CFA Institute Research Challenge Hosted by CFA Society Sydney the University of Sydney

CFA Institute Research Challenge Hosted by CFA Society Sydney The University of Sydney

Sydney Airports Limited (SYD.ASX) A Story of Growth: The Sky Monopoly and its Future

We initiate coverage on Sydney Airports Limited (SYD) with a BUY recommendation based on a 12-month price[ target of $6.61, a 10.2% upside from its last close of $6.00 on the 23rd of September 2015. While trading at historic highs and outperforming the market index, we believe there is further room to grow.

CHINA TO REMAIN RESILIENT | Taming the Chinese ‘Bear’ We believe the market has been overly bearish on China’s growth prospects and expect the economy to achieve its growth target of 7%. While accounting for 14% of foreign passengers, in 1H15 China accounted for 60% of growth in foreign nationality passengers. We forecast international passenger growth trending towards 4.4% p.a. by 2017, considerably above 2.8% in the year to June 2015 and 3.4% to August 2015. . China Tourism Boom: Despite cyclical headwinds, double-digit growth in retail sales and 28% increase in tourism expenditure points to improved consumer sentiment. Households with disposable incomes of above USD55,000 have tripled in the past five years, correlated with increased travel and less price-sensitivity. . Expanding Capacity: China-Australia air services agreement triples weekly seat capacity from 22,500 to 67,000. . Global Growth: Devaluation of the AUD against the RMB, USD and GBP over the last 18 months SYD:ASX BUY ensures inbound travel to Australia from other nations remains robust. GICS Sector: Industrials | Transport As the economic and tourism hub, accounting for 40% of international passengers to and from Australia, SYD will benefit from passenger growth, increasing core revenue segments. International passengers pay Target Price $6.61 higher aeronautical fees, and Chinese passengers have a higher propensity to spend on retail. Current Price: 23/09/2015 $6.00 Upside (%) 10.2% INVESTOR APPEAL | The Great Yield Obsession One month VWAP $5.78 We take the view that in the current low inflation environment interest rates will remain at historical low 52 week high $6.00 in the short to medium term. Demand for dividend yielding equities is expected to increase, with SYD a 52 week low $4.10 prime candidate for domestic and foreign investors. Market capitalisation ($b) 13.38 . Yield Expansion: Despite a modest dividend yield of 4.6%, SYD has significant dividend growth upside Shares (m) 2,229 of 9% CAGR over the next 4 years compared to similar Australian equities. . Superior Risk Adjusted Returns: Relative to other Australian dividend yielding stocks, SYD is more attractive on a risk adjusted basis with a beta of only 0.57 compared to the industry average in Financials (0.99), REITs (0.79) and Utilities (0.68). . Foreign Investor Appeal: The depreciation of the AUD this year is expected to generate additional interest for the stock in foreign investors who stand to receive an additional capital upside. Price History Rebased $7.0 BADGERYS CREEK | Accretive at Worst… Brilliant at Best Analysis indicates that SYD is currently trading below its intrinsic value and has been conducted without $6.0 consideration of a second airport. Towards the end of the year the Federal Government will deliver its $5.0 notice of intention regarding Western Sydney Airport (WSA), with SYD subsequently having four to nine months to respond. Uncertainties and complications over the consultation process has resulted in the $4.0 market neglecting the significant potential of a second airport, and we believe that the outcome of the negotiation can only provide further upside to the share price, reinforcing our BUY recommendation: $3.0 . Only an Upside: SYD will only develop the airport if the investment reaches its hurdle rate of return. $2.0 We forecast that the investment will have an IRR of 7.9% well above the company’s hurdle rate of 2012 2013 2014 2015 7.0%, which would lead to a further 1.5% increase in our target share price to $6.70. . Low Hurdle: SYD’s hurdle rate of return is likely to be significantly lower than other interested parties. SYD ASX200 Rebased We believe that if SYD refused to develop the airport, other investors will be similarly deterred. Source: Bloomberg . No Competition: Even if WSA were developed by a third party, we anticipate that this would have a negligible impact on Kingsford Smith Airport’s (KSA) passenger growth and profitability.

VALUATION | Key Financials and Ratios

($) AUD FY14A FY15E FY16E1 FY17E FY18E FY19E FY20E FY21E Revenue ($m) 1,157.4 1,224.9 1,386.5 1,474.0 1,557.2 1,639.7 1,718.0 1,799.9

EBITDA ($m) 948.3 998.3 1,083.0 1,157.2 1,228.7 1,300.5 1,369.4 1,441.9 Distributions ($m) 520.2 563.7 621.6 680.6 736.9 781.0 781.0 781.0 DPS ($) 23.5c 25.5c 27.8c 30.4c 32.9c 34.9c2 34.9c 34.9c EBITDA Margin 81.5% 81.5% 78.1% 78.5% 78.9% 79.3% 79.7% 80.1%

Net Debt/EBITDA 7.2x 7.5x1 7.1x 6.9x 6.7x 6.5x 6.5x 6.4x

1 T3 transaction in FY15 results in a FY16 EBITDA margin decline due to its asset profile and a Net Debt/EBITDA increase attributable to financing costs. 2 Tax credits are forecast to be exhausted in FY19, leading to a marginal decreases in net operating receipts available for distribution. BUSINESS DESCRIPTION

Revenue Contribution FY14 BUSINESS DESCRIPTION | Operations SYD operates KSA and its accompanying facilities and services. SYD develops and maintains the airport 7% infrastructure and leases terminal floor space to airlines and retail operators. All revenue streams are driven by both international and domestic passenger traffic. 12% Aeronautical Aeronautical services: SYD derives aeronautical revenues through a base charge to airlines for the use Retail 42% of terminal and airfield infrastructure and additional charges on a per passenger basis. Revenues in this Property & Car Rental segment (excluding security recovery) grew 4.9% in 2014 to $487m, which represents 42% of total 17% revenues. SYD currently operates three runways and three terminals (including the recently acquired T3). Parking & Ground Transport International and domestic revenue is split on a 63% to 37% basis, with international revenue per Other passenger ($24.11) triple domestic revenue per passenger ($7.25). An agreement has recently been reached with Board of Airline Representatives of Australia (BARA), representing c.90% of international 22% carriers, to increase charges annually by 3.8%.

Source: Annual Report 2014 Aeronautical security recovery: SYD collects aeronautical security revenues from airlines which are entirely used to pay for security. This revenue is completely offset by the security costs.

Historical EBITDA ($m) Retail: SYD generates revenues by two means in this segment, rental lease of retail outlets and licensing 1,200 of advertising rights across digital and static sights. FY14 retail revenues were derived from 184 retail 991.2 outlets and the licensing of advertising rights surrounding T1 and T2 terminals. Retail revenues increased 948.3 1,000 876.7 833.2 5.6% to $255m in 2014 accounting for 22% of group revenue. In February 2015 SYD executed a duty-free 781.1 800 re-tender with Heinemann that will run until August 2022. Duty free previously represented 55% of retail revenue and 13% of total revenue. Heinemann will operate six duty free locations with a focus on the 600 integration of retail opportunities throughout the entire airport. The T1 departure store recently opened 400 while the remaining five stores will be completed by mid-2016. Around 200 retailers further contribute to retail revenue, which are highly lucrative as there is no threat of customers shopping elsewhere and a 200 guaranteed dwell time.

0 Property and car rental: Revenue in this segment is comprised of rents from leases of car rental areas, FY11A FY12AFY13AFY14A FY15E buildings and other airport owned facilities. Property and car rental revenue for FY14 was $194m (up 3.6%) and was 17% of total revenues for the year. New tenancies were a key driver of growth for the period and Source: Annual Reports, SG Forecast occupancy rates remained high at 98%.

Dividends per Share Parking and ground transport: Car parking and ground transport revenues consist of time-based 30.0c charges for 16,864 parking spaces and charges from taxis, busses and limousines collecting passengers. 25.5c Revenues in this segment increased by 5.7% to $140m in 2014, which saw the segment account for 12% 25.0c 22.5c 23.5c 21.0c 21.0c of group revenue. Segment revenue increased due to online product expansion which accounted for 20.0c approximately 29% of booking revenues in the segment. In addition, the segment also benefited from a 964 parking space capacity expansion in proximity to the domestic terminals of the airport. 15.0c CORPORATE SOCIAL RESPONSIBILITY 10.0c A key commitment of SYD is to preserve the environment with an affirmative imitative plan dedicated to 5.0c reducing its impact on natural surroundings. In particular, SYD has focused on noise management, clean 0.0c air and promoting sustainability. At present, SYD accounts for less than 1% of Sydney’s total pollutant FY11A FY12AFY13AFY14AFY15E emissions while also monitoring the emissions of airlines and excessive engine usage. Continued

Source: SG Forecast investment in infrastructure has also allowed SYD to accommodate quieter and more fuel efficient aircraft such as the Airbus A350. Despite operating exclusively within the bounds of its organisational competencies, SYD has a robust CSR policy which supports the broader Sustainable Sydney 2030 strategy. Account FY16 (m) TERMINAL 3 TRANSACTION Add: Aero Rev (10m at $7.25) 72.5 Add: Retail Rev (10m at $3.42) 34.2 SYD purchased Qantas’ domestic Terminal 3 lease for $535m in August 2015. The lease was to expire in Less: Prop Revenue (18.5) 2019, when SYD would have had to pay for improvements and construction that Qantas funded during Incremental Revenue 88.2 the lease. SYD previously received a fixed rental income which, after the transaction, will become a variable EBITDA 54.7 income stream comprised of aeronautical and retail revenue underpinned by c.10m passengers moving Interest ($369m at 6%) (22.1) through the terminal. Incremental CAPEX (10.0) Net Cash Flow Impact 22.6 The T3 transaction is modelled into our assumptions (Appendix 12.9), with an estimated $54.7m rise in Accretion (NOR $622m) 3.6% EBITDA from the transaction, and earnings accretion of 3.6% (equity cash flow increase of $22.6m) in FY16. This implies a purchase at a 9.8x EV/EBITDA multiple, which given SYD’s LTM EV/EBITDA of 18.3x,

Source: SG Analysis indicating a value creating transaction.

INDUSTRY OVERVIEW & COMPETITIVE POSITIONING Porter's Five Forces

The Airport industry is characterised by high capital intensity and significant barriers to entry. In Australia, New airports operate as regional monopolies in their geographic areas. ‘Light-handed’ regulation and the size Entrants of airport operators contribute to strong negotiating power. The sector is comprised of two segments: households and businesses. For the former, growth in consumer sentiment and increases in discretionary

Supplier income allow households to devote a greater portion of their income to travel and tourism. For the latter, Substitutes Power growth is driven by business confidence and economic activity. INDUSTRY OVERVIEW | Tourism Boom The tourism sector is continuing to pick up with an influx of visitors from China and India contributing to Customer Rivalry the strongest annual growth rate in tourism spending since the 2000 Olympics. Power Tourism Australia has noted total spending rose by 10% to a record $33.4 billion in FY15, including a 32% Source: SG Analysis and 39% rise in spending by Chinese and Indian tourists. For SYD, Chinese and Indian passengers grew by 16.4% and 11.9% in FY14. Growth will be strengthened by the China-Australia FTA leading to improved Exchange Rates (USD, GBP, RMB) trade conditions, boosting business travel. 1.2 8.0 Macroeconomic Conditions: The global economic environment has been recently unstable, contributing to a volatile and unpredictable share market. August’s ‘Black Monday’ resulted in the U.S. stock market 1.0 7.0 dropping 1,000 points on news of China’s economic slowdown and large sell-off on the Shanghai Composite Index. However, the Chinese economy is expected to remain resilient, with GDP growth of 7% 0.8 6.0 forecasted for the next four years. Difficulties in the Eurozone are slowly improving, as the European Central Bank aims to encourage economic growth and manage the debt profile of Greece. 0.6 5.0 Exchange Rates: The AUD has hit 6 year flows, plunging below USD$0.7, on the back of falling commodity 0.4 4.0 prices and historically low interest rates. The AUD has also depreciated, 22% since mid-2014 relative to 2011 2012 2013 2014 2015 the RMB, falling from 5.9 to 4.5. This increases inbound international arrival numbers and assists the economy in its transition away from the mining investment boom. USD GBP RMB Australian Tourism: The depreciating AUD may decrease outbound travel by Australians. However, due Source: Bloomberg to Australia’s geographic isolation, outbound travel is relatively inelastic. Further, any decrease in international travel is likely to be largely offset by a rise in domestic passenger movements. INDUSTRY OVERVIEW | Aviation Industry The aviation industry has performed strongly over the past year, attributed to increased passenger Hourly Aircraft Movements numbers and cost savings. The performance of airlines influences SYD’s core revenue segments as it is a 100 fundamental driver of passenger numbers through the airport. Regulatory Limit of 80 Landings 80 Passengers per Movement: PPM is expected to increase as a function of load factors and aircraft size. 60 Load factors are expected to increase due to airline alliances and improved route optimisation. In terms of aircraft size, there has been a trend of utilising larger aircrafts such as the Airbus A380, as well as growth 40 in Low Cost Carriers (LCC) which have 35% to 50% additional seats compared to standard aircrafts. 20 Aircraft Movements: Increased capacity, new routes and growth of LCC’s will increase aircraft movements. 0 The China-Australia Air Services agreement triples capacity and eases visa restrictions. Xiamen Airlines has

announced new direct flights to Sydney from Fuzhou and Xiamen, which is expected to bring an extra

7:00

5:00 9:00

11:00

17:00

19:00 21:00 15:00 13:00 36,000 Chinese tourists annually. “Peak-spreading”, referring to increased use of the airport in off-peak 2013 2029E periods, is expected to further increase movements as cost-conscious passengers are willing to travel at less favourable times on LCCs such as Cebu Pacific and Asiana. Source: Master Plan 2033 Qantas Resurgence: Qantas’ profit turnaround should be favourable for SYD. Increased capacity has been driven by new international routes and improved load factors for Qantas International increasing in FY15 WTI Oil Price (USD per barrel) from 79.6% to 81.5%. Strategic alliances with American Airlines and China Eastern will improve route 130 optimisation. Domestically, easing competition with Virgin is favourable for both airlines.

110 Oil Prices: There has been a favourable supply side shock to oil prices, which is a determinant of airliners fuel expense. The price of oil has more than halved from FY14 levels decreasing from $110 to $49 per 90 barrel. This will have a flow-through effect, encouraging cheaper and more frequent air travel. 70 COMPETITIVE POSITIONING | Airport Dynamics 50 Airport Competition: Australia’s large geographic dispersion means that competition from road or rail transport is limited. However, internal competition exists between different airports, with Sydney, 30

Melbourne and Brisbane being the three busiest in Australia.

2011

2012 2013 2015 2014 Source: Bloomberg 3

PAX by Airport (m) All three of these major airports can accommodate the Airbus A380, which positions them to accept traffic from airlines that operate this aircraft. Both Melbourne and Brisbane airport are expected to increase 50 passenger numbers driven by the increasing attractiveness of each city as a tourist destination and 40 increased capacity. Internationally, Auckland Airport had international passenger growth of 5.7% in FY15, 30 13.1 with Chinese passengers increasing by 28.8%. This was driven by increased capacity, with China Southern 7.0 increasing services from Shanghai and Guangzhou to NZ, as well as a falling NZD and popular tourist 20 4.8 attractions which further incentivise inbound arrivals. 23.0 7.2 25.4 10 17.0 Economic and Tourism Hub: While threats exist to SYD, continued growth in arrivals is expected, with 8.1 0 the airport currently accounting for 40% of international passengers to and from Australia. This is driven BRI MEL AIA SYD by Sydney’s tourist attractions and iconic landmarks, growth in foreign students as well as 47% of people with Chinese ancestry in Australia residing in Sydney. International Domestic INVESTMENT SUMMARY Source: Company Reports We initiate coverage on Sydney Airports Limited with a BUY recommendation based on a 12-month price target of $6.61, a 10.2% upside from its last close of $6.00 on September 23, 2015. Passenger Growth 2017E INVESTMENT SUMMARY | China Resurgence to Drive Passenger Growth Passengers Growth CHN 1,336 19.0% We forecast international passenger growth to trend towards 4.4% by 2017, significantly greater than the US 780 6.0% 2.8% growth in the year to June 2015. China accounted for 60% of foreign nationality growth in passengers. We expect Chinese passenger growth of 19% for the next three years and believe the market NZ 942 0.9% is underestimating the growth in travel from China’s booming middle-class. UK 573 3.0% Other 3,537 4.0% China’s Resilient Economy: Slower growth in China’s investment and factory output, RMB devaluation AUS 7,687 2.8% and a plunge in stock markets have fuelled fears of an economic slowdown. We believe the market has Total 14,856 4.4% overreacted to short-term cyclical issues, and take a more optimistic outlook: . While double-digit growth is a relic of the past, growth of 7% in 2015 would in absolute terms generate Source: SG Forecast more output than 14% growth in 2007. This growth is more sustainable and allows the economy to transform from an economy heavily reliant on investment to one driven by consumption and services. . Structural reforms are improving the quality of growth, with 13.2 million jobs created in 2014. Services Chinese Household Spending have become the largest sector of the economy. This creates opportunities for further job creation due to the labour intensive nature of the services. 100% Outbound Tourism to Remain Robust: We expect outbound travel by China’s booming middle-class to 30% 75% 41% 45% increase even if there were an economic slowdown or global economic volatility: . Chinese households with disposable income in excess of USD55,000 have tripled over the past five 50% 34% years. The middle-class is expected to climb to 1 billion by 2030, comprising 70% of the population. 35% 37% . Discretionary spending as a proportion of total expenditure is expected to increase from 34% in 2013 25% to 45% in 2030, and will grow at 7.6% CAGR until 2030. 36% 24% 18% . Overseas tourism spending increased by 28% in 2014, with international travel becoming a firm part 0% of the consumption pattern of the middle-class. 2010 2020 2030 . Australia remains an attractive tourist destination attributed to close proximity to Asia, similar time Necessities Semi-necessities Discretionary zones and large Asian population which provides a comfort factor for tourists. The 500,000 strong

Source: McKinsey Insights Chinese diaspora in Sydney ensures steady travel. Capacity Expansion: Increased capacity between Australia and China allows SYD to benefit from international demand: . China-Australia air services agreement triples total capacity. Flights to second-tier cities such as Growng Chongqing, Fuzhou and Xiamen are expected to commence from Sydney later this year while middle-class additional capacity has been added to Beijing, Guangzhou and Shanghai routes. . China Southern has indicated a 30% increase in capacity to Sydney from Guangzhou. Flights between

Discretionary Sydney and Shanghai will increase due to the strategic alliance between Qantas and China Eastern. spending . In FY15, Auckland Airport saw Chinese passenger growth of 28.8% as a result of increased capacity and new routes for airlines. We believe that expanding capacity will see SYD mirror this growth.

Outbound Global Growth: Devaluation of the AUD against the RMB (22%), USD (23%) and GBP (16%) in the last 18 travel months makes inbound travel more appealing and ensures global growth remains robust.

Value-Add: We forecast a significant price correction at SYD’s next earnings announcement in February

Sydney 2016, with increased revenue driven by higher international passenger growth: Airport . International passengers pay higher aeronautical fees. This is reinforced by SYD’s new aeronautical revenue agreement with c.90% of airlines, with landing fees growing 3.8% over the next four years. . Chinese passengers have a higher marginal propensity to spend increasing retail revenue. Source: SG Representation 4

Yield, Growth and Risk INVESTMENT SUMMARY | Global Investor Demand

16% 1.5 Global interest rates have been in a downward trend since 2007, with the US remaining at historically low levels of 0.25%. We forecast US interest rates to remain low in the short to medium term, premised on a 12% low inflation environment, slow economic recovery and unstable financial markets. SYD stands to benefit 1.0 from market realisation that low interest rates will persist into the future, as it represents an attractive 8% steady income investment. 0.5 Dividend Growth: On the back of increased activity in Chinese travel and booming global tourism, we 4% expect significant dividend growth. This is largely driven by SYD’s policy of paying out 100% of equity cash flow as dividends which implies that the growth forecasted for the company will be passed through to 0% 0.0

shareholders. We see dividends growing at a CAGR of 9%. SYD

REIT Superior Risk Adjusted Returns: The global economy is experiencing unprecedented turbulence in terms Telstra

Utilities of fiscal instability, end of quantitative easing and regional risks. In these conditions investors will favour Financials

Transurban increased diversification, liquid assets and reduced exposure to systematic risk. SYD represents an FY16 yield FY16-19 3yr CAGR attractive investment with its historic share price growth and a low beta (0.57). Based on a Treynor measure Franking Beta SYD outperforms a majority of ASX-listed securities in reward per unit of risk terms. In this climate of Source: Bloomberg, Company Reports global volatility we believe that the rare growth and risk profile of SYD will draw substantial demand. Foreign Investor Appeal: Devaluation of the AUD to the RMB, USD and GBP is expected to contribute to foreign interest in Australian equities. The shareholder register count of foreign investors is at c.34% which WSA PAX Forecasts ('000) leaves an abundance of room for demand take-up until the 49% regulatory limit is reached.

25,000 INVESTMENT SUMMARY | Badgerys Creek Overlooked By Market International 20,000 PAX Begins SYD’s right of first refusal and the outcome of the negotiation with the Federal Government can only 15,000 provide upside for SYD. The development will only be taken on if it is accretive, providing upside to our target share price. However, if SYD refused the investment there would be negligible downside risk. 10,000 Only an Upside: The South West Priority Growth Area has been emphasised by both levels of government 5,000 and we view the development as a priority, increasing the likelihood of a positive outcome from the 0 consultation. We forecast the investment to have an IRR from 7.9% to 10.1%. This will be driven by:

. WSA alleviating capacity constraints through aircraft optimisation and cross-integration between both

2025 2030 2035 2050 2045 2040 airports. WSA’s focus on regional and freight flights increases capacity in peak periods for KSA, Domestic PAX International PAX enabling more international flights and increasing aeronautical revenues. . There is scope for regulatory restrictions to be eased. In particular, the requirement of regional carriers Source: SG Estimates to be allocated slots in peak hours. . Empirical studies suggest that a second airport owned by SYD would not decrease demand at KSA, reducing cannibalisation risk. Prominent examples include London Heathrow Airport which has PAX Type by Household Income experienced stable passenger growth despite Stansted being redeveloped in 1991. 100% Low Hurdle: SYD’s hurdle rate of return will be lower than other interested parties, attributed to the value of maintaining their monopoly power and ability to leverage economies of scale with KSA. As a result, we 80% 50% 55% 56% believe that it is in the government’s best interest to negotiate and provide favourable terms in order to 60% ensure that SYD meet their hurdle rate. Assistance could include: . Government subsidies or funding of land clearing to ensure that CAPEX does not commence until 40% 33% 2020 which decreases project risk. 31% 30% 20% Competition: While we forecast WSA to provide upside if operated by SYD, we anticipate that if WSA 17% 15% 14% were operated as a standalone airport, this would have a negligible impact on passenger growth at KSA: 0% Outbound Domestic All Pax . KSA’s closer proximity to the CBD, 8km relative to 50km, ensures that it will remain the premier hub. Travellers Visitors . While Western Sydney has a population of c.1.5m, average incomes are below AUD50,000. On average only 15% of passengers have incomes below AUD52,000, and therefore, without cross-integration <$51,999 $52,000 to $103,999 $104,000+ advantages with KSA we believe WSA will have low passenger growth leading to underutilisation. Source: Tourism Australia Research . While being owned and operated by different parties, Melbourne’s Avalon Airport has not had a detrimental impact on Tullamarine Airport. Avalon is underutilised and has seen passengers decline. Valuation Matrix However, Tullamarine has continued growing capacity and passenger growth at c.6-9% p.a. Share Method Weight Price VALUATION FCFF $6.79 60% We have considered three valuation methods to arrive at our target price of $6.61, a discounted cash DDM $6.90 20% flow model (DCF), a dividend discount model (DDM) and a comparable company multiples pricing Multiples (Airports) $5.40 12% method. The multiples method is weighted at 20% due to limited pure-play comparable companies. The Multiples (Infra) $6.34 8% DDM is allocated a 20% weighting to account for the importance of dividends to SYD shareholders and Share Price $6.61 dividends being an appropriate proxy for equity cash flows. The DCF method is allocated a 60% weighting as it allows for SYD’s unique characteristics and growth to be explicitly forecasted. Source: SG Analysis 5

Passenger Number Forecast (m) VALUATION | Discounted Cash Flows We use a three-stage Free Cash Flow to Firm (FCFF) model to forecast an explicit horizon, a high growth 60 period and a terminal stage where cash flows grow at a constant rate. We model SYD using historic financials of SAL which include SAT1. Despite the defensive infrastructure industry, SYD will experience 40 high passenger growth from emerging markets which is considered via a seven-year forecast horizon. Segment revenue is derived as a function of segment revenue per passenger and passenger numbers. 20 Passenger Number Forecasts 0 Passenger numbers are derived as a function of aircraft movements and passengers per movement (PPM)

primarily based on Master Plan prediction with appropriate adjustments. We forecast passenger growth

2017

2013 2021

2037

2029 2033 2025 to increase at 3.2% until FY19 and decelerate to 2.7% in FY20-21. International Domestic Total International passenger growth is forecasted at 4.1% in FY15, growing to 4.4% in FY16-17 and tapering Source: SG Forecasts towards 3.0% from FY18. Aircraft movements grow by 2.3% tapering towards 1.5% in FY21. PPM is Retail Revenue Forecast ($m) expected to grow at 2.1% and tapers towards 1.5% in FY21. Domestic passenger growth is forecasted at 2.5%. Aircraft movements grow at 0.9%. PPM grows at 1.6% over the forecast as excess capacity is filled.

