Grupo Aeroportuario del Pacifico S.A., henceforth known as Pacific Airport Group, trades on the New York Stock exchange under the ticker symbol PAC. The firm manages a total of 12 airports in Mexico. These include the airports in Manzanillo, San Jose del Cabo, Tijuana, Puerto Vallerta and Guadalajara. In aggregate, PAC operates 6 out of the top ten airports in Mexico by traffic flow.
Pacific Airport earns revenue from passengers and freight who travel through the facilities. In addition, PAC also obtains rental income by leasing out space at its terminals. The firm also generates income from parking garages owned at the airports. Pacific Airport pays the Mexican government annual fees equal to 5% of all gross revenues generated at the facilities. The concessions run until 2048.
86% of total revenues generated in 2005 came from regulated sources. These include landing fees, hanger charges, etc. Regulated revenues grew by roughly 13% per year over the past five years. Non regulated revenues represented 14% of 2005 amounts, and grew by almost 24% in 2005 vs 2004. These revenues come from sources which include car rental, advertising, food and beverage services and charges levied to cabs and vans using the airport.
This investment represents a play on the growth of air traffic going through its Mexican facilities. There are a total of 4 companies in Mexico which operate airport terminals in association with the Mexican government.
PAC is a relatively new listing. The shares were cleared for takeoff in February 2006. Once off the tarmac, Pacific Airport shares quickly soared to $39.50. After being buffeted around by recent stock market turbulence, the stock price has found smoother air around the $29.65 mark.
An interesting presentation in the shareholder services section of the corporate website may be found here.
http://www.aeropuertosgap.com.mx/index.php?tpl=doc¬iciaid=664¬iciafecha=2006-02-06&srctpl=§ion=GLOBAL_INFORMATION&menu=INVESTOR
There are a total of 56.1 million shares outstanding. PAC is completely free of debt and has a current cash balance of $70 million U.S. This produces an EV of $1.585 billion. I estimate that Pacific Airport may generate EBITDA in 2006 of about $173 million U.S (up from $151 million for 2005). This prices PAC at about 9.2 forecast 2006 EV/EBITDA.
In 2007 (based upon the significant increase in cash balances), I forecast an EV dropping to about $1.54 billion. EBITDA appears to have the ability to rise to $196 million. This produces a 2007 EV/EBITDA forecast of for Pacific Airport of 7.9X.
When looking at the revenue and expense statements for PAC, one is struck by the level of profitability. Pacific Airport generated a 66% EBITDA margin on revenues in 2005. This level of profit is consistent with a monopolistic operation. In point of fact, one seldon sees this level of profit, on a sustainable level, in any service or industrial businesses.
Investors who have previously owned monopolistic companies will likely find Pacific Airport to be a profoundly simple investment.
During the past 5 years, revenues at PAC airports increased by an average of 8.6% per year, while expenses have increased by less than 4% per annum. So far in 2006, air traffic throughput is up by exactly 8.6%. The accounting appears to be clean and simple, with no red flags.
Forecast spending in the next several years is anticipated to be less than one quarter of anticipated EBITDA. After deducting the statutory 30% tax rate on Mexican business, a healthy amount of cash to be used towards new ventures or payment of dividends is anticipated. PAC indicates that a base dividend of at least $.80 U.S. per share is very likely. PAC's forecast growth rate may allow for healthy increases in the dividend rate over time.
How does the valuation of Pacific Airport compare to the other major publicly traded airport authority in Mexico?
Aeropuertos del Sureste (ASR on NYSE $31.86) operates the Cancun International Airport as well as 8 other Mexican terminals. ASR has an EV of roughly $940 million U.S. In 2006, ASR may generate EBITDA of about $100 million. This produces a 2006 EV/EBITDA est. of 9.4X.
Aeropuertos del Sureste services one of the most popular tourist destinations in the world, but had a significant revenue disruption in 2005. Hurricane Wilma caused significant damage to Cancun and to the airport itself. This caused a large short term drop in passenger revenues through the Cancun airport and is expected to persist throughout 2006.
Traffic growth in the Cancun area is anticipated to be robust in the future. Oddly enough, this appears to be bad news for Aeropuertos Del Sureste. ASR greatly underestimated the explosive growth of the Playa Del Carman area as a tourist destination. As a result, the state of Quintana Roo is considering building an airport in the Playa Del Carmen area, about an hour from Cancun. This facility would cost about $200 million U.S., would be state of the art, and would serve the rapidly growing Maya Riviera.
ASR is lobbying hard against the building of this airport and has proposed adding a second runway in Cancun (at a cost of $60 million U.S) to handle anticipated growth. However, it may be a case of too little, too late. Quintana Roo feels that an airport much closer to a rapidly growing market will enhance the economic development of the area.
It seems certain that a competing airport in this area would hurt ASR's monopoly in the area. Much existing traffic presently flying to Cancun would simply divert to Playa Del Carmen. However, one certainly can't dismiss the possibility that ASR would partner with the Quintana Roo government to manage the facility.
In 2007, ASR may generate as much as $127 million of EBITDA. As the firm plans to spend heavily in the next two years, ASR's balance sheet will not be nearly as cash rich as Pacific Group. ASR shares sell for a forward 7.7X EV/EBITDA based on my 2007 estimate.
This prices the shares of ASR lower on a forward basis vs. Pacific Group. The lower valuation may be due to the very real prospect of competition in the Cancun area and the uncertainty of how this competition would impact the revenue statement.
You may link to the corporate website here. http://www.asur.com.mx/asur/ingles/perfil/perfil.asp
Both Mexican airport authorities appear to be undervalued in relation to BAA PLC (which operates Heathrow). BAA has a forecast 2006 EV/EBITDA of about 18.4X. Although BAA may be quite well known, EBITDA as a percentage of earnings is far lower than that of Pacific Airport and ASR.
One feature worth noting with respect to BAA is its five year performance measurement in the stock market. BAA shares grew in value by an average of 10.6% per annum over the last five years. BAA also raised its annual dividend by an average of 5.6% per year during the past five years.
BAA recently agreed to be acquired by Spain's Ferrovial Group at an effective price of over $10.3 billion British pounds + assumption of debts. If you wish to review the 2005 annual report of BAA PLC in detail, please link here:
http://www.investis.com/reports/baa_ar_2006_en/report.php?type=1&zoom=1&page=0
In summation, Pacific Airport appears to have excellent and sustainable growth potential over the next five years. Pacific Group serves steady growth markets and has continually increased capacity at its facilities. Most of the airport terminals under management have recently been renovated and/or expanded. Management at PAC appears to have learned from the mistakes of ASR and invested in anticipation of growth, rather than after the fact. Sustaining capital expenditures are now forecast to decline for the near term. It is only slightly more expensive than Aeropuertos del Sureste based on 2007 estimates, and has some unique attributes to justify this premium.
Organic growth potential exists at PAC, and EBITDA enhancing acquisitions are quite possible with such a strong balance sheet. These shares appear to be attractive for a small cap/mid cap model portfolio. Investors who are willing to balance the potential rewards of owning monopoly businesses, while taking into account the pertinent risks of owning 3rd world companies, might find Pacific Airport Group to be of interest.
Investors seeking to participate in the growth of the Cancun traffic may wish to own ASR. The shares have fallen sharply from their highs, due to the revenue disruption caused by Hurrican Wilma and the longer term prospects for competition in Playa Del Carmen. However, the share price of ASR seems extremely cheap on a go forward basis.
Investors should carefully monitor the potential for a public/private partnership airport at Playa Del Carmen. Any public company with a financial interest in the proposed facility may have long term investment merit.