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Grupo Aeroportuario Is a Good Value Investment

- By Faisal Humayun

There are two main types of airline stocks: aircraft manfacurers like Boeing (BA) and Lockheed Martin (LMT) and airline operators like Air Lease (AL) and American Airlines (AAL). There is a third type of airline stock however. I believe it is worth having a look at airport operators. I have a positive outlook for Grupo Aeroportuario del Centro Norte SAB de CV (OMAB) and believe it is a good investment for 2017.


Diversified business model

Grupo Aeroportuario is involved in developing, operating and maintaining airports in Mexico. It also operates the NH T2 Hotel in Terminal 2 of the Mexico City International Airport.

The company operates 13 international airports in Mexico's northern and central regions. It has a business model with diversified revenue streams. The company primarily earns its revenue from aeronautical and complementary services. Aeronautical revenues are principally dependent on passenger traffic volumes, the number of air traffic movements, the weight of the aircraft, the duration of an aircraft's stay, the time of day and the specific prices charged for each service. Principal fees for aeronautical services, which are fees charged to the airlines for using its facilities, are:

  • Passenger charges
  • Landing charges
  • Aircraft short-term parking in platform charges
  • Aircraft long-term parking in platform charges
  • Passenger walkway charges
  • Airport security charges



In addition, the company also earns revenues from third-party providers of complementary services such as baggage handling, catering, aircraft maintenance and repair and fuel.

Moreover, the company provides services through its OMA Plaza, a retail concept that ensures restaurants, shops, banks and other stores offer passengers an enjoyable experience at all airports. OMA Carga services and facilities provide handling, storage and logistics of air freight in strategically located terminals. The NH Mexico City Airport Terminal 2 Hotel is a 5-star hotel with 287 rooms. As mentioned, the company's diversified sources of income make it an attractive investment.

Development plans and strategic investment

The company invests both in its aeronautical and non-aeronautical businesses through master development plans (MDP) and strategic investments. Since 2006, the company has invested 7,616 million pesos ($382462.04) in its MDP and 1,283 million pesos in its strategic expansion. The strategic investment in Zacatecas' solar power generation project has generated more than 50% of the airport operator's electricity needs, which is a commendable result.

In order to grow further, the company has decided to invest an additional 4,640 million pesos over the next five years, with majority of its investments in terminal buildings and their expansion. Monterrey terminal is one of the most important projects with a total investment of 887 million pesos.

The investment is expected to contribute to the terminals capacity growth by around 33% and the parking in the platform by around 91%. In addition to Monterrey, the company also has expansion plans for the Chihuahua, San Luis Potosi, Tampico and Ciudad Juarez terminals. These will further add to the company's revenue growth, leading me to believe this stock has great upside potential.

Strong third-quarter 2016 results

The company reported strong third-quarter 2016 results. For revenue, it reported 28.4% growth, which comprises both aeronautical and non-aeronautical streams. The rise in aeronautical revenue is primarily due to initiatives in developing new routes, a 12.2% increase in passenger traffic and an increase in tariffs. The increase in non-aeronautical revenues is principally due to the expansion of hotel services, which is a part of its diversification strategy.

The total number of flight operations, including takeoffs and landings, increased 3.8% to 89,451 operations. Total passenger traffic also increased 12.2% (more than 558,753 passengers), of which 89% was domestic and 11% was international.

Implementation of the company's commercial strategy has resulted in the opening of seven commercial spaces during the quarter, including retail stores, passenger services, hotel promotions and a restaurant.

The company's adjusted EBITDA for the third quarter increased 38.3% over the last year, with an 8% rise in the adjusted EBITDA margin. The company has net debt of 2.08 billion pesos with a net debt to adjusted EBITDA ratio of 0.85, suggesting the company has sufficient liquidity to meet its debt obligation.

Conclusion

Grupo Aeroportuario has a well diversified business with numerous revenue streams. The company has a focused development plan and is making strategic investments that will drive growth. Solid fundamentals and increasing traffic also suggest the stock is worth considering and can be accumulated for long-term investments.

Disclosure: No positions in the stocks discussed.

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This article first appeared on GuruFocus.