500 420.5

401.4 Revenue per Passenger Forecasts

383.0 363.9

400 343.9

321.0 Aeronautical revenue is derived as a function of per passenger aeronautical revenue and passenger 271.2

255.2 numbers. Revenue is split into international and domestic revenue on a 63% to 37% basis. We forecast

300 241.6 aeronautical revenue per international passenger of $23.41 in FY15 will grow in line with BARA 200 renegotiation results of 3.0% in FY15 and 3.8% revenue charge growth until FY19, after which we 100 conservatively estimate 3.0% p.a. growth. Domestically, Qantas and Virgin renegotiations are ongoing but 0 grow at inflation (2.0%) from a base of $7.10. Conservative estimates reflect ACCC scrutiny from price

increases. Adjustments are made for T3 acquisition (Appendix 12.1).

FY17E

FY15E FY16E FY18E FY19E FY21E

FY13A FY20E FY14A Retail revenue per passenger is expected grow from $6.64 per passenger at 3.0% for FY15-17, after which growth drops to inflation (2.0%). Initial high growth is due to expected influx of Chinese passengers with Retail Revenue T3 Revenue higher propensities to spend combined with revamped duty free stores. Inflation-linked leases and SYD’s Source: Annual Reports, SG Forecasts share of retail profits suggest inflation as most appropriate long-run growth proxy. Property and car rental revenue per passenger is forecast to grow at 2% falling to 1% due to limited FCFF Forecast ($m) flow-through growth from passenger increases. Car parking and ground transport revenue per passenger of $3.64 will grow at 2%, falling to 1% due to potential increases in regulatory scrutiny.

1,200 982.3

911.0 Pro-Forma Assumptions (Appendix 13)

1,000 899.7

856.0 839.9

815.0 Statements are forecast upon segment consolidation. Line items contributing to FCFFs are discussed.

747.0 697.3

800 674.2 Cost of goods sold (COGS) is composed of employee wages and utilities expenses. COGS is forecast as a 600 percentage of revenue since it is comprised of variable expenses which increase in line with revenue. The 400 FY14 figure of 8.5% is maintained throughout the forecast horizon. Selling, general and administrative expenses are comprised of maintenance, security recoverable expenses and investment transaction 200 expenses. These expenses are similarly forecast as a percentage of revenue (10.0%) with an adjustment 0 upwards for the T3 integration. CAPEX is forecast in-line with management forecasts of $1.2bn from FY15-

19, equating to $240m p.a. An additional $10m in CAPEX is added to account for T3 maintenance costs.

FY17E

FY15E FY16E FY18E FY19E FY21E

FY13A FY20E FY14A After FY19, CAPEX increases to 18.0% of revenue accounting for investment required to increase KSA Source: Annual Reports, SG Forecast capacity. Effective taxation is forecast at 0% until the exhaustion of tax credits from past losses, expected in FY19. Subsequently, taxation is expected to remain below the statutory rate at 21% as the intercompany loan artificially reduces the taxable profit (Appendix 12.2). DCF Calculation FCFFs initially grow rapidly from $747.0m in FY15 to $982.3m in FY18. FCFF’s fall in FY19 before growing Method Share Price again as tax credits are used up with cash flows stabilising at 5.0% growth. While the 5.0% stable growth PV of FCFF’s (Explicit) 4,636.1 appears high, this rate is sustainable while KSA has passenger capacity, as cash flows are a function of Assume: 4.9% FCFF growth until 2035 inflation (c.2.0%) and passenger growth (2.7% in FY21). Capacity limits are not expected to be reached PV of FCFF’s (Second Stage) 1.559.9 until 2035, indicating the 5.0% growth rate up until FY21 is sustainable (Appendix 15). Assume: 2.3% FCFF growth into perpetuity FCFFs are discounted at 7.0%, the WACC. Cost of equity of 7.5% assumes a 0.57 beta, market risk premium PV of FCFF’s (Final Stage) 10,351.5 of 6.0% and risk-free rate of 3.8%. Cost of debt of 6.1% is calculated from a triangulation of different Enterprise Value (FY14) 21,547.5 methods. We use two WACC’s, one for the forecast horizon and one for the terminal period, owing to the Enterprise Value (23/9/15) 22,639.7 exhaustion of taxation credits expected in FY19 allowing for the creation of debt tax shields (Appendix 14). Less: Net Debt 7.439.5 Our terminal value of free cash flows is estimated to be $16.9bn, using a terminal WACC of 6.6%. Our Equity Value 15,200.2 second stage expects FCFF’s to grow at 4.9%, estimated by summing inflation and final year passenger Shares Outstanding 2,238.9 growth (2.7%). The final stage assumes KSA capacity exhaustion in 2035 with FCFF’s thereafter expected Share Price $6.79 to grow at 2.3%. After summing all FCFFs we subtract net debt to arrive at a firm equity value which is divided by shares outstanding to derive an intrinsic share price target of $6.79 (Appendix 15). Source: SG Analysis 6

WACC Calculation VALUATION | Dividend Discount Model Explicit Terminal A multi-stage dividend discount model computes a share price target of $6.90. We believe the dividend

WACC WACC discount model is also suitable for SYD given the importance of dividends to investors. As SYD distributes Cost of Equity 7.5% 7.5% all net operating cash, dividends are an appropriate proxy for equity cash flows. We assume a 7.5% cost of equity and 3.1% terminal dividend growth rate. The multi-stage DDM allows the use of forecasted Cost of Debt 6.1% 6.1% dividends from the pro-forma. Our explicit dividend growth rate of c.9% until FY19 aligns with guidance. D/V 36.5% 36.5% After the exhaustion of tax credits, we hold dividends constant at 34.9c until FY21 (Appendix 21). Tax Rate 0.0% 20.5% VALUATION | Multiples Analysis WACC 7.0% 6.6% Our relative valuation was triangulated from two different sets of comparable firms, international airports and Australian infrastructure equities. Within our international airport comparable firm set we have used Source: SG Analysis forward estimates of Adjusted Price to Earnings (P/E), Price to Cash Flow (P/CF), and Dividend Yield Spread to Domestic Bond Yield multiples, whilst in our Australian infrastructure set we used Adjusted Price to Dividend Discount Model Earnings, EV/EBIT and Dividend Yield. Airport comparable firms were selected based on their passenger Calculations profiles, international and domestic travel split and operating financial metric profiles, while the domestic Sum of Discounted Dividends $1.64 infrastructure set was screened on the basis of business and operating profiles. P/E multiple was weighted 33.3% and was adjusted by adding interest expense from the intercompany Terminal Dividend Value $8.15 loan to NPAT as this represents earnings to be paid out to shareholders. SYD trades at an adjusted P/E of Discounted Terminal Div Value $4.90 23.5x, an 8% premium above the international airport peer group median of 21.7x implying a value of Estimated Share Price (FY14) $6.54 $5.54. However, compared to AU infrastructure SYD trades at a 4% discount implying a value of $6.23.

Estimated Share Price (23/9/15) $6.90 Price/CF multiple was weighted 33.3% for the International Airport peer group as it is independent of D&A charges and is unaffected by varying international accounting standards regarding depreciation

Source: SG Analysis method and useful life. However, as all Australian infrastructure firms follow the same accounting standards the advantage of this multiple is negligible and therefore was not used for the Australian Comparable Trading Multiples infrastructure set. SYD currently trades at a P/CF of 22.7x, a 24% premium to its peers implying a $4.54 Yield valuation. Airport P/E P/CF Spread Dividend Yield to Bond Yield Spread ratio was weighted 33.3% for the international airport peer group. AIA 31.1x 25.3x -0.07% Due to secure cash flows, airport stocks are sought as an alternative to bonds in a low interest rate FLU 18.3x 8.2x 1.80% environment. We compared dividend yields of the comparable companies to their local government bond FHZN 18.5x 9.5x 1.42% yields, this spread was then used to provide a target value for SYD based on management’s FY15 dividend KBHL 26.3x 14.7x 1.35% guidance. SYD currently has a dividend yield of 4.6%, providing a 1.54% spread against 10 year CGB yields of 2.75%. This is 8% higher than the median of Euro Airports which trade at a median spread of 1.42% BCIA 16.2x 9.4x -0.85% against their respective 10 year Government bond inferring a $6.12 valuation. For the Australian SHA 21.7x 18.2x -1.96% infrastructure comparable firm set we used a dividend yield ratio and weighted it at 33.3%. SYD trades at AOT 25.2x 17.9x -1.21% a yield greater than its peers (4.09%), implying a valuation of $6.23. Median 21.7x 14.7x 1.42% EV/EBIT was weighted at 33.3% for the Australian infrastructure peer set to account for the differing Dom. Div P/E EV/EBIT capital structures and capital intensity of these firms. SYD currently trades at an EV/EBIT of 28.8x, a 9% Infra Yield discount to its peers implying a $6.54 valuation. EV/EBIT was not used for the international airport MQA 25.7x 20.1x 3.94% comparable firm set, as these airport stocks were all selected on the basis of having similar capital TCL 24.5x 40.7x 4.09% structures, therefore negating the major advantage of this multiple. APA 22.3x 31.1x 4.45% The two relative valuations provide a share price of $5.77. The international airport set was weighted 60% Median 24.5x 31.1x 4.09% as it captures business risks and macroeconomic drivers of SYD while the AU infrastructure set was Source: SG Analysis considered relevant given investor sentiment and global demand for yield, therefore weighted 40%.

VALUATION | Badgerys Creek We have made conservative assumptions to determine a minimum base case valuation for Badgerys CAPEX Forecast Creek. Under these assumptions initial CAPEX will be undertaken from FY20-24, and will cost $2.5b, in line with consensus expectations. A second stage of CAPEX will be undertaken from FY31-33, costing $700m, Stages Scenario 1 to increase capacity at WSA. The final stage of construction will cost $4b and take place from FY36-39, Phase 1 (FY20-24) $2,500m adding a second runway, allowing WSA to operate as a fully functional second international airport.

Phase 2 (FY31-33) $700m We expect WSA to commence with 3.5m passengers, below Government expectations of 5m. WSA will Phase 3 (FY36-39) $4,000m initially cater to domestic, regional and freight flights. In FY33, upon completion of the second phase of CAPEX, WSA will experience large amounts of inorganic growth as KSA approaches capacity. We assume 2m international passengers as LCCs introduce international flights from WSA. From FY40 to FY50 WSA Source: SG Estimates begins its final stage of growth following the last stage of CAPEX, resulting in total passenger growth of 8% as KSA reaches capacity and all passenger growth is diverted to WSA. WSA’s aeronautical and non- aeronautical revenue will be 80% of KSA’s corresponding revenue per passenger.

Financing Capacity WSA will commence operations with a 50% EBITDA margin reflecting an initial lack of operating efficiencies, and lower revenue charges. However, this EBITDA margin will increase to 70% over the first 8 16b years of operations.

12b To forecast WSA’s financing we have assumed a Net Debt/EBITDA ceiling of 7.5x for SYD, in line with their historical limit. By holding this Net Debt/EBITDA limit constant at 7.5x we forecast that SYD will have 8b capacity for an extra $1.5b debt by 2020, and $2.5b by 2024. As a result we have forecast that WSA will 4b be entirely debt funded, and have assumed SYD’s cost of debt remains at its current level of 6.1%. A cost of equity of 10.0%, above SYD’s 7.5%, reflects the development risk of the project. By dividing the PV of 0b FCFEs by shares outstanding we derived a conservative value per share of $0.09 with an IRR of 7.85%.

2021 CORPORATE & FINANCIAL STRUCTURE

2020 2022 2023 2024

Net Debt Net Debt Capacity Prior to 2013, SYD was a multi-asset infrastructure operator with investments in other international airports Source: SG Analysis as well as KSA. Over time international assets were divested and SYD underwent a simplifying restructure to reflect sole ownership and business focus on KSA.

Stapled securities in Australia: The listed entity is a stapled security consisting of an Australian unit trust, Sydney Airport Trust 1 (SAT1) and an Australian company (SAL). Previously, dividend distribution restrictions existed as a result of the now reformed section 254T of the Corporations Act 2001, which meant that infrastructure operators in Australia were generally unable to pay sufficient levels of dividends to SAL Loan SAT1 equity holders. As a result, these kinds of stapled structures became a common method to bypass the Interest regulation for the purposes of providing a viable investment to retail investors of infrastructure and real Earnings Dividends estate assets in Australia. taxed at taxed at 30% personal Tax treatment: In the stapled structure, SAL incurs the statutory Australian tax rate of 30%. However, the income tax profit before tax for SAL is reduced through an intercompany loan, effectively reducing annual taxable income by $245m. SYD also holds $468m in tax credits from past losses, giving SYD a tax holiday up until a forecasted FY19. Thereafter, we expect the effective tax rate to be 21% due to the intercompany loan Shareholders reducing taxable income.

Source: SG Representation Intercompany loan: SAT1 lent $1.9b at 13.0% interest in FY13, post the restructure. This increases interest expense and reduces taxable income for SAL. The $245m p.a. of interest to SAT1 is distributed to shareholders as interest income and is not subject to corporate taxation. The loan matures in FY33. FINANCIAL ANALYSIS

The target share price does not incorporate the value of the second airport. Financial analysis is conducted on the basis of KSA as the single airport under the management of SYD. Common financial metrics such as ROA and ROE have been adjusted to more accurately reflect SYD’s unique financial profile. ($) AUD FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Profitability EBITDA Margin 77.9% 81.5% 81.5% 78.1% 78.5% 78.9% 79.3% 79.7% 80.1% Operating Margin 51.2% 53.4% 54.1% 52.3% 54.4% 56.2% 57.8% 59.0% 60.2% Revenue per Passenger $29.77 $30.26 $30.87 $33.87 $34.89 $35.76 $36.52 $37.26 $38.01 Return on Assets (adj.) NM 6.0% 7.0% 7.7% 8.7% 9.8% 10.6% 9.4% 10.1% Financing and Investment Net Debt/EBITDA 7.2x 7.2x 7.5x 7.1x 6.9x 6.7x 6.5x 6.5x 6.4x Interest Coverage NM 2.9x 3.1x 3.1x 3.2x 3.3x 3.3x 3.4x 3.4x Gross Debt to EV 41.1% 38.7% 37.5% 38.3% 39.0% 39.7% 40.5% 41.3% 42.1% CAPEX/Revenue 21.8% 21.8% 20.4% 18.0% 17.0% 16.1% 18.0% 18.0% 18.0% Shareholder Return on Equity (adj.) 4.6% 4.5% 4.4% 4.8% 5.2% 5.6% 6.0% 6.0% 6.0% Dividend Growth 7.1% 4.4% 8.5% 8.9% 9.5% 8.3% 6.0% 0.0% 0.0% Return on Capital (NOPAT) 6.7% 7.1% 7.2% 8.0% 9.0% 9.9% 10.5% 8.2% 8.9%

Profitability: SYD’s EBITDA margin of 81.5% in FY14 and 77.9% in FY13 suggests an ability to extract high margins due to its monopoly power. Their margins exceed Auckland Airport’s (76.0%), the most comparable listed airport in terms of monopoly power and provision of services, with most airports having much lower margins (55.9%). EBITDA margins will fall slightly in FY16 due to the integration of the T3 terminal with margins of c.62.0% compared with the company-wide 81.5%. Margins gradually increase as a result of growth in international passengers and the integration of T3. SYD makes their largest margins on international flights with revenue per passenger $24.11 compared to $7.25 for domestic passengers.

Net Debt/EBITDA ROA is adjusted, with the intercompany loan interest added to net income, and the intangible airport operating license removed from total assets, more appropriately reflecting the profit generated from 8.0x

SYD’s asset base. ROA steadily increases until FY19, with a fall in FY20 due to the exhaustion of tax credits. 7.5x

7.5x Investment: SYD’s management expects $1.2bn will be spent on CAPEX projects from FY15-19, equating 7.1x

6.9x to $240m p.a. We have adjusted this figure upwards by $10m to account for T3 upkeep. After significant 7.0x

6.7x investment from FY13-14 in T1 renovations, CAPEX/Revenue falls to 19.0% in FY15 as CAPEX focuses on

6.5x 6.5x 6.5x 6.4x smaller incremental projects. We forecast an increase of CAPEX at 18.0% of revenue in FY19 onwards to account for capacity improvements that will be required to meet demand increases. 6.0x Financing: SYD has committed to funding most of their CAPEX through debt, allowing all equity cash 5.5x flow to be paid out to shareholders. SYD has undrawn debt facilities of $660m which will allow them to

fund CAPEX into FY18. SYD’s BBB credit rating and organic EBITDA growth mean that despite increasing

FY17E

FY15E FY16E FY18E FY19E FY21E FY20E debt annually, Net Debt/EBITDA naturally de-levers from 7.2x in FY14 to 6.4x in FY21. FY15 sees an increase Source: SG Analysis in Net Debt/EBITDA due to the purchase of T3. Foreign debt placements and short-term interest rate hedging mean that SYD’s credit rating will not deteriorate with the cost of debt unlikely to exceed 6.1% in Dividends per Share Forecast the forecast horizon. The BARA agreement provides locked-in revenue growth, allowing SYD to continually roll over and issue debt to fund CAPEX until FY19 and beyond.

40c

34.9c 34.9c 34.9c

32.9c FINANCIAL ANALYSIS | Shareholder 30.4c

30c 27.8c SYD’s stated dividends policy is to distribute 100% of net operating receipts. SYD’s dividend yield of 4.6%

25.5c 23.5c 22.5c is attractive to investors in a low interest rate environment and is the most appropriate proxy for ROE. 20c Adjustments have been made to conventional ROE calculations as a result of negative retained earnings which distort meaningful analysis. Dividend growth is expected to align with management guidance of 8- 10c 12% while the tax holiday from past losses remains. After FY19, we forecast dividends will stay constant due to a reduction in equity cash flow from exhaustion of tax credits. Return on capital has been historically 0c below the WACC (7.0%), mainly attributed to the large amount of intangible assets which includes the

airport operating license. We forecast revenue increases will create shareholder value, with a 7.2% ROC in

FY17E

FY16E FY18E FY19E FY21E

FY15E FY15 increasing to 10.5% ROC in FY19 and falling after tax credits are used up.

FY13A

FY20E FY14A

Source: Annual Reports, SG Forecast SYD trades at an 18.3x LTM EV/EBITDA, considerably above comparable airports while the share price has surged 40.1% in the last year from $4.28 to $6.00. SYD exhibits higher relative profitability due to: . Foreign airports not possessing transport monopolies akin to SYD due to its geographic dispersion. Australian Infrastructure Index . Outsourcing of low margin ancillary services such as baggage handling and catering. Rebased . Reduced regulatory oversight with greater price setting power and low effective taxation. $7.0 A market weighted infrastructure index has outperformed SYD over the last two years, suggesting SYD’s $6.0 share price growth is correlated with the attractiveness of infrastructure equities due to low interest rates.

$5.0 FINANCIAL ANALYSIS | Badgerys Creek Quantitative financial analysis of SYD operating two airports is currently untenable and would not provide $4.0 meaningful guidance to stakeholders due to uncertainty surrounding the value proposition at this stage. $3.0 However, short and long term impacts are considered from a qualitative perspective. CAPEX/Revenue will

increase substantially to develop the project. Net Debt/EBITDA will rise to historical highs as we expect

2013 2015 2014 the second airport to be predominantly debt funded. Both of these changes will occur by FY21. In FY25, Aus. Infra. Rebased SYD when we expect operations to commence, WSA margins will depress group performance as a result of Source: Bloomberg, SG Analysis initial operating inefficiencies. However, as WSA becomes self-sufficient, and KSA approaches capacity, margins for KSA will improve as a result of low margin freight and regional flights shifting to WSA. These will be replaced by more profitable international passengers for KSA. WSA will continue to operate at Scenario Analysis slightly lower margins than KSA due to its passenger mix, location and smaller scale. Bull Bear INVESTMENT RISKS DCF (Base $6.79) $7.23 $6.16 Upside (Downside) 6.5% (9.3%) VALUATION RISK ANALYSIS | Sensitivity, Scenario and Monte Carlo Analyses The key variables flexed are: A sensitivity analysis (Appendix 17) was conducted to consider the impact of key drivers on share price. Dom’ PAX Growth +0.5% -0.5% A 0.2% rise in cost of debt and equity decreases the share price to $6.35 which represents a 5.8% premium to the last close. The sensitivity analysis reveals that passenger growth below expectations will have a Int’l PAX Growth +1.0% -0.1% minimal impact on the share price as growth will continue for a more sustained period until the airport CAPEX +10m -10m reaches capacity. Sensitivity analysis is complemented by a scenario analysis (Appendix 18), which 2nd Stage Growth 5.6% 4.3% considers the impact of passenger growth assumptions. Testing a bear scenario provides a share price of 2032 2038 $6.16, which still represents a premium to the last close. However, as scenario analyses are not probability End Yr. of 2nd Stage (-3) (+3) weighted, we supplemented the study with a Monte Carlo simulation (Appendix 19), which found changes in passenger growth and margins produce a price range of $6.19 to $7.42 to a 90% confidence level. Source: SG Analysis 9

ECONOMIC RISK | China and Global Slowdown (E1) E(1) I(1)

Global volatility and the negative real interest rate environment in Europe pose issues that could lead to High

a potential slowdown in China and the global economy. Lower consumer sentiment correlated with less E(2)

discretionary spending would have adverse effects on passenger numbers, consequently decreasing SYD’s core revenue segments of aeronautical and retail. Furthermore, if outbound tourism of the Chinese

Medium middle-class reduces, this may lead to excess capacity. Airlines such as China Southern have announced

R(1) P(1) plans to increase flights to Sydney, which means that lower consumer demand would reduce airline

Significanceof Risk profitability and hence passenger numbers. Domestically, in Q2 2015, Australia’s GDP grew by only 0.2%,

Low Low O(1) and if this slowdown persists it may lead to lower domestic and outbound travel by Australians. ECONOMIC RISK | Natural Hedge (E2) Low Medium High Probability of Risk Since May 2015, interest rates in Australia have remained at a record low of 2.0%. Sustained low cash rates both domestically and globally have allowed SYD to bear increasing levels of debt and increase the relative attractiveness of SYD’s dividend yield. Any increases in rates would increase interest expenses and reduce the attractiveness of SYD as an investment. This may also increase demand for the AUD, leading to an appreciation which would deter inbound travel by foreigners, as a result of their lower purchasing power. However, SYD is ‘naturally hedged’, as the RBA and Federal Reserve are only likely to increase interest rates if economic conditions and consumer sentiment improve. This would mean that higher passenger growth would offset aforementioned negative impacts of higher interest rates. Finally, if interest rates were to increase investors who were initially attracted to SYD’s dividend yield would be replaced by a different class of investor who pursue capital gains from SYD’s improving profitability due to the likelihood of improved business performance. OPERATIONAL RISK | Exogenous Shocks (O1) SYD’s business model relies on high inflows of passengers. Unpredictable global shocks such as health pandemics or terrorist attacks can affect the propensity to travel. Domestic shocks, such as natural disasters may have an even greater impact on passenger volume. However, the probability of these events are low, and Australia’s reputation of ‘clean, green and safe’ shelters SYD from adverse shocks.

Source: SG Analysis PROJECT RISK | Badgerys Creek (P1) While Badgerys Creek represents an upside for SYD, it also carries a large amount of risk. Major infrastructure projects are prone to cost overruns, for example Kuala Lumpur Airport’s new terminal construction cost blew out to $3.5bn from a budgeted $2bn. If this occurs, the NPV of the project and value for shareholders will drop. SYD’s CEO Kerrie Mather has experience in infrastructure development through her 23 year tenure as a director with Macquarie Capital. Chairman Trevor Gerber also has experience with large development projects through his current directorship with Leighton Holdings. A further risk is that the government may refuse to provide assistance and be unwilling to negotiate mutually favourable terms. In this circumstance there is a risk that SYD refuses to take up the option and the project is subsequently taken up by an external investor with a lower cost of capital.

