Value Investors Club / Aena SA (AENA)

free cash flow. If it traded for the same EV/EBITDA multiple as its best peers (16x), the equity should be

75% higher today. Also, Aena's unregulated revenue per passenger (US$4.60) is less than half the level

of its developed market, dual till peers. If unregulated revenue per passenger only reaches US$5.25 in

2018 (5% nominal growth), EBITDA could grow 30% without any passenger growth and provide 75%

additional upside for the equity. Passenger volumes grew 6.2% in February. In 2018, Aena would still

have spectacular latent commercial earnings power, higher cash conversion (higher EBITDA margin,

lower tax rate, lower interest rate), and faster passenger growth than the other airport operators, and

would likely deserve a premium valuation, if not the premier valuation. Furthermore, Spain's economy

is emerging from a depression, which no other publicly-traded airport operator can claim today, and

thus domestic passenger volumes are severely cyclically depressed – down 30% from the peak.

Additionally, Aena will be a beneficiary of lower oil prices and a lower Euro. I think Aena equity could

easily double over the next two years, and possibly triple. Aena is sitting on at least four potentially

powerful coiled springs: 1) valuation, 2) commercial revenue tailwind, 3) Spanish economic recovery, 4)

real estate development.

I’ve included a link to the underwriters’ English version of the prospectus because I’ve heard that it’s

difficult to get, and isn’t filed anywhere. The official Spanish version is filed with the CNMV and on

Aena’s IR Web site.

https://www.dropbox.com/s/fqwuyojrwaezbtr/Aena%20E-Final%20.pdf?dl=0

Airports earn two revenue streams: aeronautical and commercial. Aeronautical revenues are fees

charged to airlines for using the airport facilities. Airport services are a critical public good, and airport

owners wield enormous power over airline customers, so airport aeronautical activities are

regulated. Regulations limit returns on regulated assets, or at least limit price increases on regulated

services. Aeronautical fees average around 2% of the passenger's airfare ($10 domestic, $20

international), but are an irreplaceable component of the air travel service. Airports could extract

significantly more rent out of airlines if their aeronautical returns weren't capped by regulation. An

unregulated airport would usually score perfectly in all of Porter's five forces. The threat of new entry is

low. Airports are extremely expensive to build. The replacement cost of Aena's airport network is $40-

60 billion. Even if it made economic sense to build a competing airport, in large cities it's usually

impossible to build another airport as close to city center as the legacy airport. And neighbors would be

very opposed to a new airport moving in next door. Airline buyers have little choice where their

passengers must land. Threat of substitutes for long distance travel is low until someone invents

teleportation. Competitive rivalry is low. Airports don't compete to be better. A passenger doesn't

choose his destination based on the attractiveness of the airport or the customer service.

Commercial revenues are comprised mostly of rent from stores, restaurants, and car rental agencies, car

parking fees, and advertising. Rents usually have minimum guarantees with upside to the minimum

based on a percentage of retail sales. Airport commercial activities are usually unregulated since it isn't

a public necessity. The commercial area of an airport can be thought of as a shopping mall adjacent to

the airport gates, with captive high income shoppers. Airport commercial activities also score well on a

Porter scale. Buyer power is low. Not many customers are willing to leave the airport for a

meal. Supplier power is low. Tenants earn revenues and pay rents for airport square footage

comparable to the best shopping malls in America, because traffic is very high per square foot. So

airports can be thought of as some of the best mall real estate there is, with no competitive threat from

online retailing. Vacancies are negligible in good airport retail space, usually below 1%. Tenants are

easy to replace because the space is lucrative and scarce. On the other hand, a retailer can't usually

move his store to a competing airport across the street. Substitutes exist in most retail categories, a

passenger can bring a sandwich, so pricing power isn't unlimited. Competitive rivalry is low - Miami

International doesn't compete for your dining dollar with LaGuardia.

In 2011 Spain’s airport operations were carved out of ENAIRE and put into Aena. New management was

hired and tasked with improving profitability in preparation for the IPO. Aena was partially privatized by

the Spanish government on February 10th. The government remains a 51% owner. 150 million shares

are outstanding. The government retained 76.5 million shares. 31.5 million shares were sold at €58 to

"cornerstone investors" including 10 million to The Children's Investment Fund. TCI also bought 1.6

million more shares on the open market up to €76.38, and 6.6 million options. Being the largest private

shareholder, Chris Hohn got a board seat. 3.8 million shares were sold to Spanish retail investors at €58

(€52.20 to Aena employees). The remaining shares were sold to Spanish and foreign institutions.

