EUR 850.00 For Business Accounts Only

Morningstar | Raising FVE After Sureste Beats on Domestic Passenger Traffic, but International Traffic Disappoints

Grupo Aeroportuario del Sureste's fourth-quarter results were mixed as international traffic disappointed, yet domestic activity was encouraging. We chose to raise our fair value estimate per ADR to $197 from $192 (to MXN 379 from MXN 368 for local shares) in light of higher-than-expected total passenger growth, though Mexico international volume disappointed. Our updated model still includes passenger growth tapering through the middle of our stage I forecast period, but we raised traffic growth in the out years and revised our 2019 forecast to account for oil-related weakness in Villahermosa, but also weakness in Cancun international travel. Conversely, we raised Cancun's demand estimates for domestic markets and adjusted expectations for San Juan given the rebound from Maria's impact. Shares remained fairly valued following our model revisions.

Aeronautical and Nonaeronautical revenue turned in double-digit growth over the same quarter last year, sending total revenue (excluding construction revenues) up 18% year over year. For Mexico operations, per passenger revenue held firm, matching last year's annual growth of 7.6% in the fourth quarter. Management attributed decent commercial performance in Mexican airports to 15 new commercial space openings in Cancun and the introduction of the new Terminal 4 facility. Because Sureste saw non-aeronautical revenues per passenger revenue growth of about 5% for the full year, we didn't make material revisions to our 6% per passenger non-regulated revenue assumptions of for the upcoming year.

With decent operating margin expansion, Sureste's technical assistance fee and concessions fees rose 16%-17%; however, cost of services related to Mexican operations increased at a manageable 4% against last year's fourth quarter. Given management's language on peaking operating costs and the recent trajectory of costs related to core Mexican operations, we don't model material inflation for service and administrative costs.

Still, we modeled operating margins narrowing against the backdrop of a weakening economic environment and growing geopolitical risks. These headwinds bring our midcycle operating margins to 57% after a rebound from under 56% in our flat passenger traffic period (2021). Shares crept higher after the market absorbed Sureste's latest results, leaving the wide-moat operator in 3-star territory.