors also account for the largest number of peak hour slots, with Sydney- Melbourne at ~3% and total domestic sectors (excluding regional) at ~5% (Figure 61). We thus see these sectors as logically the most likely on which to increase average seats per flight and potentially freeing up peak slot capacity. Figure 6: Domestic sectors prevalent in peaks slots used by slight type : 21: 2: 19: 18: 17: 16: 15: 14: 13: 12: 11: 1: 9: 8: 7: 6: Domestic (MEL) Domestic (Other) Regional International Freight Figure 61: accounting for over 5% of slots slots used by slight type (%) 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 22: 21: 2: 19: 18: 17: 16: 15: 14: 13: 12: 11: 1: 9: 8: 7: 6: Domestic (MEL) Domestic (Other) Regional International Freight (SYD.AX) 28

29 Average daily flights Index: base = 1 Seats / flight Index: base = 1 18 March 214 A closer look at the Golden Triangle Using the "Golden-Triangle" as a case study (SYD-MEL-BNE), we have analysed both average seats per flight as well as average daily flights. Currently, the average number of seats per flight is ~185 for SYD-MEL and ~18 for SYD-BNE. While noting some periods of volatility, this has remained broadly unchanged since 24. Conversely, flight frequency has increased at more substantial rates, accounting for the majority of capacity growth over the period. While we expect this trend to continue over the short-medium term, we estimate substantial upside to capacity in the event airlines utilise larger fleet. Figure 62: Some volatility in seats / flight Golden Triangle average seats per flight Figure 63: but largely flat over time Golden Triangle average seats per flight (index) Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 SYD-BNE SYD-MEL BNE-MEL Source: APGDat, Credit Suisse estimates Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 8 Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 SYD-BNE SYD-MEL BNE-MEL Source: APGDat, Credit Suisse estimates Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Figure 64: Increased frequency for SYD-MEL Golden Triangle average daily flights Figure 65: has driven bulk of capacity increases Golden Triangle average daily flights (index) Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 SYD-BNE SYD-MEL BNE-MEL Source: APGDat, Credit Suisse estimates How much could capacity changes unlock? Aug-12 Feb-13 Aug-13 Feb-14 8 Feb-4 Aug-4 Feb-5 Aug-5 Feb-6 Aug-6 Feb-7 Aug-7 Feb-8 Aug-8 Feb-9 Aug-9 Feb-1 Aug-1 Feb-11 Aug-11 Feb-12 SYD-BNE SYD-MEL BNE-MEL Source: APGDat, Credit Suisse estimates In our view, the relative consistency of average seats per flight indicates that upside can be achieved through the utilisation of larger aircraft. To this end, we have estimated the slot savings for on the basis that the ten busiest sectors upgrade to larger aircraft. If aircraft on Melbourne and Brisbane sectors were upgraded to A33 aircraft (which seat an average of 294 passengers in a domestic configuration) this would lead to capacity uplifts of 59% and 64%, respectively. Aug-12 Feb-13 Aug-13 Feb-14 (SYD.AX) 29

