Stronger Tourism Has Helped Propel Grupo Aeroportuario Del Sureste Past Its Rivals

 

Latin American air traffic demand has recovered faster than global averages (as per IATA data), and domestic travel within Mexico has recovered faster than the Latin American average, helped by stronger "visiting friends and relatives" (or VFR) demand and leisure travel, as options to travel outside the country have been more limited by the pandemic. That, in turn, has driven a faster, stronger turnaround at Grupo Aeroportuario del Sureste (ASR) ("Sureste") than I'd expected in the fall of 2020, and these shares have led the group since then on that strong traffic recovery.

I believe Sureste is still leveraged to attractive trends overall, and particularly for its Cancun, Puerto Rico, and Colombia airports. What's more, cost leverage has been impressive here, and I wouldn't necessarily assume that that is going to compress. My only real issue at this point is valuation - while Sureste still has good leverage to a recovery in international tourist traffic to Mexico as the pandemic recedes, the valuation reflects a lot of that opportunity now.

 

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Stronger Tourism Has Helped Propel Grupo Aeroportuario Del Sureste Past Its Rivals

Grupo Aeroportuario Del Sureste Will Recover, But It May Be A Bumpy Ride

The COVID-19 pandemic has hit airport operators hard, as travel effectively stopped during the second quarter and is still far below anything like normal levels. While Mexico’s Grupo Aeroportuario Del Sureste SAB (ASR) (“ASUR”) has historically been prized for its strong leverage to tourist travel, its diversification, and its strong non-aero revenue (“ancillary” businesses like car rental, parking, retail, currency exchange, et al), those assets may well be liabilities in the short term as tourist traffic may be slower to recover in a COVID-19/post-COVID-19 world.

On top of that, there’s uncertainty now tied to ASUR’s renegotiation of its Master Development Plan in Mexico, essentially the concession under which it operates airports, and how capex spending will develop before that renegotiation is finalized.

I think ASUR will be fine long term from an operational standpoint. While these shares have underperformed the company’s Mexican peers Grupo Aeroportuario del Centro Norte (OMAB) ("OMAB") and Grupo Aeroportuario del Pacífico (PAC) ("GAP"), ASUR’s valuation looks more “okay” than compelling, and I still see more opportunity in OMAB today.

 

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Grupo Aeroportuario Del Sureste Will Recover, But It May Be A Bumpy Ride

Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

The election of Mexico’s new president, Andres Manuel Lopez Obrador (commonly referred to as “AMLO”), has effectively pushed many of Mexico’s infrastructure stocks over the edge of a cliff, and Grupo Aeroportuario del Centro Norte (OMAB) (“OMA”) shares have fallen 40% since early October on a host of worries related to the new administration’s policies. Although OMA has the longest to go before its Master Development Plan (or MDP) comes up for renewal (2021) among the three publicly-traded Mexican airport operators, there are nevertheless definite worries that the government will somehow disrupt their operations and that the administration’s plans for managing air traffic and airport needs within the country will create trouble.

As the most domestic-focused of the three airports, OMA has the most to lose if AMLO’s policies hurt air travel in Mexico, but I believe the current price reflects an excessive level of worry. Slower economic growth in the U.S. could filter into Mexico’s economy in 2019, and recent strength in air traffic looks hard to replicate, but I believe OMA can do just fine from here with long-term growth in the mid-single-digits.

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Crushed By Worries About Mexico's Transport Sector, OMA Looks Interesting For 2019

Stronger Traffic And Less Political Panic Benefiting OMAB

I liked Grupo Aeroportuario del Centro Norte (OMAB) (“OMAB”) back in late May, but I didn’t really expect to see a better-than-25% move in the shares in such a short period of time. While OMAB continues to see strong traffic and a healthy Mexican economy, as well as strong execution on costs, the stock also got some leverage from the sharp rebound in the Mexican stock market since the late May lows.

With the big move in the shares, the low-hanging fruit is once again off the table here, but I do believe OMAB remains positively leveraged to a still-healthy Mexican economy. The implied returns for the shares are still good enough to justify holding on, but I’d wait in the hope of a pullback if you don’t already own shares.

