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Mexican Airports- PAC, OMAB, and ASR


bergman104
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Anyone follow PAC, OMAB, or ASR? I stumbled across them in a Seeking Alpha article and think it's one of the better ideas I've found. Huge competitive advantages trading at, from what I can tell, are historically low valuations. I don't have a strong opinion on PAC vs OMAB vs ASR. Each company is much more similar than they are different. If I took a position I'd actually probably buy all 3 to help control risk. Below is a BRIEF overview. I'm happy to go into more detail on any point if anyone is actually interested.

 

General Business Overview

Briefly, in 1998 Mexico opened up control of its airport to private companies. It divided the 3 largest airports (besides Mexico City) into 3 separate operations, which subsequently became the home base for PAC, OMAB, and ASR. Collectively they operates all of mexico’s economically viable airports on 50-year contractual agreements (Ends 2048). Generate revenue at regulated rates from airlines while also generating un-regulated rates from hotels, parking, advertisement, retail, and commercial spaces.

 

From a moat perspective, this is about as good as it gets. Pretty tough to compete with the only airport in town. The contract to operate the airport is an irreplaceable intangible asset. This gives them pricing power commercially at their airports, while benefitting from longer term trends of airline growth. Further, there is only room for these 3 competitors, as they control every economically viable airport in Mexico except for Mexico City. It gives them HUGE leverage, which is why the companies are more similar than they are different.

 

Risk

First, this year is obviously going to be ugly for airports. For perspective, the airports dropped ~30% in traffic from Feb to March, where they typically increase 20% during the same timeframe. In terms of debt, they all have ~50% of the LTD covered by current cash positions. Additionally, they also are contractually obligated to spend Capex on their current airports, which will be a drain on cash. Hopefully their contracts can be negotiated with the government, rather than taking on additional debt to cover current costs.

 

Long term, the major risk is regulation. The government owns the airports and can take them back if the rules of the agreement are broken. The companies need to submit 5-year annual plans for growth and improvement, if these plans are not followed or accepted then the government can take the airports back. However, I think this is extremely unlikely given the complexity of running an airport and that both sides are currently benefiting from the agreement. Their current contracts do not expire until 2048 and all 3 are in the process of submitting new 5-year plans.

 

Finally, the companies are expanding outside the airport into other countries such as Columbia, Jamaica, and Puerto Rico.

 

Financials

They all earn extremely high margins and ~15% ROIC. ROIC has steadily grown over the last 15 years as their non-regulated businesses (like restaurants, advertising, and commercial spaces) gain better footing. Further, all have grown revenue and net income at 15%+ over the last 15 years. They gush free cash flow at ~33% of revenue. Cash operating margins of ~40%. Return on tangible assets of 14%, which I think is pretty impressive given how asset heavy the companies are.

 

These numbers will obviously dip this year and likely for the next few years. But long terms trends are still in place.

 

Long-term Growth

Huge run way for growth. Mexico as a country has a growing middle class and airline travel has risen at ~10% CAGR for the last 15 years. Still, citizens travel by plane at <20% of Americans. Finally, each company is focused on expanding non-airline revenue. As they have updated the airports, advertisement, hotels, VIP lounges, restaurants, and parking have become more viable. Part of the reason I love the idea is that airports are one of the few retails places with virtually guaranteed foot traffic. Rents, advertising, hotels, car rentals, and parking can all be priced at above average rates. This part of each business only makes up ~33% of revenues but is extremely high margin. 

 

Longer-term, the prospects of the airline industry are great. Mexico has a growing middle class and is a physically large country (important for driving/bus vs airlines). Mexico is the 5th largest tourist destination in the world. Further, each companies is not reliant on a single airport or even a single city. By investing in all 3 companies, I think you help reduce individual risk while getting 3 fantastic companies.

 

Valuation

They are all close in terms of valuation, with OMAB being slightly cheaper than ASR and PAC. Combined they are ~12-13 PE right now. EV/EBITA of ~6-7 and FCF yield 10%+. These numbers are based on last year's financials, which will certainly not equal 2020 numbers. Not not going to attempt to predict when the industry normalizes but it will eventually. When it does the airports will capitalize.

