All numbers are expressed in US dollars & converted from Mx pesos at the exchange rate of $.09135.  Financial forecasts are my own, and may differ materially from analyst estimates.

Shares outstanding: 30 million.

Current assets-total liabilities (est. on 06/30/07): $38.6 million.

2007 Revenue forecast:  $249.9 million

2008 Revenue forecast:  $275 million

2007 EBITDA forecast:  $153 million.

2008 EBITDA forecast: $173 million.

Investors seeking a company with clearly defined near term growth prospects might consider Grupo Aeroportuario Del Sureste (Asur).  Asur is a Mexican airport operator that manages 9 facilities, including Cancun International.

In 2006, Asur serviced 13.779 million passengers, of which 9.728 million were from the Cancun International Airport. 2006 revenues were $207.2 million and EBITDA was $122.1 million.

Until now, earnings had been impacted by the aftermath of Hurricane Wilma.

The October 2005 storm halted ASR's growth. Many hotels in the Cancun, Cozumel & Mayan Riviera corridor were damaged or destroyed.   The Cancun International Airport terminal #1 was also damaged and led to a sharp reduction in the number of prime arrival/departure slots.  Subsequently, international airlines temporarily shifted many flights away to the Pacific coastal resort areas of Mazatlan, Puerto Vallarta, Ixtapa, Los Cabos and Acalpulco.

Hurricane Wilma may have been a blessing in disguise.

Fears of permanent travel shifts to the Pacific coastal resorts now appear unfounded. "White sand" tourists accustomed to 4 star and 5 star properties seem to have found many of the Pacific coastal resorts lacking in amenities and appearing quite dated. Evidence of this is contained within recent Pacific Airport Group (PAC) and OMAB reports. Noting a sharp drop in international travel for the first half of 2007 to their coastal resort areas (down 7% & 5.3% respectively), PAC & OMAB have led analysts to anticipate a further 3% further drop in international travel to the Pacific coast, for the balance of 2007. 

Conversely, damaged hotels in Cancun/Mayan Riviera were rebuilt to even higher standards with insurance proceeds. Old properties were demolished & impressive modern resorts have taken their place. The Mexican National Trust for Tourism Development reports 55,221 hotel rooms available on December 31^st, 2006 in Cancun/Mayan Riviera, up from 43,933 rooms in 2005. 

For 2007, I estimate that 8,700+ new hotel rooms will come on line in Cancun/Mayan Riviera, with a median star rating of 4.5 out of 5.  The "quality gap" between the Caribbean and Pacific coastal resorts looks to be widening, and Asur will be the prime beneficiary.

The opening of Cancun International Terminal 3 is a new earnings catalyst.

In addition to a resumption of normal traffic patterns ex-hurricane Wilma, my 2007-2009 outlook is driven by revenue growth & efficiencies from terminal 3.  This facility, built for a cost of $100 million, opened on May 17^th, 2007.

In 2006, the Cancun International airport processed 9.728 million passengers.  The mix was 7.307 million international passengers, and 2.42 million domestic passengers.   Terminal 3 will boost international capacity by 7.5 million passengers. 

I expect the following benefits to accrue.

1. New retail space will increase commercial revenues.

Terminal #3 adds 37% more retail space, which should produce meaningful revenue increases.  

2.  Modern gates will allow Cancun International Airport to handle 50% more arrivals/departures.

In the past, most Cancun flights deplaned or embarked on the tarmac, rather than at gates.  11 new gates with boarding bridges are now open.  This will speed up the traffic flows and create additional slots. 

3.  State of the art baggage screening equipment should speed check in times & reduce security waits. 

Reduced waits = additional shopping time. I expect that a 2 year period of declining commercial revenues, on a per passenger basis, will reverse in 2007.

Year to date, Asur traffic is up sharply.

Total passenger counts throughout the Asur system have increased by 1.728 million persons as of July 30^th, 2007, or 20.6% YTD.  Cancun traffic improved by 1.3 million persons (up 21.8%) as of July 31, 2007.

