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Morningstar | Unimpressive U.S. Traffic Produces Underwhelming Sureste Results; Maintaining FVE

We plan to maintain our $197 fair value estimate for Sureste’s ADRs (MXN 379 for local shares) after the Mexican operator delivered first-quarter results. Sureste’s Mexican passenger traffic nearly mirrored Centro Norte traffic volume during the first three months of 2019, with mid-single-digit domestic passenger growth outpacing international volumes by about 3 percentage points. Domestic and international passenger growth lagged the run rate we assign to 2019 due to underwhelming international volumes. Weak U.S. traffic contributed to soft international volumes, and the operator expects this trend to continue through the rest of year. We’re looking toward growth in Cancun, half of Sureste’s passenger traffic, for improvements, as second-quarter booking commentary from North American carriers turns positive and holiday travel carriers work through holiday travel.

Outside of Mexico, passenger traffic showed a marked improvement over the same period last year, with Puerto Rico climbing 23% domestically and 30% on international traffic. Colombia traffic mostly benefited from domestic improvements, which increased 16%. We expect Puerto Rico will continue delivering robust traffic growth versus the rest of Sureste’s network because of weak comps in 2018 from Hurricane Maria-related disruptions. We plan to raise our full-year passenger growth for San Juan about 1-2 percentage points over the 5% we currently model.

Compared with the same period last year, consolidated revenue (excluding construction revenue) was 7% higher on nonaeronautical and aeronautical growth of 8.5% and 7%, respectively. On middling passenger growth, Sureste pulled down 7% gains year over year on nonaeronautical revenue per passenger. We expect a steady infusion of new commercial space at Mexican airports (74% of commercial revenue) will help Sureste reach 11% full-year nonaeronautical growth, nearly in line with growth in 2018.

Service costs arrested Sureste’s EBITDA margin expansion, increasing 15% on higher maintenance, security, and energy costs. Rising electricity costs carried over from the prior quarter, and management planned to remedy the situation with a solar panel installation. We remain concerned about Sureste’s ability to suppress electricity costs, so we plan to hold our cost of service assumptions at 27% of revenue in our model, above 24.5% in 2018 and about 25% in 2019’s first quarter.