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Why this top broker just upgraded Sydney Airport to “buy”

Brendon Lau
Sydney Airport

The Sydney Airport Holdings Pty Ltd (ASX: SYD) share price is recovering some of its lost ground today and the stock may have more room to climb as it just got upgraded by Macquarie Group Ltd (ASX: MQG).

Shares in the nation’s largest airport operator jumped 1.7% to $8.29 in after lunch trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index improved 0.6%.

The rebound isn’t enough to make up for the recent big losses stemming from the coronavirus scare. Sydney Airport is still down by around 8% over the past two weeks and the threat of a pandemic is likely to keep weighing on travel-related stocks.

Time to buy the dip?

It isn’t only Sydney Airport that’s swept up in the sell-off. The Qantas Airways Limited (ASX: QAN) share price and Flight Centre Travel Group Ltd (ASX: FLT) share price have also taken a hit.  

But Sydney Airport may have an advantage over the sector. The analysts at Macquarie lifted their recommendation on the stock to “outperform” from “neutral”.

While the broker concedes that it’s hard to say with any confidence how deep the impact of the virus scare will be, it believes the stock is oversold and represents value at current levels.

Is this time like SARS?

Using the SARS outbreak in 2003 may also not paint an accurate picture of how Sydney Airport could be impacted. Back then, the company was also hit by the drop in passenger numbers following the Bali bombing, high levels of debt and a partly paid equity structure.

“China (in/out) traffic is ~19% of movements compared to 11% in 2002; this direct impact is larger, but unless it broadens like SARS to major hubs across Asia (Singapore, Hong Kong), we anticipate the impact will be more moderate,” said Macquarie.

“Assuming one quarter of negative growth as with SARS, we estimate ~$19- 23m earnings are at risk, or 2.0-2.5%.”

Expect a quick recovery

Even if the threat becomes bigger than expected, history has shown that the impact to tourism is likely to be short-lived. The first quarter might see a 20% reduction in traffic, followed by a 10% drop in the second quarter.

After which, international traffic rebounds quickly as health authorities give the all-clear and as airlines and tourism boards step up their marketing campaigns, explained Macquarie.

Why Sydney Airport is a “buy”

“The extreme risk is the virus becomes global thus 12 months of soft traffic, but given government responses this seems relatively low,” said the broker.

“More plausible is China is heavily impacted for a quarter as it seeks to contain the virus. Earnings impact is minor for Sydney, and importantly is only for one year.

“Upside remains resolution of the negotiation with the airlines for aeronautical charges.”

Macquarie’s price target on the stock is $8.68 per share.

The post Why this top broker just upgraded Sydney Airport to “buy” appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020