GPAEF - Grupo Aeroportuario del Sureste: Good Quarterly Financial Results But Turbulence Expected Ahead

2023-10-26 23:27:21 ET

Summary

• Grupo Aeroportuario del Sureste shares have lost almost a quarter of their value due to regulatory changes in Mexico.
• The company delivered solid Q3 results, surpassing pre-Covid levels, but the financial impact of the regulatory changes remains unclear.
• The company is evaluating the potential impact of the changes and has not provided new guidance at this time.
• Shares look cheap, with the market already discounting to some degree the regulatory impact, but it is difficult to tell if this presents an opportunity as the financial impact could be severe.

Last time we wrote about Grupo Aeroportuario del Sureste ( ASR ) ( ASRMF ) we downgraded the shares given the increasing risks the company was facing. Since then shares have lost almost a quarter of their value, in large part due to regulatory changes in Mexico.

The company delivered solid third quarter results, but it is not completely clear yet how much the regulatory changes will impact the company financially moving forward. In our previous article we noted this as signs that regulatory risks were increasing, prompting our downgrade:

Separately, on the news front, at the end of the quarter, the President of Mexico sent to the Mexican Congress appealed to reform 23 lots, the bill was to provide among other things, additional brands for the Mexican government to modify or to revoke license, authorizations and permits. And it's not clear whether the Congress will pass this bill and it represses the impact it may have on the Mexican economy and the company's operation.

We believe this deal will be discussed by the Mexican Congress during the third quarter of this year.

During the earnings call, this is what the company shared during the prepared remarks to address the issue:

On October 4, ASUR received a notification from the Mexican Federal Civil Aviation Agency that it has decided to amend with immediate effect the terms of the Tariff Base Regulation. These terms were laid out in the Exhibit 7 of the concession agreements established in 1998 and then amended in 1999. On October 19, as we received a notification from the Mexican Federal Civil Aviation Agency, which modified the document received on October 4. The full text of the amended Exhibit 7 was filed with the Mexican Bolsa and the Securities and Exchange Commission.

On October 18, the lower house of the Mexican Congress approved the initiative to increase the concession fee from 5% to 9%, which is now under review by the Senate. We do not know when this may be approved and when the change in the case will be effective. ASUR is currently evaluating the charges -- the changes implemented by the Mexican Federal Civil Aviation Agency and the potential impact that it may have on its business, including its finances.

There is clearly a lot of uncertainty at this point, so it is difficult to tell whether the market overreacted. According to Bloomberg , the changes impact most regulated airport tariffs, not just passenger tariffs, which are known in Mexico as TUA. Still, there are a number of possibilities as to how this can play out, as the impacted companies might be able to negotiate the changes and reduce their impact, the Mexican Senate might block it, or the companies might just have to accept reduced revenues with nothing in return from the Mexican Government. With all of this uncertainty and the fact that more than 60% of its revenue is regulated, it is not surprising that Grupo Aeroportuario del Sureste is still evaluating the potential impact and not proving new guidance at this time.

Q3 Results

Operationally the company is doing great, clearly surpassing pre-Covid levels. In fact it reached a historical maximum in the number of passengers this past September. In Q3 ~17.6 million passengers traveled through its airports. The year over year growth rate was relatively low at 3.4% for a number of reasons. These included the suspension of two Colombian airlines earlier in the year, which combined with an increase in value-added taxes, resulted in a contraction of nearly 15% in total traffic in Colombia. This was offset by Puerto Rico delivering growth of nearly 25%, and Mexico seeing 6% growth, driven by domestic traffic that offset a 0.6% decline in international traffic. All of this resulted in revenues increasing over 3% to a little over MXN $6 billion (~$327 million) in Q3 2023. Consolidated EBITDA for the quarter also increased y/y 3% to MXN 4.2 billion (~$229 million). We believe these are strong results, especially considering the strength of the Mexican peso and some of the other headwinds the company faced.

Balance Sheet

Grupo Aeroportuario del Sureste continues to have an enormous amount of cash on its balance sheet, ending the quarter with roughly MXN 16.9 billion (~$921 million) in cash and cash equivalents.

This financial strength has allowed the company to be generous with its dividends to investors, paying a special dividend this year. In May it paid an ordinary dividend of a little over $5 per ADR, and in November it plans to pay an extraordinary cash dividend of roughly the same amount. That would put the dividend yield at ~5% when combining both dividend payments.

Outperforming Competitors

We believe the three Mexican airport operators are attractive companies, but Grupo Aeroportuario del Sureste is our favorite one. As can be seen below, it has historically outperformed the revenue and EBITDA growth of both Grupo Aeroportuario del Pacifico ( PAC ) and Grupo Aeroportuario del Centro Norte ( OMAB ). All three companies are exposed to the current regulatory changes, and all of them saw significant share price declines after the news was released about the tariff changes the Mexican government is considering.

Forward-looking expectations

As we are writing this, there are some updates that are putting the passenger tariff reduction in the range of 8 to 12%.

In addition to the lowered usage fees, Mexico's transportation ministry wants to almost double what it charges operators for its concessions to run the airports, increasing the fee from 5% to 9%, which applies to operators' revenues. This higher fee would need Senate approval, but we can assume it passes to evaluate a worst-case scenario.

Our expectation is for something like a 10% reduction in tariff revenue for airport operators, and 4% of revenue lost to the increased concession fee. Taken together, we believe this would result in a roughly 20% hit to EBITDA. Significant, but not devastating, and reasonably in line with the share price decline. It is also important to remember that the company has continued investing, with meaningful growth capex for the expected continued increase in passengers. This embedded growth from investments, a turnaround in the Colombian operations, and continued growth in Puerto Rico could help reduce the EBITDA decrease next year.

Valuation

The three Mexican airport operators are trading well below their historical valuations. For example, Grupo Aeroportuario del Sureste is trading at less than half its 5-year average operating PE ratio. This tells us that the market is already discounting a big impact from the regulatory changes.

Based on our future earnings estimates, we get a net present value that is considerably higher than the current share price.

Normally such a large discount would motivate us to give shares a 'Buy' rating. Unfortunately, we feel a 'Hold' is more appropriate as uncertainty remains very high, and once a Government targets an industry, it is difficult to tell where or when they'll stop.

Risks

Just as the company seemed to be exiting the risks of the Covid period, it is now facing new uncertainties from changing regulations. Investors should monitor developments closely, but it seems it will take some time before the impact can be more clearly measured. This is what CEO Adolfo Castro replied to a question from an analyst regarding the new MDP (Master Development Program) and the new regulations:

In the case of the MDP process, as we have mentioned, this is almost two years process. We were almost at the end of the process and now with this document, we will have to restart again in terms of the document that we will have to present to authorities in the coming days, I would say. As we speak, we are adjusting the document in accordance with the new regulation that we have received last week. So, we are now in the process to evaluate what the impacts may be on this respect.

In terms of what you're saying of the 10% tariff reduction, et cetera, it's not something that we are, for the moment, available to answer. We will have to see and wait until these new bases of regulations are applied in the numbers of the company. And that I believe is going to be at -- towards the end of the year, probably the first week of January, when we are going to be able to say what was the implication of these new base tax regulations on the numbers of the company.

Conclusion

Grupo Aeroportuario del Sureste has not disappointed operationally, as it continues increasing its passenger traffic numbers, and delivering excellent financial results. Shares definitely look cheap at the moment, but without knowing how much of an impact the new regulations will have, it is difficult to estimate the profitability reduction the company might see as a result of these changes. Given the combination of a low historical valuation, coupled with high uncertainty as to the impact regulations will have, we are maintaining our 'Hold' rating.

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