EUR 850.00 For Business Accounts Only

Morningstar | Raising Our FVE After 4Q Passenger Traffic Impresses; Shares Fairly Valued. See Updated Analyst Note from 12 Feb 2019

We raised our fair value estimate about 5% to MXN 109 from MXN 104 (to $45 per ADR from $43) for wide-moat Grupo Aeroportuario del Centro Norte stock following fourth-quarter results that beat our expectations and the time value of money. We raised our 2019 passenger growth estimations after examining 2018 results and early 2019 domestic and international passenger growth, which we believe reflects strong consumer confidence in Mexican air travel. We also raised our passenger traffic forecasts for 2020 and moved our uncertainty assumptions of flat passenger growth to the 2021-22 period. After our changes, we’re maintaining our wide moat rating and high uncertainty rating.

Consolidated revenue, excluding construction services, for 2018 was 16.5% higher than 2017 on the back of strong annual growth in the final quarter (almost 18%). Aeronautical revenue growth was 20% higher compared with the same quarter last year, with per passenger aeronautical charges rising 9%, outpacing last year’s 1.6% gain. Lofted aeronautical revenue stemmed from strong passenger growth and tariff rate recovery accelerating before the current MDP (master development plan) closes in 2020.

Centro Norte posted nonaeronautical revenue growth of 10.4% and 11.6%, respectively, during the fourth quarter and full-year of 2018. Retail commercial growth remained subdued and advertising revenue was again restrained as new operator contract negotiations remain in process. However, parking, VIP lounges, and car rental activities each registered top-line growth above 15% against the same period last year.

With Centro Norte’s cost-cutting initiatives yielding savings during the second half of 2018, operating margins reached 52.4% in the fourth quarter (43.9% last year) and 52.3% for the full year (45.4% last year). Declining costs stemming from contracted services, maintenance, and materials and supplies offset one-time payroll increases and growing costs from electricity tariffs.

Centro Norte expects to build on its momentum exiting the fourth quarter and anticipates passenger traffic will eclipse 6% to 7% during the current calendar year. We raised our passenger revenue growth assumptions for 2019 in light of management’s latest dialogue, commentary from airlines, and early 2019 traffic results. With over 40 routes added during 2018, and management expecting an additional 20 routes during the first half of 2019, we increased 2019 total passenger growth from over 5%, from 4% and revised our expectations for uncertainty, expecting flattish growth now in the 2021-22 period.

With AMLO’s choice to scrap construction at Mexico City and no alternative materialized, we maintain that regional airports, which rely on connections to major hub airports, will suffer through capacity constraints in Mexico’s capital. Conversely, we expect Monterrey will benefit from tight capacity in Mexico City and recent expansions from the current master development plan. We raised passenger traffic growth to an average of about 4% during 2019 and 2020, from 2% previously.

Our long-term thesis is unchanged and we expect operating margins will reach almost 54% in our normalized 2023 period amid average revenue growth over 5%. While Centro Norte’s exposure to ultra-low-cost carriers compels stronger domestic growth, we contend Sureste and Pacifico present more upside with greater exposure to international passengers, which generally contribute more to higher-margin commercial revenue.