Across the Australian equity component of investor accounts, we have sold Sydney Airport (ASX: SYD).

At the time of investment, we acknowledged that we didn’t know the path of the virus/vaccine/government intervention or the willingness for people to adapt and begin living with the risk. However, as with past pandemics, we were confident that at some point, the world would move on from COVID-19, whether it be through a vaccine, herd immunity, or people learning to live with it, and eventually, the demand for Sydney Airport would return.

Our initial investment thesis was that international/domestic travel would continue to be materially impacted throughout the calendar years 2020-2022, with a return in the calendar year 2023 and beyond. Based on these assumptions, we forecasted a strong expected return over the investment horizon and believed the quality of the business and balance sheet strength would provide downside protection should travel be impacted beyond our expectations. There is still uncertainty around the path forward for Sydney Airport; however, this has improved materially over recent months, with travel volumes looking likely to rebound in the calendar year 2022.

Takeover offer – bringing forward a large portion of our forecast return

While not at the core of our investment thesis, very pleasing to see the takeover offer for Sydney Airport; the offer has lifted the share price close to our estimated three-year target price. However, there are still several hurdles before the takeover offer is approved, including approval from the ACCC and 75% of security holders. Voting is to take place during quarter 1 2022, also still time before a decision.

The decision to sell

We have decided to exit the position early and move on to new opportunities (in the interim, proceeds will remain unallocated). There is little upside to the offer price at current market prices and still some level of uncertainty and time-associated opportunity costs before finalising the deal. Nevertheless, pleasingly we have exited close to our estimate of intrinsic value and much sooner than expected.

As always, thank you for your ongoing support, and should you require further information, do not hesitate to contact your Elston representative.