Baron Rothschild, the 18th-century British nobleman, famously said “the time to buy is when there’s blood in the streets”. The global aviation sector is awash with red ink thanks to the Coronavirus, creating opportunity for contrarians and long-term investors.
Virgin Australia this week entered voluntary administration, becoming the first big corporate casualty of COVID-19 and sparking debate over whether federal and state governments should bail out the stricken airline, to ensure airline competition in regional areas.
Virgin was a challenging investment before COVID-19, given its high debt, ownership structure and the challenge of competing against Qantas Airways. I have always avoided Virgin.
At the other end of aviation is Sydney Airport, a stock I’ve liked for years and have been itching to add to the COVID-19 ideas list in recent columns.
Sydney Airport (SYD) this week announced a 96 per cent drop in international passengers in the first two weeks of April compared to a year ago and a similar fall in domestic passengers. Its interim dividend was cut and board fees and executive salaries reduced. What a bloodbath.
I still struggle to comprehend how an industry as large as aviation can come to a standstill due to a virus that has infected only 6,645 Australians at April 21. Right or wrong, industries are changing before our eyes due to COVID-19 and more companies, sadly, will follow Virgin into administration in coming weeks and months.
This week I add Sydney Airport and another favoured stock, Auckland International Airport (AIA), to the ideas list. Last week I wrote that aviation would be among the last sectors to recover because international and, to a lesser extent, domestic travel restrictions would linger. That view still holds. Do not expect the Federal Government to relax international travel restrictions anytime soon and even when domestic restrictions are lifted, some business and leisure passengers could still be reluctant to fly this year (or not have funds to do so).
Still, it is hard to see how the news can materially worsen for Sydney Airport. The drop in passengers, greater than analysts feared, cannot go much lower.
As expected, the dividend has been cancelled and the market is digesting Virgin’s bad news and the hit to Sydney Airport’s earnings (there could be longer-term benefits if Virgin’s problems help Sydney Airport restructure its on-ground operations).
Of course, other international airlines or small regional operators could go bust if COVID-19 lasts longer than expected. Another threat is retail tenants being unable to pay high airport rents, as is industry or government pressure on airlines to lower fees, such as car-parking.
Insolvencies in companies that provide on-ground services to airports, such as security, is another concern, for it could hamper the sector’s recovery.
Longer-term, it is too soon to know if COVID-19 will change attitudes towards international travel. Older Australians might be less inclined to fly overseas, particularly to developing nations. But it is harder to see younger people resisting the travel bug for too long.
Clearly, these are significant threats, but the share prices are already factoring in a torrent of bad news. Sydney Airport has fallen from a 52-week high of $9.30 to $5.70, near a five-year low.
Chart 1: Sydney Airport (SYD)
Source: ASX
Auckland Airport (AIA) has tumbled from a 52-week high of $9.45 to $5.46, a four-year low.
Chart 2: Auckland International Airport (AIA)
Source: ASX
Amid the gloom, there are five positives for Sydney Airport and Auckland International Airport.
First, Australia and New Zealand are outperforming globally with Coronavirus containment. Some experts thought Australia would have tens of thousands of confirmed cases by now and hundreds of deaths. Kudos to our health experts and policymakers for managing the crisis.
The risk of COVID-19 outbreaks remains, but the success so far is good news for airline operators because, if sustained, it could compress the timetable for travel restrictions to be relaxed. With international travel, much depends on how other countries combat the virus.
Second, interest rates are likely to remain low for longer – possibly for years, judging by Reserve Bank of Australia Governor Philip Lowe’s comments this week. The big knock on airports and other interest-rate-sensitive stocks was the risk of rates rising, a threat that is being pushed back by the day. Talk of an outbreak of inflation from COVID-19 is vastly overstated.
Third, expect a strong rebound in airport passenger volumes in calendar-year 2021. This year will be a write-off, even if domestic travel restrictions are relaxed in June or July. Next year should be much better as younger people who have been starved of travel, or had existing travel arrangements cancelled and vouchers provided in lieu of, go overseas. Business travel will also jump as industry events return and managers catch up on face-to-face client meetings.
Fourth, Sydney Airport and Auckland International Airport’s capital positions look assured. Sydney Airport is unlikely to have a dilutive equity capital raising and Auckland International Airport had an NZ$1.2 billion equity capital raising this month, strengthening its balance sheet. That is one less risk for prospective investors to worry about.
Fifth, the best airports – Sydney Airport is definitely in that category – are fabulous monopoly assets. Unlike several other companies crushed by COVID-19, we will still need transport infrastructure when the pandemic passes.
Expect rising interest in local and global infrastructure as more companies go into administration in the next few months, and investors continue favouring defensive assets. I’ll cover global infrastructure investing in the next few weeks in this column.
Macquarie Wealth Management has a 12-month price target of $7.06 for Sydney Airport, implying a prospective total return of about 20% from the current price. Morningstar values Auckland International Airport at $6.55 a share.
I prefer Sydney Airport – partly because it is a better asset and partly because Australia’s economy will recover faster than New Zealand’s, because we did not have such an aggressive lockdown. Both stocks are worthy portfolio inclusions.
Long-term investors might buy Sydney Airport and Auckland International Airport now. Active investors could wait until this week’s equities sell-off dissipates. After the market’s strong rally in March, it was overdue for a pullback and this week’s falls probably have further to go.
Either way, both stocks deserve a spot of watchlists. Buying airports at multi-year lows, when so much bad news has been digested, and as Australia’s COVID-19 containment exceeds expectation, makes sense.
On Morningstar’s numbers, Sydney Airport is expected to yield 4% at the current price in FY21 – a reasonable attraction for income investors who can wait for a recovery in Sydney Airport’s price over the next three years, particularly in a low interest-rate environment.
Granted, it is hard to buy airports or any company at the epicentre of the COVID-19 crisis. But having the nerve to buy quality companies when there is blood in the streets, as Baron Rothschild put it, separates successful contrarians from the rest.
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 21 April 2020.