Grupo Aeroportuario Del Surest ASR
May 19, 2007 - 8:59pm EST by
2007 2008
Price: 51.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,560 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Grupo Aeroportuario Del Sureste (ASR: $51):  22% forecast 2007 EBITDA growth.


All numbers are expressed in US dollars.


Shares outstanding:  30 million.

Current assets - total liabilities (as of March 31st, 2007):   $49.14 million


Revenue generated in 2006:  $207.301 million.

EBITDA generated in 2006:  $121.98 million


Revenue forecast in 2007:  $245.5 million.

EBITDA forecast for 2007:  $149 million.


2006 EV/EBITDA ratio:  12.64X

2007 EV/EBITDA ratio forecast:  9.9X

2008 EV/EBITDA forecast:  8.5X


Investors seeking an investment with clearly defined near term growth prospects would do well to consider Aeroportuario Del Sureste (ASR).   ASR manages 9 airports in Mexico, including Cancun International Airport.

Total 2006 passenger traffic at the 9 airports managed by ASR was 13.78 million passengers.


I envision a rapid increase ASR’s 2007-2009 revenues due to growth in the highly profitable international passenger market at the Cancun airport.  2007-2009 revenues may grow by approximately 50% and EBITDA could grow by 65% in the forecast period.


The catalyst which should drive above average near term growth will come from the opening of the new Cancun Airport Terminal #3.  This terminal, built for a cost of $100 million, opened on May 17th, 2007. 


Terminal #3 has the ability to double the total number of international travelers passing through the Cancun Airport.  In 2006, the Cancun International Airport handled a total of 9.728 million passengers.  The mix was 7.307 million international passengers and 2.421 million domestic passengers.  Terminal #3 will boost international capacity by 7.5 million passengers. 


The opening of terminal #3 will drive revenues and increase efficiencies as follows.

1.  The newly created retail space will add a significant amount of commercial revenue in 2007.  


Akin to shopping malls, airports typically receive both a fixed rent, and a percentage of total sales, from retail space.   The retail and boarding areas at terminal 3 should add over 150,000 square feet of additional space.


2.  Capacity bottlenecks, which have impacted commercial revenues at the Cancun airport, will be alleviated.   


Both domestic and international passengers have endured check in and security waits of up to 3 hours for many flights at this airport.  The delays in processing passengers have resulted in many passengers being unable to shop, in efforts to catch their flights.


I can personally attest (being a frequent traveler to Mexico) that in the last year, the lineups to check in at Cancun, often run outside of the actual terminal building, during peak periods.  Once this time consuming check in process has been completed (up to 2 hours), an equally long security screening line up takes place.


Most international airlines recommend that passengers check in two hours prior to boarding.  However, at the Cancun airport, two hours is often woefully insufficient, and could certainly result in a passenger missing a flight.   From 2006-early 2007, from personal experience, I considered Cancun Airport to be the least efficient facility I have EVER used. 


As a result of the long check in and security screening lines, passengers find themselves unable to shop at a leisurely pace (or at all).  This must have greatly impacted the commercial revenues for 2006.  My anecdotal comments seem to have shown up on the bottom line, as evidence by the information contained within the past years’ financial results.  Consider the following information:


Prior to 2005, commercial revenues per passenger were growing at a five year rate in excess of 15% per annum.  In 2005, commercial revenue per passenger averaged $3.53. 


For the full fiscal year ending 2006, commercial revenues per passenger averaged $3.56 per person.  However, revenue included a one time advance payment on terminal #3 retail space of $1.77 million, which equaled $.128 per passenger.  Absent this fee, commercial revenues per passenger averaged $3.43 for 2006.


For the first quarter of 2007, commercial revenues fell further, to an average of $3.23 per person.   This represented the high season of winter travel, when capacity constraints were most pronounced. 


It appears that total commercial revenues have declined (year over year) by about 9.3%, or $.30 per passenger, throughout the entire ASR system.  As the Cancun airport revenues represented over 70% of the commercial revenues, I estimate that commercial revenues at Cancun are down by at least $.45 per person.


More commercial space was opened up at the Cancun terminals in 2005-2006.  Accordingly, commercial revenues should have increased on a per passenger basis.  I attribute the entire $.45 per person drop in commercial revenues, and the lack of revenue growth per passenger, to the bottlenecks.    


Once the capacity constraints have been addressed, international passengers should have considerably more leisure time at the airport. 