Aena owns 46 airports, which make up 99.9% of the commercial air traffic in Spain. Unlike most other

publicly-traded airport operators, Aena owns its airports rather than just holding an operating

concession which expires. Aena also holds a national monopoly. Most other publicly traded airport

operators hold a regional monopoly.

There are likely strong advantages to owning all the airports in a country. For starters, you’re more

protected from new entrants than the regional monopolies. There is also no risk that airlines can divert

traffic as a negotiating strategy. Aena’s traffic is also significantly more diversified among carriers than

its peers.

There are probably huge cost efficiencies from having all the airports under one operating company. At

a high level this is confirmed by Aena’s industry low cash operating costs per passenger, which approach

the levels of its developing world peers, even though it was a government agency until two months ago.

Aena owns three times as many airports as the next largest airport operator.

US$ Cash Cost per Passenger:

Aena 6.69

Sydney 4.51

Beijing 5.89

Auckland 5.96

Thailand 6.18

GAP 6.61

Malaysia 8.18

ASUR 9.57

OMA 9.64

Copenhagen 10.10

Zurich 17.87

Vienna 19.29

Paris 20.74

Frankfurt 31.42

Mean 12.00

Median 9.57

Regulation

Probably the most important place to start reading is this relatively good explanation of the regulatory

regime published by Aena’s regulator:

http://www.cnmc.es/Portals/0/Ficheros/Transporte_Postales/resoluciones_postal/2014/1409_Septiem

bre/140911_Resoluci%C3%B3n%20Modificacion%20tarifaria_ingl%C3%A9s.pdf

At a high level, Aena’s aeronautical revenue is capped at operating expenses plus depreciation plus cost

of capital. Historically, commercial EBITDA acted like a contra-expense in this calculation. In 2014 the

deregulation of commercial activities was begun, 80% of the commercial EBITDA offset regulated

expenses, and in 2015 60% will, and so on until in 2018 no commercial EBITDA is used to offset

regulated expenses. In this way, the ability to earn more revenue is freed up.

Separately, Aena signed an agreement with the airline associations which caps its 2015-2025 regulated

revenue per passenger at 2014 levels. I believe it was a show of good faith to assuage airlines’ concerns

about the privatization process and the perception that there will be price gouging. And realistically,

this arrangement isn’t much different than the 1.0-1.5% tariff increases most airports get, with lower

traffic growth. The airline agreement still allows Aena to grow regulated revenues in aggregate if

passengers grow (though still subject to the regulatory maximum). I also think that this price cap

stimulates passenger growth in two ways going forward: 1) Aena will develop an even larger relative

price advantage over the other European airports over time as their prices decline in real terms, 2) it

creates stability for airlines who are planning new routes to Spain.

If Aena over- or under-earns versus the regulatory maximum, they are expected to amortize the surplus

or deficit back to neutral. As you’ll see in the CNMC document, Aena is expected to end 2014 with an

amortizable deficit of €230 million, and 2015 with a deficit of €291 million, so they are not over-earning

at present, and in fact have a cumulative deficit of 10-12% of annual regulated revenue which can be

amortized back into revenue.

In 2015 and 2016 the cost of capital will be down versus 2014. Also the regulated asset base (RAB) will

decline due to depreciation exceeding capex by at least €400 million per year. I expect the RAB to

decline by up to 4.5% per year, so organic regulated revenue probably won’t grow much if any, except

that deregulating commercial revenue will create a vacuum that may be filled with additional regulated

revenue, but obviously due to the contractual cap on per passenger fees, that growth would have to

come from passenger growth and/or more commercial revenue. Passengers have grown about 5% YOY

the last three months, and I think that’s a decent recovery growth estimate. Another reason regulated

revenue could grow is if Spanish government bond yields rise, or if Aena de-levers. Aena’s average debt

maturity is 13 years and is priced on LIBOR.