REGULATORY RISK | Regulatory Restrictions (R1) ‘Light-handed’ regulation and strong negotiating power with the government provides upside for SYD. Three major regulatory restrictions on passenger growth exist. First, movements are limited to 80 aircraft movements per hour. Secondly, there is a curfew restricting landings from 11pm to 6am. Thirdly, regional carriers are allocated peak hour slots. We expect that regulation, in particular those concerning regional BRI carriers, may be relaxed. This is attributed to cross-integration by SYD, with Badgerys Creek likely to focus on domestic, freight and regional flights. INDUSTRY RISK | Domestic and International Competition (I1) Domestic competition, from both Brisbane and Melbourne airport could reduce passenger volume for SYD. Both Brisbane and Melbourne charge lower aeronautical fees relative to SYD. Further, both airports SYD have announced plans to increase capacity. In Melbourne, capacity improvements will be achieved through the construction of a new low-cost terminal, while Brisbane airport plans to refurbish its MEL AIA international terminal. Both these factors could lead to airlines utilising these airports more frequently, reducing passenger volume for SYD. There is a further risk that passengers may prefer to travel to New Source: SG Representation Zealand rather than Australia. For example, Auckland Airport had international passenger growth of 5.7% in FY15, as a result of increased capacity, a falling NZD, and New Zealand’s popular tourist attractions. However, Australia’s air services agreement with China, as well as a falling AUD should ensure sustained international passenger growth.

Appendix Contents Page

1. Income Statement 2. Balance Sheet 3. Cash Flow Statement 4. Common Size Income Statement 5. Common Size Balance Sheet 6. Key Financial Ratios 7. Share Price History 8. Valuation Summary 9. Free Cash Flows to the Firm 10. Financial Analysis 11. Passenger Growth 12. Revenue 13. Pro-forma Assumptions 14. Weighted Average Cost of Capital (WACC) 15. Terminal Value 16. Forecast Horizon 17. Sensitivity Analysis 18. Scenario Analysis 19. Monte Carlo Simulation 20. Relative Valuation 21. Dividend Discount Model 22. Alternative Valuation Models 23. Industry Analysis – Porter’s 5 Forces 24. Industry Analysis – PESTEL 25. SWOT Analysis 26. Badgerys Creek 27. Risk Adjusted Returns 28. Risk Matrix 29. China Outlook 30. Competing Airports 31. Key Management 32. Glossary

Appendix 1 Income Statement

In AUD Million FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Operating Revenue 1,124.8 1,157.4 1,224.9 1,386.5 1,474.0 1,557.2 1,639.7 1,718.0 1,799.9 Other Revenue 0.4 6.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Revenue 1,125.2 1,163.6 1,224.9 1,386.5 1,474.0 1,557.2 1,639.7 1,718.0 1,799.9 Cost of Goods Sold (99.9) (99.3) (104.5) (118.3) (125.8) (132.9) (139.9) (146.6) (153.6) SG&A Expenses (148.6) (116.0) (122.1) (185.2) (191.0) (195.5) (199.3) (202.0) (204.4) EBITDA 876.7 948.3 998.3 1,083.0 1,157.2 1,228.7 1,300.5 1,369.4 1,441.9 Depreciation (198.2) (225.0) (236.9) (259.3) (258.5) (257.9) (259.0) (262.5) (266.8) Amortisation (101.9) (101.4) (99.2) (98.1) (96.7) (95.3) (93.9) (92.6) (91.3) EBIT 576.6 621.9 662.2 725.7 802.0 875.6 947.5 1,014.4 1,083.9 Interest Revenue 14.2 12.5 13.0 12.5 12.5 12.4 12.3 10.9 8.3 External Interest Expense (470.0) (218.1) (211.2) (237.5) (252.6) (267.7) (284.4) (302.5) (320.7) Intercompany Loan Interest Expense (246.0) (245.3) (245.3) (245.3) (245.3) (245.3) (245.3) (245.3) Change in fair value of swaps (11.6) (54.6) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Pre-Tax Profit 109.2 115.7 218.6 255.4 316.5 374.9 430.1 477.4 526.2 Tax Expense (96.8) (58.5) 0.0 0.0 0.0 0.0 (11.0) (143.2) (157.9) NPAT Before Abnormals 12.4 57.2 218.6 255.4 316.5 374.9 419.1 334.2 368.3 Abnormals 0.0 (0.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Statutory NPAT 12.4 57.0 218.6 255.4 316.5 374.9 419.1 334.2 368.3 Outside Equity Interests 14.4 1.9 1.9 1.9 1.9 1.9 1.9 1.9 1.9 Net Income 26.8 58.9 220.5 257.3 318.4 376.8 421.0 336.1 370.2 Adjustment for Intercompany Interest 246.0 245.3 245.3 245.3 245.3 245.3 245.3 245.3 Adjusted Net Income 304.9 465.9 502.6 563.8 622.1 666.4 581.4 615.6

Taxation Credits FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Pre-Tax Profit 115.7 218.6 255.4 316.5 374.9 430.1 477.4 526.2 Total Cash Flow 361.7 464.0 500.7 561.9 620.2 675.5 722.7 771.5 Taxation at 30% (Statutory Rate) (34.7) (65.6) (76.6) (95.0) (112.5) (129.0) (143.2) (157.9) Tax Losses Used (Added) (29.4) 65.6 76.6 95.0 112.5 118.1 0.0 0.0 Taxation (58.5) 0.0 0.0 0.0 0.0 (11.0) (143.2) (157.9) Effective Tax Rate 0.0% 0.0% 0.0% 0.0% 1.6% 19.8% 20.5%

Deferred Tax Losses (Beginning) 438.3 467.7 402.1 325.5 230.5 118.1 0.0 0.0 Net Tax Loss 29.4 (65.6) (76.6) (95.0) (112.5) (118.1) 0.0 0.0 Deferred Tax Losses (Close) 467.7 402.1 325.5 230.5 118.1 0.0 0.0 0.0

Dividends FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Total dividends paid 444.7 520.2 570.9 621.6 680.6 736.9 781.0 781.0 781.0 Shares Outstanding at Period End 1,976.5 2,213.5 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 EPS (cents/share) 1.4c 2.7c 9.8c 11.4c 14.1c 16.7c 18.7c 14.9c 16.5c DPS (cents/share) 22.5c 23.5c 25.5c 27.8c 30.4c 32.9c 34.9c 34.9c 34.9c

Appendix 2 Balance Sheet

In AUD Million FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Current Assets Cash 443.3 446.8 413.7 413.6 410.4 406.9 408.3 312.5 239.3 Receivables 126.1 128.4 136.6 154.6 164.4 173.7 182.9 191.6 200.7 Prepaid Expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Investments 0.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 NCA Held Sale 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 5.0 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Total Current Assets 574.4 610.9 586.0 603.9 610.4 616.3 626.8 539.8 475.7 Non-Current Assets Receivables 41.8 35.4 35.4 35.4 35.4 35.4 35.4 35.4 35.4 Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Investments 9.9 442.8 442.8 442.8 442.8 442.8 442.8 442.8 442.8 PP&E 2,556.6 2,584.7 3,132.8 3,123.5 3,114.9 3,107.1 3,143.2 3,190.0 3,247.2 Intangibles (Excl. GW) 7,079.2 6,977.8 6,878.6 6,780.6 6,683.9 6,588.6 6,494.7 6,402.1 6,310.8 Goodwill 669.7 669.7 669.7 669.7 669.7 669.7 669.7 669.7 669.7 Future Tax Benefit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 9.0 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 Total NCA 10,366.2 10,717.9 11,166.8 11,059.4 10,954.2 10,851.1 10,793.3 10,747.4 10,713.4 Total Assets 10,940.6 11,328.8 11,752.8 11,663.4 11,564.7 11,467.3 11,420.1 11,287.2 11,189.1

Current Liabilities Account Payable 170.1 182.0 188.9 213.9 227.3 240.2 252.9 265.0 277.6 Distributions Payable 252.3 266.0 266.0 266.0 266.0 266.0 266.0 266.0 266.0 Short-Term Debt 733.6 474.0 474.0 474.0 474.0 474.0 474.0 474.0 474.0 Provisions 135.8 144.6 144.6 144.6 144.6 144.6 144.6 144.6 144.6 NCL Held Sale 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 30.9 31.6 31.6 31.6 31.6 31.6 31.6 31.6 31.6 Total Current Liabilities 1,322.7 1,098.2 1,105.1 1,130.1 1,143.5 1,156.4 1,169.1 1,181.2 1,193.8 Non-Current Liabilities Account Payable 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Long-Term Debt 6,006.8 6,760.2 7,379.2 7,629.2 7,879.2 8,129.2 8,429.2 8,729.2 9,029.2 Deferred Tax Liabilities 1,700.5 1,955.5 1,955.5 1,955.5 1,955.5 1,955.5 1,955.5 1,955.5 1,955.5 Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total NCL 7,707.3 8,715.7 9,334.7 9,584.7 9,834.7 10,084.7 10,384.7 10,684.7 10,984.7 Total Liabilities 9,030.0 9,813.9 10,439.8 10,714.8 10,978.2 11,241.1 11,553.8 11,865.9 12,178.5

Shareholder's Equity Share Capital 5,178.0 5,256.2 5,404.6 5,404.6 5,404.6 5,404.6 5,404.6 5,404.6 5,404.6 Reserves (3,329.5) (3,338.7) (3,338.7) (3,338.7) (3,338.7) (3,338.7) (3,338.7) (3,338.7) (3,338.7) Retained Earnings 62.7 (400.1) (750.5) (1,114.8) (1,477.0) (1,837.2) (2,197.1) (2,642.1) (3,052.9) Outside Equity (0.6) (2.5) (2.5) (2.5) (2.5) (2.5) (2.5) (2.5) (2.5) Total Equity 1,910.6 1,514.9 1,313.0 948.6 586.4 226.3 (133.7) (578.6) (989.4)

Appendix 3 Cash Flow Statement

Cash Flow Statement (SAL) FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Cash Flow from Operating Activities Net Income 26.8 58.9 220.5 257.3 318.4 376.8 421.0 336.1 370.2 Depreciation and Amortisation 300.1 326.4 336.1 357.3 355.2 353.2 353.0 355.1 358.0 Increase in Accounts Receivable (24.9) 4.1 (8.2) (18.0) (9.8) (9.3) (9.2) (8.7) (9.1) Increase in Accounts Payable (10.7) 11.9 6.9 24.9 13.5 12.8 12.7 12.1 12.6 Cash from operating activities 291.3 401.3 555.4 621.5 677.4 733.5 777.5 694.5 731.8

Cash Flow from Investing Activities CAPEX (245.3) (253.1) (250.0) (250.0) (250.0) (250.0) (295.1) (309.2) (324.0) Purchase of Intangibles 0.0 (0.0) (0.0) (0.0) (0.0) 0.0 (0.0) 0.0 0.0 T3 Transaction (535.0) Sale of Investments (9.9) (432.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cash from Investment Activities (255.2) (686.0) (785.0) (250.0) (250.0) (250.0) (295.1) (309.2) (324.0)

Cash Flow from Financing Activities Change in Existing Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 New Debt Issuance (215.4) 753.4 619.0 250.0 250.0 250.0 300.0 300.0 300.0 Dividend Reinvestment Plan 0.0 78.2 148.4 0.0 0.0 0.0 0.0 0.0 0.0 Common Dividends (444.7) (520.2) (570.9) (621.6) (680.6) (736.9) (781.0) (781.0) (781.0) Cash from Financing Activities (660.1) 311.4 196.5 (371.6) (430.6) (486.9) (481.0) (481.0) (481.0)

Net Change in Cash (624.0) 26.7 (33.1) (0.1) (3.3) (3.4) 1.4 (95.8) (73.2) Beginning Cash Position 433.7 443.3 446.8 413.7 413.6 410.4 406.9 408.3 312.5 End Cash Position 443.3 446.8 413.7 413.6 410.4 406.9 408.3 312.5 239.3

Appendix 4 Common Size Income Statement

Common Size Income Statement FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E

Operating Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Other Revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold -8.9% -8.5% -8.5% -8.5% -8.5% -8.5% -8.5% -8.5% -8.5% SG&A Expenses -13.2% -10.0% -10.0% -13.4% -13.0% -12.6% -12.2% -11.8% -11.4% EBITDA 77.9% 81.5% 81.5% 78.1% 78.5% 78.9% 79.3% 79.7% 80.1% Depreciation -17.6% -19.3% -19.3% -18.7% -17.5% -16.6% -15.8% -15.3% -14.8% Amortisation -9.1% -8.7% -8.1% -7.1% -6.6% -6.1% -5.7% -5.4% -5.1% EBIT 51.2% 53.4% 54.1% 52.3% 54.4% 56.2% 57.8% 59.0% 60.2% Interest Revenue 1.3% 1.1% 1.1% 0.9% 0.8% 0.8% 0.8% 0.6% 0.5% External Interest Expense -41.8% -18.7% -17.2% -17.1% -17.1% -17.2% -17.3% -17.6% -17.8% Intercompany Loan Interest Expense 0.0% -21.1% -20.0% -17.7% -16.6% -15.8% -15.0% -14.3% -13.6% Change in fair value of swaps -1.0% -4.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% PreTax Profit 9.7% 9.9% 17.8% 18.4% 21.5% 24.1% 26.2% 27.8% 29.2% Tax Expense -8.6% -5.0% 0.0% 0.0% 0.0% 0.0% -0.7% -8.3% -8.8% NPAT Before Abnormals 1.1% 4.9% 17.8% 18.4% 21.5% 24.1% 25.6% 19.5% 20.5% Abnormals 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Statutory NPAT 1.1% 4.9% 17.8% 18.4% 21.5% 24.1% 25.6% 19.5% 20.5% Outside Equity Interests 1.3% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Net Income 2.4% 5.1% 18.0% 18.6% 21.6% 24.2% 25.7% 19.6% 20.6% Adjustment for Intercompany Interest NM 21.1% 20.0% 17.7% 16.6% 15.8% 15.0% 14.3% 13.6% Adjusted Net Income NM 26.2% 38.0% 36.2% 38.2% 40.0% 40.6% 33.8% 34.2%

Appendix 5 Common Size Balance Sheet

% of Assets FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Current Assets Cash 4.05% 3.94% 3.52% 3.55% 3.55% 3.55% 3.58% 2.77% 2.14% Receivables 1.15% 1.13% 1.16% 1.33% 1.42% 1.51% 1.60% 1.70% 1.79% Prepaid Expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Inventories 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Investments 0.00% 0.31% 0.30% 0.30% 0.30% 0.31% 0.31% 0.31% 0.31% NCA Held Sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other 0.05% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Total Current Assets 5.25% 5.39% 4.99% 5.18% 5.28% 5.37% 5.49% 4.78% 4.25% Non-current Assets Receivables 0.38% 0.31% 0.30% 0.30% 0.31% 0.31% 0.31% 0.31% 0.32% Inventories 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Investments 0.09% 3.91% 3.77% 3.80% 3.83% 3.86% 3.88% 3.92% 3.96% PP&E 23.37% 22.82% 26.66% 26.78% 26.93% 27.10% 27.52% 28.26% 29.02% Intangibles(ExGW) 64.71% 61.59% 58.53% 58.14% 57.80% 57.46% 56.87% 56.72% 56.40% Goodwill 6.12% 5.91% 5.70% 5.74% 5.79% 5.84% 5.86% 5.93% 5.99% Future Tax Benefit 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other 0.08% 0.07% 0.06% 0.06% 0.06% 0.07% 0.07% 0.07% 0.07% Total NCA 94.75% 94.61% 95.01% 94.82% 94.72% 94.63% 94.51% 95.22% 95.75% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Current Liabilities Account Payable 1.55% 1.61% 1.61% 1.83% 1.97% 2.09% 2.21% 2.35% 2.48% Distributions Payable 2.31% 2.35% 2.26% 2.28% 2.30% 2.32% 2.33% 2.36% 2.38% Short-Term Debt 6.71% 4.18% 4.03% 4.06% 4.10% 4.13% 4.15% 4.20% 4.24% Provisions 1.24% 1.28% 1.23% 1.24% 1.25% 1.26% 1.27% 1.28% 1.29% NCL Held Sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other 0.28% 0.28% 0.27% 0.27% 0.27% 0.28% 0.28% 0.28% 0.28% Total Cur Liabilities 12.09% 9.69% 9.40% 9.69% 9.89% 10.08% 10.24% 10.46% 10.67% Non-Current Liabilities Account Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Long-Term Debt 54.90% 59.67% 62.79% 65.41% 68.13% 70.89% 73.81% 77.34% 80.70% Provisions 15.54% 17.26% 16.64% 16.77% 16.91% 17.05% 17.12% 17.32% 17.48% Other 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total NCL 70.45% 76.93% 79.43% 82.18% 85.04% 87.94% 90.93% 94.66% 98.17% Total Liabilities 82.54% 86.63% 88.83% 91.87% 94.93% 98.03% 101.17% 105.13% 108.84%

Shareholder’s Equity Share Capital 47.33% 46.40% 45.99% 46.34% 46.73% 47.13% 47.33% 47.88% 48.30% Reserves -30.43% -29.47% -28.41% -28.63% -28.87% -29.11% -29.24% -29.58% -29.84% Retained Earnings 0.57% -3.53% -6.39% -9.56% -12.77% -16.02% -19.24% -23.41% -27.28% Outside Equity -0.01% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% -0.02% Total Equity 17.46% 13.37% 11.17% 8.13% 5.07% 1.97% -1.17% -5.13% -8.84%

Appendix 6 Key Financial Ratios

FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Growth Revenue Growth 9.1% 3.4% 5.3% 13.2% 6.3% 5.6% 5.3% 4.8% 4.8% EBITDA Growth 5.2% 8.2% 5.3% 8.5% 6.9% 6.2% 5.8% 5.3% 5.3% EBIT Growth 8.2% 7.9% 6.5% 9.6% 10.5% 9.2% 8.2% 7.1% 6.9% DPS Growth 7.1% 4.4% 8.5% 8.9% 9.5% 8.3% 6.0% 0.0% 0.0% Profitability EBITDA Margin 77.9% 81.5% 81.5% 78.1% 78.5% 78.9% 79.3% 79.7% 80.1% EBIT Margin 51.2% 53.4% 54.1% 52.3% 54.4% 56.2% 57.8% 59.0% 60.2% Return on Assets NM 6.0% 7.0% 7.7% 8.7% 9.8% 10.6% 9.4% 10.1% Financing and Capital Structure Net Debt/EBITDA 7.2x 7.2x 7.5x 7.1x 6.9x 6.7x 6.5x 6.5x 6.4x Interest EBIT Coverage NM 2.9x 3.1x 3.1x 3.2x 3.3x 3.3x 3.4x 3.4x Debt to Enterprise Value 41.1% 38.7% 37.5% 38.3% 39.0% 39.7% 40.5% 41.3% 42.1% Investment CAPEX 245.3 253.1 250.0 250.0 250.0 250.0 295.1 309.2 324.0 CAPEX/Revenue 21.8% 21.8% 20.4% 18.0% 17.0% 16.1% 18.0% 18.0% 18.0% CAPEX/Depreciation 123.8% 112.5% 105.5% 96.4% 96.7% 97.0% 113.9% 117.8% 121.4% Shareholder ROIC (NOPAT) 6.7% 7.1% 7.2% 8.0% 9.0% 9.9% 10.5% 8.2% 8.9% Return on Equity 4.6% 4.5% 4.4% 4.8% 5.2% 5.6% 6.0% 6.0% 6.0%

Appendix 7 Share Price History

30-Jun-2014 $7.0 New 70 aeronautical Volume 5-Sep- agreement $6.0 2013 60 Share Price New duty free partner announced $5.0 5-Dec-2011 50 21-Dec-2012 Decrease in ATO position MAp foreign 22-Jun-2015 paper received $4.0 ownership Traffic 40 performance May $3.0 30 millions

$2.0 20 Data unavailable

$1.0 10

$0.0 0 Aug-2010 May-2011 Feb-2012 Nov-2012 Aug-2013 May-2014 Feb-2015

Appendix 8 Valuation Summary

Our target share price of $6.61 is triangulated between a discounted cash flow method (DCF), a dividend discount method (DDM) and a multiples method. The DCF model is weighted at 60% as it allows for explicit modelling of key variables that add value to the company. The dividend discount method is weighted at 20% due to the importance of dividends to SYD’s shareholders and company policy of paying out 100% of equity cash flow. The multiples method is weighted between an international airport set and an Australian infrastructure set. The overall multiples method is weighted at 20%, with the international airport set making up 60% of thee multiples valuation while the Australian infrastructure set makes up 40% of the valuation.

Last Close Valuation $6.00 $6.61

52 Week TR $4.10 $6.00

Valuation $5.95 $7.14

DCF $6.16 $7.23

DDM $6.35 $7.59

Multiples (Airport) $4.49 $6.11

Multiples (Infrastructure) $5.59 $6.93

$2 $3 $4 $5 $6 $7 $8 $9 $10

Appendix 9 Free Cash Flows to the Firm

Calculations FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Add: EBIT x (1- tax rate) 621.9 662.2 725.7 802.0 875.6 1753.6 806.8 862.1 Add: D&A 326.4 336.1 357.3 355.2 353.2 353.0 355.1 358.0 Less: Change in NWC 2.1 (1.3) 6.9 3.7 3.6 3.5 3.3 3.5 Less: CAPEX (253.1) (250.0) (250.0) (250.0) (250.0) (295.1) (309.2) (324.0) Free Cash Flows 697.3 747.0 839.9 911.0 982.3 815.0 856.0 899.7 Free Cash Flow Growth 7.1% 12.4% 8.5% 7.8% -17.0% 5.0% 5.1% Discounted Value of FCFs (to FY14) 698.1 733.6 743.6 749.3 581.0 570.3 560.2

Total Discounted Value of FCFs (to FY14) 4,636.1

1st Stage Growth 4.9% 2nd State Terminal Growth 2.3% 1st Stage Growth Period 13 years Terminal Growth First Year 2035 Two Stage Growth Model Discounted Value of FCFs (to FY14) 4,636.1 2st Stage FY22E Year Free Cash Flows 899.7 2nd Stage Value of Free Cash Flows 10,535.6 Discounted Second Stage of Free Cash 6559.9 Flows 3rd Stage FY35E Year Free Cash Flows 22,912.6 Terminal Value of Free Cash Flows 40,076.5 Discounted Terminal Value of Free Cash 10,351.5 Flows Enterprise Value (as at FY14) 21,547.5 Enterprise Value (as at 23 Sep 2015) 22,639.7 Net Debt (FY15) 7,439.5 Equity Value (as at 23 Sep 2015) 15,200.2 Number of Shares Outstanding (FY15) 2,238.9 Today Estimated Share Price $6.79

1Tax rate changes to the effective tax rate of 20.5%. From FY15-18, tax credits mean there is an effective tax rate of 0%.

Appendix 10 Financial Analysis

10.1 Sydney Airport Statements SYD’s balance sheet makes it difficult to use common financial ratios to assess the profitability of the company. SYD’s balance sheet has several complications due to:

. $5.1bn of intangibles consisting of airport operating license. The value of the asset is an accounting measure and does not accurately reflect the asset base. . $2.0bn of deferred tax liabilities which are unlikely to be ever recognised, as SYD is highly unlikely to ever sell the airport operating license. . Dividends exceeding net income, resulting in a decrease in retained earnings annually. While similar to other infrastructure companies, this results in a net liability position in FY21.

Consequently, we make adjustments to financial ratios to accurately reflect SYD’s financial performance.

10.1.1 Return on Assets

Return on assets is adjusted as follows: 푛푒푡 𝑖푛푐표푚푒 + 𝑖푛푡푒푟푐표푚푝푎푛푦 푙표푎푛 𝑖푛푡푒푟푒푠푡 푅푒푡푢푟푛 표푛 퐴푠푠푒푡푠 (%) = 푡표푡푎푙 푎푠푠푒푡푠 − 𝑖푛푡푎푛푔𝑖푏푙푒 푎𝑖푟푝표푟푡 표푝푒푟푎푡𝑖푛푔 푙𝑖푐푒푛푠푒

. The numerator is adjusted for the intercompany loan interest to better account for income earned after tax. . Total assets is adjusted for by removing the intangible airport operating license, as the airport operating license is an accounting construct which does not reflect the asset base of the company.

