2023-04-28 15:57:13 ET
Summary
- Quarterly results for Grupo Aeroportuario Del Sureste were good, but Mexican airports faced cost challenges.
- Year-over-year growth will taper due to challenging comp.
- The high growth years are likely over, but the company remains an attractive long-term grower in a net cash position with a 4% dividend yield.
This year, I have started covering airport names as a way to capitalize on the recovery in air travel. The obvious way to ride the recovery wave is by investing in airlines, but that is not my preferred way. The reason is that airlines tend to fall hard when macroeconomic indicators are softening and when times are good, airlines tumble over each other to throw capacity on the market and erode the yield. The other option is by simply investing in the companies that supply the aircraft. The drawbacks there currently are supply chain issues. That leaves airport names as a potential way to capitalize on the demand recovery. Obviously, if demand falls, airport names are not free of the pain, and with costs in security, staffing, and construction, they are not free of inflationary cost pressures either, but they often do have inflation escalators allowing them to pass through costs to airlines.
The first airport name I covered was Grupo Aeroportuario del Sureste (NYSE: ASR ) and so far that has paid off with a 26.5% appreciation for the stock versus 8.6% for the broader markets. Over the past two weeks the stock price started to soften, possibly after a downgrade from Citi for a sector peer, and separately a bill that has not been passed, yet that would make it easier for the government to revoke concessions and permits.
About Grupo Aeroportuario del Sureste
Grupo Aeroportuario del Sureste is an international airport group operating airports in Mexico, the US, and Colombia. The company operates nine airports in Mexico, including Cancún International Airport, which is the second-biggest airport in Mexico with over 22 million passengers annually accounting for over 75% of the traffic flow through the Mexican airports operated by the airport group. Luis Muñoz Marín International Airport in San Juan, with over 9 million passengers annually, is the second-biggest airport in the company's portfolio and the only airport it operates in the US. The third-biggest airport that the group operates is the José María Córdova International Airport that serves the Medellín Metropolitan Area and has nearly 8 million passengers each year. It is the biggest airport in the portfolio of six airports operated in Colombia.
Making Money As An Airport
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 as an airport, to make money, you have to appeal to airlines providing smooth operations and offer travelers a unique experience.
A Challenging Quarter With Growth
First quarter results were up 18.9% and when we exclude the construction revenues, which are recognized as revenues and simultaneously added to the cost balance, the revenues increased 21.8%, which was 1 percentage point lower than the total passenger increase. In Mexico, the revenue growth was 26.9% excluding construction revenues on a 22.7% increase in passengers while Puerto Rico booked an 8.7% increase on 21.6% higher passenger numbers, which is driven by the appreciation of the Mexican peso appreciating 10.36% compared to the USD. In Colombia, revenues grew by 9% on 10% higher passenger numbers despite a 32.6% appreciation compared to the Colombian peso. That growth was driven by the opening of 29 new spaces over the past 12 months.
In Colombia, cost excluding construction costs rose 1.6% showing costs being more or less flat, leading to 18% higher profits and 11.8% higher EBITDA. In Puerto Rico, the operating profit decreased 31.4% while EBITDA grew 3.7%, The EBITDA increased by 3.7%, but operating profit declined by 31.4%. However, this was driven by a Ps. 196.4 million grant received last year excluding the grant, profit increased by 11%. So, Puerto Rico had a good quarter. In Mexico, costs went up 22% due to higher energy costs and wages.
Consolidated EBITDA was up 23.2%, which was a better improvement than the passenger flow, but net income was up 10.7% or 14.5% when looking at the majority net income. That was driven by strong cost control in Puerto Rico and Colombia despite forex pressure and less strong cost control at the Mexican airports. So, we did see significantly better year-over-year numbers in many regards, but that is not something that will continue as the comp is favorable for Q1 comparing a weak 2022 quarter with a good 2023 quarter, and as air travel recovered from Q2 2022 onwards that comp is not going to be resulting in big year-over-year changes.
Grupo Aeroportuario del Sureste Enters Net Cash Position
When I discussed the airport group results last year, Grupo Aeroportuario del Sureste still had a net debt of 2.18 billion pesos. Since then, the company has reduced its debt by 2.6 billion pesos and improved its cash position by over 1 billion pesos, bringing it to a net cash position. So, that gives us no concerns on the ability to pay off the debt as the company can do so with its cash position, and the business generated 3.8 billion pesos in operational cash flow in the first quarter.
The Risks For Sureste
I believe the opportunities for Sureste are plenty, it has shown years of growing passenger numbers, and its acquisition of Colombian airports provides a nice diversification that could further translate to growth. Overall, inflationary pressures are a risk, as is the case for many businesses these days, and we did see that back in the first quarter results. What we also saw is that the appreciating Mexican peso had a significant impact on the results in Puerto Rico, which is dollar-denominated.
Additionally, Cancún is Sureste's show pony and that is not something bad, but Cancún is a tourist destination and not so much an airline hub. Therefore, continued leisure, demand, and more importantly international leisure demand is required. If macroeconomic headwinds are prevalent, this could become a problem for Sureste as the recovery in Canadian travel will unlikely offset any macroeconomic-driven softening in leisure travel. Mexico is not really known for being the safest place for locals or for tourists, and that means that any eruption in violence could bring tourist sectors to their knees, like we saw happening in Tunisia some years ago.
The Upside Stretches Beyond 2023
Valuation Grupo Aeroportuario del Sureste | |||
Market Capitalization ($ bn) | $8.53 | ||
Preferred stock ($ bn) | $- | ||
Total debt ($ bn) | $0.72 | ||
Cash and equivalents ($ bn) | $0.81 | ||
Minority and controlling interests ($ bn) | $0.38 | ||
Total Enterprise Value ($ bn) | $8.83 | ||
EBITDA 2023 ($ bn) | $1.04 | ||
EV/EBITDA | 8.5x | ||
Current price | $283.35 | ||
Median | Current | Industry | |
EV/EBITDA | 8.73 | 9.07 | 8.31 |
Price target | $290.52 | $301.84 | $276.54 |
Upside | 3% | 7% | -2% |
Putting in all numbers, ASR has an enterprise value of $8.8 billion and with slightly north of $1 billion in expected adjusted EBITDA for 2023 that gives us 3 to 7 percent upside and slightly overvalued compared to the industry and another 10 percent upside for 2024.
Conclusion: A Bet On Air Travel Recovery Without Fuel Costs
I continue to see value in shares of Grupo Aeroportuario del Sureste, but investors should keep in mind that we won’t be seeing the big year-over-year increases as from Q2, 2023 onward, we will be comparing strong travel quarters last year to strong travel quarters this year. Additionally, there is some cost risk as well. Primarily for the Mexican airports, we saw some challenges to control costs. So, the risk is in increasing and the times of very high growth due to air travel demand increasing is over. Demand is still recovering globally, but due to the comp, the growth rates are going to reduce, making cost control even more important to keep earnings up. Nevertheless, I do think that shares remain attractive as a moderate-growing stock that also pays a dividend. For 2023, that dividend should be $11 putting the yield at an attractive 3.9%.
For further details see:
Grupo Aeroportuario Del Sureste: Lower Growth, But Attractive Dividend