Airport operators are generally high moat businesses, and we have a preference for airports listed in emerging markets with large tourism markets (and growth potential), fairly stable political climates and those with concessions with over 20 years of visibility. Argentina, Mexico, China, Turkey and Thailand have listed airports that qualify here.

However, the airports in China had limited growth opportunities (albeit high quality existing opportunities), the Thailand airport group trades at >30x P/E, well above our valuation preference. TAV airports in Turkey, Grupo Aeroportuario del Pacifico in Mexico and CAA in Argentina thus served as our preferred comparables to our two investments in Mexican airport groups. 

• We invested in both Grupo Aeroportuario del Sureste (ASUR – 3.5% position) and Grupo Aeroportuario Centro Norte (OMA – 4% position). ASUR has a market cap of MX $160 billion while OMA has a market cap of (MX $63 billion)
• Both companies are Mexican airport concessionaires in leading airports in Mexico. ASUR operates the Cancun Airport (57% of revenue), several smaller airports in Mexico (Oaxaca, Merida, Huatulco) and the 2^nd largest airport in Colombia (10% of revenue) and Puerto Rico’s largest airport (15% of revenue – a 60% ownership structure).
• OMA operates the Monterrey airport (42% of revenue), Culiacan (9.5% of revenue), Ciudad Juarez (9% of revenue) and 10 other domestic Mexican airports. OMA is more skewed towards domestic travel, representing 87% of its 26.9 million annual passengers.
• Valuations: We paid 12x their 2024 estimated earnings. Over the long term, we believe both ASUR (17x 2028 P/E) and OMA (18x 2028 P/E) could command a higher multiple, in line with valuations it had seen in the past (pre-pandemic). In the 40 quarters prior to the pandemic (2009 – 2019), ASUR traded below an average of 17x P/E in 8 of the 40 quarters while OMA traded below 18x P/E in 10 of the 40 quarters. Both companies are currently within 10% of their all-time low P/E or EV/EBIT multiples.
• Growth: Coupled with multiples expansion, we also see room for growth; 9% earnings CAGR in ASUR and 11% earnings CAGR for OMA over the next four years. We expect this growth to be driven by (1) international passenger growth, (2) non-aeronautical revenue- duty-free and retail growth, (3) marginal increase in charges to each passenger. While this is much slower than past earnings growth achieved, we believe both exceed their international comparable companies in both listed and unlisted markets.
• Track record: Over the past 20 years, OMA and ASUR have grown their earnings by 18% CAGR, with their EBIT margin exceeding >20% every year including during the pandemic, a period many airports came to a halt and the financial crisis. We expect ASUR’s EBIT margin to fluctuate between 52% – 57% over the next four years while OMA’s EBIT margin at 54-59%.
• Balance sheet: We believe both companies have rock solid balance sheets with ASUR having a net cash position (0.7x debt/EBITDA) while OMA (1.3x debt/EBITDA). ASUR continues to invest for growth across the Caribbean region with a recent potential growth opportunity flagged in the Dominican Republic.
• Dividends: Both companies are consistent dividend payers with ASUR currently achieving a dividend yield of 3.9% and OMA at 3.3%.
• While there are political and regulatory uncertainties with airport concessionaries and operators, we view both companies as high moat businesses we have a high (70%-85%) degree of confidence will be around at a larger scale than they are today, in 10 years’ time.
• Triple dips: As a result of these factors, we believe both companies are potential triple dips – (1) a very profitable business with a great track record and minimal debt, (2) earnings growth potential, (3) low valuations relative to its past, peers and the market.
• ASUR: 4-year upside of 96% (18.5% IRR = 9% earnings growth + 3.9% dividends + 6% multiples expansion) Medium downside risk.
• OMA: 4-year upside of 117% (21% IRR = 12% earnings growth + 3.3% dividend yield + 5.7% multiples expansion) Low downside risk.

Risks

• Political and regulatory: The revenue and cost structure for Mexican airports is influenced by the political and regulatory bodies who approve the Master plans, annual CAPEX, and concession fees to the government (increased from 5% to 9% on 4^th Oct 2023, causing a -29% drop in their share prices). The Mexican military has also seen its share of ownership of Mexican airports increase during the previous AMLO administration which could impact both companies in future concession renewals.
• Competition: ASUR faces competition with other tourism hotspots that may provide a similar experience to Cancun at an international level. In Oct 2024, there was a significant drop in tourism and passenger flows, and it remains unclear why this dropped. In Mexico, the nearby Tulum airport recently commenced operations, and we believe some domestic passengers will opt for Tulum, leading to more competition for Cancun. The Trens Maya train line, which connects Cancun with other regions in Mexico, could also impact the domestic passenger flow to Cancun, impacting revenues and profitability.
• Currency: OMA’s reliance on domestic travel leaves it more exposed to the depreciation in Mexican pesos versus USD which could impact our total returns. ASUR has less currency risks given its Puerto Rico revenue and overall international passenger fees are denominated in USD (but paid in pesos from airlines 30-115 days).
• US – Mexico relations: ASUR is heavily dependent on tourists from the US for its key Cancun airport. Strained economic and political relations with the US could impact the attractiveness for American tourists to visit Cancun, thus impacting revenue. OMA’s Monterrey airport has also benefitted from nearshoring trends between the US and Mexico and a reversal of this could impact passenger flows and revenue.
• Minimal value chain control: A significant portion of the value chain is beyond airports’ control, and airport groups like OMA, and ASUR rely heavily on airlines such as VivaAerobus, Aeromexico and United Airlines. Challenges at the airline level could materially impact both ASUR and OMA. For example, a recall of Pratt & Whitney jet engines, prominent in the Airbus A320neo, significantly impacted VivaAerobus and Volaris air traffic in OMA, which in turn reduced OMA’s earnings. Other external factors, such as earthquakes, heightened violence and security risks, could impact the flow of passengers across Mexican airports. OMA’s Acapulco airport saw a 70% passenger decline in November and December 2023 due to Hurricane Otis. Finally, security challenges and general perception impact the tourism sector in Mexico