2023-04-26 22:36:07 ET
Summary
- Grupo Aeroportuario del Sureste reported strong Q1 2023 results, with total passenger traffic increasing by 19.2% YoY and revenues increasing by around 22% YoY (excluding construction revenue).
- We believe risks are increasing and growth will probably decelerate, which leads us to change our rating from 'Buy' to 'Hold'.
- The valuation remains attractive, with shares trading at an EV/EBITDA of around 10x, and a forward dividend yield based on the increased dividend of ~4%.
We last covered Grupo Aeroportuario del Sureste, S. A. B. de C. V. ( ASR ) after its Q4 results where we pointed out that it delivered growth in the quarter and for the whole of 2022. The other main point we touched on then was that the company had too much cash on its balance sheet and was hinting that it is likely to raise its dividend by a significant amount. Since then the share price has not moved much, and we believe the stock continues to be reasonably valued with a forward P/E of less than 15x. In this article we'll analyze the Q1 2023 results, and see if the 'Buy' thesis on ASR stock remains intact.
One reason we are so interested in this company is that despite it being relatively 'boring' infrastructure, not a sexy tech company, it is very well managed and has historically massively outperformed the market as can be seen in the graph below. While we don't think that level of outperformance is likely to be repeated, we still think it can deliver very good returns in the future.
Q1 2023 Results
Total passenger traffic increased 19.2% y/y and revenues increased ~22% y/y when excluding construction revenue, reaching an all-time high of 6.3 billion pesos, or roughly $349 million. Total comparable operating expenses were up 12%, which was significantly below revenue growth in the quarter. This operating leverage led to an increase of 15% in the net majority income, which reached 2.5 billion pesos for the quarter, or roughly $139 million. Mexico represented 75% of total revenues, while Puerto Rico accounted for 15% and Colombia contributed 10%. Commercial revenues delivered excellent performance, increasing by 22%. In other good news, passenger traffic from Canada finally recovered to pre-pandemic levels.
In summary, the company had a very strong start to the year. Nevertheless, it tempered expectations for the remaining of 2023 in part because two Colombian airlines have recently suspended operations, and y/y comparison will also get tougher. With respect to the balance sheet, the company ended with a cash position of 15 billion pesos, or roughly $830 million, while total debt declined 11.1% to 13.5 billion pesos, or ~748 million. The company has therefore more cash and equivalents than debt at this point, although it will spend a significant amount on the dividend this year.
Dividend
The company is planning on paying an ordinary net cash dividend of 9.93 pesos per share in May and an extraordinary net cash dividend of 10 pesos per share payable in November. This would be a combined total of nearly 6 billion pesos in dividend payments, or roughly $332 million.
For investors holding the ADR shares, this means dividends would be 10x those described above, given that the ratio DR/underlying is 1:10. Investors in ASR shares can therefore expect ~199 Mexican pesos in dividend payments for the year, or ~$11. That is a very significant increase compared to the $7.65 paid in 2022. At current prices this results in a forward dividend yield of ~4%.
Growth
Growth this quarter was very close to the historical average of the last ten years, but we believe going forward investors should assume growth will decelerate. The reason for this is that the Cancun airport is operating close to capacity and there are no massive expansion projects or planned acquisitions to help keep growth at these levels. In fact the company is already tempering expectations for the rest of the year because of issues with two airlines in Colombia. The company does have some expansion CapEx planned, and it is likely to be able to maintain growth at a decent level, we just don't think it can sustain the current growth rate for the long-term. We find average analyst estimates to be quite reasonable, which call for ~5.5% revenue growth this year, ~9.8% revenue growth next year, and ~7.7% revenue growth in FY2025.
Valuation
The valuation remains quite attractive, with shares trading at an EV/EBITDA of ~10x, considerably lower compared to the ten year average of ~14x. Still, a discount is probably warranted given that growth is likely to decelerate going forward. Given the net cash position of the balance sheet, and the very low EV/EBITDA multiple, not much growth is required in any case to justify the current valuation.
Shares are trading with a forward price/earnings ratio of ~14x, and analysts expect on average that earnings will continue growing the next two years, albeit at a relatively moderate pace.
Risks
Where we see more issues to maintaining our 'Buy' rating is with the risks, which we believe are increasing. In our last article, we discussed the issue that the Cancun airport is not owned, but is in fact a 50 year concession, with roughly half of it remaining. During the most recent earnings call , the company shared that regarding renewal of the concession, the contract says that it's for 50 years, and that it can be renewed, but that the contract doesn't say how. This raises a lot of questions on whether the company will indeed be able to renew the concession, and on what terms. Still, we already knew that the concession had a finite number of years.
What is new, and very concerning is that there is a bill being considered in Mexico that apparently would give the President the ability to modify or revoke licenses, authorizations, and permits. It seems that not even the company is sure what the impact would be for them, this is what they shared during the call:
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.
Conclusion
Grupo Aeroportuario del Sureste delivered a very strong first quarter, but tempered expectations for the rest of the year. We believe the valuation remains quite reasonable, but are quite concerned with the increasing risks. Giving these risks we are changing our rating from 'Buy' to 'Hold', and we will revisit it once there is more clarity on the potential impact of the Mexican law being considered that could affect the company. This remains an infrastructure investment that we consider very well managed, but the risks/reward is somewhat less attractive compared to the last time we covered the company.
For further details see:
Grupo Aeroportuario del Sureste Q1: Still Growing Impressively But Risks Are Increasing (Rating Downgrade)