10.1.2 Return on Equity

SYD’s equity account is distorted by the intangibles and annual reduction due to dividends exceeding net income. Return on equity is adjusted as follows: 푑𝑖푠푡푟𝑖푏푢푡𝑖표푛푠 푅푒푡푢푟푛 표푛 퐸푞푢𝑖푡푦 (%) = 푚푎푟푘푒푡 푣푎푙푢푒 표푓 푒푞푢𝑖푡푦

. The numerator is adjusted to replace net income with distributions. Net income is depressed by the intercompany loan interest. Distributions better reflects cash flow available to equity holders due to management’s stated intention to pay out 100% of cash flow to equity holders. . The denominator is adjusted to replace book value of equity to market value of equity. Book value of equity is distorted due to distributions continually exceeding net income. Market value of equity better reflects the equity base of shareholders. . N.B. We note this formula means return on equity becomes dividend yield. SYD’s policy to pay out 100% of equity cash flow means distributions dividend by equity value is an appropriate approximation of return on equity.

Appendix 11 Passenger Growth

Passenger Growth Assumptions FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Domestic Aircraft movement growth 1.42% -0.69% 0.90% 0.90% 0.90% 0.90% 0.90% 0.90% 0.9% Passenger per movement growth 0.49% 1.95% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% International Aircraft movement growth 1.99% 1.48% 2.30% 2.30% 2.30% 2.00% 2.00% 1.50% 1.50% Passenger per movement growth 2.07% 1.25% 2.10% 2.10% 2.10% 2.10% 2.10% 1.50% 1.50%

Passenger Numbers FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Aircraft movements 229,739 233,011 231,400 233,483 235,584 237,704 239,844 242,002 244,180 246,378 Passengers per movement 107 107 110 111 113 115 117 119 121 122 Dom’ Passengers (mil) 24.6 25.0 25.4 26.0 26.6 27.3 28.0 28.7 29.4 30.2 Domestic Growth 1.9% 1.2% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Aircraft movements 63,110 64,366 65,316 66,818 68,355 69,927 71,326 72,752 73,844 74,951 Passengers per movement 194 198 201 205 209 214 218 223 226 229 Int’l Passengers (mil) 12.3 12.8 13.1 13.7 14.3 14.9 15.5 16.2 16.7 17.2 International Growth 4.1% 2.7% 4.1% 4.3% 4.4% 4.1% 4.1% 3.0% 3.0% Total passengers 36.8 37.8 38.5 39.7 40.9 42.2 43.5 44.9 46.1 47.4 Total Passenger Growth 2.6% 1.7% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7%

Passengers are split into international and domestic passengers, with international passengers significantly more lucrative ($24.11) than domestic passengers ($7.25). Passenger numbers are forecast as a function of aircraft movements and passenger per movement (PPM).

11.1 Aircraft Movements Aircraft movements is the number of aircraft that take off in any given year. Aircraft movements is influenced by airline decisions, trend towards peak-spreading and constrained by regulatory restrictions. Our estimates are guided by the Airport’s master plan published in 2013 with forecasts until 2033.

11.1.1 International Aircraft Movement Growth

Our forecast of 2.3% international aircraft movement growth tapers towards 1.5% during the forecast horizon. Our forecasts are similar to Sydney Master Plan 2033 predictions, with a small additional upside due to:

. Open Skies agreement with China to triple capacity into China from 22,500 to 67,000. The opening of supply-side constraints have also seen new routes and increase of capacity on existing routes. Xiamen Airlines will commence direct operations into Fuzhou and Xiamen while Sichaun Airlines will directly fly to Chongqing. China Southern are adding a third daily service to Guangzhou, while China Eastern are looking to add a second daily flight following ACCC acceptance of their alliance with Qantas. . Qantas’ return to profitability is likely to result in improved international capacity growth, with many routes being axed during the turnaround period. Qantas intends to increase frequencies into Hong Kong, Los Angeles, Honolulu and Santiago, while new routes will begin to San Francisco. Qantas’ alliance with China Eastern is expected to aid Sydney’s connectivity with Asia and make it easier for the growing Asian economy to connect with Australia. This complements Qantas’ existing alliances with Emirates and American Airlines, which have allowed for much greater access to Europe and North America respectively. . Low cost carriers such as Asiana, Cebu Pacific and AirAsia have increasingly extended their network into Australia. Low cost carriers are more likely to fly in during off-peak periods, reducing the impact of the 80 flights per movement regulatory restriction.

11.1.2 Domestic Aircraft Movement Growth

Our forecast of 0.9% domestic aircraft movement growth stays constant throughout the forecast horizon. Our forecasts are 90% of the Sydney Master Plan 2033 predictions, with a small downside due to:

. Reduced competition between Qantas and Virgin from the subsiding of capacity wars which led both airlines to operate at substantial losses. . Despite more domestic tourism growth, we do not see domestic aircraft movements increasingly substantially as there is significant excess capacity from routes established during the capacity competition between Qantas and Virgin . Weak competition in domestic low cost carriers see Tiger Air capacity growing more slowly than historically while Jetstar experiences limited competition

11.1.3 Regulatory Constraints

Aircraft movement growth is constrained by the following restrictions:

. Curfew restricting flights between 6am and 11pm, with shoulder periods allowed from 5am and until 12pm. This means, from places such as Asia, flight times need to be coordinated to land in Australia during a non-curfew hours. This restricts route planning for international airlines and may result in airlines choosing to fly into Melbourne or Brisbane which have no such curfew restraints. . An 80 movements per hour restriction is currently only close to being reached during peak times before noon and around 6pm, which see close to 75 flights per hour. Outside these peak times, there remains ample opportunity to increase movements per hour. . Requirement for certain number of flights during peak hours to be allocated to regional airliners.

11.2 Passenger per Movement Passengers per movement is a function of the size of aircrafts used and load factors. Focuses on load factor improvements and trends towards larger aircraft drive increases in passengers per movement.

11.2.1 International Passenger per Movement Growth

Our forecast of international passenger per movement growth of 2.1% and tapers towards 1.5%, a small upside to SYD 2033 Master Plan forecasts due to:

. Trend towards larger aircraft on operations to Australia. Due to Sydney’s distance from other major international hubs, there has been an increasing trend to using larger aircraft on operations to Sydney. Qantas has recently increased A380 services to Dallas, Etihad increasing A380 use to Abu Dhabi and China Southern intending to upgrade to A380’s. . Increasing flights into Sydney from low cost carriers (LCC’s) which have more seats than competing full-service airlines. LCC’s reconfigure areas for first class and business class seats to higher density economy seating. International LCC’s had previously a limited presence in Australia, however there has been significant growth in LCC representation in Australia through Air Asia X flights into Bali, Cebu Pacific flights into Manila and other South East Asian LCC’s flagging Sydney as a near-term destination for expansion. . Increased focus on international alliances in the airline industry allows airlines to leverage each other’s flight networks and increase load factors. Qantas’ alliances with Emirates, China Eastern and American Airlines respectively allows for improvements in load factors on flights to Europe, Asia and the United States respectively. Load factors are improved as flight times are optimised to not only carry passengers to the immediate destination but onwards to other destinations around the world. Alliances such as Sky Team, Star Alliance and OneWorld all have significant operations in Australia and the increasing integration of these alliances supports our PPM increases of 2.1%. . Technology improvements with automated pricing structures increasingly employed by international airlines results in increases in load factors as last minute seats have a higher probability of being sold.

11.2.2 Domestic Passenger per Movement Growth

Domestic passengers per movement is expected to increase by 1.6% throughout the forecast horizon, a small upside to the SYD 2033 Master Plan due to:

. While the rapid capacity increases from competition between Qantas and Virgin have subsided, there remains excess capacity with load factors averaging c.77%, significantly below historical averages of c.79% or American industry standards of c. 81%. The demand from the falling AUD should provide for moderate increases in domestic travel, fulfilled by increasing load factors and filling excess capacity. . Domestic airlines generally use A320s and Boeing 737’s which generally hold c. 200 seats per flight. The use of aircraft is not expected to substantially change. . Stagnation of competition in the domestic low cost carrier industry between Jetstar and Tiger Air is expected to result in natural growth in domestic travel fulfilled with increasing load factors.

11.3 International Passenger Growth Justification The international passenger growth rate of 4.4% appears to be relatively high when compared to the 2.8% growth in year ending June 2015 However, we rationalise the international passenger growth by decomposing international passengers into nationalities and find reasonable assumptions of growth also sum to a growth rate of 4.4%.

Passenger Numbers

Country 2012A 2013A 2014A 2015E 2016E 2017E China 617 675 786 936 1,123 1,336 United States 612 624 655 694 736 780 New Zealand 866 909 917 925 934 942 United Kingdom 520 535 524 540 556 573 Other 3,003 3,123 3,145 3,271 3,401 3,537 Australia 6,621 6,886 7,076 7,274 7,478 7,687 Total 12,239 12,753 13,103 13,640 14,228 14,856

Passenger Growth

Country 2013A 2014A 2015E 2016E 2017E China 9.4% 16.4% 19.0% 20.0% 19.0% United States 2.0% 5.0% 6.0% 6.0% 6.0% New Zealand 5.0% 0.9% 0.9% 0.9% 0.9% United Kingdom 3.0% -2.1% 3.0% 3.0% 3.0% Other 4.0% 0.7% 4.0% 4.0% 4.0% Australia 4.0% 2.8% 2.8% 2.8% 2.8% Total 4.1% 2.7% 4.1% 4.3% 4.4%

China

China experienced 16.4% growth in FY14A, demonstrating substantial travel growth from China. We substantiate the growth assumptions of 19%, 20% and 19% from FY15-17 owing to:

. FY14 growth of 16.4% was achieved without the China Australia Air Services Agreement, which gradually triples capacity from 26,500 to 67,000. . The relaxation of visa requirements will make it easier for Chinese tourists to visit Australia . Completion of the Chinese FTA will increase business ties between Australia and China, with a particularly strong focus on expanding the services industry between the two countries . Open Skies agreement will gradually increase capacity up until October 2016, meaning increases for the next three years are likely . Chinese airlines outside the ‘big 3’ having plans to fly into Australia from second tier Chinese cities . Increases in Chinese discretionary spending making international travel a new ‘normal’, with Australia one of the most accessible and convenient Western nations.

United States

United States nationality growth will grow by 6% from FY15-17, substantiated due to:

. Depreciating AUD against the USD will increase attractiveness of Australia as a tourist destination . Increased capacity on the Dallas to Sydney route of 12% in FY14 well absorbed by the market. The long-haul flight improves the connectivity between Sydney and the US, as Dallas/Fort Worth Airport has much better connectivity with the rest of the United States compared to Los Angeles International Airport. This is due to Dallas/Fort Worth Airport being the largest hub for American Airlines. . Qantas also plans to reintroduce direct flights from Sydney to San Francisco, further improving connections throughout the United States. American Airlines will also increase capacity from Los Angeles to Sydney. Collectively, this increases capacity to the US by 9%.

New Zealand

New Zealand passenger growth is expected to remain static in the absence of significant exchange rate fluctuations or capacity increases between Sydney and New Zealand.

United Kingdom

United Kingdom nationality travellers will increase at approximately 3%, owing to:

. Strengthening GBP against the AUD. . Increasing capacity between Sydney and Dubai and Abu Dhabi with Emirates and Etihad respectively driving capacity increases for the Kangaroo route.

Other Nationalities

We forecast other nationalities to increase growth at 4% into Australia due to:

. Depreciating AUD making it cheaper for foreign nationalities to travel to Australia . End of the mining boom leading Australian government making significant investments in promotion of tourism in Australia. . Growing capacity from Low Cost Carriers (LCC’s) from South East Asia into Australia. Flights to Kuala Lumpur, Singapore, Manila, Denpasar and Bangkok are comprised mostly of Australians travelling overseas. However, increasingly, travel is occurring in the other direction with the substantial growth in the South East Asian middle class. . Travel from India will grow strongly as India has the second highest foreign nationality growth (albeit from a smaller base). Sydney to Delhi services increase will increase to four times per week owing to strong demand for direct flights to India.

Australian Outbound Travel

We forecast Australia outbound to grow in line with FY14 growth rate of 2.8% due to:

. Despite the depreciating AUD making outbound travel more expensive, international travel is relatively inelastic. The main impact is the choice of international travel destination, for example, a trip to Hawaii may instead become a trip to Bali or Bangkok, which does not any impact on SYD’s revenue. . The weakness of the Euro has seen a smaller shift in the AUD/EUR exchange rate, meaning Australia’s increasingly choose to travel to Europe rather than the UK or US, which again has a limited impact on SYD’s revenue. . Improving Australian economy expected to see increases in international business travel.

Appendix 12 Revenue

12.1 Segment Revenues Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Aeronautical 486.8 518.3 627.4 669.9 714.2 758.1 799.6 843.5 Aeronautical security 81.5 84.1 86.8 89.5 92.3 95.2 97.7 100.4 Retail 255.2 271.2 321.0 343.9 363.9 383.0 401.4 420.5 Property and car rental 194.0 204.2 196.4 207.7 217.0 226.7 235.8 245.3 Car parking and ground transport 139.9 147.2 154.9 163.1 169.8 176.8 183.4 190.2 Total Revenues 1,157.4 1,224.9 1,386.5 1,474.0 1,557.2 1,639.7 1,718.0 1,799.9 Revenue Growth 4.4% 5.8% 13.2% 6.3% 5.6% 5.3% 4.8% 4.8%

Segment Revenue Growth FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Domestic Aeronautical 4.9% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% International Aeronautical 4.9% 7.6% 8.4% 8.4% 8.1% 7.3% 6.1% 6.1% Aeronautical 4.9% 6.5% 21.1% 6.8% 6.6% 6.2% 5.5% 5.5% Aeronautical security -2.6% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7% Retail 5.6% 6.3% 18.4% 7.1% 5.8% 5.2% 4.8% 4.8% Property and car rental 3.6% 5.2% -3.8% 5.7% 4.5% 4.5% 4.0% 4.0% Car parking and ground transport 5.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

12.2 Revenue per Passenger Method Aeronautical security revenue, which is completely offset by aeronautical security expense grows in-line with passengers and does not use a revenue per passenger method.

We choose to forecast T3 independently, growing domestic revenue and retail revenue in line with other domestic and retail revenue.

Justification for method: We find this the most appropriate way to forecast revenue, as each of the segments are driven by passenger numbers.

. Aeronautical revenue is most directly driven by passenger numbers, as airlines are charged on a per passenger basis for each passenger landing. We do not account for the small fixed fee per aircraft for landing but rather consider this collectively with the revenue per passenger figure. . Retail revenue is driven by performance-linked rents. With more passengers, rents become more lucrative and in-store turnover increases. This translates to improvements in retail revenue. . Property and car rental is similarly likely to increase alongside passenger numbers, as property rents is driven by passengers passing through the airport. . Car parking and ground transport similarly increases with passenger figures, as more passengers will translate to more users using parking facilities and transportation options.

Revenue per passenger FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Aero Revenue per Domestic Passenger $7.10 $7.25 $7.39 $7.54 $7.69 $7.84 $8.00 $8.16 Aero Revenue per International Passenger $23.41 $24.11 $25.02 $25.97 $26.96 $27.77 $28.60 $29.46 Retail Revenue per Passenger $6.64 $6.84 $7.01 $7.18 $7.36 $7.51 $7.66 $7.81 Property and Car Rental per Passenger $5.04 $5.15 $5.25 $5.35 $5.41 $5.46 $5.52 $5.57 Car Parking and Ground Transport per Passenger $3.64 $3.71 $3.79 $3.86 $3.90 $3.94 $3.98 $4.02

Revenue per passenger growth FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Aero Revenue per Domestic Passenger Growth 3.6% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Aero Revenue per International Passenger Growth 2.1% 3.0% 3.8% 3.8% 3.8% 3.0% 3.0% 3.0% Retail Revenue per Passenger Growth 3.8% 3.0% 2.5% 2.5% 2.5% 2.0% 2.0% 2.0% Property and Car Rental per Passenger Growth 1.9% 2.0% 2.0% 2.0% 1.0% 1.0% 1.0% 1.0% Car Parking and Ground Transport per Passenger Growth 3.9% 2.0% 2.0% 2.0% 1.0% 1.0% 1.0% 1.0%

12.3 International Aeronautical Revenue We split total aeronautical revenue into domestic and international revenue on a 37% to 63% basis respectively. Without official disclosure, we use the $24 BARA per international figure to solve for revenue breakdown between international and domestic revenue. Historical per passenger figures are calculated by dividing historical revenues by historical passenger numbers. International aeronautical revenue per passenger is driven by agreements with international airlines, Qantas and Virgin Australia. Fundamental drivers of aeronautical revenue are passenger numbers which are discussed and derived in Appendix 11.

International aeronautical revenue accounts for 26.9% of total revenue. International revenue per passenger has grown slowly in FY13 and FY14, largely attributed to Qantas’ weak performance and decision to reduce many international routes. Future per passenger aeronautical revenue will be driven by the new BARA re-agreement which is expected to be replicated by Qantas and Virgin.

Forecast: The recently concluded the BARA (Board of Airline Representatives of Australia) agreement with around 90% of international airlines sees a step down by $0.18c to $24.00 from 1 July 2015 to 20 June 2016. After the 2015 1st half increase of 4.5% international fee increase, we use the 3% growth to $24.11 as an appropriate midpoint between the fee in the first six months ($24.18) and second six months ($24.00). Thereafter, we see revenues growing by 3.8% p.a. in line with the new BARA agreement until FY19. From FY20 onwards, we conservatively estimate international aeronautical per passenger venue by 3.0%, as with per passenger fees approaching $28 in FY19, there is likely to be increased regulatory scrutiny which we account for with conservative estimates. We expect Qantas and Virgin to negotiate similar terms for international flights.

International Aero Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E International Passengers (mil) 13.1 13.7 14.3 14.9 15.5 16.2 16.7 17.2 International Growth (%) 2.7% 4.4% 4.4% 4.4% 4.1% 4.1% 3.0% 3.0% Aero Revenue per International Passenger $23.41 $24.11 $25.02 $25.97 $26.96 $27.77 $28.60 $29.46 Aero Revenue per International Passenger Growth 2.1% 3.0% 3.8% 3.8% 3.8% 3.0% 3.0% 3.0% International Aeronautical Revenue ($m) 306.7 329.9 357.7 387.8 419.2 449.7 477.2 506.4 International Aeronautical 4.9% 7.6% 8.4% 8.4% 8.1% 7.3% 6.1% 6.1%

12.4 Domestic Aeronautical Revenue Domestic aeronautical revenue accounts for 37% of total aeronautical revenue and 15.1% of total revenue. Domestic aeronautical revenue per passenger is driven by agreements with Qantas, Virgin and Tiger Air while being constrained by ACCC scrutiny.

Domestic aeronautical revenue per passenger has increased substantially with a 5.1% and 3.6% rise in FY13 and FY14 respectively. Revenue per passenger increases were driven by the capacity competition between Qantas and Virgin, which appears to have subsided.

Forecast: Domestic charges are expected to grow at 2% throughout the forecast horizon. ACCC scrutiny on domestic passenger charges leads us to conservatively grow charges in line with inflation, taken as the bottom of RBA inflation targets of 2-3%.

Domestic Aeronautical Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Domestic Passengers (mil) 25.4 26.0 26.6 27.3 28.0 28.7 29.4 30.2 Domestic Growth (%) 1.2% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% Aero Revenue per Domestic Passenger ($) $7.10 $7.25 $7.39 $7.54 $7.69 $7.84 $8.00 $8.16 Aero Revenue per Domestic Passenger Growth (%) 3.6% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Domestic Aeronautical Revenue ($m) 180.1 188.3 196.9 205.9 215.3 225.2 235.4 246.2 Domestic Aeronautical Growth (%) 4.9% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% T3 Adjustment ($) 72.8 76.1 79.6 83.2 87.0 91.0 Total Domestic Aero Revenue ($m) 180.1 188.3 269.7 282.0 294.9 308.4 322.5 337.2

12.5 Aeronautical Security Recovery Revenue Security recovery revenue is the recouped cost of providing security services such as baggage checking for airlines’ passengers. These costs are recovered from airlines at no margin. While aeronautical revenue grew 4.9% in CY14, recoverable security revenue declined 2.6% in the same period. This decline is explained by the reduced-cost security contract introduced in CY14.

Assumption: Security recovery revenue is driven predominantly by passenger volume so is expected to move in line with passenger growth, with little other variation anticipated.

Aeronautical Security Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Total Passengers (m) 38.5 39.7 40.9 42.2 43.5 44.9 46.1 47.4 Total Passenger Growth (%) 1.7% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7% Aeronautical security ($m) 81.5 84.1 86.8 89.5 92.3 95.2 97.7 100.4 Aeronautical security growth (%) -2.6% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7%

12.6 Retail Revenue Retail is the second largest source of income for SYD, contributing 22% of SYD’s total revenue in 2014. Retail revenue is calculated as a function of average retail spend per passenger and passenger volume. This reflects the expectation that retail revenue is closely tied to the number of passengers passing through the airport. Retail revenue from the T3 acquisition is modelled independently in Appendix 12.9.

Rents Likely to Increase: Rental revenue for airports is particularly lucrative, with retail space on average more than double the prime areas in Sydney and Melbourne due to several reasons:

. Sheer volume of potential shoppers . Given SYD’s monopoly, SYD is in a unique position to negotiate high levels of rent. . After the revamp is completed, SYD is expected to be the largest standalone duty-free shop in the world. This large-scale redevelopment is expected to further increase the attractiveness of retail space in the SYD terminals to retailers, which will provide greater bargaining power for SYD to negotiate higher lease prices.

Heinemann Redevelopment: Following the retender of SYD’s retail operations to global travel retailer Heinemann in September 2014, a staged redevelopment of SYD’s duty free offering commenced. Key notes of this redevelopment include:

. First of six Heinemann stores opening in July 2015, and the other five stores are gradually unveiled by mid-2016. . Heinemann plans to stock 400 new brands . The terminals will be reconfigured to focus on customer orientation zones and aims to establish a clear line of sight to boarding gates and other key areas of the terminal to deliver improved passenger experience. . Heinemann will implement a multi-channel digital commerce strategy to bring more customers the convenience of online and mobile shopping.

Chinese Consumption: SYD retail is expected to be buoyed by continued spending by Chinese travellers. This is partially due to the long- standing Chinese gift-giving culture. Foreign, and in particular Australia products, are generally regarded in China as better quality offerings, which makes them highly suited for gift-giving. People tend also to have greater propensities to spend while travelling. Combined with the lower AUD, we forecast that growth in Chinese passengers and their purchasing power will provide a boost for SYD’s retail business.

Forecasts: Retail revenue per passenger is forecast to increase strongly in FY15 through to FY18, at 3% tapering to 2.5% due to positive impacts of the T3 redevelopment and increases in lucrative Chinese passengers. Lucrative rents see retail per passenger revenue increasing at 2% from FY19 onwards.

Retail Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Total Passengers (m) 38.5 39.7 40.9 42.2 43.5 44.9 46.1 47.4 Total Passenger Growth (%) 1.7% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7% Retail Revenue per Passenger ($) $6.64 $6.84 $7.01 $7.18 $7.36 $7.51 $7.66 $7.81 Retail Revenue per Passenger Growth (%) 3.8% 3.0% 2.5% 2.5% 2.5% 2.0% 2.0% 2.0% Retail ($m) 255.2 271.2 286.8 303.4 320.6 337.1 353.1 369.9 Retail Revenue Growth (%) 5.6% 6.3% 18.4% 7.1% 5.8% 5.2% 4.8% 4.8% T3 Adjustment 34.2 40.5 43.4 45.9 48.3 50.6 Total Retail Revenue ($m) 255.2 271.2 321.0 343.9 363.9 383.0 401.4 420.5

12.7 Property and Car Rental Revenue Overview: SYD’s property and car rental revenues comprise of rents from leases for sites, buildings and other facilities around the airport. This includes airline lounges, offices, hotel sites, aircraft hangars, car rental areas, and until recently, T3. Incremental growth is driven mostly by rent reviews, new tenancies, and additional development projects. SYD’s property portfolio attracts a unique market, as tenants are generally businesses that require proximity to the terminal, airfield or other key airport infrastructure in order to operate; this includes airlines, car rental companies and other such businesses. Growth is still dependent on passenger numbers, as with more passengers, these businesses have more potential customers.

Development: Available property land will increase following the construction of the Northern Lands Bridge which opens up new space for rental.

Adjustments are made for the reduction in property revenue from the repurchase of the T3 lease (Appendix 12.9)

Forecasts: Property revenue per passenger is forecast to grow at inflation in 2% from FY15-17 due to expanding land requirements from the development of the Northern Lands Bridge, allowing a shift in some tenants to the Northern Lands. Following FY18, we forecast property per passenger to slow to 1% due to limited land available to be rented out.

