EUR 850.00 For Business Accounts Only

Morningstar | Sticky Cost Reductions Drive 3Q Operating Margins Higher for Centro Norte; Maintaining FVE

Wide-moat Grupo Aeroportuario Del Centro Norte reported third-quarter results that featured wider operating margins, excluding construction revenue and costs, over the third quarter in 2017 and total passenger traffic that increased more than 10% over the same period. Operating margins, without construction-related services, widened to 61.5% as cost initiatives eased operating-cost burdens compared with the September quarter last year. We raised our operating margin assumptions for 2018 on these results, but after raising the spot rate in our model to MXN 19.41 per $1 and adjusting for the time value of money, we maintain our ADR fair value of $45 but raise our fair value for local shares to MXN 110 from MXN 107.

In the third quarter, domestic traffic finished over 5.1 million passengers, which is 11% higher than the year-ago period. The third quarter continued the trend of robust domestic traffic growth in 2018. We raised our full-year traffic assumptions by about 100,000 passengers, assuming traffic for the fourth quarter at least matches the last three months in 2017. Even with higher traffic volumes, aeronautical and nonaeronautical revenue improved over the previous year. Total revenue per passenger increased 12%, while costs declined.

Costs per passenger finished 11% lower year over year, and we decreased our 2018 operating costs forecasts, now that the operator has registered several quarters of material declines. Our revised operating margin for 2018 equals 58.4%, about 260 basis points over Centro Norte’s 2017 operating margin. We also raised our operating margins incrementally through midcycle, but by and large, we still expect margins will finish around 54% as aeronautical services, regulated by the government and traditionally lower-yielding than nonaeronautical, will continue contributing approximately 80% of the operator’s total revenue.

Our attention now turns to the late October referendum on whether construction continues at the 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 Andres Manuel Lopez Obrador will seek to enforce the vote. Anticipating higher uncertainty around the new Mexico City airport and a spillover for Centro Norte, we adjusted our passenger traffic and revenue per passenger assumptions for 2021-22 midcycle years lower and lessened our stage II growth assumptions.