Grupo Aeroportuario del Sureste, S.A.B. de C.V.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

ASR is a Mexican airport operator with concessions to operate, maintain, and develop airports primarily in Mexico, Colombia, and Puerto Rico.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ASR’s business is primarily regulated and operates in a highly capital intensive industry, which implies that the company must make huge investments to construct and maintain airports. They also operate under long-term concessions, typically 50 years, that create a quasi-monopoly over a given airport. ASR’s revenue is primarily generated from airline-related services, including passenger and aeronautical services, and non-airline related services (commercial), that provide diversification and resilience during an economic downturn and seasonality.

Business Overview

Business Description

Grupo Aeroportuario del Sureste, S.A.B. de C.V. (ASR) is a Mexican airport operator holding concessions for multiple airports across Mexico, Colombia, and Puerto Rico. Their business model revolves around managing these airports, catering to both domestic and international air traffic. In Mexico, ASR operates nine airports primarily in the southeast of the country. In Puerto Rico, ASR holds a concession for Luis Muñoz Marín International Airport (LMM), which is primarily used by U.S. and international travelers. In Colombia, ASR has a majority stake in Airplan, who operate six airports in that country.

In terms of the industry, the airport business has been characterized by a surge in travel demand following the COVID-19 pandemic, with passenger volumes slowly recovering over time. However, inflation and various global economic issues have created a level of uncertainty and market fluctuations.

Revenue Distribution

ASR’s revenues can be broken down into two main categories:

  1. Aeronautical Revenue: This includes passenger fees, landing charges, and other revenues directly linked to aircraft operations. The most important aspect of this segment is to understand that they are mostly regulated, so any increases on airport charges are subject to local government approval.
  2. Non-Aeronautical Revenue: This is derived from commercial activities within the airports, such as retail, food and beverage concessions, parking, advertising, and other services.

The balance of revenue in the company seems to be trending towards non aeronautical revenue as they have become better at utilizing the commercial space in the airports, increasing revenue potential.

The airport industry, especially the international airport business, has been significantly impacted by the COVID-19 pandemic and is still recovering from it. Other than this main factor, the industry is facing:

  1. High fuel prices, leading to higher operational costs.
  2. Increasing labor costs across all developed economies
  3. Supply-chain issues which also have increased costs for operations.
  4. More regulation from governments that leads to a higher compliance costs.
  5. Focus on a more sustainable operation and reduction of carbon footprint.
  6. Focus on more efficiency to achieve higher returns.
  7. Greater digitalization to improve passenger experience.
  8. Growth in the low-cost carrier segment. All these industry trends will play an important role in future evaluations.

Competitive Landscape

ASR operates under concessions that create a quasi-monopoly for each of its airports in the surrounding region. So there is no real direct competition on the same airport. The companies that operate these airports in Mexico, Colombia and Puerto Rico are:

  1. Grupo Aeroportuario del Pacífico (GAP) - operates in Mexico, specifically in the Pacific zone.
  2. Grupo Aeroportuario Centro Norte (OMA) - operates in the central and northern part of Mexico.
  3. Aeropuertos de Colombia (Airplan) - operates some airports in Colombia.
  4. A few private operators in Latin America

All these companies operate under long-term concessions and therefore, each company has an almost-monopoly in the airports that they serve. As this concessionaire business model is prevalent in other countries as well (such as Europe), investors should look into their financial performance.

What makes the company different?

  1. Geographical Diversification: ASR has a unique geographic diversification, operating in Mexico, Colombia, and Puerto Rico. This reduces its dependence on any particular region, offering some buffer against local economic downturns.
  2. Long-term concessions: ASR operates under a 50-year concession agreement for the LMM Airport in Puerto Rico which, when combined with concessions with the Mexican airports, translates to stable, long-term income streams. These concessions grant a quasi-monopoly in the operation of each airport.
  3. Management Track Record: ASR has shown the ability to generate strong growth and high ROIC even in difficult periods such as COVID and after the Scottish and Newcastle acquisition, suggesting its management team is adept at navigating challenges and creating value.
  4. Solid Balance Sheet: ASR has a track record of successfully managing its debt and generating cash flow. This provides them flexibility in terms of future investments.

Financials

Revenue and Profitability

In 2022, ASR’s revenue was up 72.5% and 18.9% for Mexico and Colombia, respectively. Total revenues for the year reached Ps. 18.5bn ($970m), driven by the recovery of passenger traffic. The operating expenses increased at almost the same percentage compared to revenues, leading to an increase of 58.3% in operating profits to Ps 10.6 bn ($558 m) and an operating margin of 57.3% The increase was most pronounced in Mexico, followed by Puerto Rico, whereas Colombia increased modestly. The diluted income per share for the year was Ps. 21.88 ($1.15). 2022 Revenue: Ps 18,555 million 2022 Operating Profit: Ps. 10,642 million 2022 Net Profit: Ps. 10,298 million These indicate a strong recovery after pandemic.

Return on Invested Capital

ASR has a strong track record of generating high returns on invested capital (ROIC). The company generated 19.0% ROIC in 2007, and following the purchase of new properties, the returns have not fallen much, showing consistent profitability. The high ROIC is a good signal that ASR has a considerable competitive advantage over its peers.