30 Average seats / flight Capacity upside (%) Flights / day 18 March 214 Alternatively, on the assumption that the same number of seats are flown but with larger aircraft, this would free up a number of slots, particularly peak periods which are in high demand for both domestic and international travel. Additional detail on alternative sectors is presented below. While somewhat simplistic, we see this analysis as highlighting the impact of increased passengers per flight, 's preferred medium-to-longerterm solution. Figure 66: Capacity upgrades and slot savings by sector Daily flights Seats / Daily seats New aircraft New seats / New seats / Capacity New flights Flights flight type flight day upside / day saved / day SYD-MEL ,631 A ,434 59% 9 55 SYD-BNE ,422 A ,264 64% SYD-CBR ,78 B ,75 85% 3 26 SYD-OOL ,269 A ,13 73% SYD-ADL ,221 A ,662 71% SYD-AKL ,525 A ,8 35% 22 8 SYD-PER ,535 B ,374 43% 18 8 SYD-ABX Q4 74 1,381 48% 13 6 SYD-DBO Q4 74 1,367 57% 12 7 SYD-CNS ,785 A ,39 58% 9 5 Figure 67: Capacity upside from larger aircraft Average seats per flight (current, upgraded fleet) % 8% 7% 6% 5% 4% 3% 2% Figure 68: freeing up a number of slots Average flights per day (upgraded fleet, flights saved) SYD-MEL SYD-BNE SYD-CBR SYD-OOL SYD-ADL SYD-AKL SYD-PER SYD-ABX SYD-DBO SYD-CNS 1% SYD-MEL SYD-BNE SYD-CBR SYD-OOL SYD-ADL SYD-AKL SYD-PER SYD-ABX SYD-DBO SYD-CNS Current Upgraded Capacity upside (%) New flights / day Flights saved / day Source: APGDat, Credit Suisse estimates Source: APGDat, Credit Suisse estimates A second? While the Australian Government recently approved 's 233 Master Plan, it also indicated its expectation for the need for a second with an announcement confirming the preferred site expected in its first term of government. While a second airport has been discussed for a number of years, the delay in development of a second airport has occurred for a variety of reasons. Political parties are conscious of increasing noise levels in key constituencies as well allowing any variation of curfew relative to Sydney Kingsford-Smith. The funding mix for the development of a second airport remains unclear, with limited detail around Federal, State and private sector contributions. Central to this issue is the contribution of the NSW Government, particularly for secondary infrastructure which would likely be a state based matter. Costs will vary by location and airport type. A Type 1 airport is full service and capable of serving all market segments and accommodating a future parallel runway layout while a Type 3 airport is more limited in its service offering, with the capability to serve all market segments but with a single runway. As per below, the variation in cost is substantial. (SYD.AX) 3

31 A$mn A$mn 18 March 214 Figure 69: Indicative generic airport costs in A$mn Cost category Type 1 Type 3 Runways/taxiways Apron surfaces Car parking Landing aids/lighting Terminal international 1, Terminal domestic Other capital costs Contingency 1, Project management and design Total 5, ,723.6 Source: Ernst and Young, Joint Study on aviation capacity in the Sydney region The Joint Study on aviation capacity in the Sydney region found that the Badgerys Creek site remains the best site for the development of an additional airport within the Sydney basin. Location to key transport infrastructure and the growth profile of the South-West region means that it is best positioned to meet demand. Relative to other proposed sites, the cost of development within the Nepean region (encompassing Badgerys Creek) sits around the average/median of prospective options. Figure 7: Dispersion of development cost by region Type 3 airport development costs (A$mn) 3,7 3,6 3,5 3,4 3,3 3,2 3,1 3, 2,9 Figure 71: with Nepean around median/average Type 1 airport development costs (A$mn) 7,8 7,6 7,4 7,2 7, 6,8 6,6 6,4 6,2 6, 2,8 Cordeaux-Cataract Central Coast Hawkesbury Nepean Burragorang Source: Joint Study on aviation capacity in the Sydney region 5,8 Cordeaux-Cataract Central Coast Hawkesbury Nepean Burragorang Source: Joint Study on aviation capacity in the Sydney region has a first right of refusal to develop and operate any airport within 1km of Central Sydney before 232 (3 years from privatisation). If the government decides to build a second airport, it must consult with as to how best meet preferences for development, a process that must be between five and 12 months duration. If decides to participate in the process, the Minister for Transport and Infrastructure may issue a notice of intention specifying the terms on which the Government wishes to proceed, including an option for to develop and operate the airport (for which it has nine months to exercise). If the option is not exercised, the government can proceed with an alternative operator (on the same terms as those offered to ) within two years or engage in further consultation. However, we understand there to be a number of processes required to be completed before the option is invoked. This includes the need for a new Environmental Impact Statement (EIS), public consultation, analysis of airspace sharing arrangements and regulatory approval. In addition, the expected time for construction is expected to be considerable; for a Type 1 airport (full-service, dual runway) the estimated construction period is years, while for a type 3 airport (limited offering, single runway) construction is estimated at years. (SYD.AX) 31