I think maximum regulated revenue can be modeled pretty reliably using the regulatory formula. Once

you have the formula, there are two market-based inputs: Spanish bond yields and Spanish CPI. This is

what I’ve done rather than just targeting revenue per passenger multiplied by passengers. With 5%

passenger growth, regulated revenue remains at the present level of about €11.40/passenger.

Why is AENA under-earning?

Probably a combination of a loosely economically motivated owner, and a nonsensical regulatory

regime. Before 2014, all revenues were counted in determining Aena's regulated returns. This is known

as a single till system. In other words, EBITDA from duty free shops was added to the numerator used to

calculate the return on the regulated assets denominator. Starting in 2014, Aena's regulator began the

process of de-regulating the non-aeronautical activities toward a dual till system. In 2013, 100% of non-

aeronautical revenues were counted toward the regulated return. In 2014, 80% of non-aeronautical

revenues counted toward the regulated return. This process will continue in 20% increments until 0% of

non-aeronautical revenues will count toward the regulated return in 2018. This frees up the ability to

earn about 20% more commercial revenue each year through 2018, then commercial revenues can be

as high as the market will bear. These revenues flow through at extremely high incremental margins,

since the revenue is essentially just rent with little associated operating expenses on Aena’s end.

Overall EBITDA margins on commercial revenues today are 85%, and go-forward incremental margins

are likely even higher. Historically, if Aena wanted to earn more commercial revenue, they had to offset

that growth with lower aeronautical fees, so there was no incentive to develop the commercial

business.

I don't think Aena is structurally disadvantaged in terms of passenger incomes. Aena's passengers are

almost all higher-income EU and Spanish citizens.

Weighted average GDP per capita, using passenger mix, and 2014 nominal GDP (not PPP) at 23/3/15

exchange rates:

Aena US$28,200

Paris US$28,100

Vienna US$28,900

Zurich US$28,200

Commercial revenue per passenger, in USD:

Aena 4.64

Developed peers:

Vienna 6.70

Frankfurt 8.15

Copenhagen 10.47

Auckland 11.68

Sydney 12.00

Paris 14.30

Zurich 15.10

Emerging peers:

ASUR 5.65

Thailand 5.30

GAP 3.65

Malaysia 2.00

Aena's commercial revenue per passenger has more in common with its emerging market peers than

with their European peers. GAP in particular has a high share of local passengers, such as in their largest

airport in Guadalajara, with potentially much lower average incomes than Aena's passengers. For this

reason I'm comfortable that commercial revenue per passenger is both unnaturally low and is highly

unlikely to go much lower. It’s important to note that Vienna operates under a single till regulatory

regime, so Vienna is not a good comp.

Aeroports de Paris was privatized in 2006. Over the ensuing eight years commercial revenue per

passenger grew at an 8% CAGR from a starting base twice that of Aena’s, and grew every year through

an intense, prolonged recession during the majority of this timeframe. ADP is 51% owned by the French

government, and the CEO receives no bonus and no stock options.

Aeroports de Paris commercial revenues per passenger:

Aena will tell you that they’re different. Their passengers are poorer, they claim. While their domestic

passengers probably do have lower average incomes, in aggregate Aena has no basis for this claim.

They have a higher share of LCC traffic, which statistically has unclear effects on commercial revenue per

passenger, since LCC passengers aren’t served meals in-flight. They have a lower share of business

travelers, but business travelers actually have a lower average spend than leisure travelers. It’s not

surprising to me that Aena doesn’t want to advertise the revenue opportunities they have. As Peter

Thiel says, monopolists will always lie about the strength of their business to avoid attracting regulatory

scrutiny and competition, and competitively weak companies will always lie about the weakness of their

business to attract capital.

Where specifically is Aena under-earning?

Parking

One of the biggest opportunities in commercial revenue appears to be in parking.

On parking revenue per domestic passenger, Aena lags very far behind other airport operators:

(All numbers in USD)

Aena 1.89

Vienna 3.75

Sydney 4.33

Auckland 4.72

Zurich 9.13

Frankfurt 12.21

Paris 12.47

Copenhagen 23.76

I think this metric might potentially understate the true size of the gap in parking revenue per local

passenger. Because Aena owns all the airports in Spain, virtually every domestic passenger is local to an

Aena airport and is likely a potential airport parking customer. Since the other airports only hold

regional monopolies, not every domestic passenger is local and so not every domestic passenger is a

potential airport parking customer at those airports.

