Buying Grupo Aeroportuario del Sureste (ASR)

Two of the primary factors I look for when doing a cursory examination of a Green Screen stock are: "does it have recurring revenues" and "does it have a clear economic moat"?

Today's review - Grupo Aeroportuario del Sureste (ASR) - quickly stood out on both of those questions as a resounding "YES"!

So it was only natural to dig deeper into the business and see if this, indeed, was one we could add to the Watch List or, even better, to the Buy List.

What I found is a pretty interesting investment opportunity that will appeal to many - and not appeal to almost equally as many. Let's dig into the details.

What ASR Does

In Mexico, airports are built by the government, but are run on a continuing basis through the granting of "concessions" to outside management firms. ASR is one of these firms. It has won concessions to operate 9 Mexican airports: Cancún, Cozumel, Mérida, Villahermosa, Oaxaca, Veracruz, Huatulco, Tapachula, and Minatitlán. Mexican operations make up about 2/3rds of revenues, and Cancún alone makes up 59%.

So where do those revenues come from? More than half come from "aeronautical services". The biggest piece of these are passenger charges tacked on to every ticket out of its airports (~35% of total revenues). Landing and parking fees are assessed to the airlines for each arriving plane. Lastly, airlines are also billed for terminal fees and airport security.

"Non-aeronautical services" are a bit over 1/3rd of revenues. These are primarily leasing fees to all the commercial establishments inside the airport - restaurants, duty-free shops, car rental agencies, etc. Access fees on a percentage of revenue are charged to service providers such as those handling cargo, aircraft cleaning, baggage handling, etc. There are fees charged to transportation service providers, such as for parking, taxis, busses, and so forth. Lastly, ASR has been building out a number of new revenue opportunities in this space, such as leasing ad space and offices.

While Mexico (and specifically Cancún) is the bulk of the business, ASR also has a majority stake in subsidiaries Aerostar and Airplan, which have won concessions to operate large airports in Puerto Rico (13.5% of total revenue) and Colombia (10.4%), respectively.

In a nutshell, ASR is a management firm / landlord for the government's airport assets. In return, it pays the government a 9% of revenue concession fee and (of course) taxes.

Revenue: Growth and Recurrence

ASR's revenues are highly recurring. Almost all sales fall into either the "toll booth" (passenger, landing, access, parking fees) or "subscription" (leasing) buckets, both of which are classic recurring sales models. While certainly the volume of sales are going to be dependent on passenger traffic, it is unlikely the firm will suffer any drastic, sustained decline in revenues. Even COVID-19, as big a shock to the travel industry as the world has ever seen, led to "only" a 25% drop in sales in 2020, which only took 1 year to recover from.

Growth is less clear. Cancún is well positioned to expand passenger traffic given its proximity to the most rapidly developing tourism area in Mexico, the "Mayan Riviera". Overall traffic has grown 6% annually over the past 5 years - even including the effects of COVID in 2020-22. And ASR has been laser focused on expanding its revenues from commercial activities, which are not regulated by the government.

Given all of those initiatives, I think it passes our long-term bar for 10% annual sales growth. But just barely.

Ideally, we'd like to see the firm start to slowly but steadily increase its airports under management. The 9 Mexican airports were awarded back in the 1990's, but additional concession bids have been unsuccessful. ASR added Puerto Rico in 2013 and Colombia in 2018. A new airport every 5 years or so would really help the growth story.

Moat

Airport management is a complex but very important business, and concessions to operate them are not awarded lightly. As a result, they tend to have a very long term. For the 9 Mexican airports, ASR won 50-year concessions back in 1998, meaning they are virtually assured of this business through 2048! The Puerto Rican and Colombian concessions have similarly long terms (40 and 20 years, respectively).

Effectively, ASR has unchallenged management agreements that run, at a minimum, for the next 15 years. Those are some pretty powerful REGULATORY INTANGIBLE ASSETS underlying a strong economic moat. No competitor is going to take these airports away any time soon.

These are reinforced by the attractiveness of the airports themselves. The southeast region of Mexico is world renowned for its beaches and history, and all of ASR's airports are located in the region. Cancún is the 2nd busiest airport in all of Mexico. LMM airport in Puerto Rico is - by far - that island's busiest.

Management

ASR is run by Adolfo Castro Rivas, who has sat in the CEO desk since 2011, and has been with the firm in the 'C' suite since 2000. The entire Executive Council has a decade or more of experience inside the firm. These are veterans that know their way around the regulatory spider-webs that always come with government contracting.

Aside from unpredictable travel events like COVID, ASR's financials are quite reliable. Operating margins have been steadily rising from 45% in 2019 to over 60% today. Free cash flow margins are similarly steady in the low 40% range, and cash return on capital is excellent at 23%. The balance sheet is fine, with a cash-to-debt balance and low debt-to-equity ratios. No concerns.

Risks

Okie dokie, so far the story has been rosy. But there are a number of risks investors should be aware of, so many that I would classify this as a "high risk" stock and recommend no more than half of a normal position on it.

Let's start with asset concentration. Cancún is tremendously important to the company - 60% of sales are from this one asset. Should something happen here - a bad hurricane, an earthquake, a flood, out-of-control regional crime wave, whatever - ASR and its investors are gonna feel the pain pretty acutely.

Second, the government has a lot of power over this business. Just last year it raised the annual concession fee from 5% of revenue to 9% - a pretty major move! There's no guarantee it won't go higher. About half of ASR's revenues are capped by government restrictions on what it can charge for passenger and terminal fees. It can and has built new airports that compete with ASR's existing ones. And, ultimately, it has the power to change terms in the concessions, or even terminate them if it so desired.

Lastly, there are several risks with investing in a non-U.S. company. ASR is Mexican through and through, listed in the U.S. through an American Depository Receipt or ADR. That means the regulations, disclosures, standard business practices, and geopolitical environment are very different from the typical U.S. company.

Since the firm reports in pesos, the peso to U.S. dollar exchange rate acutely affects the value of the stock. This rate has fluctuated wildly over the past 20 years, from 0.100 in the early 2000's to 0.042 in 2021. Currently it sits at 0.055, which is on the lower end. That's a good thing, as a higher exchange rate benefits us as USD investors. However, a drop in the peso negatively affects the value of our shares.

So, overall, a healthy amount of risks to consider with this one.

Conclusion

Grupo Aeroportuario del Sureste is an interesting opportunity, a bit different than many of the stocks highlighted on this site. It has many of the characteristics we love to see in spades - its recurring revenue and economic moat are undeniable. On the other hand, its growth potential is questionable, and there are a number of risks that could easily derail an investment.

Modeling for about 13% annual near-term growth, combined with a 40% free cash flow margin (about the 5-year average, including COVID years), and a very high 13% discount rate to account for the risks, I get a value of 7,960 pesos per ADR. At current exchange rates, that amounts to $438 dollars per share. That's a significant upside from the current ADR price of $300. That means ASR gets added to the Buy List immediately! I'm excited to welcome this new stock into our universe and looking forward to following it through the coming years.