Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR) ended 2022 surpassing the pre pandemic 2019 PAX (passenger traffic) base and reported a 34% increase vs 2021. Mexico (Cancun) grew 36% and Colombia 57%. And this week it reported a 30% PAX increase for January 2023. However, the airport infrastructure stock is down 7% from recent high and on my estimates is trading at 8.7x EV/EBITDA (vs 12x historical) with 39% upside to year end 2023.
Mexico and Airports
As I wrote in greater detail in the two reports, Grupo Aeroportuario del Sureste: Mix Of Growth And Valuation (ASR) and Mexican Airports: I Prefer ASR Over OMAB And PAC, I continue to find ASR a compelling case of reasonable valuation, growth, capital returns and a defensive and resilient business model. ASR has dipped at the start of the year while peers have rebounded, this may be due to negative news surrounding extensive traffic jams in Cancun. At the same time, Mexico’s strong currency, expected interest rates cuts and more long term nearshoring trends make the country attractive to investors, in my view.
PAX is key to the sector with regulated revenue collected per passenger, while about 50% of operating cost are fixed and provide margin gains. In addition, commercial revenue from duty free, restaurant etc. add even more margin, especially at high tourist destinations such as Cancun. As seen in the table below, ASR has surpassed its 2019 PAX base and is set to continue to grow at a more moderate pace but with higher margins that provide for increasing dividends or acquisition options.
Mexico Still Dominates
ASR is predominantly a Mexican airport operator, despite the positive returns at Puerto Rico and Colombia. As such the growth dynamic should continue but at a slower pace since higher PAX requires tourism infrastructure build out as well. The Tulum airport project sponsored by the Mexican government and to be built by the Army seems a distance threat and can be compensated with lower capex/airport infrastructure needs at Cancun, which would result in higher free cash flow.
A Compelling Combination of Value, Growth and Dividends
I value ASR at 12x EV/EBITDA, below 20-yr average and more in line with a slower growth profile and potential higher dividend payout. The company is approaching a net cash position and barring acquisition may see further cash build up even when and if it embarks on a new capex plan for Cancun. I find the stock a compelling combination.
One risk is market consensus for EBITDA in 2023 and 2024, which are quite disperse, as can be seen in the chart below. It seems the market has doubts with respect to ASR’s ability to growth PAX and EBITDA. However, the market does agree that the company is headed to net cash.
ASR has proven its operating and regulatory resiliency in the face of severe disruptions and changing Mexican governments. Its key Cancun airport has seen consistent growth, increased margins and free cash flow that has been funneled into acquisitions. Going forward, ASR may grow slower but with higher cash accumulation that may lead to greater dividend payouts and/or value creating acquisitions.