On revenue per parking space per year, Aena also lags substantially.

(All numbers in USD)

Aena 1,014

Vienna 1,952

ADP 3,987

Zurich 4,017

Auckland 4,343

Copenhagen 5,187

Frankfurt 5,633

Sydney 6,548

Garage parking price for 24 hours, in USD:

Madrid 22.75

Barcelona 22.75

Tijuana 14.00

Auckland 35.00

Paris-CDG 42.60

Copenhagen 44.00

Vienna 43.50

Zurich 48.00

Frankfurt 60.00

Sydney 71.00

Part of the parking revenue per passenger gap is explained by passenger income. But I think Aena’s

parking is underpriced relative to passenger income. Below is a scatter plot of GDP per capita in USD at

current exchange rates against the multiple of GDP per capita to parking prices. The red dot is Aena

today, with my 2018 base case in purple and 2018 best case in green.

If other airports’ experiences are any guide, at Aena’s passenger income level, they could probably

charge closer to US$28 for a garage space today versus US$23.

There are also some signs of inefficient price discrimination. Some terminals don’t price discriminate

between garage and surface lot parking. And the corporate terminal lots charge the same as regular

terminal lots.

Parking usage is also probably driven by passenger income, among other factors. So I think as the

Spanish economy recovers, passenger proclivity to use parking may rise. Aena’s parking utilization is the

same as the Mexican airports. Aena might be able to do things to stimulate demand too, like the recent

addition of online booking, which I believe is a way to target the more price conscious segment and

match the capabilities of their off-airport competition. Aena has also been more actively marketing

their parking. I believe utilization improved by 7% in 2014, just related to the launch of online booking.

The upshot of all this is, if Aena can close the price and usage gaps over 4-5 years, parking revenue per

domestic passenger could grow at a 10-20% annual rate. In 2018 Aena could be earning US$3-4 per

domestic passenger versus US$1.90 today.

Retail

Retail (duty free, other shops, and food & beverage) revenue per passenger, in USD:

Aena 2.12

Vienna 2.04

Frankfurt 3.64

Paris 3.74

Copenhagen 4.05

Zurich 4.36

Sydney 5.23

Auckland 6.47

How were retail revenues kept unnaturally low? One likely way is below-market rent. In October 2012

Aena signed a new agreement with their duty free shop operator, World Duty Free Group, which

increased Aena's duty free revenue share from 26.9% to 37.4%, and provided for higher guaranteed

minimum annual rent. Aena left more than 30% of their duty free revenue on the table – this wouldn’t

be likely in a dual till, profit-motivated company. I was told by the company that the reason Aena

underpriced this operator’s contract was because WDF is a preferred, local operator, but WDF is an

Italian company which is majority owned by billionaires. The company also told me that the duty free

contract renewal was an aggressive process that isn’t likely to be repeated with the other operators, but

the duty free contract renewal was an open tender process in which seven operators participated, just

like every other duty free tender in every other airport in the world. And the revenue share is in line

with other recent duty free tenders. Aena has also been renegotiating the revenue shares on other

retail and food & beverage outlets.

The increase in guaranteed minimum rent on their duty free shops of €60 million in 2015 versus 2014

rent is enough in itself to contractually guarantee 7.4% total commercial revenue growth for 2015

without doing anything else. The increased minimum guaranteed rent will cause duty free revenue to

grow at least 34% in 2015 and at least 15% annualized over the next four years (9% annualized 2016-

2018 even after the big ramp in 2015).

Because WDF is a public company, and they are the only duty free shop operator in Spain, it’s easy to

track the underlying performance of the duty free shops. WDF has spoken extensively about the Aena

contracts publicly because it caused a hit to their EBITDA margins in 2013 and 2014. I believe, based on

WDF’s public statements, that they were earning margins on the Aena business of about 22% in 2012,

nearly twice the 12% company-wide average. That’s money that was being charitably donated by the

Spanish government to Italian billionaires and other WDF shareholders.

