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Morningstar | Sureste Registers Solid 3Q Passenger Growth but Costs Creep Higher; Raising Our FVE

We’re raising our fair value estimate for wide-moat Grupo Aeroportuario del Sureste to $205 from $194 for ADR shares, and to MXN 396 from MXN 367 for local shares. Our updated fair value estimate reflects Sureste’s increased traffic at San Juan and Colombian airports, adjustments for the time value of money, and a revised spot rate for the Mexican peso, which has depreciated lately. After shares traded off by more than 3% on Oct. 23, Sureste remains fairly valued with a price/fair value for ADR shares of 0.86.

Excluding construction revenue, the operator’s consolidated top line increased 27% on aeronautical and nonaeronautical revenue growth of 30% and 23%, respectively. Sureste earned most of its traffic growth from domestic travelers, with domestic traffic rising 8% over the September quarter last year, underscoring 6% networkwide traffic growth. Cancun delivered double-digit revenue growth over the prior year, but operating margins slid from 66% to 63% this year, because of higher expenses tied to Cancun’s newly opened Terminal 4. We anticipate total traffic in Cancun will reach over 25 million in 2018 and drive 49% of Sureste’s full-year traffic growth, up from 48% in 2017, and we assume the operator stymies falling operating margins.

Operating margins, adjusted for construction revenue and costs, narrowed from 59% in the third quarter last year to 46% this year, but we believe the operator is still on pace to record 51% operating margins for full-year 2018. Moreover, we believe operating margins will expand to over 57% in our 2022 midcycle year, owing in part to Puerto Rico’s rebound from Hurricane Maria. Our prior model assumed passenger growth for Puerto Rico would finish 2018 down 3% year over year, but third-quarter results indicate traffic will finish at least flat compared with 2017.

Our attention now turns to the late October referendum, which will decide whether construction continues at Mexico City International Airport. If voters elect to discontinue the airport’s expansion, the referendum won’t immediately become policy, as Mexican law forbids a binding vote outside of an election, but we assume there is a chance that newly elected President Andrew Manuel Lopez Obrador will seek to enforce the vote. Anticipating higher uncertainty around the new Mexico City airport and a spillover for airport operators, we adjusted our outlook for 2021-22 midcycle years and lowered our stage II growth assumptions for Sureste, Pacifico, and Centro Norte.