32 On balance, we would expect to exercise its right. However, we see potential impacts and timing as uncertain. A second airport may ease capacity constraints at the primary airport, particularly during peak periods. Further, a secondary airport is a more likely option for a new entrant, particularly a low-cost carrier, given likely favourable pricing relative to the primary airport and/or the opportunity for incumbency. On the assumption that full service airlines remain at Kingsford Smith, this may have positive implications, particularly if the shift allows a greater proportion of higher yielding international passengers at the primary airport. Conversely, the key risk of a second airport is a significant capital investment at a time when larger aircraft are being utilised at higher load factors with surplus capacity at the primary airport. (SYD.AX) 32

33 A$mn EBITDA margin (%) 18 March 214 Financial Summary Income statement Figure 72: SCACH income statement in A$mn, unless otherwise stated 212A 213A 214F 215F 216F 217F 218F Aeronautical Aeronautical security recovery Retail Property, car rental Car parking, ground transport Other Total revenue 1,39.7 1, , , ,35. 1, ,448.1 Labour Services and utilities Other operational Property and maintenance COGS Recoverable security Specific expenses Total expenses EBITDA ,13.7 1,71.6 1, ,197.2 EBITDA margin (%) 81.6% 81.6% 81.5% 81.8% 82.1% 82.4% 82.7% Depreciation Amortisation EBIT Interest income Interest expense RPS interest PBT Tax NPAT NPAT (ex RPS) Figure 73: Further EBITDA growth to 22 Revenue, expenses, EBITDA (A$mn) 1,8 1,6 1,4 1,2 1, 8 Figure 74: with slight margin expansion EBITDA margin (%) 84% 83% 82% 81% 8% 6 79% % 77% 76% Revenue Expenses EBITDA Source for both charts: Company data, Credit Suisse estimates (SYD.AX) 33

34 ND / EBITDA (x) Cashlfow cover (x) 18 March 214 Balance sheet Figure 75: SCACH balance sheet in A$mn, unless otherwise stated 212A 213A 214F 215F 216F 217F 218F Cash Receivables Other PP&E 2, , , , , ,72.4 2,75.5 Intangibles 3,319. 3, ,24.4 3,21.1 3, , ,83.2 Goodwill Other Total assets 7, ,413. 7, , , , ,455.5 Payables Borrowings (external) 6, , ,93.1 7, ,47.7 7, ,936.3 Borrowings (shareholder - RPS) 2,16.6 2,24.3 2,47.3 2,47.3 2,47.3 2,47.3 2,47.3 Other Total liabilities 8, , ,424. 9, , ,23.1 1,517.4 Net assets -1,6.3-1, , , , , ,61.9 Issued capital 1,314. 1,314. 1,314. 1,314. 1,314. 1,314. 1,314. Cash flow hedge reserve Retained earnings -2, , , ,39. -3, , ,235.3 Total equity -1,6.3-1, , , , , ,61.9 Net debt 5, ,37.3 6, ,83. 7,64.4 7,34.3 7,564.2 ND / EBITDA 7.x 7.x 6.9x 6.7x 6.6x 6.4x 6.3x Cashflow cover 2.1x 2.2x 2.3x 2.3x 2.4x 2.4x 2.5x Figure 76: ND/EBITDA declining over time ND / EBITDA (x) 7.5x Figure 77: with cashflow cover improving Cashflow cover (x) 3.x 7.x 2.5x 6.5x 2.x 1.5x 6.x 1.x 5.5x.5x 5.x.x Source for both charts: Company data, Credit Suisse estimates (SYD.AX) 34

35 Cash flow Figure 78: SCACH cash flow in A$mn, unless otherwise stated Dec-12A Dec-13A Dec-14F Dec-15F Dec-16F Dec-17F Dec-18F Gross cashflow ,13.7 1,71.6 1, ,197.2 Interest received Tax paid Interest (senior debt, SKIES) Other Operating cashflows Capex/acquisitions Other Investing cashflows Net borrowings Interest paid (RPS) Dividends paid (ordinary shares) Other Financing cashflows Net cashflow Distributable cashflow PBT RPS interest Depr. & Amort PBT pre RPS interest, D&A Non-cash financial expenses Other cash movements Cash available to shareholders (SYD.AX) 35