Property and Car Rental Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Total Passengers (m) 38.5 39.7 40.9 42.2 43.5 44.9 46.1 47.4 Total Passenger Growth (%) 1.7% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7% Property and Car Rental per Passenger $5.04 $5.15 $5.25 $5.35 $5.41 $5.46 $5.52 $5.57 Property and Car Rental per Passenger Growth 1.9% 2.0% 2.0% 2.0% 1.0% 1.0% 1.0% 1.0% Property and Car Rental Revenue ($) 194.0 204.2 214.9 226.2 235.5 245.2 254.3 263.8 T3 Adjustment ($) (18.5) (18.5) (18.5) (18.5) (18.5) (18.5) Total Property and Car Rental Revenue ($) 194.0 204.2 196.4 207.7 217.0 226.7 235.8 245.3

12.8 Car Parking and Ground Transport Revenue Parking and ground transport account for 12% of SYD’s total revenue. Revenues comprise of time-based charges from car parking facilities as well as charges from taxis, buses, and limousines collecting passengers from the airport.

Online Parking: The majority of car parking revenues come from domestic passengers that remain for a short period of time to either drop off or pick up travellers. Accordingly, car parking tends to be concentrated during peak flight periods but declines significantly during off-peak periods. In response, SYD’s online parking system has provided customers with more choice and more targeted parking offers, which has in turn resulted in higher occupancy of all car parks.

Capacity: The 6% increase in car park capacity is also expected to cater to increased demand in the domestic precinct, resulting in higher car parking revenues.

Car parking and Ground Transport Revenue FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Total Passengers (m) 38.5 39.7 40.9 42.2 43.5 44.9 46.1 47.4 Total Passenger Growth (%) 1.7% 3.2% 3.2% 3.2% 3.1% 3.1% 2.7% 2.7% Car Parking & Ground Transport/Passenger ($) $3.64 $3.71 $3.79 $3.86 $3.90 $3.94 $3.98 $4.02 Car Parking & Ground Transport/Passenger Growth (%) 3.9% 2.0% 2.0% 2.0% 1.0% 1.0% 1.0% 1.0% Car Parking & Ground Transport revenue ($) 139.9 147.2 154.9 163.1 169.8 176.8 183.4 190.2 Car Parking & Ground Transport growth (%) 5.7% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

12.9 Terminal 3 Transaction SYD agreed to buy Qantas’ domestic Terminal 3 lease for $535m in August 2015. The lease was due to expire in 2019 and Qantas has received assurances it will be able to maintain priority use over the airport until post-2019, where the terminal is expected to be transformed into a multi- use facility. SYD is expected to fund the transaction through a combination of equity, debt and cash.

Approximately ten million passengers annually pass through the terminal. Pre-transaction, Sydney airport received property lease payments for Qantas’ independent management of T3. Post-transaction, SYD takes control of T3, collecting revenue from passenger charges, revenue outlets and property revenues.

We account for the T3 transaction through the following assumptions:

. 10 million domestic passengers in FY15 . Revenue changes incorporated in FY16 . $7.25 average per-person domestic aeronautical revenue, the same per passenger charge as other domestic passengers . 50% discount to average per-person retail revenue ($3.42 vs $6.84). Passengers are primarily business orientated with less dwell-time and use airport lounges, reducing retail spending. Domestic passengers also tend to spend less in retail outlets. . Loss of property revenue of c. $18.5m based off estimated $250 per m2 for 74,000 total m2, reflecting the premium location above implied property average of $180 per m2. . EBITDA margins estimated at 62% (average group wide 81% EBITDA margin) owing to the reduced revenue from terminal but requirement to maintain the premium terminal to a higher standard. Approximated by doubling the group wide operating ratio (38% vs 19%). 11x EBITDA purchase price also provides indication of approximate margins. . Increase in CAPEX by $10m on annual basis to maintain the terminal . $369m additional bank facilities withdrawn to fund purchase . $535m increase in plants, properties and equipment account

Account Change in FY16 ($m)

Additional Aeronautical Revenue (10m at $7.25) 72.5

Additional Retail Revenue (10m at $3.42) 34.2

Loss of Property Revenue (74,000 at $250/m2) (18.5) Incremental Revenue 88.2

Operating Costs (38% Operating Ratio) (33.5)

EBITDA 54.7

Interest Expense ($369m at 6%) (22.1) Incremental CAPEX (10.0) Net Cash Flow Impact 22.6

Accretion (FY16 Net Operating Receipts $621.6m) 3.6%

Domestic aeronautical and retail revenues for T3 grow in line with their respective segments (see Appendix 12.4 and 12.6 respectively) as T3 is affected by the same variables as T2. The loss of property revenue is kept a constant figure as property rents are unlikely to increase substantially.

Appendix 13 Pro-Forma Assumptions

13.1 Capital Expenditure Capital expenditures are usually divided into maintenance CAPEX and growth CAPEX, however, this distinction is unclear for SYD as CAPEX usually for an airport involves not only maintaining, but an ongoing improvement process.

From FY15-19 CAPEX forecasts are based off management expectations of $1.2bn from FY15-19 approximately evenly spread out at $240m p.a. CAPEX until FY19 is focused on incremental improvements such as the Northern Lands bridge, T1 improvements and improved aircraft parking, which are much smaller than the higher CAPEX experienced during the T1 redevelopment that occurred until FY15. We have adjusted CAPEX upwards by $10m to account for upkeep of the T3 terminal. After FY19, we expect a rise in CAPEX being required to increase capacity of the airport. From FY19 onwards, we forecast CAPEX as 18% of revenue as CAPEX needs to increase to fund capacity improvements.

CAPEX as a % of Revenue 25.0% 21.8% 20.4% 20.0% 18.0% 18.0% 18.0% 18.0% 17.0% 16.1% 15.0%

10.0%

5.0%

0.0% 2014A 2015F 2016F 2017F 2018F 2019F 2020F 2021F

13.2 Depreciation and Amortisation SYD depreciates uses straight line-depreciation across different useful asset lives. Depreciation is forecast by calculating the historical depreciation rate. An average of the last two years of plants, property and equipment (PP&E) is used to account for the line item changing throughout the year. 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 푅푎푡푒 (%) = 1 1 1 (푃푃&퐸 + 푃푃&퐸 ) 2 1 0 A two year average from FY13-14 is used to account for the rise in the depreciation rate in FY14. A depreciation rate of 8.3% is used throughout the forecast horizon.

CAPEX & Depreciation FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Schedule

Depreciation rate 8.8% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% CAPEX 253.1 250.0 250.0 250.0 250.0 295.1 309.2 324.0 Depreciation (225.0) (236.9) (259.3) (258.5) (257.9) (259.0) (262.5) (266.8) PP&E 2,584.7 3,132.8 3,123.5 3,114.9 3,107.1 3,143.2 3,190.0 3,247.2

Amortisation is similarly forecast as a two year average of the observed rate between FY13-14. An amortisation rate of 3.0% is used throughout the forecast horizon.

Intangibles Schedule FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E

Intangibles (Excl. Goodwill) 6,977.8 6,878.6 6,780.6 6,683.9 6,588.6 6,494.7 6,402.1 6,310.8 Amortisation rate 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% Amortisation (101.4) (99.2) (98.1) (96.7) (95.3) (93.9) (92.6) (91.3)

13.3 Interest Expense Interest expense rate is forecast using the cost of debt approach derived in Appendix 14. Historical interest expense rate is forecast similarly to above, using an average of the last two years of interest bearing liabilities. However, as the average management cost of debt has decreased from FY14 (6.4%) to 1H15 (60%), we use the cost of debt as a more appropriate rate than the historical interest expense rate.

Interest-bearing method FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY14

Short term debt 733.6 474.0 474.0 474.0 474.0 474.0 474.0 474.0 474.0 Long term debt 6,006.8 6,760.2 7,379.2 7,629.2 7,879.2 8,129.2 8,429.2 8,729.2 9,029.2 Total Debt 7,234.2 7,853.2 8,103.2 8,353.2 8,603.2 8,903.2 9,203.2 9,503.2 7,234.2 Interest expense rate 7.1% 6.6% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% Interest expense 470.0 464.1 456.5 482.8 498.0 513.1 529.7 547.9 566.0

13.4 Debt Schedule SYD’s company policy is to use debt to fund CAPEX improvements. Debt has increased annually since FY11, however, EBITDA and EBIT have increased at a faster rate, allowing a natural delivering of SYD’s credit metrics, which are expected to continue into the future. We maintain the cost of debt at 6.1% despite increases in debt loading as credit metrics are expected to continually improve.

Net Debt/EBITDA Interest EBIT Coverage

7.6 3.5 7.4 3.4

7.2 3.3

7.0 3.2 6.8 3.1 3.0 6.6 2.9 6.4 2.8 6.2 2.7

6.0 2.6 5.8 2.5 2014 2015 2016 2017 2018 2019 2020 2021

SYD operates on a policy of preventing more than 15% of debt maturing in any single year. SYD’s short term debt consists of long-term debt expiring within the next twelve months. Short-term debt and long-debt are forecast with respect to the debt schedule provided by management, with long-term debt expiring in one year shifted to short-term debt. Expiring short-term debt is expected to be refinanced at similar rates.

Debt is increasingly financed using offshore bonds with lower interest rates, which are immediately converted into AUD. Exchange rate movements are fully hedged.

Debt Maturity Profile 1200

1000

800

600

400

200

0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Drawn Bank Undrawn Bank Domestic Wrapped Bonds Domestic Unwrapped Bonds Offshore Bonds

Forecasts: In FY15 we adjust for increase in bank debt of $369m for the T3 transaction. Further, we expect 250m of long-term debt issuance annually to fund CAPEX improvements. After FY19, CAPEX is likely to increase to 18% of revenue, and we expect 300m per year of debt to be withdrawn annually to fund CAPEX. We forecast expiring debt will be refinanced.

FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E New LT Debt 619.0 250.0 250.0 250.0 300.0 300.0 300.0 Net change in LT debt 619.0 250.0 250.0 250.0 300.0 300.0 300.0 Long-Term Debt 6,006.8 6,760.2 7,379.2 7,629.2 7,879.2 8,129.2 8,429.2 8,729.2 9,029.2 Short-Term Debt 733.6 474.0 474.0 474.0 474.0 474.0 474.0 474.0 474.0 Net Debt 6,297.1 6,787.4 7,439.5 7,689.6 7,942.8 8,196.3 8,494.9 8,890.7 9,263.9 Net Debt/EBITDA 7.2x 7.2x 7.5x 7.1x 6.9x 6.7x 6.5x 6.5x 6.4x Interest EBIT Coverage NM 2.9x 3.1x 3.1x 3.2x 3.3x 3.3x 3.4x 3.4x

13.5 Taxation SYD’s historical taxation rate is poorly reflective of the effective tax rate as it fluctuates from 311.3% in FY11 to -79.9% in FY12. The historical tax rate is poorly reflecting of the effective taxation rate owing to:

. Changes in corporate structure in late FY14 . The establishment of the intercompany loan from SAT1 to SAL . The ATO tax settlement of $55m in FY14 due to ATO scrutiny of the corporate structure from FY10-14.

The tax rate calculation is further complicated by two issues:

. The intercompany loan from SAT1 to SAL. The loan principal of $1.9bn payable on a semi-annual basis at an effective 13% p.a. . SYD having $467.7m in deferred tax assets from losses built up during the initial years of airport operation. The deferred tax asset is listed on the balance sheet as a component of the $1.96bn deferred tax liability. The deferred tax liability regards the capital gain on the airport license which is unlikely to be ever realised. However, as the deferred tax liability significantly exceeds the deferred tax assets, the net result is a $1.96bn deferred tax liability.

($m) FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E Pre-tax Profit 115.7 218.6 255.4 316.5 374.9 430.1 477.4 526.2 Taxation at 30% (34.7) (65.6) (76.6) (95.0) (112.5) (129.0) (143.2) (157.9) Taxation Credits used (29.4) 65.6 76.7 95.0 112.5 118.1 0.0 0.0 Taxation credits remaining 467.7 402.1 325.5 230.5 118.1 0.0 0.0 0.0 Effective Taxation Rate (%) 0.0% 0.0% 0.0% 0.0% 1.6% 19.8% 20.5%

From FY15-18, we model taxation at 30%, which is then reduced by deferred tax liabilities arising from historical losses. Taxation remains at the statutory tax rate of 30%, however, as interest income is paid out in the form of an intercompany loan, this effectively reduces the effective taxation rate. The actual pre-tax profit is better represented by adding back intercompany loan interest. To calculate the effective tax rate:

푃푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 × 30% (푠푡푎푡푢푡표푟푦 푡푎푥 푟푎푡푒) 퐸푓푓푒푐푡𝑖푣푒 푇푎푥 푅푎푡푒 (%) = 푃푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 + 𝑖푛푡푒푟푐표푚푝푎푛푦 𝑖푛푡푒푟푒푠푡

13.6 Dividends and Net Operating Receipts SYD’s policy is to distribute 100% of net operating receipts, a SYD specific proxy for equity cash flow. Net operating receipts is given by the formula: 푁푒푡 푂푝푒푟푎푡𝑖푛푔 푅푒푐푒𝑖푝푡푠 = 푃푟표푓𝑖푡 푏푒푓표푟푒 𝑖푛푐표푚푒 푡푎푥 푒푥푝푒푛푠푒 + 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 푎푛푑 푎푚표푟푡𝑖푠푎푡𝑖표푛 + 푛표푛 푐푎푠ℎ 푓𝑖푛푎푛푐𝑖푎푙 푒푥푝푒푛푠푒푠 − 푡표푡푎푙 표푡ℎ푒푟 푐푎푠ℎ 푚표푣푒푚푒푛푡푠

Profit before income tax expense has been used historically as tax expenses have been largely irregular due to ATO settlement costs or restructure taxation recognition. After FY19, when tax credits will be exhausted, we expect there to be a leakage of equity cash flow available for distribution and profit before tax expense will be adjusted by subtracting a tax expense.

Forecasts for non-cash financial expenses and other cash movements are kept constant at 1H15 levels adjusted for the full year.

As SYD does not pay corporate tax due to tax credits, there are no franking credits available for shareholders.

Australia’s Imputation System: In FY19 onwards, franking credits will likely be available as SYD is taxed at the corporate rate. In Australia’s imputation system, tax paid by a company is attributed to shareholders by way of a tax credit to reduce income tax payable on a distribution. SYD has expressed an intention to frank dividends, which would add an additional upside to our valuation.

We have not accounted for imputation tax credits in our valuation, but recognise imputation credits would add an additional upside to our target price.

Net Operating Receipts Calculation FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Profit before tax 109.2 115.7 218.6 255.4 316.5 374.9 430.1 477.4 526.2 Add: Depreciation & Amortisation 300.1 326.4 336.1 357.3 355.2 353.2 353.0 355.1 358.0 Profit before Tax, D&A 409.3 442.1 554.8 612.7 671.7 728.0 783.1 832.4 884.2 Less: Tax Expense (11.0) (143.2) (157.9) Add: non-cash financial expenses Capital Indexed Bonds Capitalised 22.0 29.7 14.6 14.6 14.6 14.6 14.6 14.6 14.6 Amortisation of Debt Establishment Costs 17.0 24.6 23.8 23.8 23.8 23.8 23.8 23.8 23.8 Borrowing Costs Capitalised (9.0) (8.0) (9.0) (9.0) (9.0) (9.0) (9.0) (9.0) (9.0) Change in fair value of swaps 11.0 54.6 (16.2) 0.0 0.0 0.0 0.0 0.0 0.0 Total non-cash financial expenses 41.0 100.9 13.2 13.2 13.2 13.2 13.2 13.2 13.2 Other cash movements (17.0) (17.9) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3) (4.3) Net Operating Receipts 433.3 525.1 563.7 621.6 680.6 736.9 781.0 698.1 735.3 Shares outstanding 1,976.5 2,213.5 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 2,238.9 NOR/Share 21.9c 23.7c 25.2c 27.8c 30.4c 32.9c 34.9c 31.2c 32.8c DPS 22.5c 23.5c 25.5c 27.8c 30.4c 32.9c 34.9c 34.9c 34.9c Dividend Growth 4.4% 8.5% 8.9% 9.5% 8.3% 6.0% 0.0% 0.0%

13.7 Dividend Reinvestment Plan SYD instituted a dividend reinvestment plan in FY14. While the last two years have seen SYD issue new equity to satisfy dividend reinvestment uptake. In the 1H15, the dividend reinvestment plan was used to finance the T3 transaction. Management has expressed intention to not issue additional equity and instead repurchase existing shares.

Adjustments: In FY15, SYD uses the DRP to fund the T3 transaction. 1H15 saw a 26% DRP uptake, resulting in a share capital increase of $148.4m and total number of shares increasing by 25.4 million.

By repurchasing existing shares, SYD uses dividends paid out to purchase existing shares. This has no impact on cash flow and thus is not modelled explicitly within our financial statements from FY16 onwards.

13.8 Other Line Items

Income Statement Accounts Assumptions

Revenue is modelled based off analysing each revenue segments relationship with passenger Revenue numbers. See Appendix 12 for more information.

Cost of Goods sold encompasses both employee and service and utility expenses, which are both Cost of Goods Sold expenses which increase with more revenue. COGS is forecast as a percentage of revenue. A three year average is used due to the stability and is forecast to remain at 8.7% over the forecast period.

Selling, general and administration expenses consists of property and maintenance costs, security recoverably expenses, investment transaction expenses and other expenses. SG&A is also forecast Selling, General and as a percentage of revenue at 10%, with an adjustment in FY16 to account for the T3 expenses. Administration Expenses Afterwards, we forecast SG&A expense rate to decrease by 0.4% p.a. as T3 is integrated with the other airports.

The interest revenue rate is held at a three year average of 3.0%, owing to a change in cash policy Interest Revenue from FY2012. Interest revenue is calculated with respect to an average of the cash holdings between the current year and the previous year.

Interest Expense Interest expense rate is calculated using the cost of debt of 6.1%, outlined in Appendix 13.3.

Abnormals The value of abnormals is held to be zero.

Balance Sheet Accounts Assumptions

Cash and Cash Equivalents Annual cash balance is calculated through an integrated cash flow statement in Appendix 3.

Accounts receivables is forecast through a Days Sales Outstanding (DSO) approach. Days Sales Outstanding indicates the average number of days for the company to collect accounts receivable. Current Receivables A two year average of 44.3 days has been used throughout the forecast period as the rate stays relatively constant between the two years.

Prepaid expenses, inventory, investments and other expenses are all held to be constant, absent of Other Current Financial Assets any indication otherwise.

Investments consist of derivative financial instruments used to hedge foreign currency and interest rate risk. SYD has shifted towards using more international bonds due to global interest rates in Investments FY14 and we expect derivative financial instruments will stay at similarly high levels of $442.8m to hedge these risks.

Intangible assets reduce annually by the amortisation rate. Intangibles consist of the airport license, Intangible assets leasehold land and concession and customer contracts, which are unlikely to change substantially.

Non-current liabilities, non-current inventories, Goodwill and other non-current assets are held to Other Non-current Assets remain constant over the forecast horizon.

Accounts payables is forecast through a Days Payable Outstanding (DSO) approach. Days Payables Outstanding indicates the average number of days for the company to pay accounts. A two year Accounts Payable average of 56.3 days has been used throughout the forecast period owing to a large change in payables between FY12-13, suggesting a change in creditor policy.

Distributions payable are the dividends payable in the next half year. We forecast this to remain Distributions Payable approximately constant throughout the forecast horizon.

Short-term debt is forecast according to a debt schedule. Long-term debt maturing within one year Short-term Debt is shifted to short-term debt. Short-term debt is assumed to all be refinanced and shifted into long- term debt at expiration. See Appendix 13.4.

Other Current Liabilities Other current liabilities are forecast to remain constant absent of indication otherwise.

Non-current Provisions Non-current provisions are held to be constant over the forecast horizon at $1.96bn.

Long-term debt is forecast according to a management debt schedule. Long-term debt expiring in the next year is shifted to short-term debt. Expiring short-term debt is expected to be refinanced Long-term Debt and shifted into long-term debt. New long-term debt is also issued to finance investing activities. See Appendix 13.4.

Other Non-current liabilities Other non-current liabilities are forecast to remain constant absent of indication otherwise.

Share Capital Share capital is forecast to increase (need to look into this one)

Reserves Reserves are forecast to remain constant absent of indication otherwise.

Retained earnings is forecast according to net income and dividend forecasts. 푅푒푡푎𝑖푛푒푑 푒푎푟푛𝑖푛푔푠- Retained Earnings 푡 = 푅푒푡푎𝑖푛푒푑 푒푎푟푛𝑖푛푔푠푡−1 + 푛푒푡 𝑖푛푐표푚푒푡 − 푑𝑖푣𝑖푑푒푛푑푠 푑𝑖푠푡푟𝑖푏푢푡푒푑푡.

Appendix 14: Weighted Average Cost of Capital (WACC)

Explicit WACC Terminal WACC Cost of equity 7.5% 7.5% Cost of debt 6.1% 6.1% Debt/Value 36.5% 36.5% Equity/Value 63.5% 63.5% Tax Rate 0.0% 20.5% WACC 7.0% 6.6%

We have used the Weighted Average Cost of Capital (“WACC”) as the discount rate for the Free Cash Flows to Firm (“FCFF”). WACC represents the minimum return the company must earn to satisfy their sources of capital.

SYD’s weighted average cost of capital is calculated to be 7.0% in the forecast period and 6.6% in the terminal period, according to the formula below. The after-tax cost of debt is used in the WACC calculation to account for the tax shields available for debt financing. 퐸 퐷 푊퐴퐶퐶 = ( ) 푘 + ( ) (1 − 푇 )푘 푉 푒 푉 푐 푑 A WACC for the seven-year forecast horizon and the terminal period have been calculated, as tax credits from historical losses are expected to be exhausted in FY19 and we find an effective tax rate of 20.5% will apply after FY19. As SYD begins to pay tax, a debt tax shield is accounted for with the (1 − 푇푐) term, thereby reducing the WACC. We expect the capital structure to remain unchanged at 36.5% gross debt to enterprise value without contrary management guidance.

Tax Rates We expect taxation credits of $468m to be exhausted in FY19. Taxation prior to the exhaustion of tax credits will be 0%.

($m) FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Pre-tax Profit 115.7 218.6 255.4. 316.5 374.9 430.1 477.4 526.2 Taxation at 30% (34.7) (65.6) (76.6) (95.0) (112.5) (129.0) (143.2) (157.9) Taxation Credits used (29.4) 65.6 76.6 95.0 112.5 118.1 0.0 0.0 Taxation credits remaining 467.7 402.1 325.5 230.5 118.1 0.0 0.0 0.0 Effective Taxation Rate (%) 0.0% 0.0% 0.0% 0.0% 1.6% 19.8% 20.5%

The terminal effective tax rate is calculated by the following formula to account for the intercompany loan acting to reduce the effective tax rate. 푃푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 × 30% (푠푡푎푡푢푡표푟푦 푡푎푥 푟푎푡푒) 퐸푓푓푒푐푡𝑖푣푒 푇푎푥 푅푎푡푒 (%) = 푃푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 + 𝑖푛푡푒푟푐표푚푝푎푛푦 𝑖푛푡푒푟푒푠푡

We find a terminal effective tax rate of 21.0% in FY21E which we take as an approximation for the terminal effective tax rate. In the long-run, the effective taxation rate should converge to the statutory rate as profit before grows while the intercompany interest remains constant. We test the sensitivity of the share price to both terminal WACC and terminal tax rate to account for this uncertainty.

14.1 Cost of equity The cost of equity is calculated through a triangulation of three methods, the Capital Asset Pricing Model (CAPM), the Fama-French 3 Factor Model and the Dividend Discount Model (DDM). The cost of equity represents the return on equity that must be earned to sufficiently compensate investors for the equity risk and thus represents the equity hurdle rate for SYD shareholders. The cost of equity is expected to remain constant throughout the forecast horizon and into perpetuity.

Triangulation Method Rate Weighting CAPM 7.5% 80% Multi-Stage DDM 7.9% 20% Fama-French 3 Factor 8.6% 0% Cost of Equity 7.5%

The triangulation weights the CAPM model at 80% as the key assumption that investors hold diversified portfolios is likely to be satisfied as SYD is largely held by institutional investors. The wide use in industry and empirical backing further justify its high weighting. The dividend discount model is considered with a weighting of 20% due to the importance of dividends to SYD investors. However, the assumptions of market efficiency and constant growth limit a higher weighting. The Fama-French 3 Factor model is weighted at 0% due to only American data being available and its inappropriateness for use in SYD with largely Australian equity holders.