WDF has said they expect the Spanish same-store revenues to grow at 7.5% per year through 2017 (3%

passenger growth and 4.5% average spend). But there’s two interesting things to note here:

1) they also project their global same-store sales ex-Spain to grow 7.8% annualized in that same time

period, even though Spanish passenger volume is substantially more depressed than the rest of the

world. They expect Spanish passengers to grow 3% but project global passengers ex-Spain to grow

3.4%. WDF’s Spanish duty free same-store sales grew 8.8% in 2014 while Spanish nominal GDP grew

just .9%, the Euro averaged 20% above today’s level, and the Brent oil price averaged 80% higher than

today’s level. Aena’s February traffic growth was 6.2%, and global traffic grew 6% in 2014.

2) WDF was given the right to expand Spanish duty free square meters by 33% from 33,000 in 2012 to

45,000. Square meters grew 18% in 2013, and I think square meters grew 5% in 2014 (subtracting same-

store sales growth of 9% from total sales growth of 14%). This leaves WDF room to grow square meters

by an additional 10% in 2015, which appears to be happening, based on their statements that in the first

two months of 2015 total Spanish sales are up 22.5% and same-store sales are up 6.8%. However, as

you can see in the chart below, when WDF modeled 2017 Spanish sales, they didn’t include any growth

in square meters, and I believe the current 2015 run-rate Spanish sales are higher than their 2017

guidance.

Source: World Duty Free Group

I think there are at least two incentives for WDF to minimize the opportunity for recovery in Spain. 1)

WDF has said that they would like to renegotiate the terms of the Aena contracts on the basis that

Aena’s 2013 traffic forecasts were too optimistic. Aena modeled 5.5% passenger growth for 2013 prior

to the October 2012 duty free auction process. Actual 2013 traffic declined 12% in Madrid, leaving an

eight million passenger deficit versus forecast just in Madrid. 2) the WDF CEO lost his job over the Aena

contract, and the new CEO probably wants to make sure expectations are low.

If WDF’s Spanish sales grow 20% in 2015 and 8% thereafter, I expect that their margins in Spain will

recover to 16% in 2018, well above company average, and rent could be above the guaranteed

minimum. The WDF contract runs through the end of October 2020.

Duty free will be over 50% of retail revenue in 2015. Food and beverage will be 27% of retail revenue in

2015. I just grow food and beverage revenues by 3% per passenger because Aena actually performs well

in that category, but Aena has noted some initiatives to improve here. The other 20%, convenience

stores and such, I have less insight into but I have a hard time believing that the duty free rents were the

only ones underpriced. I grow these other retail revenues at 5% per passenger.

The upshot is, I believe with high conviction that duty free sales per passenger will grow to US$1.50 in

2018 from US$1.03 in 2014, a 9.5% annual rate. The minimum guaranteed duty free rent will be

US$1.46 per passenger in 2018, so if the actual varies from my estimate, it won’t be more than

US$.04/passenger lower.

Advertising

I think advertising revenue is probably a pretty straight forward inefficiency to correct. Aena’s

passengers are essentially the same people as most of the other European airport passengers. I also

believe that tourist destination ad space is worth more than other airport ad space, because of the large

potential spend involved, immediacy of decisions, and very targeted audience. I think Aena could easily

earn .30-.40 per passenger one day, possibly more because of its high mix of tourist traffic. Note that

Aena is earning 65% less per passenger than single till peer Vienna.

Advertising revenue per passenger (USD):

Aena .141

GAP .27

ASUR .29

Paris .338

OMA .397

Vienna .408

Zurich .671

Capex

Aena's has committed to cutting capex going forward. The company estimates in its prospectus that its

airports have the capacity to handle 335 million passengers comfortably within the confines of the

current operating hours, current quality of service levels and current regulatory and environmental

restrictions. This compares to 2014 traffic of 196 million passengers, giving them room to grow

passengers 67% before needing to add aggregate new capacity. Management believes Aena has enough

capacity to accommodate growth through 2025 and beyond.In many airports Aena is operating at 50%

of capacity.Like the rest of Spain, the airports were overbuilt in the credit boom.

