2023-03-14 07:47:38 ET
Summary
- TAV Airports has been hit with additional CapEx due to regrowing its business after losing Istanbul Atatürk Airport due to closure.
- The company is diversifying and making investments at the expense of dividend payments to regrow, but is a good reason not to pay a dividend.
- Turkey should continue to benefit from strong tourism numbers which will help the Turkish airports portfolio.
- CapEx is focused on growing capacity as well as improving retail revenues.
On the back of a revival in air travel demand, I have not only been looking at market outperforming airline names such as Air France-KLM ( AFRAF ), but I also have been looking at airport operators . The buy thesis for these names is actually quite simple, with air travel demand improving, people will find their way back to the airport and spend their money inside of the terminals while airlines are paying aeronautics fees. In this report, I will be analyzing TAV Havalimanlari Holding, also known as TAV Airports Holding ( TAVHY ).
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, as an airport to make money you have to appeal to airlines providing smooth operations and offer travelers a unique experience.
Why TAV Airports Holding Stock Could Be Attractive
Above I already outlined how airports make money. What potentially makes TAV Airports Holding attractive is the fact that Turkey is a tourist destination for many people. You could say of course that with the recent earthquakes in Turkey, tourism might weaken. That holds true if tourists are fear infused by the earthquakes rather than fact driven. Because the fact is that many tourist destinations are in central and west Turkey and the earthquakes were in the east.
TAV Airports operates or owns five airports in Turkey, all of which are situation in Central Anatolia, the Mediterranean and the Aegean region. Rational thinking would suggest that there shouldn't be a significant adverse impact on tourism if any and particularly for the airports operated by TAV Airports. Beyond that, tourist destination airports in Tunisia are also operated and perhaps the 15% share in the airport of Zagreb could be growth story with the accession to the Schengen Area. Being focused on tourist destinations primarily, seasonality is of course an item but we also saw TAV Airport making its business less seasonally impacted by signing a share purchase agreement in 2020 for Almaty Airport in Kazakhstan in an attempt to cover the loss of the closed airport in Istanbul. Furthermore, with its global exposure the Turkish revenues only account for 37% of the business now.
I am not so much interested in solely looking at the quarterly numbers, due to seasonality. Over the full year, we see that revenues were up 40%, EBITDA was up 15% but more importantly looking at the results from continued operations we saw net income increase by 63%. Istanbul Atatürk Airport was basically TAV's flagship airport and in April 2019 that closed for passenger traffic and in February 2022 it closed for cargo operations as well. That part of the results has to be omitted to assess the underlying performance and we see that that performance was good.
TAV Airports: No Longer A Dividend Payer
If you are looking for a dividend paying airport name, you can skip TAV Airports. The company had an attractive yield for years but it cut its dividend in 2020. That is partially driven by the pandemic, but also by the loss of Atatürk Airport, which required the company to look for another airport to operate and invest in. That airport became Almaty Airport in Kazakhstan.
To TAV that is not the kind of investment where it took control and just operated the airport. The company has invested in a new terminal which will open in the second half of 2024 and it will be a significant boost to the capacity of the airport with more revenue opportunities. Similarly, Alanya Airport new terminals are being constructed which should open in 2025 and boost retail spending by passenger. So, the dividend is suspended but that is driven by CapEx requirements that should significantly boost revenue potential at two airports in the years to come. While I do like companies that pay a dividend, I can see why TAV Airports is not paying one currently. It is investing the money into revenue generating projects that should safeguard future dividends and growth.
TAV Airport Holdings: Guiding For A Strong 2023
For 2023, we see that growth is expected in all metrics including negative movement on the leverage, which is driven by the continued expenditures as seen by the CapEx increase. From EBITDA perspective, at the mid point 10% growth is expected which is below the projected revenue growth. The projections towards 2025 have come down somewhat due to low margin business growth but overall the longer term expectation is that EBITDA growth will start outpacing revenues and we will see some investments such as Almaty Airport come into play as well as the new Antalya Airport concession for which a joint venture of Fraport and TAV has won the concession starting 2027 until 2051 and upgrades to the airport should bolster its capacity and revenue potential.
Conclusion: TAV Airports Holding Stock Is A Diversified Airport Buy
While TAV Airports Holding no longer pays a dividend and we have no line of sight on when that dividend might be reinstated, I can appreciate that the dividend is suspended to make investments towards revenue generating initiatives. TAV Airports has to replace the missed results from the closure of Istanbul Atatürk Airport and they are making those investments now, and as air travel grows and the investments start adding more towards the business, we should also see that dividend being reinstated. So it is not really about an inability to pay a dividend, it is a conscious choice to invest it into airports that should help the business regrow.
The business is focused on tourism and the Almaty airport reduces that a bit, but overall I do like the geographic distribution where TAV services are offered in 108 airport in 29 countries with a reduction of the share of Turkish revenues.
For further details see:
TAV Havalimanlari Holding Stock: A Turkish Tourism Growth Buy