Capital Asset Pricing Model The CAPM model proposes shareholders need to be compensated in two ways, for the time value of money and the risk they have taken. The time value of money is accounted for with the risk-free rate (rf). The risk of an asset is the risk that it adds to a market portfolio, which is measured through a standardised covariance, beta (β). The CAPM assumes investors hold a diversified portfolio, have no transaction costs and can borrow or lend at the risk-free rate. The CAPM formula is:

퐶퐴푃푀 = 푟푓 + 훽(푟푚 − 푟푓)

The CAPM model requires (i) the risk-free rate (rf), (ii) the beta (β) and (iii) the equity market risk premium (rm-rf)

Risk-Free Rate

The risk-free rate is the expected return of an entirely risk-less asset. While no such asset exists, the 10-Year Australian Government Bond has been chosen as the most appropriate as the Australian AAA credit rating and sovereign taxation powers implies a negligible default risk. The long 10-year maturity asset is appropriate to align the asset with the cash flows, which have been forecast into perpetuity.

Method Rate Weighting 10 Year CGB (Spot) 2.5% 40% 10 Year CGB (TTC) 4.7% 60% Risk-free rate 3.8%

While the current yields are at cyclical and historical lows, in the long-run, interest rates will likely eventually rise from eventual global economic recovery. To accurately gauge long-term interest rates, we have weighted a 10 year average representing the “through-the-cycle” (TTC) risk-free rate and the current risk-free rate as at August 2015. We conservatively weight the spot rate at 40% and through-the-cycle rate at 60% to account for interest rates eventually increasing. Despite our view of low interest rates persisting, we have conservatively estimated a higher risk-free rate, as a lower risk-free rate would reduce the WACC and thereby add further upside to our valuation.

Historical Interest Rates (10 year CGB) 7.00 6.00 5.00 4.00 3.00 2.00 1.00

0.00

2011 2011

2010 2012 2012 2013 2013 2015

2014

2007

2005 2005 2006 2006 2008 2008 2009 2009 2004 39

Beta

Beta is triangulated from three different methods; a historical regression, a Bloomberg adjusted beta and a median of comparable companies.

Method Beta Weighting Historical Regression 0.50 20% Bloomberg Estimate 0.58 60% Comparables Median 0.81 20% Triangulated Beta 0.57

Historical Regression: A historical regression outputs a beta of 0.50. A three-year time frame is considered optimal to avoid capturing SYD prior to its restructuring in 2011, which due to divestments of foreign airports and increased holding in SYD, fundamentally changes the risk associated with the equity. Monthly intervals are appropriate to balance between insufficient data points from longer intervals and non-trading bias associated with shorter intervals. The All Ordinaries is considered the most appropriate market proxy due to the survivorship bias present in the ASX200 and capturing a greater proportion of the market. The historical beta is assigned a weighting of 20% due to the better reliability of the Bloomberg estimate.

Bloomberg-sourced Beta: Bloomberg outputs a raw beta of 0.58, calculating the slope of a regression of excess returns of SYD against the All Ordinaries Index. The beta differs to the historical regression as it is conducted on a weekly basis for two years, an industry standard calculation. As Bloomberg’s unadjusted beta is commonly used in industry, it is weighted the highest at 60%.

An alternative beta is an adjusted Bloomberg beta of 0.72, calculated by adjusting the beta according to the formula 훽푎푑푗푢푠푡푒푑 =

훽푟푒푔푟푒푠푠푖표푛 (2/3) + 1 (1/3). This adjusted beta is inappropriate for SYD as the assumption of all betas converging towards 1 does not hold true for SYD, which as an infrastructure asset will inherently have less risky cash flows than the market. Consequently, the adjusted beta is weighted at 0%.

Comparable Companies Beta: A comparables beta of 0.81 is calculated from an average of betas of the airports in our multiples analysis listed below. The comparable betas are unlevered at company-specific capital structure and re-levered at SYD’s capital structure to isolate the operational risk of each company. Owing to a weak comparable set due to the unique nature of SYD’s operations, the comparables company beta is weighted at 20%. We do not consider competing infrastructure equities as they have vastly different operational risks.

The reweighting process is shown below. Data is as at 23/09/2015, with a target tax rate of 30% and target debt-to-equity ratio of 57.5% as there are no indications of debt-to-equity changes.

Levered Beta Debt/Equity Unlevered Beta Re-levered Beta Auckland International Airport 0.96 30.0% 0.79 1.11 Flughafen Wien 0.25 29.0% 0.20 0.28 Flughafen Zurich 0.68 23.0% 0.58 0.81 Københavns Lufthavne A/S 0.38 19.0% 0.33 0.47 Beijing Capital International Airport 0.27 46.0% 0.20 0.28 Shanghai International Airport 0.90 5.0% 0.87 1.22 Airports of Thailand PCL 1.40 8.0% 1.32 1.85 Median Comparables Beta 0.81

Market Risk Premium

The market risk premium 6.0% is calculated from a triangulation of a forward-looking survey and historical analysis. The historical risk premium is assigned a 20% weighting as it is backward looking while the forward looking survey is weighted higher at 80% as it is forward looking and more reflective of the current market risk premium.

Method Risk Premium Weighting Historical Risk Premium 5.7% 20% Survey Risk Premium 6.0% 80% Triangulated Risk Premium 6.0%

The historical risk premium is taken from a study conducted by Brailsford (2012), finding a 5.7% market risk premium for arithmetic, nominal excess returns above the return on bonds from the period 1937-2010. The longer period accounts for extreme troughs and peaks. We use a market risk premium without imputation credits as SYD has historically not paid imputation credits.

A forward-looking survey (Fernandez et al. 2011) of 6,014 academics, analysis and companies finds a market risk premium of 6.0%.

Fama-French 3 Factor Model The Fama-French 3 factor model calculates a cost of equity of x.x%. The model improves upon the CAPM by accounting for market, size and value premiums according to the formula:

푘푒 = 푟푓 + 훽푚푎푟푘푒푡(푟푚 − 푟푓) + 훽푠푖푧푒(푆푀퐵) + 훽퐻푀퐿(퐻푀퐿) A three-year regression is conducted against available information from Kenneth French’s database on American SMB (Small-minus-big) and HML (High book-to-market minus low) and the Australian market risk premium. Small-minus-big measures market capitalisation while high book-to-market minus low measures “value”. Only American data is available for the SMB and HML factors and is used as an input in the Fama- French 3 Factor Model.

Method Premium Co-efficient Market Risk Premium 6.0% 1.01 Size Premium 3.1% -0.49 Value Premium -0.7% -0.33 Risk-Free Rate 3.8% Cost of Equity (FF3) 8.6%

Dividend Discount Model (DDM) A single-stage DDM model outputs a cost of equity of 7.9%. The model assumes the price of SYD is a function of the discounted cash flows paid out to shareholders in the form of a dividend.

퐷𝑖푣1 푘푒 = − 푔 푃0 The single-stage model assumes dividends grow at a constant rate, leading us to believe the single-stage DDM is sub-optimal for calculating the cost of equity. Instead, a multi-stage DDM is more appropriate to factor in our explicit assumptions of dividends into calculations. We have assigned the single-stage DDM a 0% weighting in our cost of equity triangulation. The single-stage DDM model computes a cost of equity of 7.6%.

The multi-stage DDM computes a cost of equity of 7.9%. The two-period approach allows for explicit forecasts to be into the calculations.

2015 2016 2017 2018 2019 2020 2021

Forecasted Dividend 25.5c 27.8c 30.4c 32.9c 34.9c 34.9c 34.9c

Assumption Rate

Terminal Dividend Growth 3.2%

Cost of Equity (DDM) 7.9%

The method continues to assume dividends grow at a constant rate from FY21 and market value of a stock is equal to intrinsic value. We use the solver function of Microsoft Excel to find an appropriate cost of equity for the dividend discount share price to equate with the market share price.

SYD distributes dividends according to net operating receipts, a proxy for cash flow available for equity holders. Net operating receipts is calculated according to the formula푁푒푡 표푝푒푟푎푡𝑖푛푔 푟푒푐푒𝑖푝푡푠 = 푝푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 + 퐷&퐴 + 푛표푛 − 푐푎푠ℎ 푓𝑖푛푎푛푐𝑖푎푙 푒푥푝푒푛푠푒푠 + 푐푎푠ℎ 푚표푣푒푚푒푛푡푠. The latter two terms cannot be accurately forecasts as they vary considerably annually. We instead forecast dividends alongside the growth of 푝푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 + 퐷&퐴. Up until FY19 we expect dividend growth of c. 8-9%, similar to management expectations of 8-12%.

After the exhaustion of tax credits in FY19, we expect dividend growth to recede to stay constant for a few years due to the leakage of cash flow to taxation expenses. Subsequently, in our terminal period, we use a terminal dividend growth rate of 2.9%, which we find is an appropriate approximation of the terminal growth rate. A direct terminal growth rate cannot be calculated due to our use of the three stage growth model.

Further, the method involves a circularity, using the market price to derive a cost of equity, which we then use to predict a share price. This leads us to weigh the dividend discount model of calculating equity at a low 20%,

14.2 Cost of Debt The cost of debt is triangulated from three different methods. Additionally, the yield-to-maturity method is discarded as it is intuitively too low and the Altman’s Z-Score method does not account for SYD’s unique ability to carry more debt. `

Method Cost of debt Co-efficient Management Rate 6.0% 50% Credit Spread 5.6% 25% Interest-bearing method 6.6% 25% Cost of Equity (FF3) 6.1%

The interest-bearing liabilities method is assigned a weighting of 25% as it is backwards looking and there is limited data reflecting SYD’s cost of debt today. The credit spread method is given a 25% weighting as external agencies are assumed to be able to accurately measure and account for SYD’s unique default risk. However, the credit spread rating is restricted by the lack of reliable, comprehensive Australian data and the difficulty in accounting for the range of debt instruments SYD holds across different currencies. Due to the recent refinancing, management guidance is best able to estimate the cost of debt moving forward and is appropriately assigned a 50% weighting.

Management Rate Management estimates a cost of debt of 6.0% for the first-half of the year ending 30 June 2015.

Credit Spread Method The credit spread method uses the BBB S&P rating to approximate a risk premium above the risk-free rate. This method uses Damodaran’s data on credit spreads in the United States. The lack of comprehensive Australian data necessitates American bond spreads and are appropriate as a large proportion of debt is USD denominated with SYD’s intention to increasingly raise further debt internationally. We use the risk-free rate determined above in the cost of equity.

Credit Spread Method Rate Base Rate (Risk-free) 3.8% Yield Spread over 10-year maturity 1.8% Cost of Debt 5.6%

Interest Bearing Liabilities Method The interest bearing liabilities rate of 6.6% is calculated by dividing the historical income statement interest by the total balance sheet interest bearing liabilities. Interest bearing liabilities are calculated as an average of the current and previous year to reflect changing debt levels throughout the year. Only the FY14 historical rate is used owing to the landmark refinancing in late FY13 which reduced average debt rates owing to improved credit metrics and globally low interest rates.

Value ($m) Interest Expense 461.1 Average Total Debt 6,987.3 Cost of Debt (IBL) 6.6%

Yield-to-Maturity Method The yield-to-maturity method produced a rate of 3.4%; this was done by finding the YTM on all SYD's public debt and then weighting these to find the aggregate weighted YTM. This method was given a 0% weighting in the cost of debt calculation as the rate produced is below the risk- free rate.

Altman’s Z-Score The Altman’s Z-Score method uses five different metrics to calculate the probability of bankruptcy and converted through a credit rating into a cost of debt. Altman’s Z-Score Value ($m) Co-efficient Working Capital/Total Assets -0.04 1.20 Retained Earnings/Total Assets -0.04 1.40 EBIT/Total Assets 0.05 3.30 MV of Equity/BV of Total Liabilities 1.17 0.60 Sales/Total Assets 0.10 1.00 Altman’s Z-Score 0.89 Credit Rating B Yield Spread over Risk-free 5.0% Cost of debt (Altman’s Z-Score) 8.8%

While Altman’s Z-Score implies SYD is close to bankruptcy, this method is based off an American 1960’s study on manufacturing firms. It does not account for SYD’s monopoly position and extreme stability of cash flows common to infrastructure firms. The Altman’s Z-Score method is not used in the calculation due to the 8.8% cost of debt which is intuitively too high.

Appendix 15 Terminal Value

In our discounted free cash flow model, we use a three-stage growth model. We explicitly model the first seven years until FY21, after which we assume the Free Cash Flows to the Firm (FCFF’s) will grow at a predictable rate The terminal value consists of the latter two stages of the three- stage model, growing FCFF’s at a higher initial rate to account for the possibility for passenger increases until 2035, after which we expect FCFF growth to be at inflation. This requires three inputs (1) the FCFF growth rate of the higher-growth stage, (2) the year at which we expect KSA capacity to be reached and (3) the FCFF growth rate into perpetuity.

15.1 Three Stage Growth Model

Inputs 1st Stage Growth 4.9% 2nd Stage Terminal Growth 2.3% 1st Stage Growth Period 13 years Terminal Growth First Year 2035

Two Stage Growth Model Discounted Value of Free Cash Flows (to FY14) 4,636.1 1st Stage Final Year Free Cash Flows 899.7 1st Stage Value of Free Cash Flows 10,535.6 Discounted First Stage of Free Cash Flows (to FY14) 6,559.9 2nd Stage Previous Year Free Cash Flows 1,685.6 Terminal Value of Free Cash Flows 40,076.5 Discounted Terminal Value of Free Cash Flows (to FY14) 10,351.5 Enterprise Value (as at FY14) 21,547.5 Enterprise Value (as at 23 September 2015) 22,639.7 Less: Net Debt (FY15) 7,439.5 Equity Value (as at 23 September 15,200.2 2015) Current Shares Outstanding (FY15) 2,238.9 Price of Share (as at 23 September 2015) $6.79

Explicit Stage FCFF Growth Our explicit forecast horizon predicts FCFF growth to taper to 5.1% in FY20-21. FCFF’s initially grow strongly due to the high passenger number increases from open skies agreements with China, Qantas’ recovery and the purchase of the T3 lease. Additional discussion of FCFF’s up until FY21 can be found in Appendix 16.

Second Stage FCFF Growth We forecast the second stage of FCFF’s to continually grow at a high rate due to both inflation and passenger increases driving FCFF growth above a reasonable growth perpetuity growth rate. We have determined the second stage FCFF growth rate by summing the final year passenger growth (2.7%) and inflation (2.25%), to arrive at a second stage FCFF growth rate of 4.9%.

We justify this rate as appropriate because the cash flow growth of Sydney Airports is ultimately a function of inflation and passenger growth. We have chosen not to use the 5.1% FCFF growth between FY20-21 as this does not accurately represent the long-run CAPEX that would be required in expanding the airport to increase capacity to c. 70m passengers.

Second Stage Growth End Date We expect the second stage of high growth to persist until capacity at KSA is reached. The year at which the second stage is expected to be reached is a function of (1) the passenger growth rate and (2) the total capacity for the airport. Studies find a varying range of years when capacity is forecasted to be exhausted. The studies we have considered include:

. Commonwealth Bank predicting capacity to be exhausted in 2025 assuming a 4.0% annual growth rate. We argue this study does not appropriately consider reconfiguration of the airport to accommodate increased capacity. . Sydney Airport Corporation releasing a statement arguing there is ample capacity to meet forecast demand to 2045, with a CAGR of 2.7%, factoring in changes in configuration of the airport and the construction of a second airport. . Sydney Airport Master Plan forecasts a 3.4% CAGR up until 2033, after which capacity can continually increase to c. 90m . Joint study forecasts of a 3.1% CAGR from 2010 to 2035, after which limited additional capacity is available.

We choose to take a conservative view and forecast a 2.7% growth rate in passenger numbers. We take the lower end of estimates for passenger growth as a higher passenger growth rate would result in capacity exhaustion even earlier than expected. This would have the effect of bringing cash flows forward, increasing the present value of cash flows, providing further upside to our valuation.

We take a conservative view and expect maximum capacity of KSA to be c. 70m. While Sydney Airports argues there is considerable scope for expansion up to 90m p.a., this is condition upon expansion which could be limited by the development of the second Badgerys Creek airport and other regulatory considerations. A higher capacity would allow for a longer high growth stage, providing further upside to our valuation.

Passenger Growth and Capacity

100

2017

2015 2019 2021 2031

2041

2027 2037

2023 2025 2029 2033 2035 2039 2047

2043 2045 2049

2.7% 2.0% 2.5% 3.0% 3.5%

We conduct a two way sensitivity between year of capacity exhaustion and the second-stage FCFF growth rate to appropriately consider the impact of a change of these variables. This is discussed in Appendix 17.

Perpetuity FCFF Growth The perpetuity FCFF growth rate is the rate which FCFF’s grow into perpetuity. As we presume this stage will only occur upon reaching KSA capacity limits, revenue should only grow at inflation beyond this point. We take 2.25% as inflation, on the lower end of RBA inflation targets between 2-3%.

We conduct a sensitivity analysis in Appendix 17 to appropriately consider the impact of the final growth stage on the share price.

15.2 Alternative Terminal Valuation Methods To test for the robustness of our result, we consider how our three stage DCF model fits within the assumptions of (1) a two-stage DCF model and (2) a terminal exit multiple.

Two-Stage DCF Model Implied Terminal Growth Rate

The two-stage DCF model is generally the most common intrinsic valuation technique. The two-stage DCF model requires a prediction of the terminal growth rate (“TGR”), which is an extremely sensitive assumption. Rather than directly applying the technique, we use our DCF share price of $6.79 to derive an implied TGR to ascertain if growth assumptions are reasonable.

Using Solver on Excel, we find a 3.1% terminal growth rate would produce a terminal value of $27.1bn, equivalent to our three-stage growth model. The terminal growth rate must lie above inflation and below long-run GDP growth. A TGR below inflation no longer values the company as a going concern. A TGR above long-run GDP growth suggests the company will eventually expand beyond the size of the economy. Assuming a 2% as the lower bound for inflation and 3.5% for the upper bound of GDP growth, we find the implied TGR lies on the upper spectrum of this range.

Triangulating a TGR

We also triangulate a TGR to consider the appropriateness of the 3.1% implied terminal growth rate. The terminal growth rate is derived as a function of (1) inflation, (2) inflation summed with passenger growth and (3) long-run economic growth.

Terminal Growth Rate Analysis

Economic Variables Inflation 2.3% Terminal PAX Growth 2.7% Economic Growth Rate (nominal) 3.5% Domestic Population Growth 1.8% International Population Growth 1.1%

Single Stage Growth Model Triangulation Rate Weighting Economic Growth Rate 3.5% 10% Inflation 2.3% 60% Inflation + PAX growth 4.9% 30% Terminal Growth Rate 3.2%

We place a 60% weighting on inflation as cash flows should ultimately grow in line with revenues. We place a 30% weighting on inflation summed with terminal passenger growth owing to SYD’s capacity to increase passengers until approximately 2035. A 10% weighting is assigned to the long-run GDP growth rate to account for the economy impacting the long-run growth of SYD.

The TGR of 3.2% is similar to the implied TGR (3.1%), supporting the appropriateness of assumptions made in the three stage DCF growth model.

Terminal Exit Multiple The terminal exit multiple calculates an appropriate terminal value by applying a trailing multiple to EBITDA or earnings. We use EV/EBITDA as SYD holds large amounts of debt, making P/E unsuitable because it does not consider capital structure. Rather than directly applying the method, we use Solver to find the implied terminal exit multiple that outputs a share price of $6.79.

We find an 18.8x EV/EBITDA terminal exit multiple produces a terminal value of $27.1bn, equivalent to our three stage growth model. Compared to SYD’s trailing EV/EBITDA multiple of 18.3x, the implied 18.8x EV/EBITDA multiple appears reasonable and supports the terminal value of the three-stage growth model.

Appendix 16: Forecast Horizon

Free Cash Flows to Firm 1,200 25%

20% 1,000 15%

10% 800 5%

600 0%

-5% 400 -10%

-15% 200 -20%

0 -25% FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021

FCFF

The FCFF’s fall significantly in FY19, as SYD’s exhaustion of tax credits results in a significant reduction of free cash flows.

A forecast horizon of seven years is used in modelling SYD, in order to find a stable level of cash flows to the firm. Without a ‘steady state’ where cash flows grow at a constant level, an assumption of terminal growth would be invalid. The seven year forecast horizon is longer than a normal explicit horizon applicable to an infrastructure asset as we expect significant growth from emerging nations flying into Sydney.

FCFF’s grow at 5.0% in FY20-21, indicating a steady rate of growth has been reached. The steady growth rate of 5.0% is above the normal constraints of the terminal growth rate and is considered in Appendix 15.

After FY21, we use a three stage perpetuity to calculate the terminal value of the business (Appendix 15).

Appendix 17 Sensitivity Analysis

Sensitivity analyses are conducted to test key assumptions of our discounted cash flow analysis for the FCFF and DDM models.

17.1 FCFF Three Stage Growth Model The key assumptions of the Free Cash Flow to Firm Discounted Cash Flow model are WACC, the terminal value, passenger forecasts and margins. The latter two assumptions are considered in the Monte Carlo analysis, which simulates a normal distribution around our base case scenarios. The focus in Sensitivity Analyses are around the components of WACC and assumptions of the terminal value.

17.1.1 Cost of Equity and Cost of Debt

The cost of debt and cost of equity are components of the forecast horizon WACC and terminal WACC. Despite being 90% hedged for the next year, SYD’s high use of debt financing of maturities extending to 2033 means the cost of debt is a key input. The cost of debt is sensitised between 5.5% and 6.7% in increments of 0.2%, representing a reasonable range in the pre-tax cost of debt. The cost of equity is sensitised between 7.2% and 8.2% in 0.2% intervals, representing a cost of equity range found by adjusting our beta triangulation weightings (Appendix 14).

We note both have significant impacts on SYD’s share price owing to the large proportion of debt financing. It is observed a 0.2% increase in the cost of debt and cost of equity respectively decrease the share price to $6.64 and $6.49, a 2.2% and 4.4% change respectively.

Cost of debt

5.45% 5.65% 5.85% 6.05% 6.25% 6.45% 6.65% 7.15% $7.97 $7.79 $7.62 $7.45 $7.28 $7.12 $6.97 7.35% $7.60 $7.43 $7.27 $7.11 $6.95 $6.80 $6.66 7.55% $7.25 $7.09 $6.94 $6.79 $6.64 $6.50 $6.36

Cost of equity 7.75% $6.92 $6.77 $6.63 $6.49 $6.35 $6.22 $6.09 7.95% $6.61 $6.47 $6.34 $6.20 $6.07 $5.95 $6.79

17.1.2 WACC and Terminal WACC

The explicit period WACC and terminal WACC are both flexed as to determine their impact on the share price. As the terminal value contributes 78.5% to the enterprise value, a change in the terminal WACC has a greater impact on the share price. The terminal WACC is flexed between 6.4% and 7.2%, reflecting the low value of the base case WACC of 6.6%. The explicit WACC is sensitised between 6.6% and 7.4%, as the low beta of the stock and high leverage contribute the WACC being relatively low.

Terminal WACC 6.4% 6.6% 6.8% 7.0% 7.2% 6.6% $7.55 $7.25 $6.98 $6.73 $6.49

6.8% $7.30 $7.02 $6.75 $6.51 $6.28

WACC 7.0% $7.07 $6.79 $6.53 $6.30 $6.08 7.2% $6.84 $6.57 $6.32 $6.09 $5.88 7.4% $6.62 $6.36 $6.12 $5.90 $5.69

17.1.3 Second Year Growth Stage

In our three stage DCF valuation, the rate of growth in the second stage and the end year of the second stage of growth are sensitive inputs. For SYD, a higher growth in the second stage would come about due to higher passenger growth. Higher passenger growth would be offset with capacity being reached at an earlier date. We take 70m passengers as a conservative estimate of capacity at KSA. In Appendix 15.1, it is estimated a 0.5% increase in passenger growth results in a capacity being reached three years earlier. The sensitivity analysis tests the impact of this change on the share price.

Terminal Number of Years until Capacity Reached

2029 2032 2035 2038 2041 2044 7 10 13 16 19 22 3.9% $5.63 $5.83 $6.03 $6.22 $6.39 $6.56 4.4% $5.83 $6.12 $6.40 $6.66 $6.92 $7.16 4.9% $6.04 $6.42 $6.79 $7.14 $7.48 $7.81 5.4% $6.26 $6.74 $7.20 $7.65 $8.09 $8.53

Passenger Passenger growth rate 5.9% $6.48 $7.06 $7.63 $8.20 $8.75 $9.30

17.1.4 Final Stage Growth Rate

The final stage of growth will begin in 2035, after KSA capacity is reached and continue into perpetuity. This stage of growth is driven by the final stage growth rate, which we have taken as 2.25%, the lower end of inflation. Inflation is an appropriate proxy for this final stage as after capacity is reached, any growth in FCFF’s can only come about from inflation. We find a 2% inflation rate, the very low end of RBA estimates, would product a share price of $6.32, still a substantial premium to the last close.

