Corporacion America Airports: Another Huge Earnings Beat

Aerial view of the airport.

zeynep boğoçlu

The world’s largest private airport operator by number of airports owned, Corporacion America Airports (NYSE: CAAP) has soared to new multi-year highs in recent days following another huge quarterly earnings report. Since then, the stock has gained more than 50%. the company announced its results for the previous quarter.

Is it time to call the register? I don’t see it that way. Of course, the stock went up a lot. But I see a lot more room to run. And it all depends on the earnings and the direction in which everything is going.

The street is still asleep in this company

I pointed out last quarter that analysts were sorely missed, as CAAP’s second-quarter earnings of 43 cents per share completely blew away analysts’ expectations for a profit of 6 cents.

But maybe that was just an aberration. Was there anything that caused CAAP’s income to be unusually high or non-recurring?

No, it wasn’t. Nevertheless, analysts did not seem to get the message and continued to forecast 2023. simply non-stop results. Rushing to its third-quarter results, the company blew away expectations again:

CAAP Revenue Forecasts

CAAP Revenue Forecasts (Looking for Alpha)

2222 CAAP earned 36 cents per share in the third quarter, while analysts had expected a narrow loss. One quarter is a data point, two is a trend. Revenue rose 112 percent year-over-year, and the company jumped from essentially breaking even a year ago to strong net income.

The numbers show that the company has structurally improved its business and is now very profitable even with traffic levels that are still well below 2019 levels. CAAP’s management told analysts that they cut costs by 20% during the pandemic, but people still seem to be modeling CAAP as if its unit economics were the same as in 2019.

What we learned in Q3

October month. I posted my best idea report on CAAP stocks. This remains my long-term analysis of the company’s prospects and I recommend reading it for a summary of the company’s development in recent years. So what’s new after this report?

On the one hand, last week’s third quarter results show that EBITDA in the first nine months of the year reached 339 million. With traffic and profitability increasing and the holiday travel season approaching, a strong fourth quarter should also be expected. In other words, we are aiming for almost 500 million. USD adjusted EBITDA for the full year 2022 and well over 600 mln. USD in 2023

The stock is currently trading at around 6.5x EV/EBITDA, and closer to 5x going forward. See the previous article for more detailed math.

Long-term, I think the stock should be trading at least 8x EV/EBITDA, which puts the stock closer to $20, not $9, where we are today.

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Diagram
Data from YCharts

CAAP’s stock is up 50% since last quarter’s earnings report, which is fitting since that was the turning point when the company went from loss-making to very profitable. The stock now trades at less than 6x forward earnings (based on annualized results for the last six months) and a similar level of EV/EBITDA. Such low numbers are not justified for a fast-growing company of such solid quality. I expect the stock to continue to rise as the company posts stronger quarterly numbers, resulting in better displays and more attention.

CAAP is the preferred bidder for the two airports in Nigeria

Who else could pay attention? CAAP announced this quarter that it is the preferred bidder for two new airport concessions in Nigeria. From the third quarter conference call:

Finally, as part of our expansion ambitions, we were this month announced as the preferred bidder to operate the Abuja and Kano airports in Nigeria. We are currently in discussions with government officials regarding the terms of the concession agreements and will update you as we progress.

I can’t give exact details about the financial terms yet because nothing is finalized. However, we can get an idea of ​​the possible size. Kano Airport does not appear to be a significant airport in terms of scale, serving mainly domestic flights within Nigeria. It has only a few international routes and traffic has been well below 1 million in recent years. passengers per year. I think Kano is nothing more than a CAAP future value rounding error.

However, the Abuja airport is promising. Until recent years, the number of passengers was 4 million per year, but just before the pandemic, the number increased to 5.5 million. Traffic recovered to almost full pre-pandemic levels in 2021.

I think these numbers could be much higher in the future. Of course, Abuja will never overtake Lagos in terms of demand. But Abuja is the capital of Nigeria, and capital cities always tend to punch above their weight in attracting international routes. Diplomats, lobbyists, employees of non-governmental organizations, etc. have disposable cash and want to fly direct.

The city of Abuja itself also has a population of 1.7 million. It’s not a huge city by emerging market standards, but it’s enough to generate traffic, even aside from its capital city status.

By then, the Abuja government had made two major attempts to expand its airport. In 2006, a $101 million contract was awarded to expand the airport with shops, a hotel, private parking, and more. However, this contract was soon cancelled. In 2010, the government entered into a contract process for the construction of a second runway, but it was later canceled due to unexpected high costs. However, for the government in 2018 managed to complete the construction of the new terminal building, which increased the airport’s capacity to 15 million. of passengers annually.