Source: Aena

2014 utilization versus theoretical passenger capacity, based on company-supplied public data:

Aena 59%

Sydney 65%

Vienna 75%

Zurich 79%

Copenhagen 85%

Paris 87%

Frankfurt 88%

For the next 10 years, Aena is limited by regulation to spending no more than €450 million per year in

capex. Overspending on capex needlessly costs the airlines because it increases the RAB. So whatever

you think true maintenance capex is, €450 million is the worst case by law.

Here's how Aena breaks out their capex spend over the last three years:

2014 2013 2012

Capacity Expansion 72 149 381

Expropriation 78 91 76

Other 21 59 125

Total Growth Capex 171 299 582

Security 33 79 125

Environment 12 18 22

Service Maintenance 84 72 66

Total Maintenance 129 169 213

Security and Environment are maintenance costs since security technology will always need to be

improved and not just maintained. Environmental capex mainly relates to sound insulation costs for

nearby homes. Expropriation is money that's spent to buy the land necessary to add runways and

terminals. I'm including Other in growth because it includes mostly capex to expand and improve

commercial square footage and it generates a good incremental return.

The average annual maintenance capex over the last three years has been €170 million. I'm using €200

million going forward.

Sydney management says that their maintenance capex is A$15 million per year because of their

advantageous utilization position. If Aena spent at the same percentage of gross PP&E, their

maintenance capex would be €88 million. Sydney’s estimate seems aggressive to me, but management

is confident enough in it to pay out 100% of EBITDA - Interest - Taxes - Maintenance Capex. This is one

reason I believe Sydney gets the premier valuation in the sector, and I believe Aena could be similarly

situated if they demonstrated Aena’s earnings power with an aggressive dividend payout policy.

Sydney’s equity trades for 25x this measure of no-growth FCF, and is growing passengers and

commercial revenue per passenger more slowly than Aena is growing. Aena is likely the best-situated

airport in the developed world in terms of capital needs per incremental passenger for the next 10+

years.

What are the political risks?

Podemos, a radical left party is polling well – probably in a dead heat with the governing conservative

party – for the general election on 20 December 2015, in which almost all seats in the legislature are up

for re-election. Privatizations are unpopular with left-leaning politicians. So it's important to spend a lot

of time thinking about this risk, though I’m a very unqualified Spanish political analyst.

I don't expect that raising commercial revenues will be politically unpopular. For one, airport

passengers are mostly higher income. For two, these are discretionary purchases for these higher

income passengers. Aena has agreed to freeze non-discretionary fees for 10 years. For three, the

revenue that we're talking about will actually be coming from concession operators who were

previously being subsidized. I don't think that Podemos cares about either constituency. They perhaps

do care about the tax revenue and dividends that the government will get from Aena. I also think that

the Spanish and European courts may provide a reasonably reliable source of property rights protection.

Spain and the EU are real governments with legitimate court systems, and they aren’t Venezuela.

One Podemos legislator mentioned that he wanted to re-nationalize Aena, though he subsequently de-

escalated his rhetoric to just say that Spain should never sell more than 49%. Other than that, the news

about Aena has been a trickle at most since after the IPO.

I think the biggest risk is if the legislature reverses the switch to a dual till system, but I see virtually no

incentive to do so. Podemos won’t win a majority in the legislature (they’re polling at 22.5%), so they

won’t have free rein to create a socialist utopia. An aggressive regulator could play with some of the

variables used to calculate Aena’s regulated income, though I think these kinds of changes would have a

relatively small effect.

I would also note that the French government owns 51% of Aeroports de Paris, and ADP has the highest

commercial revenue per passenger of all the publicly traded comps and are guiding to phenomenal

growth of 18% in 2015 to €19/passenger. That has caused no controversy.

In some ways a Podemos victory could be positive for Aena. If Spanish yields rise as Greek yields did

after Syriza’s victory, it will increase Aena’s regulatory cost of capital without increasing its actual cost of

capital. Podemos has spoken openly about wanting to restructure the national debt. Also if Podemos

engages in fiscal stimulus, it will be positive for Spanish GDP.

Land Holdings

Aena owns 4,940 acres (2,000 hectares) of land adjacent to its airports that it describes in its prospectus

as “largely underdeveloped”. 80% of this land is in Madrid and Barcelona, according to former

management. Former management believes there is a lot of pent up demand for airport hotels in

Madrid and Barcelona.