36 EV / EBITDA (x) Distribution yield (%) 18 March 214 Valuation We initiate coverage of with a $4.2 target price and a NEUTRAL investment rating. SYD currently trades at 16.3x 12-month forward EBITDA relative to a near-term average at 14.1x. The more recent re-rating (i.e. from August 213) coincided with the announcement of the group's restructure and settlement with the ATO which resulted in a relatively minor negative outcome (payment of $69mn or 3cps see Appendices below). Analysis of the current distribution yield relative to the historical relationship with bond rates indicates limited upside exists on a total return basis. While we see a 5.8% distribution yield as attractive with near-term growth opportunities likely to outweigh downside risks, the stock appears fully valued, in our view. Figure 79: EBITDA multiple above near-term average EV/EBITDA (x) 18.x 17.x 16.x Figure 8: with recent yield compression distribution yield (%) 9.% 8.5% 8.% 15.x 14.x 13.x 12.x 7.5% 7.% 6.5% 6.% 5.5% 11.x Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: IBES, Company data, Credit Suisse estimates Apr-12 DCF valuation methodology Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 5.% Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: IBES, Company data, Credit Suisse estimates Our valuation is derived via DCF of distributable cashflows (equity cashflows discounted at a cost of equity) and assumes a 1% payout over the life of the concession (to 297). We adjust cashflows and the cost of equity for refinancing. The cost of equity incorporates an asset beta of.6 (with equity beta derived through forward leverage), a risk-free rate of ~5% and a market risk premium of 6%, providing a cost of equity of ~11%. Figure 81: valuation Available distributions Corporate expense Net cashflow Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Risk free rate 5.1% 5.3% 5.4% 5.4% 5.4% 5.4% 5.2% Asset beta D/E 7.1% 69.3% 7.2% 7.8% 7.6% 7.3% 7.2% MRP 6.% 6.% 6.% 6.% 6.% 6.% 6.% Equity beta Ke 11.2% 11.4% 11.5% 11.5% 11.5% 11.5% 11.3% Airport valuation 9,245. 9, ,25.4 1, , , ,369.3 Corporate valuation Net valuation 9, , ,24.8 1, , , ,332.4 Per share (SYD.AX) 36

37 HOLT Applying key Credit Suisse Research estimates through our HOLT framework results in a A$4.19 valuation. This valuation initially uses six years of key estimates to drive CFROI forecasts, before proprietary algorithms determine the rate of fade towards the long-run average CFROI (~6%). Figure 82: HOLT analysis of, HOLT (SYD.AX) 37

38 Figure 83: HOLT summary of, HOLT For a more detailed view of SYD's valuation within the HOLT framework, please click on the following link (unauthenticated access permitted for a short period of time): CS Research scenario Summary: CS Research scenario Flex Valuation: Global Peer Analysis: (SYD.AX) 38

