Summary
- Grupo Aeroportuario del Sureste continues to impress, with very significant growth delivered in Q4 and for the whole of 2022.
- The company is talking about having too much cash on its balance sheet and is hinting that it is likely to raise its dividend by a significant amount.
- Shares appear reasonably valued, trading below their ten-year EV/EBITDA average, and with a forward P/E of ~17.
We started coverage of Grupo Aeroportuario del Sureste ( ASR ), the Cancun airport operator, with a 'Buy' rating when it was trading at ~$210, and it looked like the company had fully recovered from the Covid crisis. Since then , shares have significantly outperformed the S&P 500 Index ( SPY ) by returning ~33% compared to -2.6% for SPY. While shares are now more fully valued, the company continues to post impressive performance, which might allow it to continue outperforming further into the future.
When reporting Q4 results, the company noted that travel demand remains strong, with 17.6 million passengers passing through its airports during the quarter. This represents an 8% y/y increase and is roughly 26% higher when compared to Q4 2019. For the full year 2022, a total of 66.3 million passengers went through its airports. One of the only weak spots for the company was travel coming from Canada, which remains at ~77% of 2019 levels, but which the company expects will recover soon.
In Q4, revenue was up 23% y/y to a record MXN 5.9 billion, or roughly $320 million. Compared to the pre-pandemic levels of Q4 2019, revenue was up ~54%. Mexico accounted for roughly three-quarters of revenue, most of which came from the Cancun airport. Puerto Rico accounted for ~15% of revenue, and Colombia was responsible for ~11%. Grupo Aeroportuario del Sureste delivered another record quarter for EBITDA, which reached MXN 4.4 billion, or approximately $239 million. This was an increase of ~38% y/y, and ~82% from 2019 levels. The adjusted EBITDA margin reached an impressive 75%. Net majority income reached MXN 2.6 billion in the quarter, or roughly $141 million. This was a ~27% increase y/y, and basically double what the company earned in the fourth quarter of 2019.
The company is therefore generating a lot of cash, and this is showing in the balance sheet. Grupo Aeroportuario del Sureste ended the quarter with over MXN 13 billion in cash, or more than $700 million. This is roughly 8.3% of its market cap in cash. The company still has a very small net debt position and leverage. Net debt to EBITDA is only ~0.1x, and interest coverage is ~12.6x. It is therefore very likely that the company will find itself soon with a net cash balance sheet, especially given that its capex plan for 2023 is very modest. It is planning to spend MXN 1.2 billion, or $65 million.
Too much cash
It is rare to hear a company complain that it has too much cash. Perhaps the only example we can think of is Berkshire Hathaway ( BRK.A ) ( BRK.B ), where Charlie Munger and Warren Buffett have called it a "high class" problem. It seems Grupo Aeroportuario del Sureste is joining the elite club of companies where too much cash is a problem. During the Q&A session of the earnings call , an analyst asked if the company was not carrying too much cash on its balance sheet, and this is what CEO Adolfo Castro replied:
We're closing the quarter with MXN13 billion in cash in hand. And apparently, that is too much. Of course, we cannot forget what we have went through over the last couple of years, in the case of Co -- but it's true that this is too much, not just that, the CapEx program for this year, the MXN1.2 billion, of course, is very low when compared with other years. And I'm almost ready to present my proposal -- my dividend proposal to the Board and then to the shareholders' assembly. So you will have to wait for that in the coming, I don't know, 30 years -- 30 days.
Our take is that the company will probably remain responsible and retain a good cash buffer, especially after the Covid crisis experience, but it sounded like the CEO was hinting that a big dividend increase could be coming for shareholders.
Strategy for the next 25 years
One of the few things about Grupo Aeroportuario del Sureste that makes us a little bit less enthusiastic is that the company does not own the Cancun airport, but instead it has a 50-year concession that has roughly 25 years left. We would like the shares a lot more if they actually owned the airport, but at least the company has a clear strategy to maximize value for shareholders. In this respect, we found this comment from the CEO particularly interesting:
Well, in the case of Mexico, we're still 20 years away from 25 years away from the end of the concession. So we are, I would say, in the middle of the 50-year period. We -- normally, we invest or we propose our investments in accordance with the demand we expect. That's what I was saying, the most important effect in terms of the proposal we have presented to the government is Cancun because we expect more traffic in the case of Cancun. In the other airports, basically, we do have the capacity for the future demand.
He was even more explicit when asked by an analyst that as the company enters the second half of the concession duration, if he thought the majority of the future free cash flow should eventually be distributed to shareholders. He was very clear in his response, basically hinting again that more free cash flow will be distributed to shareholders:
I have to agree with you because if we see the results for the first 25 years, basically, most of the cash flow generation has been invested in the airports with the exception of the dividend payment mostly has been invested there. And this trend should reverse towards the end of the position.
Growth
The revenue growth that Grupo Aeroportuario del Sureste has delivered over the past ten years is just spectacular. It probably exceeds that of some well-known software companies, as it has averaged quarterly y/y growth of almost 19%. We are not sure how long this level of growth can continue, but so far the company is not showing signs of growth deceleration. One potential issue in the future could be the new Tulum airport that might take some passengers away from the Cancun airport.
If we had to guess, growth in the next ten years will be significantly lower compared to the past ten years. Fortunately, the valuation is low enough that it does not require the same level of growth to justify the current share price.
Valuation
Shares are trading with an EV/EBITDA multiple below their ten-year average, and what we believe to be a very reasonable absolute level. We believe the current multiple does not require much future growth to be justified.
In terms of the price/earnings ratio, shares are trading with a forward p/e of ~17. Given that the company has a history of attractive revenue and earnings growth, a very solid balance sheet, and an attractive dividend yield, we believe the valuation is quite reasonable.
The company has a trailing dividend yield of ~2.7%, but we believe there is a good likelihood that a dividend increase will be announced soon. It is important to note that the company pays its dividends annually.
Risks
As we've learned from Covid, one of the biggest risks from investing in airports is pandemics. That is not the only risk, however, as the company is also highly regulated on its aeronautical revenues, and has to negotiate with the government as to what fees it can charge. These risks are mitigated by the fact that airports are indispensable infrastructure, and that the company has a very strong balance sheet. This is reflected in its very high Altman Z-Score, comfortably above the 3.0 threshold.
Conclusion
Grupo Aeroportuario del Sureste continues to impress, with very significant growth delivered in Q4 and for the whole of 2022. Whiles shares are near record prices, the valuation remains quite reasonable. The company is also hinting that it might increase its dividend, as it currently has too much cash on the balance sheet, and is generating very significant free cash flow. After reviewing the most recent results, and given that the valuation remains quite reasonable, we are maintaining our 'Buy' rating.
For further details see:
Grupo Aeroportuario del Sureste: Too Much Cash