More shopping time could result in commercial revenue growth of at least $.45 per passenger in 2007 + incremental growth, in line with historical retail trends experienced at the airport.  To be conservative, I assume that this incremental amount could be 5%.  This is 1/3 of the five year growth rate demonstrated from 2000-2005. 


With the ability to easily accommodate a 15% traffic increase at Cancun airport during 2007, commercial revenues could top $4 per person this year.  A return to simply status quo spending amounts per person, should result in at $6.4 million of additional commercial revenues being earned at the Cancun airport for 2007.  Most of this revenue will find its way directly to the bottom line. 


3. International passenger traffic should increase sharply.  In the past year, most flights deplaned/embarked on aprons, well away from the airport.  Passengers and luggage were boarded onto buses, and transported to the actual terminal.  This is by far and away, the most inefficient and time consuming way to operate a terminal.  While domestic travelers don’t object to deplaning on aprons, international travellors (many who are senior citizens and not terribly ambulatory) find this objectionable.


A total of 11 new gates at terminal #3 are now open.  These gates will permit the fast transfer of passengers and luggage directly into the terminal, greatly improving traffic flow. The current costs of bussing passengers, luggage and freight from the aprons to the terminal will also be reduced/eliminated.


The new terminal combined with commercial revenue increases, and growth from other airports, should produce robust revenue comparisons.


I calculated that during 2006, international passengers generated approximately 52% more revenues per person than domestic passengers.  Overall, terminal 3 should prove greatly accretive to ASR’s top and bottom lines in 2007 and beyond.


For 2006, the average net revenue earned per passenger at the Cancun Airport was $16.12 US.  This resulted in EBITDA earned of $10.69 US.  per passenger, or 66.3% of revenues.  71% of the revenues were generated from international passengers, with only 29% from domestic passengers.


The revenue earned from the 8 other airports (ex Cancun) averaged $12.45 per person. 2006 EBITDA per passenger from the 8 facilities (ex Cancun) was $4.46 per passenger, or 35.8% of revenues.  The primary reason for the lower revenue and EBITDA contribution from the non Cancun facilities, lies in the passenger mix.    82% of the revenue mix for these airports came from domestic passengers, and just 18% from international passengers.


Overall, a 2 million passenger increase at the Cancun airport seems quite feasible to forecast.  For the first four months of 2007, passenger traffic at Cancun increased by 983,535 persons.  The throughput increases in Cancun have been achieved, despite the capacity constraint issues.


Airport traffic at the 8 other airports operated by ASR have also shown steady traffic increases for 2007.  At the end of April 2007, the passenger count for the 8 other airports was up by 153,000 passengers vs. the same period ending April 2006.


Through the end of 2007, it seems quite plausible to estimate ASR total passenger counts of 16 million.  This implies a slowdown from the growth rate experienced year to date.


Financial Forecast


For 2007, I forecast regulated/aeronautical revenues of $185.9 million.  Over and above this, I estimate commercial revenues in the range of $55 million-$64 million.


In aggregate, total revenues could be $245 million.  If EBITDA margins remain at the 58.8% rate earned in 2006, this would suggest 2007 EBITDA of $144.6 million.


The efficiencies that should be generated from the new terminal, coupled with increased EBITDA contributions from improved utilization at the 8 other airports, could result in the EBITDA margin meeting or surpassing the 62.6% level achieved in 2004.     Given the potential increase in international passengers, I feel confident that record EBITDA margins are in store.


EBITDA margins at the 62.6% level suggests forecast EBITDA of $153.3 million for 2007.


The midpoint EBITDA estimates for 2007 suggests that $149 million can be achieved.  


My preliminary forecast suggests that 2008 revenues may rise to $270 million, and EBITDA could rise to $170 million.


A blockbuster airport concession awaits in Playa Del Carmen.


The Mexican government has decided to issue a public tender, for the right to build and operate an international airport in the area of Playa Del Carmen.  Situated south of Cancun, and in close proximity to the fast growing tourist area known as the “Mayan Riviera” this airport would be as large (or larger) than the Cancun International Airport.  This will be a first class airport, build to handle international tourists, built at third world prices.  I estimate that the airport will take a minimum of 5 years to be completed, and will cost no less than $600-$700 million.


