The Sydney Airport Holdings Ltd (ASX: SYD) share price has rallied over 20% since the start of March in the lead-up to its long-awaited decision of whether or not it will build the second airport in Western Sydney.
Assisted by a raft of management changes and strong passenger growth numbers, shares in Australia's largest airport operator have climbed to 2017 highs in the wake of its board's decision to reject the option to build and operate a second airport at Badgery's Creek in West Sydney.
Whilst the decision appears to be a sensible one given it failed to meet Sydney Airport's investment criteria, I believe Sydney Airport's current share price fails to take account of all the risks associated with a second player in the Sydney aviation market.
Badgery's Creek
At the start of May, Sydney Airport announced that it had rejected the Commonwealth government's notice of intention to develop and operate a new international airport at Badgery's Creek in Western Sydney.
Though Sydney Airport's decision was applauded by the broader market given the "considerable risks" associated with it, I for one am not certain that it was the best decision for the long-term growth of the company.
Whilst I admit that a $6 billion funding burden falling solely on Sydney Airport under the notice of intention was inherently risky for shareholders, the consequences of traffic cannibalisation at Sydney Airport's flagship asset – its Kingsford Smith International Airport – could lead to an earnings decline over the long term.
Passenger growth
To date, Sydney Airport's success has been bolstered by a wave of inbound tourism to Sydney, particularly from Asian visitors.
A host of airlines have expanded capacity to reap the growing demand of Asia's middle-class with local carriers Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) introducing additional services and opening new routes to and from Asia daily.
This bodes well for increased passenger movements, evidenced by the company continuing to deliver strong international and domestic passenger growth year-on-year.
Although current economic trends suggest this can continue, I believe Sydney Airport's success is too heavily reliant on organic growth. Furthermore, I don't believe the current share price attributes any cannabilisation of traffic to a second international airport in Western Sydney, leaving it with more downside risk than upside potential (in my opinion).
Growth alternatives?
Unlike infrastructure heavyweight Transurban Group (ASX: TCL), which has the ability to deliver road projects to local governments in a myriad of locations, Sydney Airport is captive to a web of Federal and State politics.
Although international expansion and individual asset acquisitions remain a prospect for Sydney Airport, both of these options are not without risks, and thus the company is heavily reliant on the tailwinds of tourism growth continuing.
Even if this trend continues, I believe Sydney Airport's current share price implies consistent growth rates meaning it is unlikely to outperform the broader market over the medium term.
Foolish takeaway
Based on Monday's close of $7.22 per stapled security, Sydney Airport's forecast full-year distribution guidance of 33.5 cents per security places it on current forward yield of 4.6% (unfranked).
Although this distribution trumps bank deposit rates of 3%, I believe the recent run-up in share price is factoring in strong growth in passenger movements and little risk of the Badgery's Airport affecting traffic numbers.
Accordingly, whilst the infrastructure star remains a solid stock to hold for all seasons, I would recommend investors wait for an entry price below $6.70, before buying more shares.
