Sold ADP and AENA

 ADP has been showing signs of distribution in the past month.  Falling prices on higher volume:

It could be due to India's covid situation.  But when reading charts: "Ours is not to wonder why".  

Normally I could ignore little wobbles in a company's share price.  But I think the bull market is coming to an end.

Source: Hedgeye, Jonesy's twitter

For AENA, it was a close decision on whether to let this stock go or hold it long term for dividends.  Its got a decent yield, monopoly position, and could survive a Eurozone breakup.  But I have enough dividends to live off, and it doesn't have enough growth potential - with a 5% yield while paying out 100% of their 2019 earnings.  I need more dry powder for the next cycle.

Sold 300 shares of ADP @ 101.10.  Profit SGD 8.8K, or 22% over 6 months.  And 210 shares of AENA @ 134.25.  Profit ~ SGD 5.1K, or 12%.

As a "covid recovery" trade, they've been disappointing.

Bought European Airports

I think we get a covid vaccine in the next 2 weeks (Pfizer & BioNTech) to 2 months (Moderna or Novavax).

It won't mean everything is over.  Pfizer and BioNTech's vaccine requires 2 shots and must be stored at -70 degrees Celsius, making distribution hard.  We can expect most people in the US to be vaccinated by the start of 2023.  Mid-2021 if an easier-to-use vaccine makes it.

News of a vaccine will remove uncertainty and give a timetable for recovery. The stock market hates uncertainty but it can take bad news of a known quantity.  I think this is the turning point for covid plays.  If I'm right on the vaccine timing, its now darkest just before dawn, when uncertainty (when will this virus ever go away?) gives way to bad news (one more year to go).

And even if the all the vaccines somehow fail, I think the virus turns into a normal seasonal flu by the start of 2023.  The 1957 and 1968 pandemics lasted around 2 years.  So 2023 is the last we see of corona chan.

My covid recovery play is airports.  They've made it through the crisis without raising cash so far.

I'm buying European Airports because:

• Regional Airports (Australia/NZ/Thailand) are too expensive, even based on pre-covid earnings.
• MAHB has is changing their regulator model to be more capital intensive.  Its probably good for them, but we can't use historical numbers to value it.
• NYSE-listed Mexican airports have only 28 years concession left
• Booking.com is too expensive, as if covid never happened!  The other OTAs are bring squeezed by google.

My picks are Aeroport de Paris and Aena, from Sven Carlin.   Bought 210 shares of AENA @ 118.8 Euros, and 300 shares of ADP @ 82.45 Euros.

Theres still some risk.  From their results, I can't figure out their opex and capex (ie: cash outflows with zero revenue), and Paris has high borrowings.  If the recovery is delayed till 2023, there's a chance they do end up raising money.

AENA SME

Spanish Airport owner/operator.  Interesting because they have (had) high operating margins, and are trading at 13X trailing (peak) earnings.  But I won't buy yet because too many uncertainties.

Air travel is not allowed in Spain now, except for "reasons that cannot be postponed".  Airports are considered essential services, and must still be run, but many are partially closed.  How long can AENA survive without revenue?

Survival

Balance sheet first.  At end 2019:

1. Current liabilities are 842m, excluding debt.  Current assets (inventories, cash and receivables are 750m).  Thats almost a 100m shortfall, even assuming they can get all their 500m receivables paid.  There is a real risk of airlines going bust.
2. Ignore long-term debt, at 5.6bn.  Forget this now, worry about 2020 first.  Debt includes lease liabilities (under IFRS 16).
3. Short-term debt is 1.2bn.  But, 640m of this is from a joint loan with ENAIRE (Spanish Government).  AENA may not have to pay it immediately.  Both ENAIRE and AENA are "mutually obligated to each other before the bank" to pay off the loan.   If AENA does not meet its obligations, ENAIRE will pay off the loan first, then charge 3% plus penalty interest to AENA (bottom p98).  Even if they can defer this, it still leaves 560m to pay this year.
4. (1st April) AENA has taken 1bn loans that mature in 1-4 years.
5. (26th Mar) AENA has the ability to issue another 550m of Euro Commercial Paper.  Ignore this now.
6. Loan covenants (p96) specifies that net debt can be up to 7X EBIDTA and 3X financial expenses.  Measured half yearly.  EBITDA was around 2.8bn in 2019, debt is now around 7.8bn.  So EBIDTA cannot drop below 1.1bn.  Difficult if the lockdown continues.

So, assuming they can delay the 640m short term debt in 3. and assuming they can collect all receivables in 1., they have 580m cash.

What are their cash operating costs?

• Other operating expenses of 1bn.

          Remove the 158m taxes.  They said they can cut monthly operating expenses by 43m, so remove another 516.  So 400m. 

• Staff costs: 456m.  ERTE will pay up to 70% of a worker's salary (excluding social security, which is 30%, which the employer can now delay), but AENA has not said they have taken advantage of this program.
• Interest: 124m.  With the new 1bn loan, let's make it 135m.
• Thats it: so annual operating costs drop to 1bn.

So, if they can delay the 640m short-term debt, they can last 7 months (end July).  If they can use ERTE for half their employees, then we reach almost 9 months (end Sep).

The key is really point 3 above: can AENA delay paying the 640m joint loan?  Normally I would say yes, but the Spanish government can't print its own money. They are trying to sell AENA in the first place to fill their budget deficit!

Business

96% of their 2019 EBIDTA was from Spain (p56).  I think they own their Spainsh airports (not operating under a concession), but I could not find it in any official document.  Slide 65 talks about a 40 year development plan.

They manage nearly 50 airports in Spain.  A few of them are very busy, like Madrid or Barcelona, but there is a long tail of underused airports.  "One estimate has it that all but eight of AENA’s airports are regularly unprofitable. And some of the more remote ones do not even see daily flights."  So they are running these as a public service.

A large proportion of their passengers are domestic or from the EU (slide 52), so they are not big spenders.

Operating margins were 44% in 2018 and 2019.  Pretty high.

Competitors

Spain has a good high-speed rail network as an alternative to domestic flights.

Conclusion

AENA can probably survive, the issues are:

1. Can they delay their 640m short term debt?
2. Collecting 500m receivables (from airlines?)
3. Can they reduce staff costs by using ERTE?
4. Assume banks wont enforce the debt/EBIDTA covenant.

I'm guessing they have an 80% chance of surviving without issuing new equity.

This company is more risky than Grupo Aeroportuario Centro Norte as they have less cash, but has higher upside because they own their airports.  My gut feeling for this one is to wait for their 2Q results for more clarity.

Really hard to know what to do for this one.  I want to buy highly profitable airports (that are owned, not leased).  But 4 points above need to be cleared up.  But when things are 100% clear, the stock price will have recovered.

Misc

Company news updates are here (they call it "Inside Information").