One of the most coveted but overstretched dividend paying ASX shares could run higher despite concerns about its valuation and slowing Chinese visitor growth.
The stock in question is the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price, which gained another 1.1% to $8.23 ahead of the market close to take its one-year gain to 23% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only managed an 8% increase.
Investors have flocked to the stock for its relatively defensive income streams and reasonably high dividend yield, but it isn't a favourite of mine as the Chinese tourism boom appears to be petering out.
What's more, our nation's largest airport operator is locked in tense negotiations with the airlines, including Qantas Airways Limited (ASX: QAN), over access rights and the SYD share price is trading on a price-earnings multiple that's over 40 times.
Macquarie upgrades Sydney Airport to buy
It feels like a lot of good news is already priced in, although Macquarie Group Ltd (ASX: MQG) thinks the new terminal T4 could be its saving grace and has upgraded its recommendation on the stock.
Macquarie thinks there's more upside for Sydney Airport despite acknowledging that management needed to lift its service offering while renegotiating with the airlines.
The airport needs to improve its offering because its peers, like the Melbourne and Brisbane airports, are adding new runways, and that puts pressure on Sydney Airport to focus on service quality to better differentiate itself.
"The T4 discussion provides a step change to terminal capacity, and quality. We estimate a new terminal will lift capex spend from ~$1.6bn to $2.3-2.4bn," said Macquarie.
"Despite shifting to tax paid, SYD's balance sheet can fund 100% of the capital needed with debt.
The additional capex spend will also mitigate the pricing pressure SYD is facing from falling bonds (150-200bps) and the reset of international PAX outperformance of ~1.4m above forecast."
Not so expensive after all
The broker also reassures investors that Sydney Airport isn't expensive. It noted that Hobart Airport was sold at around 26 times its earnings before interest, tax, depreciation and amortisation (EBITDA) – and that is for a lower quality asset.
Ignoring the quality question, Sydney Airport is trading on an enterprise value to EBITDA of around 24 times.
Macquarie lifted its rating on Sydney Airport to "outperform" from "neutral" and has a 12-month price target of $8.77 per share.
Add that with the stock's forecast yield of 4.7% for 2019 and the total return for Sydney Airport sits at just over 11%.
