Unless specified otherwise, all prices are quoted in U.S. dollars.
ADR Outstanding: 56.1 million
Total Liabilities- short term cash and equivalents: $89.0 million.
Current Enterprise Value: $2.918 billion.
2012 EBITDA: $225.9 million.
2013 Forecast EBITDA: $248.0 million.
2014 Forecast EBITDA: $279.2 million
2013 Forecast EV/EBITDA ratio: 11.8X
2014 Forecast EV/EBITDA ratio: 10.5X
Traffic for 2012: 21.287 million units.
Forecast Traffic est. 2013: 23.16 million units.
Forecast Traffic est. 2014: 25.13 million units.
Thesis. A cyclical decline in passenger traffic from 2007 (23.56 million persons) to 2012 appears to have been reversed. Pacific Airport Group is on the cusp of a weak regional recovery in international tourist travel. This may be bolstered by business oriented reforms underway in Mexico; if correct, business travel will be stimulated and increase throughput in the key airports managed by PAC. By the end of 2014, passenger traffic at airports managed by PAC should surpass the previous cyclical high.
Action. The model portfolio has recently initiated a position in PAC. The author has also purchased shares personally.
Business Description.
PAC holds concessions to operate a total of twelve airports in Mexico. The key airports include Guadalajara, Los Cabos, Puerto Vallarta and Tijuana. Revenues are earned from a combination of regulated fees earned from passenger, freight and airplane landing/takeoff charges plus concession and various unregulated fees generated from terminal operations.
Balance sheet and revenue reporting issues are of lessening concern in a rising passenger revenue environment.
Mexican reporting requires that capital expenditures on airport improvements be added to the revenue column of an income statement. This is offset by an equivalent entry to the expense column. No impacts of this policy accrue to net EBITDA; however, it does make for bumpy year over year revenue and expense comparisons. In 2014, planned capital expenditures are forecast to decline over 2013. To the untrained eye, this will show up as a revenue headwind. However, it is of limited consequence.
Several land claims are working their way through Mexican courts. These claims surround lands expropriated by the Mexican government and provided to PAC as part of lands in their airport concessions. The lands, henceforth known as “ejido”, have resulted in disputes in the key airports of Tijuana, Puerto Vallarta, and Guadalajara. I believe that at least one of these claims may eventually result in a significant one time charge to earnings.
Regulated charges are scheduled to decline roughly .75% per annum, for the next five years.
Recent regulatory agreements with ASUR suggest that the Mexican government will mandate a modest decline in regulated charges for PAC. Airports operate with high fixed costs and benefit greatly from increased volumes of freight and passenger traffic. A gradual decline in regulated charges will not necessarily impact total revenues under the proviso that passenger growth continues apace; rather, this should simply impact that rate of revenue growth.
Pacific Airport’s Confirmation of the improved prospects may lead to a rerating of the company’s enterprise value.
The global market’s sharp rise in 2013 has eliminated most of the true bargains in the world of equities. Which begs the question; “what is a company worth when it features a clean balance sheet and consistently generates EBITDA margins in the range of 60% per annum?”
Should revenues grow on a forward basis in the range of 7%-10% per annum for several years and providing that global interest rates don’t throw a spanner in the works, my 2014 estimated valuation of 10.5X EV/EBITDA for PAC does seem relatively inexpensive.
The bulk of investment analysts and pundits that have covered PAC for the past 5 years have largely failed in prior forecasts. This has made them unduly cautious in recent valuation forecasts. Of the dozen analysts in the coverage universe, only one has the stock rated as a buy or better. Eleven of the dozen have PAC rated as a hold or sell with downward revisions to estimates exceeding upward revisions by a ratio of 5 to 2 for 2014.
https://www.adr.com/DRDetails/Earnings?cusip=400506101
Such pessimism seems unwarranted in light of recently published passenger statistics. It would appear that consensus prospects for increased tourist travel from the central United States and the American west coast are unduly conservative.
If there has been one trap that investors have fallen into, when reviewing PAC, it has been to compare the prospects of this firm to that of Grupo Aeroportuario del Sureste (ASR-NYSE, $117.)
Pacific Airport’s customer mix is approximately 66.5% domestic and 33.5% foreign. In contrast, ASR’s customer base is roughly 45.5% domestic and 55.5% foreign. Airports with a tourist focus tend to generate higher non-regulated revenues than domestic operators.
ASR is the premiere airport manager in Mexico, has recently acquired a long term management contract for the largest airport in Puerto Rico and is overwhelmingly tourist oriented. ASR is also a core holding of the model portfolio and has been held on account since 2006.
ASR invests heavily in modernizing and expanding their airports. In contrast and based upon personal observation, the bulk of PAC airports are somewhat down at heel.
Conclusion
Should the apparent growth rate in passenger traffic persist for the next twenty four months, PAC has the potential to generate a strong EBITDA surprise. A rerating looks highly likely, in my view.
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