Auckland International owns 3,707 acres adjacent to its airport that it values at US$2.65 billion, or

US$536,000 per acre at 30/9/14. At the same value per acre, Aena’s land could be worth €2.3 billion.

Airports de Paris owns 3,200 acres (1,310 hectares) of excess land that they have been aggressively

leasing out. Their appraisers have valued it at €2.1 billion at 12/31/14, €650,000 per acre. At the same

valuation per acre, Aena’s land could be worth €3.2 billion. ADP has leased out about 70% of their land,

probably 90% subject only to land leases, and is earning €120,000 per acre.

Source: Aeroports de Paris 2013 annual report

Here’s a scenario in which Aena forms a SOCIMI (Spanish REIT) and leases out their 4,940 acres at the

same rate per acre as ADP:

Rent/Acre 120,000

Rent 592,800,000

Margin 80%

EBITDA 474,240,000

Multiple 15.0

EV 7,113,600,000

Years 10.0

Discount Rate 5.0%

PV 4,367,133,320

European REITs get EBITDA multiples of 15-20x, and I think Aena’s SOCIMI would be worth a high

EBITDA multiple since land leases require less capex. Even if the SOCIMI spin-off doesn’t work out, the

rental EBITDA would be worth €3 billion after paying a 25% tax rate.

Maybe land has little value in Spain right now since there is probably very little marginal development,

but France isn’t doing so hot either. Maybe there aren’t enough businesses willing to absorb 4,900

acres next to the airports. But it’s a lot of land that isn’t totally in the boonies, and even at half the

valuation per acre of ADP, it could be worth €1.6 billion. At any rate, I’m not including this value in my

target price.

Leverage

Aena ended 2014 with 5.7x debt/EBITDA. Their long-term leverage target is 5.0-5.5x. An interesting

footnote is that Aena allocates €12.8 billion of assets to Aeronautical and says it has a 72% debt/capital

ratio. If this is the case then €9.2 billion of the debt is allocated to the Aeronautical segment, leaving

about €900 million in the Commercial segments. This is also confirmed by Commercial segment interest

expense of €15.9 million in 2014, implying €839 million of average debt outstanding in 2014. Here is an

estimate of the relative leverage ratio of the segments on 2015 EBITDA:

Debt EBITDA Debt/EBITDA

Aeronautical 9,200 1,300 7.1x

Commercial 900 760 1.2x

The reason I think this is interesting is because it puts Aena in a position to delever the Aeronautical

segment and raise its regulated cost of capital over time by building equity, while increasing Commercial

leverage and maintaining overall leverage flat. I believe Aena can dividend about 400% of its

Commercial net income per year, maintain leverage at 5.25x, and still increase its WACC and thus its

maximum regulated revenues.

Valuation

EBITDA multiples correlate most strongly to EBITDA margins. Higher

EBITDA margins result in a higher percent of EBITDA converting to free cash flow, and so the same FCF

multiple will result in a higher EBITDA multiple all else equal.

Comps, all numbers in million USD:

EV 2015 EBITDA Multiple Margin EBITDA Growth

Sydney 14,400 780 18.5x 82% 5.5%

Auckland 5,600 290 19.3x 76% 7.4%

Thailand 12,700 770 16.5x 58% 16%

ASUR 4,100 271 15.1x 55% 12.3%

OMA 2,000 136 14.7x 49% 15%

GAP 3,700 274 13.5x 63% 11.1%

Copenhagen 4,550 333 13.7x 56% 5.0%

Paris 15,200 1,292 11.8x 40% 6.8%

Frankfurt 9,750 922 10.6x 33% 4.6%

Zurich 5,500 565 9.7x 55% 3.1%

Vienna 2,500 287 8.7x 40% 5.1%

Following the regression line through EBITDA margin versus EBITDA multiple tells me that at 64%,

Aena’s 2017 EBITDA multiple should be about 16x.

Model

In this model I’ve assumed Spanish yields increase linearly 10 bps annually to 3.0% in 2025, from 2.0%

currently. The historical average is closer to 5%.

