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"Sydney Airport Rejects Offer To Run Second Airport, AustralianGovernment Goes It Alone"

Tuesday, May 2, 2017

Sydney Airport Rejects Offer To Run Second Airport, Australian Government Goes 
It Alone
By Robert Guy 

Shares in Sydney Airport (SYD.AU) are slightly weaker in early trade after the 
company said it wasn't interested in developing and operating a new AUD5 
billion Western Sydney Airport (WSA).

The decision by the Sydney Airport to pass on the development prompted Prime 
Minister Malcolm Turnbull to commit this morning to building the airport. 
Details will be released in next week's federal budget.

Sydney Airport said that after receiving the WSA Notice of Intention (NOI) it 
had engaged with contractors to determine development costs but had decided 
that the project did not meet its investment criteria.

Here's what CEO Kerrie Mather had to say on why the offer was rejected:

"Sydney Airport's decision not to accept the WSA NOI on the terms provided is 
in the best interests of our investors who represent millions of Australians 
through their superannuation funds. Despite the opportunities that WSA will 
present, the risks associated with the development and operation of WSA are 
considerable and endure for many decades without commensurate returns for our 

Analysts have welcomed the discipline shown by Sydney Airport. Here's a take 
from RBC Capital Markets' Paul Johnston:

Overall, we view the decision as positive, but do not expect the shares to move 
materially, given that the decision does not come as a surprise to us and has 
been highly anticipated by the market. At the FY16 results, management noted 
that the WSA project is "deeply uneconomic", and more recently, last week, the 
Government mentioned that if SYD does not build the second airport, then it 
will likely step in and develop the airport. However, this decision indicates 
disciplined capital management practice.

No change to our Price Target of $6.50 and Sector Perform rating:  We note that 
in our base case, we already assumed that SYD will not build the second 
airport. We assume that from FY26E-FY35E, SYD will lose domestic market share 
with domestic passenger growth of -1%, but will achieve higher international 
passenger growth of 5%. We also model a 10% fall in aero charges in FY26E (as a 
result of increased competition).
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