The Sydney Aviation Alliance has increased its bid price for a third time $8.75 to acquire Sydney Airport with the board granting due diligence to the consortium. This effectively values the airport at a $30 billion enterprise value. Prior to Covid-19, the 2019 financial year EBIDTA was $1.3 billion. This implies a valuation multiple of Sydney Airport 23x on a pre-Covid basis, a valuation some would consider high given the valuations on other ‘moaty’ assets (see the article on investment moats!).
With most of Australia in lockdown and state and international borders closed, Australian airports are suffering with very low passenger numbers. Elsewhere around the world, border restrictions have largely ceased, and the travel rebound is well underway. As shown in the chart below, In the US, passenger volumes are nearing 75% of the pre‑Covid peak of passengers, and in Europe, a similar rebound is occurring where passenger numbers are nearing 50% of pre Covid levels.
Australia is about 6-12 months behind Europe and North America. It would seem that at some point in late 2021 or early 2022 the international border with NSW (and perhaps VIC) will be opened and states that have been successful with elimination to date (eg, QLD, WA and TAS) will open up to international travellers a bit later in early 2022.
Sydney Airport may be facing short run patronage issues, however, there is no doubt that the asset will continue to be one of the highest quality core infrastructure assets in Australia. It would be reasonable to expect a rapid rebound in travel to some base line figure.
The big question will be whether permanent damage has been done, particularly in the business travel segment. Have habits been formed over the last two years such that Zoom meetings will continue to be the acceptable norm? Will this provide a dampener on business travel, compared to pre-Covid norms?
Containerised sea freight has seen an explosion in cost and demand, with shipping rates increasing at what seems like a parabolic rate. The Freightos Baltic Global Container Freight Index is at record all‑time highs. This index measures the average global cost of a 40 ft shipping container which has increased from a price of US$1,500 in 2020 to US$10,920 today. This is an amazing seven-fold increase! When you drill down into specific routes it gets even worse. The average price of a container from East Asia to the North American East Coast is currently US$22,234 versus US$2,500 in early 2020, a nine‑fold increase! As you can imagine, stock prices of businesses involved in all parts of the shipping services supply chain are going through the roof.
The time it takes to process containers has increased with additional health and safety measures introduced during the pandemic. There are reports that ships are waiting 8-10 days at North American Ports to be processed. For Australian ports, there has been a significant increase in volumes. Over the 2021 container volumes were 10-30% above the previous year (see next chart). The following is a chart of the aggregate container volume growth at Port of Botany, Port of Melbourne and Port of Brisbane.
This has the potential to create significant inflationary forces in the short term. Particularly when combined with the rising costs of manufacturing in China. The current market consensus is that current inflation is transitory. But is this really the case? Markets could be underestimating future inflationary expectations.
Seaports and airports are fantastic core infrastructure assets with strong correlations to economic growth. The current pandemic environment and the differing effects on assets are an example of the benefits of diversification!