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I am looking at them too, they have very low debt. I think you need to include country risk - Mexico will get disproportionately hard hit and they currency lost already 20% Relative to the USD and may devalue more.

 

For sure. But does the currency risk matter in the 5-10 year time frame? I know it has been hit hard in the last couple of months, but doesn't that even out over time?

 

You said you've been looking into them. Any thoughts?

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I am looking at them too, they have very low debt. I think you need to include country risk - Mexico will get disproportionately hard hit and they currency lost already 20% Relative to the USD and may devalue more.

 

For sure. But does the currency risk matter in the 5-10 year time frame? I know it has been hit hard in the last couple of months, but doesn't that even out over time?

 

You said you've been looking into them. Any thoughts?

 

I like OMAB. It’s more of a business destination, which might recover faster than tourism. I think their net debt negligible, so they should survive even a lengthy downturn. I wouldn’t expect much business for the next 12 month and hopefully a recovery after.

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I am looking at them too, they have very low debt. I think you need to include country risk - Mexico will get disproportionately hard hit and they currency lost already 20% Relative to the USD and may devalue more.

 

Spekulatius, how do you compare these with FRA.DE (Frankfurt Airport). Lower country and regulatory risk in Germany I would think.

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I am looking at them too, they have very low debt. I think you need to include country risk - Mexico will get disproportionately hard hit and they currency lost already 20% Relative to the USD and may devalue more.

 

Spekulatius, how do you compare these with FRA.DE (Frankfurt Airport). Lower country and regulatory risk in Germany I would think.

 

Well, Germany has less country risk and I think returns need to be adjusted for country risk. Then on the other hand, Fraport balance sheet is far worse, with debt being 3.5x EBITDA going on and it was rising due to a buildout program. I think they need to readjust their strategy around this, as capacity may not be needed a long time.

I think air travel will need a long time to recover - many years to get back to peak levels in 2019. I think there will be very little air travel for the next 12 month.

 

FRA.DE should be fine, the state Hessen owns the majority of shares and will support with loan guarantees if necessary, but let’s face it all thee airports are impaired for years. I sold my Fraport shares that I initially bout buying the dip at a loss for a bit more than 42 Euros. There is a Lot of stuff that will recover faster than air travel, especially international air travel.

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Right now, would you get on a plane? And in the current seating configuration?

Most places (without border restrictions) you can only fly to/from ‘gateway’ airports, and most airlines are pulling the middle seat from the rows of 5.

Airports get paid on activity; planes don’t fly, airports don’t get paid. So how long are you willing to wait until planes start flying again?

Because it could be a long time.

 

Number of flights depends on demand, stimulated by either price or service. Today, price has to fall a long way before someone will fly; and this is AFTER improving service by taking out the middle seats. No tourism, no flights, and no need to travel anywhere other than a gateway city.

 

Cash yield depends on dividend and price paid. A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

SD

 

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

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Right now, would you get on a plane? And in the current seating configuration?

Most places (without border restrictions) you can only fly to/from ‘gateway’ airports, and most airlines are pulling the middle seat from the rows of 5.

Airports get paid on activity; planes don’t fly, airports don’t get paid. So how long are you willing to wait until planes start flying again?

Because it could be a long time.

 

Number of flights depends on demand, stimulated by either price or service. Today, price has to fall a long way before someone will fly; and this is AFTER improving service by taking out the middle seats. No tourism, no flights, and no need to travel anywhere other than a gateway city.

 

Cash yield depends on dividend and price paid. A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

SD

 

If I'm honest I think it stacks up great. Most companies I follow that fit your description are still expensive or do not have the long-term growth potential that these companies do. Companies that I would love to buy, like HSY, SBUX, MDT, FICO, MCO, VRSN, NVO, SPGI, are all still trading at 15+ EV/EBITDA. Most of those don't have the compounding growth potential either. I don't find too many opportunities that have fantastic operating margins, are virtually guaranteed to be more valuable in 10 years, and are trading at 10% FCF yield. What companies are you looking at that fit that bill?

