ASR - Grupo Aeroportuario del Centro Norte: Analyzing The Fee Change Impact (Rating Upgrade)

2023-10-09 18:14:24 ET

Summary

• Grupo Aeroportuario del Centro Norte operates airport concessionaires in central and northern Mexico. These are businesses with high barriers to entry.
• On October 5th news broke that the Mexican government planned to reduce airport fees for domestic passengers. The risk of regulation has always been present.
• I estimate that it will not affect the company's revenues much and the market is overreacting to the news, as we will explore in this article.

Investment Thesis

In my previous article last month about Grupo Aeroportuario del Centro Norte (OMAB), I mentioned while giving a Buy rating that one of the risks associated with the company (and airports in general) is regulations. These companies operate as monopolies with high barriers to entry, but they are also subject to significant government regulations in various aspects.

Regulatory and Political Risks: Changes in government policies and regulations, including taxation, airport fees, or customs procedures, can affect airport operations and profitability. Political instability or corruption can also pose risks to business continuity.

And on October 5th, this risk materialized, causing a drop of between 30% and 40% in all Mexican airport stocks. In this article, I will discuss the news that shook this group of stocks and the effects it will have on OMAB's revenue. Additionally, I will explain why I believe it might be an overreaction situation, leading me to give the company a ' strong buy ' rating.

The Big News

The big news last week was that the Mexican government intended to change the formula that establishes price limits on fees for the use of airports, which are typically charged to passengers. This fee is called the Tarifa de Uso de Aeropuerto ((TUA)) in Spanish, or the Airport Use Fee ((AUF)) in English, and it is only paid by domestic passengers.

While this is something positive for passengers – I say this as a Mexican who usually takes flights within the country and is aware of the complaints that Mexicans make about the AUF – it may not be as positive for airport revenues and could result in a considerable loss. Or is it?

There is still no official statement from any of the parties involved, but the newspaper called El Financiero reported that this reduction could be around 8%, or let's call it 10% for argument's sake. During FY2022, 59% of OMAB's revenues came from Aeronautical Services, which include the Passenger Charges that are planned to be modified. Of this percentage, 68% came from domestic passenger charges themselves, so the remaining 32% would not be affected, at least not initially.

Then the FY2022 distribution of revenues look like this:

• Total Revenue: $11.93 billion MXN
• Aeronautical Services: $7.05 billion MXN
• Domestic Passenger Charges : $4.79 billion MXN

If we consider the 10% reduction that the newspaper El Financiero mentioned in Passenger Charges (they reported an 8% reduction, but let's be conservative), then these revenues would have been $4.32 billion MXN. Therefore, total revenues for FY2022, after factoring in this 10% reduction in Passenger Charges , would amount to $11.45 billion MXN, representing a 4% decrease compared to reported revenues. This does not seem to justify a 25% drop in just 5 days.

I understand that the decline in shares may be more related to the precedent this situation could set, with concerns that Mexico might follow the path of countries like China or Russia where the government significantly intervenes in business operations. However, it's important to note that the proposed change appears to be minimal in terms of business impact, and we still do not have official confirmation or details on whether negotiations could alter the conditions. At this point, these developments could be based on rumors.

Valuation

In my previous valuation, I mentioned that I considered it feasible for revenues to grow by 12% annually in the coming years. However, to account for the factors discussed above, let's make a 4% adjustment to the growth rate.

This adjustment would result in an annual growth rate of 8%. If we apply valuation multiples of 10x EBITDA and 15x earnings, this would translate to an annualized return of 21% from the current share price of $150 MXN in the Mexican Stock Exchange (Bolsa de Valores Mexicana).

Final Thoughts

The investment thesis has not changed, and one could argue that it has become even more attractive. This is due to the news causing valuations to drop to levels not seen since the 2008 financial crisis and the worst of 2020 when the economy came to a standstill, and airports had no traffic due to the lockdown.

The risks remain consistent with those I mentioned in my previous article . However, in this case, we have already witnessed how the stock can react when one of these risks materializes. The key question here is whether you believe that this government action sets a precedent for what we might expect in the future, or if it is a relatively minor adjustment within reason. In my case, I tend to believe the latter because this change would only represent around 4% in the company's revenue, assuming the worst case scenario in one of the companies with the greatest exposure to Passenger Charges revenues, companies like (NYSE: PAC ) only have 64% of their revenues exposed to this segment, while (NYSE: ASR) has only 42% of their Aeronautical Services Revenues exposed, in contrast to OMA's 68% exposure.

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