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Morningstar | Fresh Look at Mexican Airport Operators Brings Raised FVE for Sureste; Remaining Operators Unchanged

We’re reiterating our wide moat rating for Mexican airport operators and leaving our fair value estimates in place for Centro Norte and Pacifico, while raising Sureste’s fair value estimate per ADR to $197 from $192 (MXN 379 from MXN 368). Our fair value estimate for Sureste is higher on raised passenger traffic expectations in 2019 and 2020 following fourth-quarter results that outpaced our expectations. In each model we moved our flat growth period to 2021 and raised passenger growth in the outer years. After reviewing our assumptions for airport operators under our coverage, Pacifico remains our top choice based on its balanced exposure to both domestic and international markets, in addition to its ownership of vital airports like Guadalajara, which falls only behind Mexico City and Cancun in total passengers serviced.

We conservatively model passenger traffic growth slowing at the end of 2019 and flattening through 2021 due to economic headwinds and president Andres Manuel Lopez Obrador’s referendum that canceled construction at Mexico City’s international airport. That crimps growth at a major artery within the Mexican air travel system and consequentially lowers the growth profile for air travel across the Mexico’s system through lower connectivity. We think Obrador’s administration will refrain from meddling with airport concessions, and we instead model higher uncertainty surrounding Obrador’s economic policies. This means we’re explicitly modeling air traffic weakness in 2021, forecasting 0% top-line growth due to lower air traffic.

Passenger traffic deceleration toward 2021 has a detrimental effect on operator margins in each model due to immense operating leverage. Lowered traffic growth yields 2021 trough operating margins of 53%, 54%, and 56% for Centro Norte, Pacifico, and Sureste in our models, respectively, from peaks of 61%, 57%, and 64% over the past three years.

While Sureste presents considerable exposure to higher margin international travelers and generates the highest operating margins, Pacifico remains our top choice based on the diverse set of airports it manages and the upside we expect from those stations. Guadalajara and Tijuana, good for business travel, and Los Cabos and Puerto Vallarta, good for tourist travel, offer Pacifico access to a budding middle class in Mexico but also ever-growing international markets. What’s more, Guadalajara and Tijuana are among the top five busiest airports in the country and are unlikely to cede these positions in the coming years thanks to growing urbanization in Mexico’s metropolitan areas. Pacifico’s non-aeronautical revenue represents only about a quarter of overall sales, below about 35% for Sureste, so we model stronger revenue growth after a slowdown in passenger traffic through 2021 for Pacifico versus Sureste.

On the whole, we believe Mexican operators will benefit from favorable demographic trends as more of Mexico’s population joins the middle-class and air travel markets become more interconnected with the cost of flying narrowing against traditional bus travel. We also believe growing connectivity to mature markets like the U.S., Canada, and Europe will promote growth for many years to come.