This growth rate exceeds figures reported by PAC (up 13.1%) or OMAB (up 19%). It should be also noted, that the bulk of YTD growth at ASR came from the highly profitable international passenger market.  International traffic at ASR increased by 945,137 persons in the first seven months of 2007.   

OMAB & PAC have shown strong passenger increases YTD by serving the lower margin domestic market.  Domestic passengers spend far less at airports than international travellers. This might suggest slowing EBITDA growth for PAC & OMAB.  ASR growth in EBITDA should continue to accelerate.

2007 looks to be a record setting year.

The bottlenecks which caused commercial revenues declines (on a per passenger basis) at Cancun should be resolved with the opening of terminal 3. Rising passenger charges in 2007 are also forecast, which may lead to earnings surprises.  My 2007 Asur forecast assumes total passenger growth of 2 million persons, or 14.3%.  

For the first half of 2007, EBITDA and revenues at Asur handily beat expectations.  The median Wall Street analysts missed 2nd quarter EPS growth by almost 20%.  This suggests positive ratings revisions should follow. Terminal 3 retail revenues were only partially reflected in the 2nd quarter. The next fiscal quarter should offer further clarity as to ASR's earnings potential.   

What could fair market value for Asur shares be in 2008?

ASR has recaptured lost market share, and then some.  EBITDA margins at Asur may set new records in 2007-2008, based upon forecast operating efficiencies at Cancun terminal 3.  There has also been a significant recovery in Cozumel International Airport traffic YTD. Several high end resorts have recently opened on the island. 

Should Asur sell for its historic premium to PAC and OMAB (prior to Wilma), fair value could be 12X my 2008 est. EV/EBITDA.  $76 US per share is possible.

A mid sized airport concession awaits in Playa Del Carmen.

The Mexican government will offer a new airport concession in the Playa Del Carmen area.   The airport would serve the fast growing tourist area known as the "Mayan Riveria".  Ultimately, this facility may be even larger than the Cancun International airport.  Depending upon the configuration, a new 15 million-20 million passenger, 3 terminal, dual runway airport could cost up to $700 million.  A more basic facility could cost $300 million.

The tender seems desirable.  Like Cancun, the Playa Del Carmen concession would derive most of its revenues from international passengers. Reports expect this announcement to draw interest from all 3 publicly traded Mexican airport firms (OMAB, PAC and ASR).   However, OMAB and PAC manage airports well outside of the Caribbean market.  My present view is that the Mexican government intends to maintain an informal triopoly, designed to prevent any one firm from coming into direct competition with another. 

Over and above the Playa Del Carmen airport, a further 2 new airport projects are to be tendered out.  Should my theory be correct, each of the publicly traded Mexican firms will be awarded one new airport, in their present monopoly area.  

The possibility of a competing airport in Playa Del Carmen may largely be built into Asur's stock price, but should not be dismissed as irrelevant.  My theory may prove to be completely incorrect.

If Asur does not win the Playa Del Carmen airport concession, the shares could decline in the short term. Irregardless, it will take many years for a new airport to come on line.  Forecast growth in the Mayan Riviera implies that 2 airports will eventually be needed. 

At worst, I feel that the business will go from that of a pure monopoly, to that of monopolistic competition.  Monopolistic competition is still highly profitable, and does not necessarily suggest profit erosion for ASR.  

All else being equal, I now feel that Asur has potential to deliver superior performance among the 3 publicly traded Mexican airport managers. 

The chairman of Asur seems to share my outlook. He recently attempted to purchase a controlling interest in the company, via a tender offer equivalent to $51.80 per share.  This offer was deemed inadequate by most.  Accordingly, the CEO now holds a 20% interest.

I am now buying shares of ASR in the blog model portfolio at the current price. 

This investment may fit into a diversified account seeking to capitalize on global growth trends. At exactly 9.5X my 2007 year end EV/EBITDA estimate, I consider ASR to be inexpensive.

The model portfolio will also continue to hold PAC shares.  PAC should be favored to manage the proposed new international airport in Mexico City.

I personally own shares in Asur (ASR) as well as PAC, but do not own OMAB.