Grupo Aeroportuario Del Sureste (ASR-NYSE, $285.85) Selling for 9.6X my Estimated 2023 EV/EBITDA Ratio.

ASUR likely closed out fiscal 2022 with total long term debts of just $600 million US.

Net passenger revenues could have finished as high as $1.14 billion for 2022. EBITDA was possibly as high as $800 million. Concrete terminals and runways depreciate quite slowly and without significant lease or interest expenses, taxes are the only meaningful cash outlay to account for, prior to making a net profit assessment.

At ASUR, net profits may have just touched $500 million US in 2022.

The airport operator has operated in a “capex-light” mode throughout the Covid-19 outbreak of 2020-2021, directing most of its healthy cash flows towards balance sheet improvements vs terminal expansion.

An incredible recovery in tourist traffic has accelerated the rapid build-up of cash reserves throughout 2022, leaving the company with total long term debts of about $600 million. This largely matches the short term cash balances that I estimate will be on account at the end of the year, resulting in an effective net long term indebtedness of less than $100 million US.

ASUR prefers not to issue financial guidance.

There is considerable detail in fiscal quarterly reports of revenues, operating profits and EBITDA per region. Anyone with enough initiative can come up with a reasonable back-of-the-envelope assessment themselves and get to within spitting distance of Wall Street assumptions.

If one doesn’t want to do all of the legwork, a quick and useful “hack” is available.

Over the entire life of ASUR, the company’s airport concessions had consistently reported 1.3% higher overall passenger growth annually than Grupo Aeroportuario del Pacifico (PAC). The more recent addition of the Columbian airport concessions have further increased those percentage growth rates. When one adds the Columbian incremental growth to the historic outperformance, passenger count wise, between Pacific Airport Group and ASUR, ASUR typically now generates about 2% greater passenger growth annually than does PAC. In terms of annual revenue increases, ASUR typically outgrows the revenues of PAC by about 1.4% annually. In terms of EBITDA growth, ASUR also outperforms PAC historically, increasing annual total EBITDA by about 2.3% above PAC.

Pacific Airports indicated their corporate guidance for 2023 a week back and are initially budgeting for 7%-8% passenger growth, 12%-14% revenue growth, a 12% increase in EBITDA and a 1% overall improvement in EBITDA margins. The history of Pacific Airport Group’s fiscal guidance is that, typically around mid-year, management reassesses the outlook and almost inevitably raises it. This means that the passenger throughput initial estimates of 8% traffic growth is really an 8%-9% range. Every other financial metric follows suit.

The “hack” is to take the PAC true guidance estimates and apply the relative percentage of outperformance reported historically by ASUR as a multiplier.

if PAC guidance is sensible, and I believe it to be, then this would suggest that ASUR can generate 10% to 11% more passenger throughput in 2023, representing total throughput of between 72.9 million to 73.64 million persons. Net passenger revenues may increase by 13%-14% in 2023, to $1.29-1.3 billion. EBITDA could increase by 15-16% for a range of $920-$930 million and net profits could increase to $580 million.

While such net profit and potential EBITDA increases sound dramatic, that’s just what happens to the bottom lines when a company sporting a 70% plus EBITDA margins can grow its revenue in the low double digits while maintaining strong cost controls. Net profit for ASUR in 2022 likely equaled 44.3% of net passenger revenues and that figure, as astounding as it seems, could rise to 45% of net passenger revenues in 2023.

International airport operators may have a bit of an inflationary tailwind going into 2023.

A typical airport operator leases out space in their terminals to a variety of retailers. The standard rental agreement at international airports is typically a base fee plus a percentage of the sales at any terminal. This is why most prices at an airport are outrageous when compared to a non-airport shop or restaurant; the airport operator, like a bookie, gets a cut of each sale. As inflation drives up the price of any good or service at the terminal, the airport take rises in lock-step with the higher pricing, but does not incur additional expenses on that sale; any inflationary price increase is all gross profit based upon the predetermined split.

Overall, in 2023, if passenger volumes grow as I expect, there should be a disproportionately positive impact on EBITDA and potentially the bottom line.

The highest street estimate for ASUR in 2023 is presently for $1.36 billion of revenue and net earnings per share of $18.83. It bears mentioning that this figure includes about $100 million of construction revenues, basically a form of pass-through accounting figure(they add the cost of construction and renovations to their airport facilities as revenue and remove it in the expense column) that has no bearing on profit or loss. Therefore, the optimistic analyst is budgeting for about $1.26 billion of actual net revenues from passenger fees and retail at the terminals; the implication is that one Wall Street firm anticipates ASUR to earn a 44.8% net, after tax, profit, on the 2023 passenger revenues.