Share Price 1.75% $5.90 2.00% $6.32 2.25% $6.79

2.50% $7.31

ate

inal Stage Growth

F R 2.75% $7.91

17.2 Dividend Discount Model The key assumption of the dividend discount model is the terminal growth rate of the dividends. We have estimated a 3.1% increase in dividends payable, estimated from the implied terminal growth rate (Appendix 15.2) and adjusting the figure downwards to account for the gradual increase in taxation expenses which reduce equity cash flow payable to shareholders. The terminal growth rate is flexed between 2.1% and 4.6%, the lower bound representing inflation while the upper bound represents a higher growth rate in line with passenger growth summed with inflation. The dividend discount model is extremely sensitive to the terminal dividend growth rate assumption and we raise this as the primary reason the model is assigned a 20% weighting.

The base case for our DDM is a terminal growth rate of 3.1%, giving an intrinsic share price of $6.90.

Share Price 2.1% $5.90 2.6% $6.35 3.1% $6.90

3.6% $7.59

ate

erminal Growth

T R 4.1% $8.48

Appendix 18 Scenario Analysis

We conduct a scenario analysis by flexing key variables to assess the robustness of our DCF valuation. We find a bull scenario result of $7.23 provides a further 6.5% upside above the DCF target price of $6.79. Our bear scenario result of $6.16 provides a 9.2% downside to the $6.79 DCF target price.

Bull Bear DCF Valuation $7.23 $6.16 Upside (Downside) 6.5% (9.3%) The key variables flexed are: Domestic Passenger Growth Change +0.5% -0.5% International Passenger Growth Change +1.0% -0.1% CAPEX Change +10m -10m Second Stage Growth Rate 5.6% 4.3% End Year of Second Stage Growth 2032 (-3) 2038 (+3)

We flex our passenger growth assumptions in both directions, as the number of passengers largely drives SYD’s revenue.

Domestic Passenger Growth

Our bull and bear situation changes domestic passenger growth by 0.5% and -0.5% respectively. Our bull situation aligns more closely with Sydney Airports Master Plan 2033 predictions. Our bear situation would have domestic passenger growth significantly below Sydney Airport projections. We flex domestic passenger growth less than international passenger growth as domestic passenger numbers are expected to be more steady and subject to less fluctuation following a reduction in volatility in the domestic airline market.

International Passenger Growth

Our bull and bear situation changes international passenger growth by 1.0% and -1.0% respectively. While our base case is optimistic on Chinese growth, our bull situation is premised on further unexpected increases in passenger growth from China. Our bear scenario reduces international passenger growth to 3, roughly in-lines with historical growth and would only occur if the open skies agreement had a minimal impact on international travel.

Revenue Growth for Bull and Bear Case

Revenue Growth FY15E FY16E FY17E FY18E FY19E FY20E FY21E Base Case 5.8% 13.2% 6.3% 5.6% 5.3% 4.8% 4.8% Bull Case 6.6% 13.9% 7.1% 6.4% 6.1% 5.5% 5.5% Bear Case 5.1% 12.5% 5.6% 4.9% 4.5% 4.0% 4.0%

The bull case increases revenue growth significantly from 5.8% to 6.6%, driven by the increases in passenger growth. Similarly, the bear case reduces revenue to 5.1%. Passenger growth assumptions flow through to change revenue, which subsequently changes FCFF’s.

Second Stage Growth Rate

In our three-stage growth model, our second stage growth rate is a function of FY21 passenger growth and inflation. With a change in passenger numbers in our bull and bear scenarios, the growth rate of the second stage will also change. From the base case of 4.9% second stage growth, the bull case increases the second stage growth to 5.6% while the bear case decreases the second stage growth to 4.3%.

End Year of Second Stage Growth

A higher second stage growth rate will mean KSA capacity is exhausted more quickly. Therefore, the end year of the second stage of growth will also be brought forward. Similarly, a lower second stage growth would result in capacity being exhausted at a later date. To account for this, we have adjusted the year where capacity is reached by having KSA capacity being reached three years earlier in the bull case and three years later in the bear case. We find this an appropriate adjustment based off KSA capacity of c. 70m which is further discussed in Appendix 15.

Capital Expenditure (CAPEX)

The CAPEX schedule will depend on the passengers coming through the airport, with more CAPEX required to increase capacity while less CAPEX is required if passenger numbers do not meet expectations. In a bull scenario with higher than expected passenger numbers, we expect CAPEX to increase by $10m to improve facilities to accommodate the increase in passengers. Similarly, if passenger numbers do not meet expectations, we expect CAPEX to fall by $10m as the need to increase capacity for KSA becomes less pressing. 51

Appendix 19 Monte Carlo Simulation

A Monte Carlo analysis is performed to test the robustness of our price target. 10,000 trials find a share price range between $6.19 and $7.43 to a 90% level of certainty. Passenger growth forecasts and cost margin forecasts are flexed in the Monte Carlo analysis.

Variable Standard deviation Distribution Domestic Passenger Growth 0.4% Normal Distribution International Passenger Growth 0.8% Normal Distribution COGS Margin 1.0% Normal Distribution SG&A Margin 1.0% Normal Distribution

The Monte Carlo simulation outputs the following results:

Percentile Price Target Summary Statistics Values

10% $6.31 Trials 10,000 20% $6.47 Base Case $6.79 30% $6.59 Mean $6.80 40% $6.69 Median $6.79 50% $6.79 Standard Deviation $0.38 60% $6.89 Variance $0.15 70% $6.99 Skewness 0.1033 80% $7.11 Kurtosis 3.01 90% $7.30 Mean Standard Error $0.00

Appendix 20 Relative Valuation

Selection of Comparable Firms

In addition to a DCF and DDM, we also utilised a relative valuation using 12-month forward looking multiples, as these are more indicative of future expectations than historic multiples. Our relative valuation was triangulated from two separate relative valuations: one using a set of comparable firms consisting of international airports, and the second relative valuation using a set of comparable Australian infrastructure stocks. Within the international airport relative valuation we used the following multiples: Adjusted Price to Earnings (P/E), Price to Cash Flow (P/CF), and Dividend Yield Spread to Domestic Bond Yield multiples. We identified seven international airport stocks as being comparable, these were: Auckland International, Flughafen Wien, Flughafen Zurich, Beijing Capital, Shanghai International, Airports of Thailand, and Kobenhavns. These airports were selected based on their total number of passengers, split of international and domestic travel, financial leverage, and their respective ratio of aeronautical versus non aeronautical revenue.

A second relative valuation using Australian Infrastructure stocks was also used. We identified three stocks which were comparable based on size and risks of operating and managing the infrastructure, these were: Transurban, Macquarie Atlas and APA Group. Similarly to the international airport relative valuation, an adjusted P/E multiple and dividend yield ratio were used. An EV/EBIT multiple was also used due to the fact that it is independent of capital structure and is therefore not skewed by the different levels of leverage between the comparable firms. Each multiple was equally weighted at 33.33% due to their individual merits, this provided a valuation of $6.34.

Together these two different relative valuations were then triangulated to provide a share price of $5.77. The international airport relative valuation was weighted more highly at 60% as these firms more accurately capture the business risks and macroeconomic drivers of Sydney Airport, specifically regarding tourism and travel growth. However, the Australian infrastructure relative valuation was also deemed as important in capturing investor sentiment within the local Australian market, and implicitly capturing assumptions regarding interest rate forecasts due to their respective focus on dividend yields, therefore it was weighted 40% in the triangulated relative valuation.

Airport Comparables (all values provided in AUD) Div Yield Spread to Gov’t Comparable Companies EV Bonds P/E Price to FCF 23/09/16 FY14 FY15E FY14 FY15E FY14 FY15E Sydney Airport 20.2B 2.26% 1.75% 19.6x 23.5x 14.8x 22.7x Auckland International Airport 6.7B -0.33% -0.07% 26.6x 31.1x 25.0x 25.3x Flughafen Wien AG 3.4B 1.38% 1.80% 19.6x 18.3x 7.3x 8.2x Flughafen ZUERICH AG- 6.9B 1.26% 1.42% 19.9x 18.5x 9.5x 9.5x Kobenhavns Lufthavne 7.0B 1.45% 1.35% 24.6x 26.3x 13.0x 14.7x Beijing Capital International Airport 8.0B -0.77% -0.85% 15.6x 16.2x 7.9x 9.4x Shanghai International Airport Ltd 10.0B -1.57% -1.96% 18.0x 21.7x 11.1x 18.2x Airports of Thailand PCL 14.9B -1.24% -1.21% 28.0x 25.2x 19.9x 17.9x

Australian Infrastructure Comparables (all values provided in AUD) FY15E Comparable Companies EV EV/EBIT Div Yield P/E Sydney Airport 20.2B 28.8x 4.29% 23.5x Macquarie Atlas Roads Group 1.81B 21.1x 3.94% 25.7x Transurban Group 18.4B 40.7x 4.09% 24.5x APA Group 17.9B 31.1x 4.48% 22.3x

Selection of Multiples and Weighting

We selected and used EV/EBIT, Dividend Yield Spread to Government Bonds, Dividend Yield, P/E and P/CF multiples with the base case triangulated through a weighted average across the respective peer group.

EV/EBIT: Enterprise Value to Earnings before Interest and Tax is generally used to compare companies’ earnings to their firm value where financial leverage and capital intensity between comparable companies may vary. As a result this multiple was deemed as being useful in assessing the comparable value of Australian Infrastructure firms due to their varying D/E ratios, and also varying capital intensity as they all operate slightly different forms of infrastructure (toll roads, airports and gas pipes), as a result this multiples was weighted 33.33% for the Australian Infrastructure relative valuation. One of the filtration criteria when selecting comparable firms for the International Airport was that it had similar levels of leverage to Sydney Airports D/E of 58%, similarly, all firms were selected on the basis of being international airports of a similar size and scale to Sydney Airport. Therefore a multiple which accounted for differing levels of leverage and capital intensity was not deemed as important, furthermore as each comparable firm was from a different country, this multiple would have been distorted by differing national accounting standards regarding useful lives, and depreciation/amortisation methods.

Dividend Yield: The large construction costs associated with infrastructure represents a barrier to entry which often culminates in a natural monopoly for many types of infrastructure. Furthermore, regulatory requirements and the government licensing needed to run an international airport results in fairly secure cash flows. As a result, many infrastructure stocks are viewed as similar to fixed income products which provide an investor with a fairly consistent yield. Due to the importance of dividend yield in infrastructure stocks, this multiple was used for both the Australian Infrastructure and International Airport Relative Valuation. However, in our International Airport relative valuation we took this multiple one step further by taking a spread of the dividend yield against the company’s domestic 10 year government bond yield. This was performed in order to assess the dividend yields of various airports with respect to their local market’s fixed income environment and to therefore take into account the relative desirability of the dividend yield to an investor. Furthermore Beijing, Shanghai and Airports of Thailand were excluded from this multiple due to their corporate focus on capital growth rather than dividend yield meaning that these companies were inappropriate for inclusion.

P/E: The price to earnings ratio illustrates the price an investor is willing to pay for one years’ worth of the company’s earnings. SYD’s official earnings per share amount is skewed by its corporate structure which results in c. $245m interest expense being paid on an intercompany loan to SAT1, which is subsequently paid out to investors as a distribution from the trust. Thus SYD’s official P/E is artificially high with an official P/E of 53x, therefore we used an adjusted P/E ratio by correcting for this interest expense as it still represents earnings which are paid out to shareholders. For consistency, we have also adjusted the P/E ratios of the Australian Infrastructure comparable firms which are similarly impacted by their stapled structure. The P/E ratio implies constant growth of earnings and a constant risk and is therefore most effective when used to value mature firms in a steady state. All infrastructure firms selected fit this profile and therefore P/E was deemed an appropriate multiple, it was weighted an equal 33.33% in the Australian Infrastructure valuation, and also weighted at 33.33% for the International Airport valuation.

P/CF: The Price to cash flow multiple values a company’s stock based on the cash flow it’s able to generate. This major advantage of this multiple is that, unlike P/E, it is unaffected by accounting treatments of non-cash items such as depreciation and amortisation. As a result, this multiple was weighted 33.33% in the international airport relative valuation, as it was deemed to be useful in normalising the effect of varying accounting standards across the different countries. However, this multiple was deemed inappropriate and weighted 0% for the Australian Infrastructure relative valuation, as all comparable firms were obligated to follow the same Australian accounting standards. Furthermore each firm operated a different type of infrastructure and therefore capital intensity, measured through depreciation and amortisation, was something that was important in determining the valuation of Sydney airport in relation to these firms.

Valuation Summary

The valuation summary diagram below illustrates the implied price ranges by each of the multiples used with Sydney Airport’s peer group.

Comparables Target: $5.77

Div Yield (Aussie Infra) $5.73 $6.47

EV/EBIT (Aussie Infra) $3.14 $9.52

P/E (Aussie Infra) $5.69 $6.56

Div Yield Spread to Govt Bonds (Intl Airports) $5.60 $6.22

P/E (Intl Airports) $4.13 $7.92

P/FCF (Intl Airports) $2.53 $7.84

52-Week Range $4.10 $6.03

$1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00

Appendix 21 Dividend Discount Model

The dividend discount model calculates an intrinsic value of $6.74.

SYD operates on a policy of distributing 100% of net operating receipts, a method of calculating equity cash flow. 푁푒푡 푂푝푒푟푎푡𝑖푛푔 푅푒푐푒𝑖푝푡푠 (푁푂푅) = 푃푟표푓𝑖푡 푏푒푓표푟푒 푡푎푥 + 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 푎푛푑 퐴푚표푟푡𝑖푠푎푡𝑖표푛 + 푇표푡푎푙 푛표푛 푐푎푠ℎ 푓𝑖푛푎푛푐𝑖푎푙 푒푥푝푒푛푠푒푠

A multi-period dividend discount model allows us to integrate our explicit forecasts of SYD’s performance until FY21. Dividends from FY19-21 are kept constant at 34.9c due to the exhaustion of tax credits leading SYD to pay tax and reducing cash flow available to equity holders.

The dividend discount model is an appropriate valuation technique for SYD as:

. Cash flows strongly correlate with cash flows. . SYD is a high dividend yield stock and the value of distribution cash flows is a significant consideration.

Input Notes Cost of Equity 7.5% From FCFF methodology (Appendix 14) Terminal Dividend Growth Rate 3.1% From the implied FCFF terminal growth rate from the terminal value (Appendix 15).

Dividend Discount Model

Multi-period Dividend Discount Model FY15E FY16E FY17E FY18E FY19E FY20E FY21E

Forecasted Dividends (cents) 25.5c 27.8c 30.4c 32.9c 34.9c 34.9c 34.9c Discounted Forecasted Dividends (cents) 23.6c 23.8c 24.2c 24.2c 23.8c 22.1c 20.4c Terminal dividend value ($) $8.15 Discounted Terminal Dividend Value $4.90 Estimated Share Price (FY14) $6.54 FY14 Date 31-Dec-14 Today 23-Sep-15 Today Estimated Share Price $6.90

Appendix 22 Alternative Valuation Models

In our valuation we use three main models, the discounted Free Cash Flow to Firm model, the dividend discount model and a comparable company multiples analysis.

We also consider the Free Cash Flow to Equity model and the Residual Income model to assess the robustness of our valuations from the three models used in our valuation analysis.

22.1 Free Cash Flow to Equity Model We use the FCFE model to calculate the cash flow available to equity holders. We do not directly apply the method due to the requirement to forecast debt, which cannot be accurately done owing to a lack of management guidance. 퐹퐶퐹퐸 = 푁푒푡 𝑖푛푐표푚푒 + 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 푎푛푑 퐴푚표푟푡𝑖푠푎푡𝑖표푛 − 퐶퐴푃퐸푋 − Δ푁푊퐶 + 푁푒푡 퐼푛푐푟푒푎푠푒 𝑖푛 퐷푒푏푡

We use the cost of equity of 7.5% and a 3.2% terminal growth rate from our FCFF methodology.

Alternative Valuation

Calculation Assumptions Cost of Equity 7.5% Terminal Growth Rate 3.2%

Calculation FY13 FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E Add: Net Income 172.4 26.8 58.9 220.5 257.3 318.4 376.8 421.0 336.1 370.2 Add: D&A 300.1 300.1 326.4 336.1 357.3 355.2 353.2 353.0 355.1 358.0 Less: Change in NWC 40.1 42.8 2.1 (1.3) 6.9 3.7 3.6 3.5 3.3 3.5 Less: CAPEX (218.2) (245.3) (253.1) (250.0) (250.0) (250.0) (250.0) (295.1) (309.2) (324.0) Add: New Debt 258.3 (215.4) 753.4 619.0 250.0 250.0 250.0 300.0 300.0 300.0 Less: Debt repaid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FCFE 552.7 (91.0) 887.7 924.4 621.5 677.4 733.5 782.4 685.2 707.8 Discounted Value of FCFE (to FY14) 859.5 537.3 544.5 548.2 543.7 442.8 425.3 Total Discounted Value of Free Cash Flows to Unlevered Firm (to FY14) 3,901.4 Final Year Free Cash Flow to Equity 707.8 Terminal Value of Free Cash Flows 16,732.8 Discounted Terminal Value of Free Cash Flows (to FY14) 10,053.6 Equity Value (as at FY14) 13,955.0 Equity Value (as at 23 Sept 2015) 14,717.0 Number of Shares 2,238.9 Today Estimated Share Price $6.57

The result further supports our target valuation of $6.52 from a triangulation of the discounted Free Cash Flow to Firm model, the dividend discount model and a comparable company multiples analysis.

22.2 Residual Income Model The residual income model focuses on the economic profitability of the firm by focusing on income earned above the minimum return to shareholders. A company which is profitable on an accounting basis may not be profitable if the return earned is below the required return to shareholders.

We use a WACC of 7.0% for the forecast horizon 6.6% WACC in the terminal period and a 3.2% terminal growth rate for economic profit, taken from the FCFF methodology.

The economic profit is defined as the value earned above the capital charge, the minimum return required to investors. 퐸푐표푛표푚𝑖푐 푉푎푙푢푒 퐴푑푑푒푑 (퐸푉퐴) = 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 × 푅푂퐼퐶 − 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 × 푊퐴퐶퐶 퐶푎푝𝑖푡푎푙 퐶ℎ푎푟푔푒 = 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 × 푊퐴퐶퐶

We define invested capital according to the formula: 퐼푛푣푒푠푡푒푑 퐶푎푝𝑖푡푎푙 = 푇표푡푎푙 퐴푠푠푒푡푠 − 푛표푛 𝑖푛푡푒푟푒푠푡 푏푒푎푟𝑖푛푔 푙𝑖푎푏푙𝑖푡𝑖푒푠

Residual Income Model

Calculations FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E NOPAT 621.9 662.2 725.7 802.0 875.6 923.4 710.0 758.7 Capital Charge 612.7 641.9 633.9 626.0 618.3 574.5 565.0 557.7 Economic Profit 20.3 91.8 176.0 257.3 348.9 145.1 201.0 Discounted EVA 19.0 80.2 143.7 196.3 248.7 96.7 125.2

Terminal Value 5,971.2 Discounted Terminal Value 3,717.9

EVA 909.7 Discounted Terminal EVA 3,717.9 FY14 Invested Capital 8,749.1 MVA (as at 23 Sept 2015) 14,054.7 Shares outstanding 2,238.9 Today Estimated Share Price $6.28

Appendix 23 Industry Analysis – Porter’s 5 Forces

Porter’s 5 Forces Bargaining Power of Suppliers 5 4 3 Bargaining Power of 2 Existing Rivalry Customers 1 0

Threat of Substitute Threat of New Entrants Products

Porter’s Five Forces: Competitive Threat Low Amidst global economic volatility and low interest rates, airports are an attractive class of assets for investors. SYD’s high dividend yield and defensive revenue model provides cash-flow surety and stability in the long-term. Moreover, the company’s defensive model and strong bargaining power stems from being a regional monopoly with limited long-distance transport alternatives.

Threat of entrants: LOW

For SYD, the low threat of entrants is driven by industry-wide and company-specific factors. The Airport industry is characterised by high capital intensity and regulation, thereby creating significant barriers to entry, with airports generally operating as regional monopolies in their geographic areas. Airports are regulated by agencies such as ACCC, as well as face regulatory constraints such as movement and noise restrictions. For SYD, their right of first refusal for the proposed airport in Badgerys Creek provides further barriers to entry, decreasing the threat of new entrants.

Threat of substitute products: LOW

Substitutes for airport services include other modes of transport such as road or rail. As Australia is geographically disperse, there are limited long-distance transport alternatives. Furthermore, the growth in low-cost carriers (LCC) places road and rail at an increasing disadvantage.

Bargaining power of customers: MEDIUM

For the aeronautical revenue segment, SYD’s pricing power over customers is negotiated with the other airlines, most notably, the Board of Airline Representatives of Australia (BARA). In June 2015, SYD negotiated a five-year deal, which provides surety and predictability in future revenue.

Bargaining power of suppliers: LOW

SYD’s services are delivered through a mixture of internal capabilities and outsourcing. Given the scale of capital expenditure programs, airports are in a strong negotiating position with contractors.

Existing rivalry: LOW

The degree of competitive rivalry is low, given the absence of competing airports in the NSW region. This is strengthened by SYD’s right of first refusal. To the extent that the airport in Badgerys Creek was owned by a third party, Kingsford Smith Airport’s proximity to the CBD provides a competitive advantage.

Appendix 24 Industry Analysis - PESTEL

Political . Strong negotiating power and relationship with Government – airports provide a beneficial service for the community, Government has an incentive to ensure that airport is operating effectively and can meet the needs of Australian population . Structural transition in Australian economy, from mining-led growth to broader sources of economic growth – tourism seen as a ‘pillar’ for economic growth, providing a strong rationale for future Government support . SYD has right of first refusal over Badgerys Creek – negotiations with Government . Government Free Trade Agreements to increase air travel . China-Australia Bilateral Air Services Agreement to expand routes to Australia . Government incentives to increase education service exports (more influx of internationals)

Economic . Domestic and global growth rates – predominant driver of air travel . Consumer discretionary income and confidence . Slowdown in China recently – potential risks to SYD, given growth in international passengers in China + China making up large % of foreign passengers + retail spend . Interest rates – influence attractiveness of dividend yield . $A – likely to depreciate, providing upside to international inbound travel as makes travelling to Australia relatively cheaper for foreigners. . While low $A makes outbound travel more expensive for domestic residents, this may boost domestic travel – providing a natural ‘hedge’

Social . Increasing culture of travel, as travel by plane has become a lot more accessible . Flights have become cheaper and so air travel has become more affordable for more families

Technological . The ability to offer services across multiple platforms will be important in driving revenue in the retail and car parking segments of SYD. . Technological innovation that allows for a seamless retail experience across both brick-and-mortar and digital platforms will drive increased spending . Online car parking offers and deals will also improve take-up of car parking spots

Environmental . Increasing environmental concerns have led to increasing innovation in the industry; aircraft are increasingly designed to make minimal noise and airports are managed and monitored closely to avoid excessive noise. . Carbon emissions are closely monitored, with many aircraft becoming increasingly fuel-efficient

Legal . Sydney Airport Demand Management Act 1997 – movement limit of no more than 80 aircraft movements at Sydney Airport in a regulated hour . Aircrafts operating in Australia must meet noise standards specified in the Air (Navigation (Aircraft Noise) Regulations 1984 . ACCC Price monitoring – aeronautical fees and car parking

Appendix 25 SWOT Analysis

SWOT

Strengths Weaknesses

SYD currently has a monopoly as it is the only international airport in SYD’s business model is predominantly driven by passenger growth. Sydney. Their monopoly means that they have high bargaining power Passenger growth is in turn driven by a combination of multiple and so SYD is able to make high margins from the fees they charge macroeconomic factors that are unpredictable and uncontrollable. As from airlines and other such parties. such, SYD’s business is dependent on various exogenous factors, which makes it very cyclical and potentially unstable. Given the huge infrastructure investment required and the sheer scale of operations that SYD already has, there is very little chance that a real competitor will emerge to challenge SYD.

Opportunities Threats

As travel become more affordable for more people around the world, Increased competition from Auckland International Airport as New Australia and Sydney in particular is well-positioned to benefit from Zealand focuses on their campaigns to attract more international this social trend. Known for its favourable climate and natural tourists. New Zealand has many similarities to Australia as a tourist landscapes, Australia, and Sydney in particular has become an destination; both countries are in the same region, and boast iconic increasingly popular destination for tourists. landmarks and natural landscapes.

Along with globalisation, international business and study opportunities have also grown exponentially. SYD is well-positioned to benefit from this as Sydney is the business hub of Australia, and is also home to many world-renowned tertiary education institutions.

