OMAB - Grupo Aeroportuario del Pacífico: Efficiency Punished
2023-11-10 07:49:44 ET
Summary
- Grupo Aeroportuario del Pacífico may be negatively impacted by the Mexican government's change to concession terms, which could reduce ROI from 14% to 10%.
- New price target of US$137 warrants a Hold.
- ASR's MDP outcome in December could be a trigger.
Summary
Grupo Aeroportuario del Pacífico (PAC) stands to be the most negatively impacted by the Mexican government's unilateral change to concession terms. This is mainly due to the shift from a weighted average cost of capital ((WACC)) to cost of equity ((KE)) implementation in next year's master development plan ((MDP)), which could reduce the airport group's return on investment ((ROI)) from 14% to 10%. Additionally, the concession fee will increase from 5% to 9%, which should be passed through tariffs in the 2025 MDP.
Based on my estimates, PAC may receive a 5% increase in airport tariffs ((TUA)) in the 2025 MDP, resulting in an EBITDA margin of 73% and a new price target of US$137 on an 8.5x enterprise value/EBITDA multiple.
Background to Unilateral Changes
On October 4th, 2023, the three Mexican airport groups, Grupo Aeroportuario del Pacífico, Grupo Aeroportuario del Sureste (ASR), and Aeroportuario del Centro Norte (OMAB) announced that the government regulators had unilaterally changed the concession terms. No other information was provided at the time and the stocks promptly sold down as much as 30%.
In the following week, details of the changes were provided, and while not nearly as bad as speculated it should have a material impact on operating results. In this note, PAC: No Easy Way Out, I attempted to quantify several scenarios. And post-concession term changes I updated the OMA investment case in OMA: Safe To BUY
WACC vs Ke
The new formula to calculate the maximum tariff that PAC may charge will be determined by the end of 2024 and implemented in 2025 for a 5-year period. The main change in the discounted cash flow ((DCF)) calculation is the discount rate used, which now punishes PAC given its more efficient capital structure. The company has reduced equity via capital reductions (dividends) and increased debt, which combine to drive down its WACC. This lower discount rate means that the MDP capex investment in new airport infrastructure would get a higher net present value and result in lower revenue needed, i.e., lower tariff per passenger. During the recent earnings call, the company mentioned that they see the new formula as negative.
PAC WACC Estimate (Created by author with data from PAC)
PAC WACC Estimate (Created by author with data from PAC)
Lower EBITDA Margins
It is expected that the PAC's margins at the Mexico concession will decrease from 74% in 2023 to 72% in 2024. However, it is anticipated to partially recover in 2025 due to the new tariff increase. The passenger traffic ((PAX)) is expected to remain high at 6%-7% during this period, while the commercial revenue is projected to grow at 3% per pax. The main negative impact for YE24 estimates is the higher concession fee, while in YE25, the higher tariffs may not be enough to offset the operating costs due to the new MDP tariff formula.
PAC Mexico Operating Model Estimates (Created by author with data from PAC)
PAC Mexico Operating Estimates (Created by author with data from PAC)
Cashflow and Dividends
Based on my analysis, I anticipate that PAC will begin generating positive free cash flow in the next MDP cycle, due to the capex and the regulator's new formula that cuts into ROI. I assume that the company will continue its trend of paying out most of its FCF as dividends and may also consider exploring merger and acquisition opportunities outside Mexico. However, this forecast may change if the new tariffs and MDP results at Grupo Aeroportuario del Sureste ( ASR ) turn out to be more favorable than expected.
PAC Cash Flow Estimates (Created by author with data from PAC)
Consensus Estimates
The current consensus estimates haven't yet factored in the changes made to the concession terms and results of 3Q23, but still exceed my initial expectations. However, there is a possibility of further downgrades as analysts revise their models. The consensus price target for YE24 is US$184, which implies an EV/EBITDA ratio of 10.5x, an undeserved premium according to my assessment.
PAC Financial Summary & Valuation (Created by author with data from Capital IQ)
Valuation
After revising the estimates for PAC, considering the new concession terms and reducing the fair target multiple from 10x to 8.5x EV/EBITDA, my analysis led to a year-end 2024 price target of US$137. However, this result does not indicate a significant upside potential, and therefore, I recommend a Hold rating. It is important to note that the outcome of the ASR MDP, which is expected next month, will play a critical role in determining the company's valuation.
PAC Financial Summary & Valuation (Created by author with data from PAC)
Conclusion
I have assessed PAC and believe it is best to hold on to the stock for now. The recent changes to the concession terms could have a negative impact on the company's long-term return on investment and valuation. However, it seems that the stock has already taken much of this impact into account. There is a chance that the stock may improve its rating next month if the ASR MDP outcome is positive.
For further details see:
Grupo Aeroportuario del Pacífico: Efficiency Punished