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Stronger Traffic And Less Political Panic Benefiting OMAB

Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

I wasn’t overly fond of the short-term prospects for Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) (or “OMA”) back in July, as I was concerned about how the shares would respond to further weakness in traffic and headline risk around NAFTA, not to mention longer-term concerns regarding the Mexican economy, the next election cycle, and changes to air traffic patterns within Mexico. The shares are down about 20% in that short window since July, with rivals/peers Grupo Aeroportuario del Pacifico (NYSE:PAC) and Grupo Aeroportuario del Sureste (NYSE:ASR) down roughly similar amounts. 

Traffic growth has continued to weaken, and not just because of multiple natural disasters. Worse yet, there are particular pockets of weakness (like the non-aero revenue per passenger trends in Monterrey) that still concern me. As I already expected weaker results, the changes to my model are mostly tied to currency moves, and my fair value is still above today’s price. While the apparent undervaluation is tempting, buying into shaky traffic trends and problematic per-passenger revenue is uncomfortable for me and I’m inclined to keep watching this name from the sideline.

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Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

Will Turbulence In Mexico Mean A Bumpy Ride For OMA?

The last year or so has had its ups and downs for Grupo Aeroportuario del Centro Norte (OMAB), also known as “OMA”. The prospect, and then reality, of Donald Trump's victory in the U.S. Presidential election took away almost a third of the stock's value in late 2016 despite healthy traffic numbers, as investors worried that this Mexico-centric airport operator would suffer disproportionately from a change in U.S.-Mexico relations.

Since then, a lot of optimism toward Mexico and Mexican equities has returned, lifting the shares back to within 10% of their all-time high. Still, while I do believe OMA is a well-run airport operator, I don't think an “all clear” is entirely reasonable at this point. Mexico's economy is doing pretty well, true, but rates are rising, there is still political/trade risk with the new U.S. administration, Mexican airlines have been adding quite a bit of capacity, and next year will see a new election cycle in Mexico.

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Will Turbulence In Mexico Mean A Bumpy Ride For OMA?

Seeking Alpha: OMA Looking To Traffic And Non-Aeronautical To Drive Growth

Like Grupo Aeroportuario del Pacifico (PAC), Grupo Aeroportuario del Centro Norte (OMAB), also known as "OMA", operates airports in Mexico under long-term concessions from the government. While OMA should benefit from the same surge in low-cost airlines as PAC and Grupo Aeroportuario del Sureste (ASR), OMA is looking to non-aerospace opportunities like real estate development to help drive growth.

OMA may not look so interesting from the perspective of backwards-looking valuation metrics, but the potential cash flow growth here makes this an interesting name. OMA is more focused on domestic traffic than PAC, but if the company's attempts to develop properties like hotels and cargo facilities pan out, double-digit free cash flow growth and a fair value in mid-$30's both seem reasonable.

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OMA Looking To Traffic And Non-Aeronautical To Drive Growth

Seeking Alpha: GAP's Traffic Improving, But Costs And Shareholder Squabbles Need Watching

If you like businesses with significant economic moats and effectively unscalable barriers to entry, Grupo Aeroportuario del Pacifico (PAC) or "GAP" as it is commonly known, could be up your alley. GAP holds 50-year concessions to operate, maintain, and develop 12 airports in the Pacific and Central regions of Mexico, including Guadalajara, Los Cabos, Puerto Vallarta, and Tijuana. With traffic on the way up and the company exploring more ways to increase revenue from parking, duty-free operators, and other merchandise/service providers, the revenue outlook is pretty solid.

There are clouds in the sky, though. First, the company's traffic and costs haven't always been the best, and the company has lagged other Mexican airport operators in terms of returns on capital. There is also a serious ongoing squabble among its shareholder base, with the loser potentially looking to sell a large amount of shares. I do see some value in these shares, but a lot of growth and margin improvement already seems to be factored in by the market.

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GAP's Traffic Improving, But Costs And Shareholder Squabbles Need Watching