39 Environment, Social and Governance (ESG) Summary of key issues The board is not considered independent by majority given the involvement of members with Macquarie, recently the largest investor in the group as well as tenure of several members (over ten years). The Chairman is also not considered independent. Remuneration does not include any long-term incentive payments (LTI). STI hurdle disclosure could be improved. Environmental Biodiversity and land use operates in close proximity to wetlands. As such, it has exposure to biodiversity land use risks which could potentially lead to loss of license to operate, litigation or increased costs from land reclamation/protection. manages its impact on the environment through its Environmental Policy and Strategy, with the Environment Strategy approved by the Australian Government on 24 May 21 following community and stakeholder consultation. This covers aspects such as: environmental management and community engagement, climate change and energy management, water management, air quality, ground transport, ground-based noise, biodiversity and conservation management, heritage, waste and resource management, soil and land management, spills response. The Environmental Management System (EMS) has been developed in accordance with AS/NZS ISO 141 which we understand to be best practice. On this basis, as well as achievements under previous strategies (First and Second Environment Strategies), we see this framework as assisting in the minimisation of potential impacts of any adverse environmental issues. Social Noise sharing The Long Term Operating Plan (LTOP) was introduced in 1997 to address concerns around aircraft noise, with an aim to achieve a distribution of flights to share noise rather than allow a particular area or region to be exposed to aircraft noise from a particular set of flight paths. Targets have been developed for the number of movements for each direction to and from the airport (55% south over Botany Bay, 15% west, 17% north and 13% east). Daily runway selections aim to achieve and outcome that best achieves noise sharing targets, subject to factors such as safety and weather. In our view, the key risk is the impact of further capacity constraints and inability to operate preferred noise-sharing modes (estimated at 55 movements or more per hour). To this end, assessments have been undertaken on behalf of the Community Forum (SACF) to assess the impacts on changes in demand. Greater emphasis and/or enforcement of adherence to noise sharing targets could present some downside risk. Governance Regulatory risk currently operates under a shadow dual-till return on capital structure (aeronautical services priced on a stand-alone basis, with no consideration of revenue from non-aeronautical services). Prices are agreed between and airlines. The ACCC monitors prices of aeronautical and services and facilities. The Productivity (SYD.AX) 39

40 Commission has recommended that current arrangements apply until June 22, subject to a review in 218. In our view, the key risk would be a move to formal price controls (a CPI-X formula) which may reduce returns relative to those achieved under a price monitoring regime. Board structure The board consists of members with relevant experience in accounting/finance, infrastructure/transport and government relations. One member has ASX1 board experience. We would prefer more board members with ASX1 director experience. As a former CEO of and a consultant of Macquarie Group (previously the largest investor in prior to in-specie distribution in early 214), the Chairman is not considered as independent. As non-executive Chairman of Macquarie Infrastructure and Real Assets (MIRA), John Roberts is also not considered independent. Further, we note the tenure of three board members (in excess of 1 years) does not meet our own internal targets (ten-year threshold) and as well as proposed revisions to ASX Corporate Governance principles (nine-year threshold). We note the appointment of Ann Sherry to the board (effective from 1 May 214, replacing Bob Morris) goes some way in addressing this issue. However, on balance, we do not consider to board to be independent by majority and lacking an independent Chairman. Figure 84: Board composition Member Position Tenure Acc'ting / Legal Infra / Govt. Listed (Years) Finance Transport Relations CEO Max Moore-Wilton Non-Executive Chairman 7.9 x x x x Kerrie Mather Executive Director 3.6 x x x Trevor Gerber Non-Executive Director 11.9 x ASX1 Board Exp. Michael Lee Non-Executive Director 1.7 x x Robert Morris* Non-Executive Director 11.5 x John Roberts Non-Executive Director 4.4 x Independent (CS) Stephen Ward Non-Executive Director 3. x x Ann Sherry* Non-Executive Director N/A x x x x. *Ann Sherry's appointment effective 1 May 214. Remuneration The remuneration structure of key management personnel (KMP) comprises fixed annual remuneration (FAR; salary and benefits) and at-risk remuneration (ARR; variable and directly linked to key performance targets and business objectives). Remuneration for the CEO is split between base pay (including benefits), short-term incentives and deferred short-term incentives, split 5%, 4% and 1%, respectively. This implies that the maximum possible salary is double FAR or $3.4mn. The CEO earned 1% of FAR as a STI in both 212 and 213. Given the nature of the concession and stability of cashflows, we are surprised with a lack of long-term incentive (LTI). Figure 85: Comparison of FY12 and FY13 pay structure for CEO Item FY12 FY13 Base pay (FAR) $1.7mn $1.7mn Short term incentive (STI) Short term incentive (STI deferred) 37.5%-1% of FAR 1% awarded ($1.7mn) 33% of any STI award > $5, is deferred in cash for 3 years; $55, retained 37.5%-1% of FAR 1% awarded ($1.7mn) 2% of any award up to 1% of FAR; 33% of any award in excess of 1% of FAR $34,78 retained Mix (Base : STI : STI deferred; LTI) 5%:34%:16%: % 5%:4%:1%: % Maximum possible salary $3.4mn $3.4mn (SYD.AX) 4

