Corporación América Airports S.A.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

A multinational corporation that develops and manages airport concessions, mainly located in Argentina, Latin America and Europe.

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.

CAAP’s business is deeply connected to global travel and tourism. The airports it operates serve as crucial infrastructure in their respective regions, handling passenger traffic and air cargo transportation.

Business Overview

CAAP’s business model revolves around securing and operating long-term airport concessions. It doesn’t simply own airports; it secures contracts with governments to manage, operate, and develop airport infrastructure. This model requires significant upfront investment, intricate operational expertise, and ongoing relationships with governmental authorities. The company earns revenue primarily through airport-related fees from airlines (landing fees, parking fees, and passenger charges), and commercial activities such as leasing retail spaces, restaurants, and car rentals. The revenue is highly sensitive to passenger traffic and is subject to government regulations.

In recent years, despite recovering air travel post Covid-19, some analysts have raised questions about whether the revenue and profitability is as consistent as it appears. There are also concerns about how the company may navigate volatile global markets, specifically the emerging markets that it operates in, and how it may use leverage. The company was also in the crosshairs of some controversies regarding accounting practices and tax implications.

Revenue Distribution

  • Aeronautical Revenues: Primarily from charges to airlines for landing and parking fees, passenger charges, and baggage handling. These charges are generally regulated and can be a predictable revenue source once traffic has returned to normal pre-covid levels.

  • Commercial Revenues: Retail operations, car rentals, restaurants, advertising, and other non-flight operations make up this segment.
  • Construction Services: A much more volatile sector depending on ongoing projects.

The aviation industry is undergoing a slow and painful transformation with multiple challenges affecting the airlines and airports. Some important factors:

  • Passenger Demand: This is a critical driver of revenue for airports. After the sharp declines in 2020/2021 due to the pandemic, there has been a significant rebound. However, the current recessionary pressures are likely to slow down this trend and could lead to a pullback of passenger demand.
  • Airlines’ Profitability: Airlines are facing increasing input costs due to fuel and labor costs. Their struggle in profitability could cause them to reduce routes, leading to an immediate negative effect on CAAP’s revenue.
  • Government Regulations: The aviation industry has always been heavily regulated and the ever changing laws can affect CAAP’s financial performance. There are concerns about potential changes in concessions and other regulations that could lower the amount of revenue the company is able to capture.
  • Shift Towards Regional Travel: People have become more willing to take domestic routes and this has been an added issue that CAAP has to address since most of its airports cater to international travelers.
  • Competition: Airports typically face limited competition. But increasing consolidation in the airline industry has resulted in higher bargaining power for airlines, which often pressures airports to reduce fees.

Competitive Landscape

CAAP’s business model inherently provides some protection from competition:

  • Long-Term Contracts: Airport concessions are typically long-term contracts with governments. These contracts create a barrier for other companies to enter the market, but in the process, also limit pricing power for CAAP.
  • Geographic Advantage: Airports in large metropolitan areas often become mini-monopolies. A large amount of traffic flow in the area effectively makes it very hard for a company to come in and start a competing airport.
  • Capital Intensity: The capital requirements of building and maintaining an airport are large, thus acting as a natural barrier to entry for new firms.

However, these advantages are not permanent as regulatory hurdles can lower barriers to entry. And while CAAP is usually the only airport provider for a particular region, it still faces competition from other modes of transportation or even from nearby airports for the same traffic.

Management has repeatedly addressed the importance of strengthening its long term strategic assets. The aim has been to diversify into new airports and reduce their reliance on more mature operations. Management has also consistently pushed towards operational efficiencies, and has been implementing a technological framework for this.

Financials

Here’s a deep dive into CAAP’s financials:

  • Revenue: CAAP’s revenues have rebounded significantly post Covid. In 2022, the company’s revenues were $1.54B compared to only $750 million the year before. The total revenue is primarily dependent on passenger traffic in its airports.
  • Profitability: The company reported a profit of $174 million for the fiscal year ended December 2022, this a significant rise from a loss of $316 million in 2021 and a loss of $260 million in 2020.
  • EBITDA: The Adjusted EBITDA of the company has followed the revenue trend. Going from $167M in 2020 to $402M in 2021 and then to $725M in 2022.
  • Operating margin: The company has reported an operating margin of 44.7% for the fiscal year ending Dec 2022, this shows an increase from 30% in 2021 and a negative figure of -7% in 2020. * Debt: Total borrowings stood at $1.5 billion as of December 2022, primarily long-term borrowings and finance leases. * Equity: Total equity stood at $1.6 billion as of December 2022.