I concur with the high estimate at the present, but consider that figure to be where the rest of the analytical pool needs to be as an average. Should passenger growth hit the high end of a range, then conceivably as many as 74 million persons would go through all ASUR operated terminals in 2023. That could result in gross revenue of $1.31 billion and produce $940 million of EBITDA.

In order for Grupo Aeroportuario Del Sureste to break the $20 EPS mark for 2023 ($600 million + net profits / 30 million ADS), passenger growth rates need to be in the 12% range and retail spending per passenger will also have to rise somewhat.

We are still working through some pent-up travel backlogs globally and this is a somewhat difficult to quantify variable for any 2023 terminal throughput forecast.

I believe that pent-up demand will still be absorbed into global travel throughout 2023. More specifically to ASUR, the location of this passenger growth is also important. The Mexican operations generate more than 2.5X the per passenger revenues as compared to the Columbian airports.

Columbian operations are highly profitable and are vital to the long term thesis. This is due to the fact that the Columbian airport concessions are growing far faster than Mexico. However, those airport concessions are starting off from a very low per passenger revenue base and don’t yet generate a lot of retail revenues at the terminals. The Columbian airports, to my way of thinking, are like investing in a Mexican airport concession 25 years ago, ripe with opportunity, but still in an earlier stage for mass tourism.

The San Juan airport in Puerto Rico is a slower growing terminal than either the Mexican or Columbian operations, and generates about 89% of the revenues, per passenger, vs the Mexican airport concessions.

Therefore, in order for the net passenger revenues to come in above $1.35 billion at constant forex rates, not only does there need to be total throughput above 75 million persons, it also must be with the right mix that emphasizes greater Mexican throughput. The most profitable customer of an airport, based upon retail spend, is an international traveler and Mexico has the highest percentage of international tourists in the three country mix.

30% of ASUR’s Mexican passenger revenues come about from persons flying via American Airlines, Delta, United and Southwest and all are looking to add seats, planes and additional routes to-from Mexico during 2023.

Is an EV/EBITDA ratio for 2023 of 9.6X a good value, a fair value or a bad value?

The markets, not analysts, ultimately decide what an appropriate level of valuation happens to be. My belief is that ASUR sits atop the heap among the publicly traded tier airport operators in the world today; the company grows steadily, features incredibly tight expense controls and can expand the terminals at bargain rates relative to first world nations.

A lot of the publicly traded airport operators went on acquisition binges throughout the period 2010-2020. In too many cases, massive overbidding led to extremely poor investment decisions, contracts that often drag down earnings for decades. ASUR largely stayed out of the bidding frenzy, buying one concession for a good price (San Juan) and one concession for a great price (Columbia).

Cancun International Airport is as well run as any of the top 10 airports globally and looks as good, both inside and out, as any of the global peer group. Furthermore, with roughly 68% of the total Mexican international passenger traffic arriving or departing via the United States, it is a relatively good proxy for ownership of a US airport, and that’s useful, because at the present time, there are no publicly traded US airports.

The key with secular trend investments is to get the big picture right.

If a company generates enough revenue growth, above the rate of inflation and if expenses are maintained, then EBITDA margins should also be stable, or perhaps will even rise.

In 2019, prior to the Covid-19 outbreak, ASUR sold for an EV/EBITDA multiple of 11.7X. Total passenger throughput was 55.66 million persons in 2019. While many international airports are still reporting passenger counts below 2019, overall, ASUR counts are up by 10.67 million persons, or 19.2% overall.

From 1999-2019, ASUR reported average annual passenger traffic growth of 6%, annual revenue growth of 13.2%, average annual EBITDA growth of 14.8% and average growth in net earnings of 19.1% annually. That’s the big picture.

Despite the fact that ASUR is trading at an all time high, a full 48.2% more expensive than the share price on December 31st, 2019; today on a valuation basis, it is about 18% cheaper, at the current price, than it was 3+ years ago.

As to the minutiae in any forecast, that’s of lesser importance.

If I dwell on whether ASUR is more likely to generate $930 million of EBITDA or $920 million in 2023, then I am greatly overthinking it. Just how many companies out there are capable of consistently growing revenues by better than 10% annually and generate an after tax net profit, not a gross margin, but an after-everything profit, one equaling 43% to 45% of net revenues?

Then, let’s add in some additional hurdles; those companies should be selling for less than 10X their enterprise value while featuring an unleveraged balance sheet. Finally, exclude companies that report high EBITDA margins but then have to turn around and reinvest the majority of that cash to replace what has been sold, as is the case for minerals, oil & gas or other cyclical businesses.

When you are done scouring the planet for publicly traded companies that meet all those requirements, by all means, please get back to me. I mean that sincerely as my goal is to assemble and hold a portfolio containing more companies achieving these sorts of margins. If I have missed one or two out there, I am all ears.

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