41 Other key executives have similar remuneration structures, albeit at varying proportions (Figure 87). The maximum pool for Non-Executive Directors (NEDs) remuneration is capped at $2mn and which incorporates fees at the operating company level. NEDs do not receive at-risk remuneration. Figure 86: Half of CEO, KMP remuneration fixed Remuneration structure for CEO and KMP % 1% 16% 14% Figure 87: slight variability YoY Remuneration structure for CEO and KMP % 1% 1% 14% 8% 8% 6% 34% 37% 29% 6% 4% 37% 29% 4% 4% 2% 5% 53% 57% 2% 5% 53% 57% % CEO CFO ED - Aviation FAR STI STI deferred % CEO CFO ED - Aviation FAR STI STI deferred Group performance objectives used to determine STI outcomes for the CEO and KMP are presented below. The majority of outcomes are weighted against financial and specific individual objectives (7-8%). While we see key financial measures as appropriate, greater disclosure on specific targets could be provided. Figure 88: Performance scorecard for FY13 STI awards (CEO and KMP) Objective Weight Performance Measure Performance Financial 3-5% All executives have objectives relating to improved business performance and growth in EBITDA and cashflow. Stakeholder 1-2% All executives have objectives relating to Customer and Stakeholder engagement, and the key area of focus in 213 was in relation to the Master Plan. People 1% All executives have objectives relating to employee engagement, leadership capability, safety performance, diversity and organisational development. Specific individual objectives 2-5% Key areas of focus in 213 were the: Corporate simplification and restructure, resolution of ATO matters and an increase in the foreign ownership cap; Master Plan Development; Ground Transport Plan; Customer service improvements; and Other initiatives as appropriate for the KMP All financial measures met or exceeded corporate targets. EBITDA growth of 7.3% in 213; Average EBITDA growth of 7.3% since 28; Shareholder distribution growth of 7.1% in 213; and Shareholder value appreciation of 19.% in 213. Significant management effort in engaging a range of stakeholders, including a concerted effort on building strong community engagement, has resulted in public support and advocacy for s Master Plan. Diversity: In 213, the number of women employed at has increased from 95 to 15 and the proportion of women in management roles has increased from 26.3% to 28.6%. Staff Engagement: Increased by 6.5% in the last survey and a number of staff driven initiatives will be implemented in 214 to further enhance staff engagement. Organisational Development: In 213 a comprehensive Learning & Development program was launched to ensure continued focus on organizational development. Key areas of focus were: Leadership Capability, Management Training, and Safety Leadership. Management programs were supplemented with an organisation wide Safety Culture program. A significant corporate restructure, the acquisition of minorities resulting in 1% ownership, and the resolution of a number of ATO matters, was successfully completed in 213 with no dilution in the number of securities held by existing shareholders. This has resulted in a material improvement in the enterprise value and delivered certainty for shareholders going forward. A new draft Master Plan for was successfully developed and released for public consultation in 213; the implementation of the plan will allow the airport to be developed to generate greater efficiency and productivity, as well as increased capacity. Extensive engagement with the many different stakeholder groups has resulted in unprecedented interest in and support for s position. Through close collaboration with NSW agencies, a coherent Ground Transport Plan for has been developed, along with alignment on priorities for Westconnex enabling works outside the airport boundary. In response to customer feedback throughout 213, a number of initiatives which will improve the customer experience at have been successfully implemented. (SYD.AX) 41

