EUR 850.00 For Business Accounts Only

Morningstar | Centro Norte Shows Strong Traffic Growth in 2Q; Shares Fully Valued

Wide-moat Centro Norte posted second-quarter earnings that featured higher passenger revenue and growth in earnings over the year-ago period. While the recent election of Andres Manuel Lopez Obrador, AMLO, adds some uncertainty to Mexican air travel demand, we’re encouraged by the 10% year-over-year passenger traffic growth achieved this quarter. In addition to strong revenue growth, Centro Norte opened 10 new routes and grew its seat capacity by 11% compared with the second quarter of 2017. Our long-term thesis remains unchanged, and we believe shares are currently fully valued at our $45 fair value estimate.

Aeronautical revenue rose approximately 18% year over year, and domestic passenger revenue came in particularly strong, increasing 24% over the same period last year. International passenger revenue, which represents only about 14% of total revenue, grew a more moderate 8%. On a per-passenger basis, the aeronautical business improved roughly 7% over the prior year. With healthy domestic passenger traffic, Monterrey (Centro Norte’s largest airport) posted another solid quarter, with passenger traffic growing at nearly 10%.

Turning to the nonaeronautical business, Centro Norte pulled down double-digit revenue growth on the back of parking services, freight logistics, and checked baggage screening. Collectively, nonaeronautical revenue grew more than 11% over the second quarter in 2017.

While Centro Norte expanded its top line, the airport operator shrank total operating costs (excluding construction costs) by about 3% year over year. Airport services and administrative expenses recorded the largest declines, falling 9% over the second quarter. Although adjusted EBITDA margins, excluding construction costs, rose 600 basis points to 71%, we doubt Centro Norte will conjure similar gains through the remainder of 2018. Our forecast includes 60% EBITDA margins for the full year.

Despite the political and regulatory uncertainties surrounding Mexico’s new presidential administration, air travel demand remains healthy. AMLO campaigned as a populist, but based on his tenure as mayor of Mexico City and his decision to allow continued construction at Mexico City’s new airport, we think he will turn out to be a moderate in some areas. While we do believe Mexican policy vis-à-vis the energy sector and trade with the U.S. may change significantly, we don’t see an AMLO administration touching the airport concessions granted to the three Mexican airports we cover: Pacifico, Sureste, and Centro Norte.