ANYYY - Grupo Aeroportuario Del Pacifico Stock: A Growth Story Buy

2023-04-18 12:17:13 ET

Summary

• Grupo Aeroportuario del Pacífico, S.A.B. de C.V. has the highest market share, operating 5 out of the top 10 airports in Mexico.
• The airport group continues to grow and it will grow its airport capacity and commercial solutions to serve the underpenetrated air travel market in Mexico.
• Grupo Aeroportuario Del Pacifico benefits from a diverse passenger profile.

In recent months, I have expanded my coverage from aerospace, defense, airlines and airplane leasing towards airport operators. So, far I have covered three airport operators. The first one is Grupo Aeroportuario Del Sureste ( ASR ) which I have a positive view on and the two other airport operators are Fraport ( FPRUF ) and TAV Havalimanlari (TAVHY). Both of these airports are facing some CapEx headwinds. With this report, I will be adding a fourth airport name to the coverage, namely Grupo Aeroportuario del Pacífico, S.A.B. de C.V. ( PAC ) ("GAP").

How Many Airports Does Grupo Aeroportuario del Pacifico Have?

GAP operates 12 airports in Mexico and 2 airports outside of Mexico. In its Mexican airport portfolio, it has 5 out of the 10 biggest airports in Mexico. These airports are also of importance to GAP as it accounts for over 75% of the total number of passengers handled. The group owns 100% of the Kingston and Mexican airport operations while it owns 74.5% of the joint-venture operating the Montego Bay airport. GAP itself is own for 15% by Controladora Mexicana de Aeropuertos and AENA ( ANNSF ) and for 85% by investors.

How Do Airports Make Money?

So, how do airports make money? It is basically two revenue streams, the first one is aeronautics revenues that include landing and departure fees, passenger charges, terminal space rentals, security and aircraft parking. The second stream is non-aeronautical revenues which include things like car parking, car rental, ground transportation, retail, food and beverages and fast track.

So, there are two revenue streams that are well-suited to capitalize on the travel rebound. On one hand, we have airlines increasing their flight schedules again, which benefits the airline via aeronautical revenues. On the other hand, the passengers are returning to the terminal halls and they have money to spend, which benefits the commercial revenues which form a big portion of the non-aeronautical revenues.

So, for an airport to make money you have to appeal to airlines providing smooth operations and offer travelers a unique experience.

A Look At The Grupo Aeroportuario del Pacifico Q1 2023 Results

For Q1 2023, analysts were expecting roughly $420 million in revenues and earnings of $2.36 per ADS. The actual revenue was $462.5 million. For EPADS, Seeking Alpha suggests that actual earnings were $1.96, while the comprehensive income per ADS which I consider to be the EPADS was $2.36. So, I don’t want to highlight how results stacked against analyst expectations, as those were actually inconsistent.

In Q1, passenger numbers grew by 24% to 15.6 million for all 14 airports. Revenues grew by 38.7% which is higher than the growth in passenger numbers. However, this does not only include aeronautical and non-aeronautical services but also IFRIC 12 — Service Concession Arrangements which are revenues from a concession arrangement is an arrangement whereby a government or other public sector body contracts with a private operator to develop (or upgrade), operate and maintain the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons or hospitals. The revenues are recognizing but are also recognized as costs. Excluding this component from revenues, we get to a 29.4% improvement in revenues, which is also higher than the passenger growth. Non-aeronautical revenues increased by 25.9%, driven by significantly higher revenues from businesses directly operated by the operators, namely a 43.9% improvement while third-party business operations increased by 21%, which was lower than the passenger growth.

What is somewhat unfortunate is that at the time of writing, besides a press release and traffic numbers, we don’t have a presentation available or data on the number of flight movements. So, we don’t have data on how much of the 30.5% increase in aeronautical revenues is driven by a larger number of departures. However, most of the revenue for aeronautical revenues is a function of the number of departing passengers and the maximum tariffs that can be charged incorporating inflation, meaning that cost inflation can be offset on the top line. So, overall we see strong revenues that exceeded passenger number growth and include inflation.

What I like about airport operators is their relative stability on margins. The Mexican airports are subject to maximum tariffs that incorporate inflation adjustments, so I am not too worried about inflation adjustments even though labor costs are on the rise. The margin stability also shows in the year-over-year results with EBITDA margins excluding IFRIC-12 at 72.3% compared to 73.8% last year and operating margins excluding IFRIC-12 at 62.7% compared to 62.6% last year, while cost of services are 14.9% compared to 15% last year.

The Risks And Opportunities For Grupo Aeroportuario del Pacifico

Obviously, as an airport operator, there is a big dependence on continued demand for air travel, meaning that economic growth is a risk factor as well as an opportunity. Another opportunity is the continued penetration of air travel in Mexico. Mexico currently is an underpenetrated market for air travel, so there is a significant growth ahead that could benefit airports.

Perhaps if you think about Mexico, you might think of it as a tourist destination. However, GAP’s passengers are a mix of Leisure (40%), VFR (38%), and business (22%). So, this is not an airport group that almost exclusively relies on either business or leisure. As the market remains underpenetrated there is a huge potential for higher passenger numbers, and GAP is positioning for that with expansion of Guadalajara Airport with a second terminal and runway, as well as terminal expansions in other airports and development of commercial spaces, parking lots, hotels, corporate offices and VIP lounges.

What I would consider the biggest risk is the gang violence in Mexico, but it should be noted that not all airports are in parts of Mexico with gang conflicts and it is also not the case that if an airport is in a conflict area that the entire area is unsafe. Nevertheless, the biggest risk for the ability to attract business and leisure passengers in my view is the cartel-related violence in Mexico.

Conclusion: Grupo Aeroportuario del Pacifico Stock Is A Buy

Currently, analysts have a price target of $191.20 per share which is below the current stock price. However, I don’t think this accurately reflects the growth that can be expected from growth in passenger numbers as domestic and international travel increases. Airports in Mexico have to perform hub functions for international traffic, as there is no clear development plan for improving connectivity for the country’s capital, which I believe will benefit other airports in GAP’s portfolio (Mexico City Airport is not in their portfolio). In 2018, the development of a state-of-the-art new Mexico City airport was cancelled, leaving the capital with a capacity-constrained airport allowing other airports in the country to play a more meaningful role in international connections. As the airport group with the highest market share, GAP might not be seeing an expansion drift to add to the airport portfolio, but we will most definitely see expansion to drive further commercial value and capacity for additional passenger traffic.

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