Global growth, and in particular growth in China presents a huge opportunity for Sydney Airport.

Appendix 26 Badgerys Creek

26.1 Badgerys Creek Proposition Sydney Airport has the first right of refusal on construction of the new Western Sydney Airport at Badgerys creek and are currently in a consultation stage with the government. The Federal Government is expected to release a final report by the end of this year, with Sydney Airport then having until mid-2016 to make their decision. Exact details regarding the plans and costs for the site are currently unknown, however the speculation is that development is likely begin by 2021, with the site operational by 2025. The private cost to Sydney Airport is likely to be c.2.5bn, not accounting for potential subsidies from the government. The Western Sydney Airport is initially expected to be a single runway airport handling 5 million passengers per annum, however upon completion of the final stage of development will be a double runway airport capable of supporting up to 70 million passengers.

26.2 Demographics of the Western Sydney Region The Greater Western Sydney region has a population of close to 1.5m and is the fastest growing region in Sydney. The region is expected to see further growth at c.2% CAGR over the next decade. The region is also expected to see incremental growth with NSW government development focus on Blacktown and Parramatta alongside government focus on projects like the South West Priority Growth Area (SWGC) and North West Priority Growth Centre (NWGC). The Western Sydney Employment Area is located about 50km from the CBD and gives business access to roads and utility services close to the new planned airport at Badgerys Creek. The NSW Metropolitan Plan expects an addition 384,000 jobs will be required in Western Sydney by 2036 to support the rapid population growth.

Percentage Change in Population 2011-2036 14.0% 12.4% 12.0% 9.8% 10.0%

8.0% 6.5% 6.0%

4.0%

2.0%

0.0% Western Sydney Rest of Sydney Rest of NSW

26.3 Cannibalisation Implications for Kingsford Smith Airport Empirical studies and evidence from case studies suggests that a second Sydney airport would not decrease demand at Kingsford Smith Airport. In fact, most studies suggest that a second airport would increase the total demand for flights into Sydney, without any impact on KSA. Low cost carriers are the most likely to relocate to Badgerys Creek, however the more likely scenario is that Low Cost and Regional Carriers expand their capacity by offering more flights from the second airport rather than reducing the number of flights at Kingsford Smith Airport. The following recent case studies of second airports support the notion that a second airport at Badgerys Creek is unlikely to negatively impact demand at Kingsford Smith Airport:

London, UK: Heathrow, Gatwick, Luton and Stansted

London Heathrow Airport has experienced stable passenger growth despite Stansted and Luton Airports being redeveloped in 1991. One key finding was that the demographics of passengers at Heathrow did change, London Heathrow became more concentrated with International and business class flights, suggesting that LCC’s and domestic routes moved over to Luton and Stansted, however this did not materially lower PAX growth.

Frankfurt, Germany: Frankfurt and Hahn

Frankfurt airport is a major European hub airport currently handling c. 60m passengers per annum. In 1993 Hahn airport began operating, mainly handling LCC and short regional flights. Whilst Hahn’s introduction has slightly reduced Frankfurt’s domestic capacity growth, Frankfurt has still maintained 5-7% year on year PAX growth since 1998. Frankfurt’s EBITDA margins did fall from 35% to 25% from 1997 to 2003, however since 2009 they have climbed back up to 34%.

Osaka, Japan: Osaka Itami and Kansai

Kansai airport was opened in 1994 to primarily cater to domestic routes within Japan, whilst Kansai airport would be the host of most international traffic. Thus far the two airports have resulted in steady PAX and capacity growth for both airports.

Melbourne, Australia: Avalon and Tullamarine

Melbourne’s Avalon Airport opened in 1997. Jetstar is the only operator which currently has flights originating from Avalon Airport, as a result Avalon airport has largely been underutilised and has seen a volume decline since 2011. However, Tullamarine airport has continued growing capacity and PAX at 6-9% per annum, consequently Avalon airport does not appear to have had a detrimental impact.

26.4 Project Stages and Capital Expenditure We have modelled two distinct scenarios for Badgerys Creek Airport based off of data provided as part of the Federal Government’s Joint Study into a second Sydney airport, the Federal Government’s Wilton Study and comparisons to the growth profiles of other Australian airports.

We anticipate the Western Sydney Airport (WSA) to undergo a phased expansion, undertaking three distinct stages of growth. The initial phase of operation of WSA is expected to resemble characteristics similar to Canberra or Darwin Airports, catering primarily to domestic, regional and freight flights. The second phase of growth is expected to take place once Kingsford Smith Airport begins to reach capacity in 2033, resulting in WSA experiencing substantial inorganic growth as well as introducing short haul international routes, resembling characteristics akin to Gold Coast or Adelaide Airports. The third and final stage of growth begins in 2040 once Kingsford Smith Airport reaches full constraints and WSA is expanded to become a full service international airport.

We have forecast each stage of growth to require its own allocation of capital expenditure. The CAPEX figures have been benchmarked against comparable expansions at other Australian airport. Under our base scenario the initial construction period runs from 2020-2024 and costs $2.5b with the CAPEX skewed towards the latter half of the development. The second phase of development then takes place from 2031 to 2033 costing $700m to expand the capacity of WSA. Finally the third stage of construction costs $4bn, takes place from 2036-2039 expanding the capacity of the airport to 30 million passengers and adding a second runway allowing WSA to operate as a fully functional second international airport. Whilst there is a large degree of uncertainty around what the first stage capital expenditure figure will actually end up being, we believe that the range of $1,700m $2,500m represent a reasonable lower and upper limit for which SYD would realistically pay without government assistance. In both scenarios there is an implicit assumption that if capital expenditure was to exceed these figures then it would be covered by government assistance in the form of: subsidies, low interest loans or a small per passenger levy on KSA.

Capital Expenditure Scenario 1 Scenario 2

Phase 1 (2020-2024) $2,500m $1,700m Phase 2 (2031-2033) $700m $1,000m Phase 3 (2036-2039) $4,000m $5,000m

26.5 Passengers We have also modelled two different scenarios regarding the growth rate and passenger profile of the Western Sydney Airport. Under the first scenario we have modelled Badgerys Creek initially commencing with 3.5 million passengers; this is a conservative estimate below the government’s current expectations of an initial 5,000,000 passengers. Furthermore we have assumed that WSA will cater solely to domestic, regional and freight flights until the second phase of growth and CAPEX is completed in 2033. We then expect that WSA will experience large amounts of inorganic growth as KSA begins to reach capacity, resulting in 2 million international passengers as low cost carriers introducing short haul international flights from WSA. From 2040 onwards WSA begins their final stage of growth following their last stage of CAPEX, resulting in international and domestic passenger growth of 8% as KSA reaches absolute capacity and all passenger growth into Sydney is diverted to WSA.

The second scenario makes largely similar assumptions to the first scenario, however we have assumed that the airport commences with the government’s expected 5 million passengers, and that low cost carriers begin introducing short haul international flights from the get go, resulting in 1 million international passengers.

Passengers (000’s) Scenario 1 Scenario 2

Domestic International Domestic International 2025 3,500 0 4,000 1,000

2038 10,000 2,500 11,500 4,000 2050 21,000 6,000 25,000 10,000

26.6 Revenue and EBITDA We have forecast revenue for WSA on the basis of revenue per passenger multiplied by number of passengers. We have assumed that WSA will be able to recover 80% of the amount that KSA receives per passenger. We have forecast KSA domestic and international aeronautical and non- aeronautical revenue per passenger to grow at the rate of inflation out to 2025, then we have taken 80% of these rates as an approximation for WSA’s revenue per passenger charges.

Revenue Per Passenger in 2025 KSA WSA

Domestic Aero Rev PP $8.83 $7.07 International Aero Rev PP $33.16 $26.53 Domestic Non Aero Rev PP $7.85 $5.80

International Non Aero Rev PP $45.80 $36.70

To calculate EBITDA we have applied an EBITDA margin to WSA’s forecasted revenues. KSA currently maintains an EBITDA margin of 81.5%, we have assumed that WSA will commence operations with a 50% EBITDA margin reflecting an initial lack of operating efficiencies, and lower revenue charges at WSA. We have then assumed that this EBITDA margin will ramp up to a steady 70% over the first 8 years of operations.

26.7 Financing In order to forecast SYD’s capacity to fund Badgerys Creek, we have assumed a debt capacity ceiling through forecasting an upper limit Net Debt/EBITDA ratio of 7.5x. This amount is in line with SYD’s upper most historical Net Debt/EBITDA of 7.4x in 2011. In 2020 we forecast that SYD will have an EBITDA of $1.3bn and net debt of $8.7bn, resulting in a Net Debt/EBITDA of 6.40x; as a result we believe that there is still capacity to increase net debt by 1.1x EBITDA, resulting in an extra $1.5bn debt. As Sydney Airport’s earnings grow faster than its net debt, there is a natural deleveraging effect, and therefore by 2024 we forecast that SYD will have the capacity for an extra $2.5bn debt before being stretched beyond their 7.5x Net Debt/EBITDA limit. Additionally we have assumed that SYD’s cost of debt remains at its current level of 6%.

Financing Capacity 14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

- 2020 2021 2022 2023 2024

Net Debt Net Debt Capacity

26.8 Scenario Analysis and Valuation As explained previously, we have modelled two different scenarios for Badgerys Creek, each scenario illustrating a lower and upper limit for capital expenditure and passenger growth. Under the first scenario we assumed that initial capital expenditure will amount to $2.5b and that there will be 3.5 million passengers, all domestic upon the airport’s commencement. In the second scenario we have assumed an initial capital expenditure of $1.7b, and 5 million passengers upon commencement, 1 million of which are international passengers. These two scenarios illustrate potential ‘bear’ and ‘bull’ cases for the WSA, and the differing implications for shareholders. We have used a free cash flow to equity model to derive a per share value for the various scenarios. We assumed a cost of equity of 10%, higher than SYD’s current cost of equity of 7.5% to reflect the greater risk profile of the project. These provided an IRR range of 7.63% to 10.08%, and a value per share of $0.08 to $0.32.

Capital Expenditure Scenario 1 Scenario 2

IRR 7.63% 10.08% Assumed Cost of Equity 10% 10% Value per share $0.08 $0.32

Upside to SYD Share Price 1.4% 5.5%

Appendix 27 Risk Adjusted Returns

Beta FY16E Yield FY16E-19 CAGR Sydney Airports 0.57 4.8% 9.0% Utilities 0.68 6.6% 2.7% REITs 0.79 5.6% 2.7% Financials 0.99 5.8% 2.1%

When considering the attractiveness of Sydney Airports as an investment the key criteria was determined to be the equity beta, dividend yield and anticipated dividend cumulative annual growth rate. The Sharpe Ratio

The Sharpe ratio is a measure if investment performance based on the excess return generated per unit of standard deviation.

푟푖 − 푟푓 푆ℎ푎푟푝푒 푅푎푡𝑖표 = 휎푖 푟푖 = 푆푒푐푢푟𝑖푡푦 푅푒푡푢푟푛 푟푓 = 푅𝑖푠푘 퐹푟푒푒 푅푎푡푒 휎푖 = 푆푒푐푢푟𝑖푡푦 퐵푒푡푎 The Treynor Ratio

The Treynor ratio is a measure of returns that are earned on an investment that has no idiosyncratic risk, i.e. a security in the context of complete portfolio diversification.

푟푖 − 푟푓 푇푟푒푦푛표푟 푅푎푡𝑖표 = 훽푖 푟푖 = 푆푒푐푢푟𝑖푡푦 푅푒푡푢푟푛 푟푓 = 푅𝑖푠푘 퐹푟푒푒 푅푎푡푒 훽푖 = 푆푒푐푢푟𝑖푡푦 퐵푒푡푎

Risk Adjusted Measure The Treynor ratio was used to approximate risk adjusted returns for Sydney Airports and Utilities/REIT/Financials indexes.

In the context of volatile equities markets, it is assumed that investors are well diversified in order to minimise portfolio variance. Hence, the relevant metric by which to adjust returns is the equity beta

Treynor Results

Treynor Measure Sydney Airports 0.0404 Utilities 0.0603 REITs 0.0392 Financials 0.0333

The calculations of the Treynor measure illustrate that Sydney Airports outperforms the REIT and Financials Indexes in terms of risk adjusted reward at 0.0404. However, Utilities appear to outperform Sydney Airports with a substantially higher Treynor of 0.0603.

However, a flaw of the Treynor measure is that it does not account for the expected growth in the return of the underlying security. In order to choose an investment, a risk adjusted measure must be considered alongside the growth prospects in that securities return.

On this basis Sydney Airports, with an expected CAGR of 9%, presents a significantly more attractive upside compared to other Australian equities, alongside a comparatively low systematic risk profile.

Appendix 28 Risk Matrix

Global economic Domestic and

slowdown; international

High contagion competition Downside Risk Downside Risk

Economic growth spurs travel

increase Upside Risk

m m

Mediu

Significanceof Risk Badgerys Creek is Regulatory positive NPV or restrictions inhibit SYD retains passenger growth monopoly Downside Risk Upside Risk

Exogenous shocks terror attacks,

natural disasters

etc. Low Downside Risk

Low Medium High

Probability of Risk

Appendix 29 China Outlook

Economy Throughout the last year, growth targets for China have been repeatedly adjusted downward with the most recent target at only 7%. The OECD also forecasts that China’s economy will slow further in 2016 to 6.5%. While this growth rate remains relatively high, it is a sharp decrease from the double-digit annual growth China averaged over the past three decades. China’s economic slowdown is not unexpected, and in fact desirable as it reflects policy efforts to slow rapid credit growth, reduce excess capacity and limit borrowing by local governments. Such lower growth is consistent with China’s gradually shifting growth model – from manufacturing to services, from exports to domestic consumption and spending. However, China has continued to grapple with industrial overcapacity, weak demand, property downturn and a volatile stock market.

Furthermore, the recent turbulence in China’s equity markets has fuelled increased uncertainty about the health of the Chinese economy. However, many industry experts have emphasised that the true impact of the stock market crash is likely to be limited, arguing that the market correction was not the signal of an impending financial crisis. The July edition of Westpac’s MNI China Consumer Sentiment Survey also indicated that the household sector was not overly concerned with the stock market crash, with consumer sentiment remaining stable.

Although industrial production remained weak by historical standards, China’s industrial output strengthened in the June 2015, increasing from 6.1% year on year in May to 6.8% in June. This exceeded market expectations, which had expected a small decline to 6.0%.

Chinese tourists in Australia Australia is a prime travel destination for Chinese tourists for several reasons. . Australia is the most geographically accessible Western country to China . Australia is known for its favourable climate and natural landscapes which stand in contrast to the pollution in most major Chinese cities. . Recent depreciation of the AUD relative to the RMB makes travelling to Australia more appealing to Chinese tourists due to increased purchasing power.

In particular, Sydney is one of the most visited cities in Australia. With landmarks such as the Harbour Bridge and the Sydney Opera House, as well as iconic tourist spots such as Bondi Beach, Sydney is generally on the itinerary for travellers. In the year ending June 2015, 38% of international visitors to Australia landed in NSW, compared to 24% in Victoria and 22% in Queensland. 93% of visitors to NSW stayed in Sydney.

The research also supports robust Chinese tourism growth and an associated increase in spending, with the RMB’s relative strength, low fuel prices as well as increased airline capacity due to the Chinese-Australia bilateral agreement. While Chinese visitor numbers increased 22%, Chinese overseas tourism spending in 2014 totalled USD$164.8m, a dramatic 28% increase on 2013. This represents clear evidence of the continued rise of Chinese household wealth.

Appendix 30 Competing Airports

SYD has three main competitors: Auckland International Airport, Melbourne Airport, and Brisbane Airport. All three of these airports, like SYD, have capacity to serve international flights, and are able to accommodate the largest passenger aircraft in the world, the Airbus A380.

Auckland (AIA) Overview

. Auckland airport is the main airport in New Zealand. In FY14, passenger movements increased 5%, with international passenger growth of 5.7% to 8.1m passengers and domestic passenger growth of 4.2% to 7.2m. . New Zealand’s recent focus on attracting tourists, especially from China, has driven the 28.8% Chinese market growth in FY15. AIA has also allowed China Southern Airlines to increase flight capacity, with the airline to implement a year-round, twice-daily service starting in October 2015. Following highly successful trials, China Eastern will also operate year-round flights, four times a week, starting in September 2015, which adds c.100,000 seats for this route. . A major initiative in FY15 was AIA’s duty-free operator retender. LS Travel Retail Pacific and Aer Rianta International were the two retail operators chosen following the tender process. Both began operations at the end of FY15, and are contracted to operate in AIA for the next 7 years. In addition to the new duty-free stores, more specialty retail stores will also be unveiled as the airport completes its expansion of the international departures precinct at the end of 2017. . Revenue for AIA in FY15 totalled $508.5m: airfield and aeronautical revenue accounted for 46.0% of revenue, retail covered 26.0%, rental covered 12.7% while car park accounted for 9.2%. Recent developments

. Capital expenditure has focused predominantly on projects that increase AIA’s ability to accommodate growing passenger numbers. This includes redevelopment of the international terminal to deliver additional gates, which is expected to be completed by mid-2017. This will double AIA’s A380 gate capacity and deliver a 50% increase in the number of goes that the Boeing 787 can use. . Guidance of $190m - $205m is planned for capital expenditure for FY16.

Melbourne Overview

. Melbourne airport is the second largest airport in Australia by passenger numbers, with an increase of 4% to 31.2m in FY14. . Passenger growth is largely driven by international passengers, with Chinese tourists contributing most of the growth. However, passenger numbers from other countries in the Asia Pacific region such as Singapore, Japan, Malaysia, Hong Kong and Taiwan all grew by more than 20%. . As with SYD, New Zealand remains Melbourne’s largest source of international visitors. . Melbourne has the highest aeronautical operating margin, at 45.2% of total revenue. . Total revenues consisted of 44.2% from aeronautical ($315m), 28.3% from retail ($273m), 16.1% from property and rental ($115m) and 1.4% from security and other revenue ($10m). Recent developments

. Melbourne Airport reported the largest aggregate aeronautical capital expenditure, having spent $421m in FY14 which is a 65% increase from the year before. . Melbourne international seat capacity also increased by 10% from FY13 to FY14 in order to accommodate high growth in international passengers. Melbourne experienced a 10% growth in international passenger numbers in FY14, reaching 7.8m international passengers.

Brisbane (BNE) Overview

. Privatised in 1997, Brisbane airport operates 24/7, and is the third largest airport in Australia by passenger numbers, serving more than 21.8m passengers in FY14. . International passengers make up 22% of passengers, and grew at 5.9% in FY14; domestic passengers make up 78% of passengers, and grew at 1.3%. . Airport revenues totalled $564.1m and consisted of the following: 37% from aeronautical, 20% from landside transport, 12% from retail, 12% from investment property, 7% from operating property and 7% from other revenue sources. . BNE’s has an aeronautical operating margin of 23%. Recent developments

. Approximately $3.5b over the next decade is planned to be invested in improving infrastructure for the airport. . BNE’s new parallel runway project is the largest aviation infrastructure development of its type in Australia. The new runway is scheduled for completion in 2020, and will enable BNE to further increase the number of flights that can arrive and depart. . A $45m redevelopment of the international terminal is also being completed. This includes redesigning the interior of the terminal, providing more seating, dwelling and relaxation areas, as well as bringing in new retailers and a new duty-free store.

Appendix 31: Key Management

Kerrie Mather Managing Director and Chief Executive Officer

Ms Mather was appointed as Sydney Airport’s Managing Director and Chief Executive Officer in July 2011, and has over 18 years of international aviation and transport experience and expertise. Ms Mather has been the CEO of Sydney Airport Group since its privatization in 2002. She has had experience working with airports across multiple international jurisdictions, including as a Board Director for a number of UK and European airports. In 2011, she also headed the sale of Brussels and Copenhagen Airports, and managed the acquisition of a further interest in Sydney Airport. Ms Mather led the restructuring of Sydney Airport Limited, which now holds 100% ownership of Sydney (Kingsford Smith) Airport. Prior to joining SYD, Ms Mather was an Executive Director at Macquarie Capital; she worked as an infrastructure specialist, focusing on the aviation and transport sectors.

Hugh Wehby Chief Financial Officer

Mr Wehby joined Sydney Airport in 2011, and was a key figure in delivering the minority acquisitions, restructuring and ATO settlement, which led to the transformation of the company in 2013. Immediately prior to being appointed CFO he was the Head of Strategy and Capital Projects. Even before joining Sydney Airport, Mr Wehby worked extensively in airport transaction and asset management; he also has investment banking experience in both Australia and the UK.

Shelley Roberts Executive Director – Aviation Services

Shelley Roberts is currently the Executive Director of Aviation Services of Sydney Airport Holdings Limited. In this role Shelley provides strategic oversight and leadership of Sydney Airport’s Aviation business. She is responsible for strategically managing the interplay between day to day operations, airline business development, airline commercial negotiations and long term capacity planning and associated relationships with airlines, regulators and the government. Prior to her appointment at Sydney Airport, Shelley was Managing Director of Tiger Airways Australia Pty Limited, an affiliate of Tiger Airways Holdings Limited and Tiger Airways Pte Limited. From 2005-2008 Shelley was the Asset Director of Macquarie Airports and served as a Division Director of Macquarie Bank Limited.

Glyn Williams General Manager – Retail

While Glyn Williams only joined Sydney Airport as the General Manager of Retail in mid-May 2014, he has extensive retail experience. With more than 10 years experience as the Regional General Manager at Westfield and 7 years as Head of Retail/Head of Retail Management of Dexus Property Group, Williams is well-placed in his current role.

His current role involves overseeing SYD’s entire retail offering across all three terminals. Williams was heavily involved in the retender process at the end of 2014 which saw SYD sign a new 7-year deal with Gebr Heinemann which allowed them to exclusively redevelop and operate SYD’s duty-free offering.

Peter Wych General Manager – Development and Construction

Peter Wych has been the General Manager of Property Development and Construction since 2008.

Craig Norton General Manager – Parking and Ground Transport

Craig Norton joined SYD as the General Manager for Parking and Ground Transport in 2011. Prior to this, he held managerial positions in companies such as Vodafone, Telstra and IBM. Norton appears to lack any prior infrastructure or transport experience; his roles have mainly centred on marketing and customer service.

Norton’s current role involves developing strategies to boost revenue, improve business efficiencies and profitability from parking as well as overseeing all ground transport operations to ensure that they operate to seamlessly connect travellers to their destination.

Appendix 32 Glossary

ACCC – Australian Competition and Consumer Commission

Aircraft movements – The number of aircraft that take-off or land in a certain period of time.

AUD – The Australian Dollar

BARA – Board of Airline Representatives of Australia

Capacity – The maximum amount of passengers that can be accommodated.

China Air Services Agreement – A landmark agreement between the Chinese and Australian government that allows for additional capacity for flights between Australia and China as well as more relaxed visa requirements.

GBP – The British Pound

Heinemann – Gebr Heinemann is a global travel retailer that won the SYD retender to operate SYD’s duty-free retail offering. The contract is a seven-year contract that

Kingsford Smith Airport (KSA) – Kingsford Smith Airport is the main airport in Sydney, also known as Sydney Airport. It is an international airport located 8km from the CBD.

Load factor – Percentage of seats filled per flight.

Low Cost Carriers (LCC) – Airlines that specialise in cost-differentiation, providing a low-cost alternative for travellers.

Net Operating Receipts – Calculated according to the formula: 푁푒푡 푂푝푒푟푎푡𝑖푛푔 푅푒푐푒𝑖푝푡푠 = 푃푟표푓𝑖푡 푏푒푓표푟푒 𝑖푛푐표푚푒 푡푎푥 푒푥푝푒푛푠푒 + 퐷푒푝푟푒푐𝑖푎푡𝑖표푛 푎푛푑 푎푚표푟푡𝑖푠푎푡𝑖표푛 + 푛표푛 푐푎푠ℎ 푓𝑖푛푎푛푐𝑖푎푙 푒푥푝푒푛푠푒푠 − 푡표푡푎푙 표푡ℎ푒푟 푐푎푠ℎ 푚표푣푒푚푒푛푡푠

PPM – Number of passengers per aircraft movement.

PAX – Acronym for passenger growth

Peak spreading – Peak spreading is the term used to describe how flights are staggered across lower-demand times throughout the day to avoid exceeding the 80 per hour aircraft movements.

RMB – The Chinese Yuan

Terminal 3 – One of three terminals operating in Sydney Airport, Terminal 3 also known as T3 is the domestic terminal that was until recently, operated by Qantas on a lease. It was returned to SYD four years before the original expiry date for $535m.

USD – The United States Dollar

Western Sydney Airport (WSA) – Western Sydney Airport, also known as Badgerys Creek, is the proposed second Sydney airport. The designated site is situated 44km from the airport.

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