The tender should attract bids from the three publicly traded Mexican airport firms (OMAB, PAC and ASR).  To date, the airport business has been carved up among regional lines.  PAC primarily operates Pacific coast airport and GAP primarily serves the North and Central Mexican industrial areas.  ASR primarily serves the Caribbean coastal areas. 


ASR shares, which traditionally sold for parity or a premium to PAC, have not performed as well as PAC over the past year.  This is because of investor fears that PAC or OMAB might win the contract to build the Playa Del Carmen airport.  If a competitor was awarded this concession, it could serve to draw off traffic from the Cancun airport at completion. 


I speculate that ASR will be awarded this concession.  This belief is based upon the recent decision of the CEO of ASR to increase his holdings in the company to over 52%, via a tender offer. 


I do not consider the timing of Mr. Pardo’s tender offer, in light of the completion of the Cancun terminal #3, and the tender on the Playa Del Carman airport to be purely coincidental. Given the fact that the CEO is willing to invest a further $700 million, at the market high, into ASR, I feel that the outcome of the tender process is likely to favor ASR.  


In the event that ASR is awarded such a concession, the $600-$700 million could be funded via internally generated cash flow over the next 5 years, coupled with approximately $200 million of bank debts. 

A $55 million expenditure planned at the Cancun Airport has been announced.  This will go towards building a second runway.  Should ASR win the Playa Del Carmen bid, the additional runway may not be necessary.  Consequently, the strong current balance sheet, coupled with rising cash flows, should easily support the Playa Del Carmen airport concession, without greatly levering the books.

If won, the Playa Del Carmen airport could virtually double the EBITDA capacity of ASR, when fully operational.


What could the fair market value for ASR shares be in 2008?


PAC sells for 14.8x trailing 2006 EV/EBITDA, and has historically generated a higher EBITDA margin than ASR, which justifies the premium price.  I estimate that PAC is selling for approximately 12.5X EV/EBITDA, and 11X 2008 EV/EBITDA. 


OMAB sells for roughly 15X trailing 2006 EV/EBITDA, and has historically generated a lower EBITDA margin than ASR.  I estimate that OMAB is selling for approximately 13X 2007 EV/EBITDA, and 12X 2008 est. EV/EBITDA.  


In the past, ASR has historically traded at a rough parity with the valuations afforded to PAC.  From time to time, ASR has in fact sold for a premium.


A smooth ramp up of the new terminal 3 revenues, coupled with continued growth from the other holiday destination airports (Huatulco and Cozumel) could eventually result in ASR rising to its historic financial valuation, which could be at a modest premium to PAC valuations.  This could imply a fair market value of 12X EV/EBITDA by the end of 2008, or $75 per share.



The completion of terminal #3 represents a clear catalyst, which may drive revenue and EBITDA sharply higher for 2007-2008. Built for a cost of $100 million, at full capacity, terminal #3 could eventually add more than $100 million of annual revenues, and $62 million of annual EBITDA.  The commercial revenue decline per passenger should be resolved as the terminal bottlenecks are removed. 


The build out of major resorts in both Cancun, Playa Del Carmen and down the coast of Mexico to Tulum, suggest that airport traffic may accelerate in the next 24 months.  This bodes well for ASR and I envision a fair market value of at least $75 in 2008.

Some investors have held off from making an investment decision regarding ASR, despite the low EV/EBITDA vs peers.  The chairman’s decision to increase his stake, suggests an insight into ASR’s future regarding the Playa Del Carmen airport that the public may not fully grasp.  Those who are focusing on the short term arbitrage potential with the tender,  perhaps are missing the point as to Mr. Pardo’s motive for taking control. An announcement confirming ASR as the concession winner for the Playa Del Carmen airport would add a strong growth element ASR, over and above my fair market value estimate.  Upon completion of the tender, I also suggest that the chairman will seek to raise the dividend sharply. 
In the event that ASR is not the winner of the Playa Del Carmen tender, the shares may decline modestly in the near term.  However, the rapid growth of the Mayan Riviera should result in both airports being able to operate at capacity.  The new facility will take many years to build, leaving ASR in a position to maximize EBITDA for at least five years.
I consider the risk/reward to be acceptable, for either a concession win or loss.


The website is here


Terminal #3 is now open, and removing capacity bottlenecks. This could lead to a 65% EBITDA increase by 2009. Chairmans' move to purchase additional stock gives me confidence of a concession win for Playa Del Carmen airport.
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