Grupo Aeroportuario Centro Norte

Its worthwhile to look for travel related companies with high leverage hammered by the coronavirus. Ones that can survive.

This idea came from Lyn Alden's free newsletter.

Grupo Aeroportuario Centro Norte (OMA) operates 13 international airports in Mexico's central and northern regions till Nov 2048 (28 years from now).  1/3rd of their revenue comes from one airport in the wealthy industrial city of Monterrey.

65% of their revenue is from aeronautical services (passenger and aircraft charges), 20% from non-aeronautical (eg: leasing, hotel, industrial park, baggage services, F&B, and industrial park), 15% from construction (due to capex).  The first 2 are dependent on passenger traffic.

Business

This is a regulated business.  Every 5 years, the airport operator submits a plan (MDP), which projects the traffic loads.  The maximum allowed rates charges for aeronautical services are determined by this.  If the rates are too high for one year (ie: because the operator underestimated traffic), then the government can 'claw back' the excess profits in the next year by lowering rates.  So upside is limited.  Conversely, the company may request adjustment on maximum rates due to natural disaster or recession (5% GDP decrease in 12 month period).

For non-aeronautical revenue, a substantial amount is royalty based (with a minimum and maximum bound).

The next MDP is to be submitted in 2021.

Financials

Balance Sheet looks very clean:

• Total (not net) debt of 4.5m pesos is less that last year's operating income (before interest/tax).  
• Apart from that, they have cash of about 3.4bn pesos.
• 1.2bn current liabilities.  So that leaves 2.2bn cash left over.
• No operating lease liabilities on the balance sheet (IFRS 16 adopted in 2019).
• Only 2% of their debt is USD denominated, the rest are in pesos (as is their revenue).

Income statement looks straightforward:

Construction costs are the costs of construction (building improvements on the concessions' lands); these are added in revenues then deducted in operating costs (netted out). 

How long can they survive with zero revenue?

• The first expense line "cost of services", seems fixed (page F-69), so keep it.
• Remove concession taxes, technical assistance fee, and D&A.  
• Keep construction costs (part of 5 year plan), and interest income/costs

We get around 2.5bn pesos.  With 2.2bn pesos cash, they should be able to last 11 months with no revenue.

Capital Expenditure

At the end of 2018, they projected 2.1bn pesos capex in 2019, and a smaller 0.5bn in 2020  (p122):

The 2bn is actually to make up for shortfalls in the 2016-2018 period.

However, at the end of 2019, they only invested 1.3bn (p1).  Giving a shortfall of 0.8bn in 2019, and expected 0.6bn in 2020; total 1.3bn for next year if they stick to the plan.  If they do stick to it, then they can only last 10 months without any revenue.  Still not too bad.

Capex for the next five year plan is expected to be 14-15bn pesos.

Risks

"In the future, we may face competition from Aeropuerto del Norte, an airport near Monterrey operated by a third party pursuant to a concession. Historically, Aeropuerto del Norte has been used solely for general aviation operations. The state of Nuevo León has requested in the past that the Ministry of Communications and Transportation amend Aeropuerto del Norte’s concession to allow it to serve commercial aviation operations. To date, the Ministry of Communications and Transportation has not amended Aeropuerto del Norte’s concession"

A positive risk is that the concessions may be renewed for another 50 years, though under new conditions.

Valuation

At 80 MXN per share on the BMV exchange, thats a PE of just under 10 (pre virus).

Misc

Mexico has a 10% withholding tax on dividends.  Not sure if this is waived for Singapore residents (Article 10).