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All this speaks of an asset that has been underutilized. With a responsible owner and access to outside capital, there should probably be room for more runway capacity and a lot more money (for a hotel, shopping, warehouses, etc.)

CAAP has a buy and build model. It is trying to acquire assets where it can put more capital into increasing expansion and modernization. This is in stark contrast to Mexico’s airport operators, who focus on free cash flow. Mexican airport operators generally work to maximize the amount of dividends they can pay.

However, CAAP seems to be looking to maximize its EBITDA. That’s why I don’t think we’ll see any significant dividends or share buybacks from CAAP anytime soon. Instead, look for them to find more assets to put your money into. In the CAAP family, we have seen great development in one of the airports in Buenos Aires, Florence and Brazil. CAAP is now likely to put money upfront to win the Abuja airport and then expand it to 15 million passengers or more under his leadership in the coming decades.

CAAP is currently on pace to serve around 75 million passengers per year, and should move closer to 85-90 million once we fully overcome the impact of the pandemic.

Adding Nigeria’s airports will immediately add 6-7 million to that number. or 7-8%, but note that CAAP will own 51% rather than 100%. these new discounts. In any case, revenue and EBITDA growth is likely to be lower as well, as I would assume that Abuja’s revenue per passenger and EBITDA margin is significantly lower than the CAAP average.

However, it says that given that these airports are probably not very profitable today, CAAP should come in at a fairly attractive price. Build new stores and other amenities and you will get more revenue and higher margins.

In short, these airports in Nigeria do not change the thesis. However, they confirm CAAP’s buy-and-build model and increase the company’s footprint while reducing dependence on Argentina’s main stocks. And this is an iterative process. CAAP started out only in Argentina’s airports, and over the last 20 years has gradually developed the rest of the business. Over time, they will add new cities and countries to the map.

Let’s take a different direction here. Despite the recent rally, CAAP still has a market cap of just $1.4 billion. For this we get almost all commercial airports in Argentina, as well as the capitals of Armenia, Brazil, Uruguay, Nigeria and several significant tourist airports in Italy and Ecuador.

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Airports in Surrey (ASR) The joint venture of Cancun, Medellin, San Juan (Puerto Rico) and many other smaller airports in Colombia and Mexico has a market cap of more than $7 billion.

I would argue that Buenos Aires, Brazil, Florence and Pisa, Italy, Guayaquil and Montevideo, Uruguay are at least on par with Cancun, Medellin and San Juan.

Does this mean CAAP should have the same market cap as Sureste? No. Sureste has a much higher EBITDA margin (more optimized assets) than CAAP, and Argentina understandably gets a big management discount compared to Mexico. That said, are we going to look back and say that maybe the 5x market cap for ASR Airports Group was a bit too high compared to CAAP? Yes, I think we can.

One final valuation metric, let’s consider price/sales. CAAP now trades at 1.4 times earnings and less than 1.0 times earnings. Here’s a comparison with the respective airports in Mexico:

Diagram
Data from YCharts

Again, we can debate how much CAAP deserves a valuation discount against its Mexican peers, but this is ridiculous.

CAAP 2023 will earn more than $1.5 billion, with a market cap of $1.4 billion. In the long run, airports typically earn at least 50% EBITDA margin, and with capable management and favorable concession agreements, can get close to 70%.

Airports are natural monopolies and have consistently grown at multiple times the global GDP. How much would people pay for a software company with an EBITDA margin of 60% and annual growth of 10%? 5, 7, 10 times revenue? From a financial point of view, airports are functional equivalents. And indeed, Mexico’s airports have historically traded at 5 to 10 times earnings. And I would think that maybe too low, although that’s a topic for another day.

Regardless, CAAP with 1x forward earnings is just plain stupid. And to get 2x forward earnings, you need to add about another $1.5 billion to the market cap, which pushes CAAP stock to $19 from its current price of $9. I’d argue that 2x sales is still too low, but it’s a starting point.

I could go on, but you get the point. CAAP shares are still very mispriced at $9. Admittedly, $9 is a slightly less scary valuation than $6 last quarter or $2 per share in 2020. But it’s still a global airport empire that’s selling for far less than its reasonably estimated true value today, let alone where it’s going to end up. its growth projects and acquisitions are bearing fruit.

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