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

His stock picks go to another school

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

All for keeping illiquid ideas to yourself, but I find it odd that you won’t throw out at least one name.

 

Where are these mythical best of breed companies cutting their dividends and trading at prices which will allow for a double or tripling to normalization?

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Right now, would you get on a plane? And in the current seating configuration?

Most places (without border restrictions) you can only fly to/from ‘gateway’ airports, and most airlines are pulling the middle seat from the rows of 5.

Airports get paid on activity; planes don’t fly, airports don’t get paid. So how long are you willing to wait until planes start flying again?

Because it could be a long time.

 

Number of flights depends on demand, stimulated by either price or service. Today, price has to fall a long way before someone will fly; and this is AFTER improving service by taking out the middle seats. No tourism, no flights, and no need to travel anywhere other than a gateway city.

 

Cash yield depends on dividend and price paid. A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

SD

 

If I'm honest I think it stacks up great. Most companies I follow that fit your description are still expensive or do not have the long-term growth potential that these companies do. Companies that I would love to buy, like HSY, SBUX, MDT, FICO, MCO, VRSN, NVO, SPGI, are all still trading at 15+ EV/EBITDA. Most of those don't have the compounding growth potential either. I don't find too many opportunities that have fantastic operating margins, are virtually guaranteed to be more valuable in 10 years, and are trading at 10% FCF yield. What companies are you looking at that fit that bill?

 

A widow/orphan stock normally pays $4.00/share, and yields 7%. Price is 57.14 (4.00/.07). Due to Covid-19 related stress, dividend is cut to $1.00; the POS is dumped and sells down to $10.00, at a 10% yield (1.00/.1). You buy it. If post Covid-19, the dividend is restored to its former $4.00 - the cash yield is 40% (4.00/10.00), and the price is back to 57.14 (470% increase).

 

But apparently, this airport authority stock can do better than this .......

 

SD

 

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

All for keeping illiquid ideas to yourself, but I find it odd that you won’t throw out at least one name.

 

Where are these mythical best of breed companies cutting their dividends and trading at prices which will allow for a double or tripling to normalization?

 

Could care less. You have a brain, use it ;)

 

SD

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

All for keeping illiquid ideas to yourself, but I find it odd that you won’t throw out at least one name.

 

Where are these mythical best of breed companies cutting their dividends and trading at prices which will allow for a double or tripling to normalization?

 

Could care less. You have a brain, use it ;)

 

SD

 

The ACWI quality index is down 15% through March 31 and many large cap US tech stocks are up year to date.

 

In using my incapable brain, I am unable to identify “a great many” of “best of breed” companies that fit your description (or one for that matter).

 

I can only conclude that you either

 

A) are much better at sourcing ideas (hence my request for examples)

B) have a different definition of “best of breed”

C) are making a statement not based in fact

 

Or maybe my brain just doesn’t work.

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A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

Can you name your top 3-5 that fit this description?

 

Sorry!. Do your own DD

 

SD

 

All for keeping illiquid ideas to yourself, but I find it odd that you won’t throw out at least one name.

 

Where are these mythical best of breed companies cutting their dividends and trading at prices which will allow for a double or tripling to normalization?

 

Could care less. You have a brain, use it ;)

 

SD

 

The ACWI quality index is down 15% through March 31 and many large cap US tech stocks are up year to date.

 

In using my incapable brain, I am unable to identify “a great many” of “best of breed” companies that fit your description (or one for that matter).

 

I can only conclude that you either

 

A) are much better at sourcing ideas (hence my request for examples)

B) have a different definition of “best of breed”

C) are making a statement not based in fact

 

Or maybe my brain just doesn’t work.

 

You could probably narrow down candidates. Scan for anyone, period, who's cut a dividend between, say 2/1/20 and now. Scan should only include companies that still pay dividends and maybe extend the search range from the 50-67% SD mentioned, to 40-80% cuts. Out of that entire universe, these best of breed would have to be in there, if they exist.