42 We do not currently incorporate any explicit ESG risk within our target price. Key risks that would potentially lead to an adjustment to forecasts and valuation would include environmental (land use) and regulatory (pricing) risks. We see the current MSCI rating of AA as appropriate given the current environmental policies in place and no imminent regulatory review expected prior to 218, and as such, we have a Neutral outlook on the MSCI rating. Figure 89: MSCI rating, risks MSCI IVA (ESG) Rating AA Environment Social Governance TP ESG Risk (%): MSCI IVA Risk: Neutral Credit Suisse View TP Risk Comment: We have not currently factored in any specific ESG risk into out target price. Key risks that would potentially lead to an adjustment to forecasts and valuation would include environmental (land use) and regulatory (pricing) risks. MSCI IVA Risk Comment: We see the current rating as appropriate given the strong policies in place relating to the environmental impacts of its operations. Stock Country Local Sector Global Sector Source: MSCI IVA, ESG Credit Research Suisse estimates (SYD.AX) 42

43 Board of Directors and Management Board of Directors Max Moore-Wilton (BEc AC) Chairman, Non-Executive Director Max is a non-executive director. He is Chairman of, and he was also the Chief Executive Officer of SACL from January 23 to April 26. Previously, Max was Secretary to the Department of the Prime Minster and Cabinet, a position he held from 1996 to 23. He is currently the Chairman of Southern Cross Austereo Media Group and a former Chairman of the Airports Council International. He has held a number of key executive roles both within the public and private sectors, and he has extensive experience in the transport sector. Kerrie Mather (BA, MComm) Executive Director Kerrie has been Managing Director and Chief Executive officer of Corporation Limited since June 211. Kerrie has 18 years prior experience in airports and transport infrastructure in a wide range of countries. Kerrie was previously appointed to the boards of a number of UK and European airports and was an Executive Director at Macquarie Capital, where she worked for 18 years specialising in the airports and transport sectors. She is a member of the Tourism and Transport Forum s advisory board and is on the board of Airports Council International (Asia Pacific). Trevor Gerber (BAcc, CA) Non-Executive Director Trevor is an independent director and chairman of the Audit & Risk Committee. He is an independent non-executive director of ASX listed Tassal Group Limited. Trevor is a professional director and previously worked for Westfield Holdings Limited for 14 years as Group Treasurer and subsequently as Director of Funds Management responsible for Westfield Trust and Westfield America Trust. Hon. Michael Lee (BSc, BE, FIE Aust) Non-Executive Director Michael is an independent director. Michael is also chairman of the SACL Safety, Security, Environment and Health Committee. Michael Served in the Australian Parliament for 17 years, and held a number of senior positions in both government and opposition, including serving as Minister for Tourism, Communications Alliance. Michael is also a director of ASX-listed DUET Finance Limited and Superpartners. John Roberts (LLB) Non-Executive Director John is a non-executive director. He is non-executive chairman of Macquarie Infrastructure and Real Assets (MIRA), a division that has around $1 billion of assets under management. John joined Macquarie in 1991 and is based in Sydney, Australia. John serves on a number of boards and investment committees in MIRA. His previous roles within Macquarie Group include Head of Europe, Joint Head of Macquarie Capital Advisers, Global Head of Macquarie Capital Funds (prior to it being renamed MIRA) and executive Chairman of Macquarie Fund Group. Stephen Ward (LLB) Non-Executive Director Stephen is an independent director. Stephen is also chairman of the Nomination and Remuneration Committee. Stephen is a partner of Simpson Grierson, and a member of the firm s board. He is also Head of Simpson Grierson s Corporate/Commercial Department. Robert Morris (BSc, BE, M Eng Sci) Non-Executive Director (Outgoing) Bob is an independent director. Bob is also a director of Aspire Schools Financing Services (Qld) and SA Health Partnership Securitisation. Prior to 23, Bob was an Executive Director of Leighton Contractors. (SYD.AX) 43