CAAP’s financials demonstrate that while its revenue and profitability depend largely on external factors such as passenger traffic, the underlying economics of the business are solid.

Moat Rating: 3 / 5

CAAP possesses a narrow moat. While they have a few competitive advantages that are based on geographic presence and contracts, those advantages are not very large:

  • Intangible Assets: The company has long-term contracts and concessions for various airports. This provides a level of stability and a barrier to entry for new competitors.
  • Switching Costs: Switching costs are not high as airlines can operate through other airports if they deem the costs to be unmanageable.
  • Cost Advantages: A lot of costs are fixed and the company does have an advantage by running its airports more efficiently than other companies can. But this advantage is not as high as other companies that have structural advantages based on cost.

In conclusion, the “moat” is not very wide, it’s a narrow one. Hence, we give it a 3/5 rating. The company is not extremely well insulated from external market pressures, but it does have some level of defensibility.

Legitimate Risks That Could Harm the Moat and Resilience

While CAAP has a certain level of stability, there are specific risks that should be considered:

  • Economic Downturn: CAAP is highly susceptible to global economic downturns. These would directly impact the number of people willing to travel, leading to a sharp decline in passenger traffic and revenue.
  • Financial Leverage: The debt is not very high at 0.9x but due to the volatile nature of the business it does create some degree of instability. The company relies heavily on debt and needs to focus on reducing that.
  • Political & Regulatory Risks: The company operates in several emerging economies, often which are subject to a highly volatile political environment. Any change in governmental regulations could directly affect CAAP’s concessions and its revenue prospects. Also, the company is subject to a lot of regulations in every single country it operates in. Compliance can add to costs and at times even limit the growth of the company.
  • Acquisition Risks: The company has a lot of past acquisitions. If the strategy is not executed correctly it could lead to significant losses and reduce the overall returns.
  • Airlines’ Financial Distress: Airlines are the primary customers of airports and CAAP relies heavily on them. Any distress or bankruptcy in the sector could lead to a rapid decline in revenues and profitability of the airports.
  • Geopolitical Risks: The various geopolitical tensions and war can have an immediate effect on travel, and will disproportionately hurt CAAP.

Understandability Rating: 3 / 5

CAAP’s business is relatively simple at its core-airport concessions generate revenue through passenger volume and commercial activities. However, it can become very complicated when considering the numerous concessions in various countries, accounting requirements, and different regulatory requirements in every country it operates in. Therefore, we are giving the company an understandability rating of 3/5.

  • Easy To Understand Aspects: The underlying revenue model is easy to comprehend. How airports make money and operate is intuitive and easy to grasp.
  • Complex Aspects: The numerous acquisitions, regulatory hurdles, and various currencies add to complexity for valuation and financial performance analysis. There are several moving pieces and the picture gets complicated when evaluating the overall financial stability and profitability. Also, it’s very difficult to grasp the full extent of the agreements and concessions and how they might affect future cash flow.

Balance Sheet Health: 3 / 5

CAAP’s balance sheet health is rated as 3/5, a decent health, but comes with some major areas for concern:

  • Debt: While they have a decent operating profit, a lot of the revenues are used to service debt. This reduces flexibility and is concerning in the volatile aviation industry.
  • Intangible Assets: The company does have large amounts of intangibles on its balance sheet. This could potentially hide risks of reduced value creation in the future.
  • Liquidity: The current asset to liability ratio of 1.5x is not that great, especially considering the amount of long term debt. The company would have some problems if there was a major recession.
  • Good points: The company does have a large asset base and decent revenues compared to the total debt. Also, the company has managed to achieve good financial performance over the past year or so, and this is a positive sign.
  • Current situation: The company needs to monitor its debt carefully and should focus on generating free cash flow.

While the company is generating decent revenue and profits after Covid, the high debt and volatile aviation industry is definitely a point of concern.

I’ve tried my best to provide a deep dive into CAAP’s business, financials, and its moat based on the provided data. I hope this detailed report is helpful.