2018 2017 2016 2015 2014

Passengers 239.2 227.8 217.0 206.6 195.9

YOY 5% 5% 5% 5% 5.5%

Aeronautical Revenue 2,775 2,556 2,521 2,357 2,242

Per Passenger 11.60 11.22 11.62 11.41 11.44

Aeronautical EBITDA 1,528 1,403 1,385 1,289 1,221

Commercial Revenue 1,256 1,136 1,027 929 837

Per Passenger 5.25 4.99 4.74 4.50 4.27

Commercial EBITDA 1,032 924 826 738 654

Total EBITDA 2,560 2,326 2,211 2,027 1,875

Deprec. & Amort. 815 815 815 815 815

Interest Expense 100 133 163 191 200

Pre-Tax Income 1,645 1,378 1,233 1,021 860

Taxes 411 345 308 286 258

Net Income 1,234 1,033 925 735 602

Add: D&A 815 815 815 815 815

Less: Maint. Capex 200 200 200 200 200

Maintenance FCF 1,849 1,648 1,540 1,350 1,217

Debt 4,311 6,169 7,827 9,375 10,733

2017 EBITDA 2,326

Multiple 16x

EV 37,200

31/12/16 Debt 7,827

31/12/16 Equity Value 29,400

Shares Outstanding 150

31/12/16 Share Price €196

Alternatively, 16x maintenance FCF per share of €11 in 2017 gets me €176 per share.

This model makes no assumptions about dividend reinvestment, and simply assumes that all free cash

flow goes to debt paydown at a 1.5% after-tax return.

Dividends

Management has stated their intention to pay out 50% of net income in dividends. Net income is about

50% of distributable free cash flow in 2015 and two-thirds of distributable free cash flow in 2018. If

Aena doesn’t want to de-lever, then 50% of net income is plainly an inadequate dividend. After months

of research, my embarrassing conclusion is that infrastructure asset EBITDA multiples are most closely

correlated with the dividend payout ratio. Investors will pay more for cash flow that they can see and

feel. Unless the market is forced to look at distributable free cash flow, then the market probably won’t

look at distributable free cash flow, and the stock will be valued haphazardly. Sydney and Auckland

have forced the market to look at distributable free cash flow, and Sydney and Auckland get the highest

valuations of any airport assets in the world. Lowest common denominator investment theses aren’t

my favorite, but in this situation I don’t think there are any other real alternatives for reinvestment.

Capex is restricted by law. Acquisitions will be small and infrequent given management’s admirable 10-

12% IRR hurdle. Buying 51% of Luton’s equity, as an example, only cost Aena €65 million and had an

enterprise value of €500 million. Luton was a fabulous investment, but it probably only has an equity

value per Aena share of €1.50 today and probably consumes disproportionate management energy.

And airports don’t come up for sale often, unlike some other industries. So for the first time in my

career, I’ve found myself hoping for dividends, and I’m not a yield investor and have no need for income.

I would probably just reinvest my dividends into Aena stock.

I also think that it’s completely within the government’s best interests to maximize their Aena dividends

for fiscal stimulus programs to help build momentum behind the Spanish economic recovery, or to

provide some relief from crippling budget austerity. If Aena paid out 150% of distributable FCF in

dividends, which I think is possible within the confines of their leverage targets, the government could

earn €1.5 billion in dividends from their Aena stake in 2018 (€4.5 billion cumulatively 2015 through

2018). €4.5 billion is 17% of Spain’s 2015-2017 projected primary deficit. The dividend in that scenario

would be €20/share in 2018, a 24% yield on today’s stock price. Continental European comps trade for

an average 2.1% dividend yield. The Australian and New Zealand comps, where interest rates are 1-2%

higher, trade for 4.5% and 3.2% yields. Aena trades for a 3% yield on the stated 50% of net income

dividend payout ratio policy, but has the capacity to pay an 11% dividend yield with just a 100%

distributable free cash flow payout ratio. Put simply, a single effortless decision could cause the stock to

double or triple tomorrow.

			2015	2016
Price:	83.60	EPS	4.90	6.00
Shares Out. (in M):	150	P/E	17	14
Market Cap (in $M):	12,500	P/FCF	9.3	8.3
Net Debt (in $M):	10,700	EBIT	1,200	1,400
TEV (in $M):	23,200	TEV/EBIT	19.3	16.6

Description

Catalyst