44 Ann Sherry (BA) Non-Executive Director (Incoming) Ann is an independent director. Ann is currently CEO at Carnival Australia. She also serves as Director at the Australian Rugby Union, The Myer Family Company Holdings Pty Ltd and is non-executive director at ING Australia. She previously served as First Assistant Secretary, Office of the Status of Women in the Department of Prime Minister and Cabinet, and was formerly the CEO of Bank of Melbourne and Westpac New Zealand. Senior Management Kerrie Mather (BA, MComm) Chief Executive Officer Refer above. Stephen Mentzines (BEc, CA) Chief Financial Officer Stephen has over 3 years of financial and infrastructure sector experience. Before his current role, Stephen was Head of North American Funds for the Infrastructure and Real Assets business of Macquarie Group and prior to that Global Chief Operating Officer of that business and a Chief Financial Officer of several funds. Stephen has also held senior roles at Westpac Banking Corporation including Chief Financial Officer roles in a number of operating divisions and was an audit director at KPMG. Jamie Motum (BEc, LLB) Company Secretary Jamie is a qualified solicitor with over 15 years' experience. Prior to becoming General Counsel and Company Secretary of Corporation Limited in February 21, Jamie was a partner of DLA Phillips Fox, the firm where he began his legal career in Jamie was a partner in the Corporate Group of DLA Phillips Fox, specialising in mergers and acquisitions and corporate advisory work. (SYD.AX) 44

45 Appendices overview Location and facilities is located on 97 hectare site with two main parallel north-south runways and one crossing east-west runway. The main north-south runway and the east-west runway can accommodate the Airbus 38. The two North-South runways are not able to operate independently to achieve 8 movements per hour. Historically, the runway usage split is 67% of operations on the longer runway and 33% on the shorter runway. Runways Main north-south runway: 3.962km Parallel north-south runway: 2.438km Cross east-west runway: 2.53km. Terminals has three terminals one international and two domestic. Terminal 1 (T1) International Service for all international flights. 25 boarding gates including five A38 gates. 254, m 2 of floor space. 21,4 m 2 retail, 152 outlets. Terminal 2 (T2) Domestic Service for domestic flights by Virgin Australia, Jetstar and other regional airlines. 18 boarding gates (with an additional 5 under development). 65, m 2 of floor space. 4,6 m 2 retail, 51 outlets. Terminal 3 (T3) Domestic Currently leased, operated and maintained by Qantas. Lease due to expire in June 219. Does not contribute domestic terminal aeronautical or retail revenues for Sydney Airport. Car parking Approximately 16, spaces in three areas (multi-storey parking at the domestic and international terminals, long-term parking). Day-to-day operations currently outsourced to Secure Parking. Commercial Buildings 1 hectares of leased land used by a range of entities including aviation related activities (freight handling, maintenance, fuel and offices), rental car operations and roadside service centres and hotels. (SYD.AX) 45

46 Group structure In August 213, announced the acquisition of 15.2% in minority interests as well as a simplification program aimed at addressing concerns raised by the Australian Tax Office (ATO) in relation to Redeemable Preference Shares (RPS). As part of the acquisition of minority interests, 333mn additional securities (equal to the 15.2% minority interests acquired) were issued to ensure no dilution to existing securityholders. An institutional placement was conducted for minority securityholders who monetised interests (85.6mn securities or 3.9% of the expanded total securities on issue), while 246.5mn securities (11.3%) were issued to continuing minority investors (Public Sector Pension Investment Board, Future Fund, Motor Trades Association of Australia Superannuation Fund and UniSuper). Figure 9: structure pre and post minority acquisition Source: Company data The position paper delivered by the ATO in December 212 sought to disallow the deductibility of interest paid on RPS for tax years ending 31 December 21 and 31 December 211. As part of the agreement, agreed to make a payment of $69mn (equivalent to 3cps). Further, the simplification resulted in an unwinding of outstanding RPS, replaced by a loan between Trust 1 (SAT1) and a new parent company. As part of the simplification, the foreign ownership limit was raised from 4% to 49%. (SYD.AX) 46

47 Figure 91: RPS issued under prior structure holding structure prior to simplification Figure 92: replaced with a loan under new structure holding structure after simplification Source for both charts: Company data (SYD.AX) 47

48 PEERS Figure 93: PEERS map of customers and competitors (SYD.AX) 48