Latin American air visitors demand has recovered quicker than international averages (as per IATA knowledge), and home journey inside Mexico has recovered quicker than the Latin American common, helped by stronger “visiting friends and relatives” (or VFR) demand and leisure journey, as choices to journey exterior the nation have been extra restricted by the pandemic. That, in flip, has pushed a quicker, stronger turnaround at Grupo Aeroportuario del Sureste (ASR) (“Sureste”) than I’d anticipated within the fall of 2020, and these shares have led the group since then on that robust visitors restoration.
I imagine Sureste remains to be leveraged to engaging tendencies general, and notably for its Cancun, Puerto Rico, and Colombia airports. What’s extra, price leverage has been spectacular right here, and I would not essentially assume that that’s going to compress. My solely actual concern at this level is valuation – whereas Sureste nonetheless has good leverage to a restoration in worldwide vacationer visitors to Mexico because the pandemic recedes, the valuation displays quite a lot of that chance now.
Stronger Traffic Driving Stronger Leverage
While the restoration in air journey demand inside Mexico has exceeded exceptions on an general foundation, Sureste has benefited in notably from robust demand at places like Cancun, and has leveraged that quicker turnaround right into a quicker, stronger revenue restoration.
Overall income rose 60% year-over-year and 50% from 2019 ranges, and except in any other case specified I’ll be referring to numbers in reference to 2019 (pre-pandemic) ranges from right here on. Revenue excluding building (or “cash revenue”) rose virtually 25% on virtually 7% passenger progress, with robust progress in each passenger (up 21%) and non-aero income (up 20%), with company-reported per-passenger non-aero income up 10%.
Cash income rose 28% in Mexico and 4% in Puerto Rico, whereas falling 1% in Colombia. Overall, income beat expectations by 6%, with stronger efficiency in Mexico persevering with to drive the narrative.
Improved visitors and utilization of airport sources (parking, retail, et al) can also be driving significant enchancment in working leverage. EBITDA rose 23% from 2019 ranges, with margin bettering 150bp to 69%. Mexico once more led the way in which, with 37% EBITDA progress and a better than 16-point enchancment in margin to 74.9%.
Relative to different Mexican airport operators, Sureste noticed the very best visitors numbers – up 7% versus a small enchancment at Grupo Aeroportuario del Pacifico (PAC) (“Pacifico”) and a ten% decline at Grupo Aeroportuario del Centro Norte (OMAB) (“OMA”). While Sureste’s money income progress was on half with Pacifico’s, the beat relative to Street expectations was bigger (6% versus a modest miss), and Sureste additionally delivered the very best EBITDA progress relative to expectations, with a 9% beat on the EBITDA line.
Can The Good Times Keep Rolling?
One potential bear argument towards Sureste at this level is that with the corporate seeing a faster restoration to pre-pandemic norms, the chance for future progress is extra modest than with different airport operators.
Performance when it comes to January passenger visitors numbers (Sureste had not but printed its February numbers as of the time of this writing) noticed a bit of pullback in Mexico relative to Pacifico (down 2% versus up 2% on the latter), however I do not suppose there’s an excessive amount of to make of that. I do suppose there’s most likely some reality to the concept Sureste will see slower, extra normalized, progress tendencies earlier than its friends. I do additionally suppose that worldwide journey to Cancun can nonetheless drive progress in 2022 and past, and I additionally see a bit of little bit of remaining upside from totally implementing the expanded tariffs allowed underneath its renegotiated grasp growth plan (or MDP) with the Mexican authorities.
There can also be the query of the Tulum airport to contemplate. The authorities of Mexico desires to construct a brand new airport nearer to Tulum, a rising vacationer vacation spot, and this might seemingly siphon off visitors from Sureste’s Cancun airport. The authorities of Mexico has talked in regards to the Tulum airport internet hosting over 4M vacationers a yr, which might have a noticeable influence on Cancun, however I feel that estimate might nicely show excessive.
While the brand new airport can be fairly a bit nearer to Tulum (25km as an alternative of 120km), there aren’t the identical lodging constructed round Tulum – many guests to Tulum make day journeys and return to accommodations in Cancun on the finish of the day. Clearly that may change over time, and hoteliers will construct in response to demand, however Tulum’s present infrastructure would appear to have hassle internet hosting a lot past 2M to 2.5M guests.
As far as different progress drivers go, Sureste is taking part within the bidding course of for the brand new Barbados airport, however there’s actually no visibility on that bidding course of at this level. Sureste administration has additionally mentioned they are not pursuing the airport concession alternatives in Brazil. With that, I see a extra average progress alternative at Sureste – I anticipate progress in tourism to Cancun and progress in general journey/visitors to Colombia, in addition to alternatives to develop non-aero income by improved airport service choices, however I feel these alternatives are well-understood by the Street.
Given the deliberate spending to make the realm round Cancun much more accessible and fascinating to vacationers (home and worldwide), I like Sureste’s progress prospects, and I’m searching for long-term income progress within the neighborhood of seven%. While the corporate does nonetheless have capex obligations underneath its MDP, I imagine long-term FCF margins can exceed 40% on stronger working leverage, driving long-term FCF progress round 8%.
In the brief time period, I do see some vulnerability to macro points. While Russian tourism is not essential to Mexico, Mexico’s economic system is technically in recession now and client spending is underneath some pressure (even with robust remittances from the U.S.), and I do see some threat to tourism from increased vitality costs and general elevated uncertainty.
The Bottom Line
To the extent that I’ve any complaints about Sureste, it is that the stronger share value motion right here appears to seize quite a lot of the stronger restoration that the enterprise has already seen. The shares have been weak just lately on the widespread market weak point, and I do see some threat of upper vitality costs finally resulting in weaker international financial recoveries and decrease disposable client earnings. At this level, I view Sureste as extra of a stable maintain, with excessive single-digit long-term appreciation potential, than a purchase, however there are nonetheless alternatives right here for administration to outperform on margins.