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Top broker argues Sydney Airport stock will continue to ‘outperform’

We examine why Macquarie Wealth Management continues to see upside potential from Sydney Airport (ASX: SYD).

Sydney Airport share price jitters

The emergence of the coronavirus threat has seen many companies – particularly those with links to Chinese markets fall steeply.

These fears look most pronounced today, with the ASX 200 dropping more than 100 points before noon.

Indeed, as the Sydney Morning Herald reported on Sunday:

‘Australia has put a travel ban on people coming from anywhere in mainland China in an unprecedented bid to stem the flow of coronavirus into the country.’

In response to this, Sydney Airport’s (ASX: SYD) stock has dropped consistently in the last week; currently trading at the $8.23 per share mark, with a dividend yield of 4.74%, as of 14:28 (AEDT).

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The analyst take: Macquarie says ‘Outperform’

Even with all these concerns, Macquarie Wealth Management continues to like Sydney Airport’s (ASX: SYD) prospects – last week reiterating their ‘Outperform’ rating on the stock – as well as their $8.68, 12-month share price target.

Drawing a quantified comparison between SARS and the coronavirus, Macquarie notes that for SYD, Chinese ‘traffic is ~19% of movements compared to 11% in 2002; this direct impact is larger, but unless is broadens like SARS to major hubs across Asia (Singapore, Hong Kong), we anticipate the impact will be more moderate.’

Though arguing for a more ‘moderate impact’, Macquarie does however note some impact, cutting SYD’s earnings (EBITDA) estimates by $17 million for the 2020 calendar year. This, reassures Macquarie: is on the assumption of a single quarter of negative growth, before things return to normal.

The investment bank further points out that ‘traffic typically rebounds quickly once the all clear is given, as airlines and tourism boards step-up marketing efforts.’

Ultimately, Macquarie specifies that the next catalyst for the stock would be ‘comfort the coronavirus is being contained.’

Coronavirus: a changing dynamic

Yet one should be aware that Macquarie published this research early last week – 28 January, specifically. Since then the impact of the coronavirus has intensified: with China reporting that infections have risen to 17,205 and that deaths have reached 361.

Bloomberg even reported that ‘China could struggle to honour its trade deal with the U.S.’, and that the country’s ‘central bank will pump an additional 150 billion yuan ($21.7 billion) into money markets on Monday ‘to try to prevent a sell-off.’

The Shanghai Composite index nonetheless sunk 8.7% when trade resumed this morning, reported Bloomberg.

With that in mind, one is left questioning when the kind of ‘comfort’ around containment that Macquarie cites will be found by the market.

Sydney Airport is set to report their FY20 results to the market on 20 February.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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