Grupo Aeroportuario del Pacífico (PAC)

Hi all,

With markets in fear mode, especially with Ebola scare gaining strength, I have been looking at opportunities in the travel industry. I don’t want to invest in an airline stock because they generally have done poorly over time. So, I have been looking at other travel related options, such as booking services (e.g., Priceline, Ctrip) and airports. I spent sometime digging into Mexican airports, which are effectively monopolies in the areas they operate, and hence have a moat that’s hard to crush.

Sharing some notes I have on the first one I finished looking into.

Anirban

Company, industry, and sector

16 Oct 2014

Grupo Aeroportuario del Pacífico, S.A.B. de C.V.
English translation “Pacific airport group (PAC)”, Jalisco, Mexico
American depository shares, each representing 10 series B shares, trade on NYSE
NYSE: PAC
Industry: Industrials
Sector: Airport & air services

Stock price at 15 Oct close: $66.74

Business overview

Pacific airport group holds concessions to operate, maintain, and develop 12 airports in the Pacific and central regions of Mexico. PAC operates airports in two major metropolitan areas (Guadalajara and Tijuana), several tourist destinations (Puerto Vallarta, Los Cabos, La Paz and Manzanillo), and a number of mid-sized cities (Hermosillo, Guanajuato, Morelia, Aguascalientes, Mexicali and Los Mochis). Looking at airport traffic in 2013, PAC operated the third, fifth, sixth, and seventh busiest airpots in Mexico, which includes Guadalajara and Tijuana, Mexico’s two most important manufacturing, industrial and commercial centers.

The concessions are for a period of 50 years starting 1 November 1998 and these concession terms can be extended for another 50 years by the Mexican Ministry of Communication and Transport.

These airports are essentially monopolies in the regions they operate.

History. The group originated from the Mexican government’s initiative in 1998 to privatise the airport sector in 1998. The Mexican government identified 35 out of 58 airports as suitable for investment and divided them into 4 groups:

  • Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (PAC)
  • Grupo Aeroportuario del Sureste, or the Southeast Group (currently consisting of nine airports),
  • Grupo Aeroportuario de la Ciudad de México, D.F., or the Mexico City Group (currently consisting of one airport) and
  • Grupo Aeroportuario del Centro-Norte, or the Central-North Group (currently consisting of 13 airports).

The government guidelines allowed the airport groups to become open to investment through a two-stage program. In the first stage, through a bidding process, minority interest was vested with a strategic shareholder. In the second stage, all or a portion of remaining interests were sold in the Mexican and International markets. All of the groups except the Mexico City Group have completed both stages of the program.

The Mexican government sold the strategic holding to AMP. AMP owns 15% of the shares.

In 2006, the remaining 85% of the shares were sold in Mexican and International markets via an IPO. The proceeds of the IPO went to the Mexican government.

How does PAC make money?

Aeronautical services accounted for about 69% of their 2013 revenues. These are things like passenger charges, aircraft landing charges, aircraft parking charges, airport security charges, cargo handling, and permanent ground transportation.

Revenues from aeronautical services are governed by

  • the passenger and cargo volumes at the airports
  • the maximum rates allowed under the price regulation system established by the Mexican government.

PAC also provides non-aeronautical services. These include developing commercial spaces outside of terminal buildings and expanding businesses operated directly by the PAC group, such as advertising, VIP lounges and convenience stores in their airports. Commercial activities such retail stores, food/beverage services, car rentals, duty free stores, ground transportation, parking facilities, VIP lounges, etc. These revenues are unregulated.

Revenues from improvements to concession assets represent the fair value of the additions and upgrades to the concession
that PAC undertakes in accordance with approved Master Development Programs.

PAC passenger profile

Domestic - 66 %; they estimate a significant majority of the international traffic to be lower income Mexicans traffic to/from the US.

Company strengths, advantages, and strategy

This is a monopoly business, where the operator can gain leverage via non-aeronautical revenues. Increasing revenues from non-aeronautical services is one of their key focus areas.

Strategy

  1. Tailor services and offerings according to passenger demographics
  2. Focusing on increasing revenues from commercial activities. They believe it can represent about 30 - 40% of their revenue and it currently non-aueronautical services accounts for about 23.1% of total revenues (e.g…, more aggressive use of available space)

Competition

Excluding airports servicing tourist destinations, PAC’s airports generally are natural monopolies in the geographic areas that
they serve and generally do not face significant competition.

Risks

  1. General economic woes, which can impact both tourist and business travel.

  2. Epidemics

  3. Government risk

  4. Currency risks

  5. Hurricanes!

Q2 2014 Highlights

Passenger traffic increased 12.3% over Q2 13; domestic increase was 10.1% while international increase was 15.7%

Aeronautic services revenues increased 13.7% roughly inline with traffic volume increases
Non-aeronautical services revenues increased 23.6%, primarily because of checked baggage services to more airlines. Also business lines directly operated by the group showed healthy increases.
Concession revenues decreased 34.4% because of lower level of investments by the group in 2014 vs 2013. These are inline with the master development plans with 2014 projected to have the least investments.

Overall, revenues increased 11.4%

Total operating costs increased 1.6%

Net income increased 24%

Operating margin was 48.9% versus 43.9% in Q2 14. Excellent operating margin!!!

EBITDA margin was 68.3% versus 67.5%

Earnings can be a bit bumpy.


---------------
Quarter   EPS
---------------
12/12     0.76
03/13     0.76
06/13     0.50
09/13     0.68
12/13     1.30
03/14     0.87
06/14     0.59
---------------

Concluding remarks

I like this business. An investment in PAC provides exposure to Mexican economic growth as PAC has a significant investment in domestic air travel in Mexico. PAC is showing its ability to increase revenues from non-aeronautic revenues. If anything, the main drawback right now may be the pricing. The stock doesn’t appear cheap.

On a trailing basis, EPS is $3.44. That puts it on a trailing PE of 19.4. Here’s the high/low PE for the past three years:


-----------------------
year     High     Low
-----------------------
2011     19.3     14.2
2012     22.2     13.3
2013     19.9     12.5
-----------------------

Based on the table above, it appears PAC is trading close to the high end of its PE range. Over a longer time horizon though, I would expect traffic to grow and the revenues to grow along with it. This can be a solid investment for the long run. I just wish it can be snagged up at a slightly better price.

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