CAAP - Corporación América Airports Experiencing Strong Demand Recovery

2023-04-23 05:42:38 ET

Summary

• All airport management companies have been experiencing passenger traffic recovery since the last year. In 2022, global traffic increased by 64.4% from 2021 and reached 68.5% of pre-pandemic (2019) levels.
• I estimate the company's revenue and EPS for FY2023 to be $1.58 billion and $1.12, respectively.
• Currently, the company is trading significantly below its industry average P/E ratio and sector median, which I think is enough to conclude that the CAAP is undervalued.

Investment Thesis

Corporación América Airports S.A. ( CAAP ) is an airport services company that acquires, develops, and manages airport concessions granted by governmental bodies. The company is experiencing a rebound in demand and recovering from the adverse impact of the Covid-19 pandemic. I believe the company can surpass the pre-pandemic revenue levels in FY2023 with the help of the rising revenue per passenger and rising passenger traffic at all CAAP-operated airports.

About CAAP

CAAP's primary activity includes acquiring, developing, and managing airport concessions granted by governmental bodies for a finite period. The company administers fifty-three airports in Argentina, Armenia, Brazil, Uruguay, Italy, and Ecuador. The biggest and most ancient market of CAAP is Argentina, where it administers 37 of the 56 airports in Argentina's national airport system, including the country's two busiest airports, Ezeiza and Aeroparque. The company reports its revenue under four segments: Aeronautical, Commercial, Construction Service, and Others.

The aeronautical segment earns revenue from the passengers' and airlines' utilization of the company's airport services. The company's aeronautical concession agreement regulates fees that CAAP charges to airlines and customers. Aeronautical segment revenue includes the fees the company collects from the departing passengers for the use of the airport and charges that airline companies pay for the aircraft parking and landing. The company generates 44.23% of the total revenue from the Aeronautical segment. The commercial segment generates revenue through fees derived from warehouse utilization services, retail stores, car parking services, duty-free stores, catering, food & beverage services, and hangar services. The company earns 44.30% of the total revenue from the commercial segment. Construction Revenue represents exchange value between the company and the respective governmental agencies regarding the improvements, given that the company builds or improves airports' services as per the respective concession agreements. In exchange, the governmental agencies permit it the right to receive benefits for services rendered using those assets, which are identified as intangible assets. This segment contributes 10.87% to the company's total revenue. Activities that cannot be categorized under the aeronautical, commercial, or construction segments are part of the 'other' segment. The other segment generates 0.6% of the company's total revenue.

Financial Trend and Demand Rebound

The company's revenue heavily depends on the level of customer traffic at airports & the number of take-offs and landings organized in the airport. We can observe in the above chart that the company's revenue has decreased significantly in FY2020 and FY2021 as compared to FY2019. The company's revenue decreased by 61.06% in FY2020 compared to $1.56 billion in FY2019. This heavy fall in sales resulted from the adverse impact of the Covid-19 pandemic. The pandemic negatively affected passenger traffic at airports. The disruption first appeared in Asia-Pacific, but according to ACI, the quick contamination of the virus and the containment measures put in place as a result—such as government advice to stay home and airport closures—led to a 22.9% decline in global air traffic in February and a 53.1% decline in March. This amounted to a drop in passenger volume of 620 million in the first quarter of 2020. Due to a 90% global reduction in passenger travel, April was an incredibly challenging month.

All airport management companies have been experiencing passenger traffic recovery since the last year. In 2022, global traffic increased by 64.4% from 2021 and reached 68.5% of pre-pandemic (2019) levels. Even CAAP is experiencing a solid rebound in passenger traffic.

According to the company's latest press release, total passenger traffic on CAAP-operated airports has increased by 33.6% YoY in March, and overall passenger traffic was 91.7% of March 2019 levels. This rising passenger traffic shows that the company has almost recovered from the adverse impact of Covid-19. After considering the passenger traffic recovery rate of the CAAP, I believe that the company can fully recover from the adverse effects of Covid-19, as the management has confirmed that they are experiencing strong demand at all airports.

