I hope no one sells their MAp shares based on the Sydney Airport analysis in today’s Sydney Morning Herald. I’m in the middle of an in-depth research piece on MAp (I like it), so was somewhat surprised to pick up the paper and read the headline ‘Interest bill on $8bn debt pushes Sydney Airport into the red‘. Could this be the same Sydney Airport I’m looking at? I’ve got it producing more than $150m a year for shareholders.
So I read on, and soon discovered that the journalist had given the financial statements no more than a cursory glance. For a start, the $8.1bn of debt includes $1.5bn of redeemable preference shares which are stapled to the ordinary shares. It’s quite clear to anyone who reads note 18 (Sydney Airport’s financials are lodged with the ASX under the code SAK) that this is, for all intents and purposes, equity.
The structure has been set up so that a) the airport doesn’t pay any tax and b) all available cash can be distributed to shareholders, whether there is an accounting profit or not (we’ll come to the reasons why there might be an accounting loss but a cash profit in a moment). Instead of contributing ordinary equity, the owners of Sydney Airport put the equity in as preference shares that can be repaid at the airport’s whim.
Interest on the preference shares, which is only paid if the airport generates enough cash, is deductible for tax purposes (assessable, of course, to the party who receives the interest … which just happens to be a Bermudan trust). So the true debt number is $6.7bn, and there’s more than $500m cash. The airport has net debt of $6.2bn. Which is still a big number but, even after paying the interest bill, there’s plenty of cash left over for the owners.
The article goes on to say the airport made a loss of $146m. True, if you just look at the bottom line of the profit and loss. But the expenses include $211m of interest paid to those redeemable preference shareholders – distributions to the owners of the business. Then there’s $39m of licence amortisation and lease amortisation. The airport doesn’t actually own the land or the airport, it has a 99-year lease which will take it through to the year 2101. There is no cash cost to shareholders but the cost of that lease, the purchase price of the airport, needs to be amortised over its life.
There are a number of other accounting quirks that mean the cash available to shareholders is almost always more than the accounting profit. But it’s quite clear that Sydney Airport is not broke and, despite the substantial debt burden, it’s unlikely to be so any time soon.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.