 

At first I thought his do you own DD was a tongue in cheek reference to Dupont, but it doesnt fit the profile either. If I had to make an educated guess, SD is probably referring to some energy companies. Runner up guess would be mortgage servicers. The former I have little interest in, the later may be something special as servicers IMO have a much easier path to "return to normal" than oil stocks.

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Let me give you a example, very moaty oil service company, Core Labs, dividend down to $.01.

 

I guess my point was that you can't be certain those companies will be worth more 10 years from now. Will we still be using oil then? Absolutely. But I have no idea what oil prices will do or how the energy industry plays out. Maybe I'm wrong and we would happy to hear a counter point.

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Right now, would you get on a plane? And in the current seating configuration?

Most places (without border restrictions) you can only fly to/from ‘gateway’ airports, and most airlines are pulling the middle seat from the rows of 5.

Airports get paid on activity; planes don’t fly, airports don’t get paid. So how long are you willing to wait until planes start flying again?

Because it could be a long time.

 

Number of flights depends on demand, stimulated by either price or service. Today, price has to fall a long way before someone will fly; and this is AFTER improving service by taking out the middle seats. No tourism, no flights, and no need to travel anywhere other than a gateway city.

 

Cash yield depends on dividend and price paid. A great many, high quality best-of-breed companies have already cut their dividends 50-67%, and trade at low prices. All they need do is restore their dividend within X years, and todays cash yield doubles, or triples. How does this opportunity stack up?

 

SD

 

If I'm honest I think it stacks up great. Most companies I follow that fit your description are still expensive or do not have the long-term growth potential that these companies do. Companies that I would love to buy, like HSY, SBUX, MDT, FICO, MCO, VRSN, NVO, SPGI, are all still trading at 15+ EV/EBITDA. Most of those don't have the compounding growth potential either. I don't find too many opportunities that have fantastic operating margins, are virtually guaranteed to be more valuable in 10 years, and are trading at 10% FCF yield. What companies are you looking at that fit that bill?

 

A widow/orphan stock normally pays $4.00/share, and yields 7%. Price is 57.14 (4.00/.07). Due to Covid-19 related stress, dividend is cut to $1.00; the POS is dumped and sells down to $10.00, at a 10% yield (1.00/.1). You buy it. If post Covid-19, the dividend is restored to its former $4.00 - the cash yield is 40% (4.00/10.00), and the price is back to 57.14 (470% increase).

 

But apparently, this airport authority stock can do better than this .......

 

SD

 

Agreed with everything people stated above. What you said sound great on paper, but how many of those companies are leveraged or non-competitive positions. You don't even have to name a specific company, just an industry that you like. Further, you haven't actually said anything against my original idea. The whole reason I posted is to find holes in my thesis, so poke away if anyone has insight.

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There is nothing wrong with the idea. There are just better alternatives, and I offered a direction.

A very basic search on the TSE, would have given you WCP.TO and PEY.TO. Search other exchanges and you'll get different names.

The only question, is do they survive, and do their dividends ultimately mean revert. Not rocket science.

 

SD

 

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ahhh yes, Peyto and Whitecap. Silly me for not realizing every widow and orphan places such beacons of business quality and stewards of shareholder capital in their portfolio alongside their Berkshire Hathaway, Nestle, Johnson & Johnson and Microsoft.

 

I guess we'll go with answer B.

 

B) have a different definition of “best of breed”

 

high quality, best of breed, widow and orphan stock are not adjectives I would use to describe companies where the only question is if they survive. guess that's what makes a market.

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ahhh yes, Peyto and Whitecap. Silly me for not realizing every widow and orphan places such beacons of business quality and stewards of shareholder capital in their portfolio alongside their Berkshire Hathaway, Nestle, Johnson & Johnson and Microsoft.

 

I guess we'll go with answer B.

 

B) have a different definition of “best of breed”

 

high quality, best of breed, widow and orphan stock are not adjectives I would use to describe companies where the only question is if they survive. guess that's what makes a market.

ä

I‘d rather take my chances with Mexican airports. People will fly again, it may take some time, but they will have use airports than for sure. I also never heard an airport operator going bankrupt although this doesn’t mean it can’t happen.

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