OMAB - Centro Norte Airports: Accelerating Reshoring Will Power The Next Leg Higher

2023-06-27 04:29:59 ET

Summary

• Centro Norte Airport shares are now trading well above pre-pandemic levels.
• I believe this is easily justified given that traffic, earnings, and EBITDA are also well above 2019 levels.
• A flood of new investment announcements near OMAB airports suggest a healthy trajectory for passenger and earnings growth in coming years.
• I believe shares should top $100 over the next 12 months.

I've been invested in Mexico's Grupo Aeroportuario del Centro Norte ( OMAB ) since the mid-2010s and have written extensively about the company over the years. I'd point folks unfamiliar with the company to my extensive bull thesis on the company highlighting the firm's attractive characteristics in the global economic reopening as many American firms started to shift their supply chains in part from Asia to Mexico.

Last year, I offered a broad update on that thesis, showing evidence that Mexican manufacturing's golden age had begun, and that Centro Norte Airports would be a key beneficiary. I highlight these past works as they lay the groundwork for understanding the airport operator's fundamentals and the broad thesis that I expect to play out through the 2020s.

Today's article will offer a look at the new developments that have occurred in 2023, and how my outlook for OMAB stands heading into peak summer travel season.

On An Excellent Trajectory

Centro Norte has enjoyed a robust traffic recovery from the pandemic. Overall, its passenger numbers surpassed pre-pandemic levels in early 2022 and are continuing to grow at a double-digit rate today. Combined with rising margins and we've seen EBITDA reach new highs:

EBITDA is now about 20% above year-end 2019 levels and is continuing to rise at a favorable pace. We see a similar trajectory for earnings per share:

While the pandemic was a serious obstacle for the Mexican airport operators, it ended up not having a real impact on the longer-term growth pattern. And to the extent that macroeconomic changes tied to the pandemic drove more tourism and manufacturing to Mexico as opposed to rival countries, the disruption had positive ramifications for the Mexican airport operators, and OMAB in particular.

Let's look at traffic. In May 2023, OMAB handled a total of 2.19 million passengers. This was up from 2.00 million in May of 2019, indicating that traffic is now roughly 10% higher than it was pre-pandemic.

This isn't quite as robust of gains as we've seen from the other two publicly traded Mexican airport operators. Keep in mind, however, that OMAB is primarily driven by industrial and business-led traffic and has only a modest tourism component. So OMAB's airports were never going to pick back up as quickly as traffic did at sunny beach resorts such as Cancun and Cabos.

Now that industrial activity is humming in Mexico, however, OMAB is set for longer lasting and more predictable growth, as it is driven by new industrial activities rather than the sometimes fickle whims of tourists.

To that point, I'd highlight that international traffic at Monterrey is now up sharply from 2019 levels, and said traffic grew at a stunning 46% rate for year-to-date 2023 versus the same period of 2022.

International travelers spend far more than domestic ones (more likely to rent a car, stay at an airport hotel, etc.) and expand the reach and prominence of an airport. Aeromexico , for example, opened a new direct Monterrey-Madrid route at the end of 2022, and that sort of long-range traffic is going to do significantly more for an airport's profitability than picking up another frequency on a short domestic hop.

I've laid out these statistics about traffic, earnings, and EBITDA to highlight that the whole business is well beyond where it was at the end of 2019. People might just look at the stock price, see it is up since the onset of COVID-19, and think the opportunity has already played out. Far from it.

Industrial Activity Is Accelerating In Key Centro Norte Areas

My underlying thesis is that we will see rapid economic and population growth in Northern Mexico, in and near many of the airports that OMAB operates. This will come because of deepening economic ties between Mexico, the U.S., and Canada.

There have been numerous new factories and industrial activities announced in cities where OMAB has airports; this year, we've already seen investment in beverages, food, and packaging, among other industries. However, I'd like to highlight three big wins in particular.

The first is the new Ternium ( TX ) steel mill in a suburb of Monterrey. Ternium will be putting in a fresh $2.2 billion to expand its existing facilities there; it will add 2.6M metric tons a year to its existing 4.4M metric ton supply. Ternium CEO Maximo Vedoya's explanation of the move was fitting:

"The value chain in Mexico is rapidly addressing and responding to the growth opportunities presented by the nearshoring of manufacturing capacity."

In addition, Ternium is eager to get this capacity online to meet requirements of the new U.S.-Canada-Mexico trade agreement which go into effect later this decade. It takes a while for these sorts of regulatory changes to start showing up in the real world, but once they do, they generate considerable economic momentum.

What might all that steel be used for? Some will surely go into vehicles, long a strong point in Mexico's manufacturing market. And there's no bigger fish to land than Tesla ( TSLA ), which announced a $5 billion manufacturing plant in Monterrey this spring. I don't think I need to add much here. Having Tesla build a huge plant miles from your company's largest airport is the most obvious sort of validation one can get, and it's no surprise OMAB stock reached new all-time highs at the time that the plant was announced.

Regardless of what you may think about Elon Musk or Tesla personally, it's hard to deny the economic benefits that having a mega-plant like that will bring for the broader area. It will help intensify the regional hub around making auto parts, electronics, packaging and so on that are needed for large-scale vehicle production and should help speed up Mexico's ability to produce next-generational electric vehicles, batteries, and so on.

And last week, we got news that Australian energy firm Woodside ( WDS ) will be going ahead with a $7.2 billion oil extraction project in offshore Mexico, roughly 180km (112 miles) away from land. It will develop this field in conjunction with Pemex , the Mexican state oil company. The development is expected to help facilitate investment in the development of the Matamoros port, which is the closest Mexican facility to the planned energy site. The nearby city of Reynosa has commercial air service to the area; Reynosa is an OMAB airport.

OMAB Stock Verdict

Does a new steel plant, offshore energy facility, or Tesla factory single-handedly change the trajectory of Mexico's industrial airport operator? On their own, no.

But when you see a bunch of similar large-scale announcements in a row, it's a sign of a clear trend. Money is rushing to Mexico to take advantage of the changing global landscape. Mexican equities are at eight-year highs . And the Mexican Peso has been the strongest currency in the world in recent years, appreciating notably against the U.S. Dollar and rising dramatically against virtually everything else.

The Mexican Peso has rallied roughly 20% against the U.S. Dollar over the past five years, and most of the gains have come just over the past six months.

Of the Mexican airport operators, I am most bullish on OMAB today because it is most tied to this structural improvement in the Mexican economy. People fly to Cancun, Cabos, or Puerto Vallarta (rival airport operator holdings) for tourism. Whereas OMAB airports such as Reynosa, Juarez, or Culiacan attract few tourists and instead are levered almost entirely to underlying industrial and economic growth. For people bullish on Mexico as a rising power in the new economic landscape, Centro Norte is the airport operator to own.

Given the rapid acceleration in manufacturing and industrial operations near key OMAB airports, I expect double-digit annualized traffic, earnings, and dividend growth in the years to come. Starting from today's wholly reasonable valuation, and that should lead to highly agreeable total returns in the years to come.

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