Recently, the company reported the Q4FY22 results. The company reported revenue of $386.4 million in Q4FY22, a growth of 76.7% YoY and 1.7% compared to $380.1 million in Q4FY19. Even though passenger traffic was 13% lower in Q4FY22 compared to Q4FY19, the company managed to surpass the revenue levels of Q4FY19 with the help of a solid increase in revenue per passenger. The company's revenue per passenger has increased by 26% compared to $14.1 in Q4FY19. After considering the substantial recovery in passenger traffic and rising revenue per passenger, I think the company can exceed the revenue level of FY2019 ($1.56 billion) in FY2023. According to Seeking Alpha, CAAP's revenue for FY2023 might be $1.58 billion, which is 1.3% higher compared to $1.56 billion in FY2019 and 14.5% higher than $1.38 billion in FY2022. I believe the seeking alpha's estimates justify the above-mentioned factors. Therefore, I estimate the company's revenue for FY2023 to be $1.58 billion. The company's operating profit was $304.6 million in FY2022, and its operating margin was 22.1%. CAAP's interest expense has increased by 30.6% compared to $99.4 million in FY2022. This growth in interest expense is driven by the rising interest rates in the market. The company has reported a net profit of $168.2 million, giving a net profit margin of 12.2%. After considering the rising revenue per passenger and interest rates, I think the company can maintain a net profit margin of 12.2% in FY2023. The net profit margin of 12.2% gives the EPS estimate of $1.12 per share for FY2023.

What is the Main Risk Faced by the CAAP?

High Debt

The company's balance sheet shows a sizable amount of long-term debt. The company now has $1.29 billion in long-term debt, 71% of its market capitalization. The financial burden to the company may increase as interest rates rise. The federal reserves are constantly raising interest rates to keep inflation under control. CAAP's interest expense has increased by 30.6% compared to $99.4 million in FY2022. The company's profit margin may suffer if the federal bank decides to raise interest rates in the upcoming years.

Valuation

CAAP is experiencing a rebound in demand and recovering from the adverse impact of the Covid-19 pandemic. I believe the company can surpass the pre-pandemic revenue levels in FY2023 with the help of the rising revenue per passenger and rising passenger traffic at all CAAP-operated airports. According to Seeking Alpha, the company's revenue for FY2023 might be $1.58 billion. With the estimated net profit margin of 12.2%, we get the EPS estimate of $1.12 for FY2023, which gives the forward P/E ratio of 10x. The forward P/E ratio of 10x is 40% lower than the sector median forward P/E ratio of 16.65x. The company's primary peers are Grupo Aeroportuario del Sureste (ASR), Grupo Aeroportuario del Pacífico (PAC), Grupo Aeroportuario del Centro Norte (OMAB), as all of them have a significant presence in Latin America and have similar revenue levels. Currently, all three peer companies are trading at a significantly higher P/E ratio. ASR is trading at a P/E ratio of 15.24x, OMAB is trading at a P/E ratio of 17.07x, and PAC is trading at a P/E ratio of 17.18x. The company's industry average P/E ratio is 14.87x which is 48.7% higher than CAAP's forward P/E ratio of 10x. Currently, the company is trading significantly below its industry average P/E ratio and sector median, which I think is enough to conclude that the CAAP is undervalued at the current share price of $11.19.

CAAP's valuation has increased by more than 400% in the last three years, which is significantly higher compared to its peers, and still, its valuation is relatively cheap compared to its peers. This indicates the company's high-quality business model.

Conclusion

My final thought on CAAP is that the company's demand is increasing again, and it is recovering from the negative effects of the Covid-19 pandemic. I think the business can surpass pre-pandemic revenue levels in FY2023, helped by increased revenue per passenger and rising passenger volume at all CAAP-controlled airports. The company has huge debt on its balance sheet, which is concerning in the current economic scenario. The CAAP is, in my opinion, undervalued at the current share price because it is currently trading substantially below its sector median and industry average P/E ratios. After considering all these factors, I assign a buy rating for CAAP.

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