Cash Flow

ASR reported free cash flows of Ps. 11,587.4 in 2022. The high level of cash that ASR generates allows the company to invest into maintenance and expansion capex, as well as to pay dividends to shareholders and pay off debts. 2022 Free cash flow: Ps. 11,587.4 million

Leverage and Solvency

ASR has used debt to finance acquisitions, but the company’s overall leverage appears manageable and their solvency is above the required levels. Their debt is mainly long term and therefore reduces the risks of liquidity issues. 2022 Total Assets: Ps 42,570 million 2022 Total Liabilities: Ps 12,226 million

Recent Concerns/Controversies

ASR was recently under scrutiny for not complying with certain reporting standards but this issue has been cleared. In early 2023, there have been concerns that the concessions of some Mexican airports could be altered to allow other operators to participate in airport business. This might reduce their quasi-monopolistic moat.

Moat Rating: 4/5

ASR has a strong and narrow moat based on a number of factors:

  • Regulatory Moats: ASR benefits from long-term concession agreements with governments, which provide an exclusive right to operate in certain regions and therefore provides a moat. While these concessions provide an element of stability, they also are limited by the nature of the agreement, leading to limited pricing ability.
  • Location Advantage: Airports in general are localized and difficult to compete against. Since the airports are at set geographical locations, competitors are not able to take away traffic from an established airport and will have to instead open their own new airports nearby, which is highly capital intensive and usually not viable. The location also ties the company to a specific region and provides a stable source of passengers.
  • Intangible Assets: ASR’s brand reputation and established relationships with airlines and passengers provide an intangible asset that makes it difficult to replicate their position in the market.
  • Scale Advantage: ASR has a significant scale due to operating in three different countries. The large scale allows them to utilize more efficient supply chain and more cost benefits as they spread overhead costs.

These factors combined provide a defensible advantage, but some of these advantages are not as strong as brands, switching costs, or network economics. That makes it a strong but narrow moat.

Risk to the Moat

There are a few identifiable risks that could negatively affect ASR’s moat:

  1. Government Regulation: A change in concession structure or regulations may impact profitability, although it is less probable given the concessions are usually long term.
  2. Industry Disruption: Emergence of new low cost carriers or airport technology shifts might put pressure on prices and profitability.
  3. Global Economic Slowdown: The fluctuations in the global economy can affect travel demand and hence affect airline profitability, in turn reducing aeronautical revenues.
  4. Fluctuations in Currency Exchange Rates: As a considerable amount of earnings are generated in foreign currencies, this is a significant risk for ASR because they translate to different values when converting back to Mexican Pesos. A company such as ASR with considerable operations in foreign markets must consider this risk during valuation.

Business Resilience

Despite all the risks, ASR possesses a high degree of resilience:

  • Long-Term Concessions: These ensure that the business will operate through changing dynamics of the industry.
  • Geographic Diversification: It is important to notice the global diversification of the company, which also helps to stabilize revenue during economic downturns in a specific country or region.
  • Demand Recovery: The travel industry is recovering from the slump caused by COVID. This recovery should provide a positive impact on revenues and profitability.
  • Focus on Non-Aeronautical Revenues: The company’s recent push to increase non-aeronautical revenues creates a buffer against cyclicality in the industry and provides some stability. The combination of these characteristics suggests that the company should show resilience over the long term.

Understandability: 3 / 5

ASR’s business model is moderately complex due to the following factors:

  1. Regulatory Complexity: The airline and airport business is highly regulated and the rules and regulations are different in each country the company operates in, this adds to the complexity of the business.
  2. Capital Intensity: The amount of infrastructure investment needed can make the business quite complex for the outsider to fully understand.
  3. Multi-faceted Revenue Streams: While ASR’s revenue generation is mostly simple, the presence of aeronautical and non-aeronautical revenues creates complexity in analysis.
  4. Non-Standard Accounting: The company does accounting adjustments for non-monetary revenues and currency fluctuations which makes it more difficult to gauge the true financial picture of the business.
  5. Forecasting Cyclicality: As the company has shown a cyclical behavior, it becomes difficult to forecast and value ASR based on financial statements without making any assumptions about future cycles.

Even though all these complexities exist, the business model is relatively easier to understand than other financial and highly leveraged companies such as insurance, reinsurance, or banks. This is why we have given the company a score of 3.

Balance Sheet Health: 4/5

ASR has a fairly healthy balance sheet with a reasonable degree of financial flexibility due to the following factors:

  1. Positive Free Cash Flow: ASR consistently generates positive free cash flow, which it uses to expand, pay dividends, or reduce its debts.
  2. Manageable Debt Load: ASR is not a very highly leveraged company, especially compared to its peers. The company has a track record of deleveraging their balance sheet.
  3. Strong Coverage Ratios: The company is able to comfortably pay interest and principal on debts, indicating healthy and stable solvency ratios.
  4. Noncyclical Assets: Airport assets are quite solid and do not depend on the overall economic outlook or cycle. Their worth is quite stable over a long period of time.
  5. Good Asset Liability Ratios: ASR has a very low ratio of current liabilities to assets, further bolstering its balance sheet.

These factors combined contribute to a healthy balance sheet.

ASR possesses structural advantages, solid financials, and a predictable market to operate in. Despite all that, investors must keep a close eye on the management and how they intend to utilize the free cash flow. Also keep a close eye on any future government actions that might alter their current concessions.