GAP Day was held at the Mexican Stock Exchange. During the presentation, management outlined prospects for the market in general and the company in particular. Below we discuss the highlights and information we have included in our model in order to ensure a more complete valuation.
Market share. At the end of 2016, GAP served 26% of total passengers transported by Mexican airports, ranking second after AICM (33%). Furthermore, five of GAP’s twelve airports were among the top ten based on the number of transported passengers and accounted for 22% of total air traffic.
Diversification. GAP’s greatest strength is its diversification, both geographically and by passenger type. The group’s five main airports are divided into two large metropolitan areas (Guadalajara and Tijuana) and three tourism destinations (Montego Bay, Los Cabos and Puerto Vallarta).
Natural hedge. At the end of 2016, GAP’s debt amounted to MXN$9.814 bn, 47% of which is in dollars and carries a variable interest rate. However, the company closed 2016 with a Net Debt/EBITDA ratio of 0.7x due to strong cash generation. Furthermore, 25% of the company’s EBITDA is dollar denominated; 15% can be attributed to Montego Bay and the other 10% to the commercial area, mainly in tourism destinations.
Thus, Standard & Poor’s has assigned the company a credit rating of mxAAA on the domestic scale with a stable outlook, while Moody’s has assigned the company an Aa1 rating with a positive outlook.
Greater supply and penetration of air transportation. Airlines have taken steps to increase capacity. In 2016 alone, available seat miles increased by 16.6%. Airlines with the biggest presence at GAP’s airports in descending order are: Volaris (32%), Aeroméxico (16%), Interjet (9%), VivaAerobús and American Airlines (7% each) while the remaining 36% corresponds to a number of domestic and international airlines. Given the share of airlines with a greater presence, the +19.9% increase in Volaris’s offer and +53.9% increase in VivaAerobús was significant for GAP. It is also worth mentioning that the offer of regional airlines like TAR, AeroCalafia and Aeromar, has substantially increased (+84.1%, 79.1%, and 62.6%, respectively), reflecting ongoing confidence in the underpenetrated Mexican airline industry.
According to Airbus Aircraft estimates, a company with a comparatively clear view of the industry’s development because it receives aircraft orders, the Mexican aviation market could grow at an average rate of 4.6% over the next twenty years compared to an average rate of 1.2% for more mature aviation markets.
Furthermore, it is estimated that in 2017, total passenger traffic in Mexico will grow +8.6%, while GAP passengers will grow by +11%, based on ongoing growth in airline offer (+8.7%E in the first half of 2017) and the still latent possibility of air transportation winning share from land transportation. The air transportation-land transportation ratio is currently 1:96, and while air transportation has been growing at a weighted average rate of 10.6% over the last five years, land transportation is growing at 1.9%, reflecting an area of opportunity for the industry.
Furthermore, the price of jet fuel has remained stable, enabling airlines to increase their offer.
Based on the above, GAP expects revenue, EBITDA, and Net Profit growth of +12.2%, +12.4%, and +14.0%, respectively, driven by passenger traffic growth at its airports and the expansion of retail space at its terminals, which should boost non-aeronautical revenues.
On the cost side, due to strong growth in demand in 2016, GAP estimates wear and tear generated by greater demand will increase the cost per passenger by +20% in 2017, due to maintenance, service and staff expenses. Consequently the EBITDA margin should decrease by -200 bp YoY, from 70% in 2016 to 68% in 2017.
Likewise, the company expects lower growth rates in the second half of 2017 derived from a high second-half- 2016 comparison base, especially at the Tijuana airport, which benefitted from the inauguration of the Cross Border Xpress.
Finally, the Board approved a dividend of MXN$9.5 per share in 2017, which is a dividend yield of 5% at the December 31st 2016 closing price (P$152).
We believe GAP has solid ten-year growth potential. 2016 was an extraordinary year for the company, mainly due to the consolidation of the Montego Bay airport in Jamaica, the inauguration of the Cross Border Xpress in Tijuana, and the extraordinary increase in available seat supply. Therefore, we expect the double-digit growth rate registered in 2016 to continue in 2017 when we forecast Flow growth of +10.0%. Growth rates should be decremental going forward (8% on average until 2022 and thereafter 5% until 2027). We also believe that within ten years, the aeronautical and airport industry could enter a consolidation phase with growth rates of 5%.
Based on the above, we updated our valuation model to include new prospects for the industry and the company. That yielded a 2017-IV target price of MXN$210, which implies upside of +14.9% at the day after the conference closing price. However, after adding the preapproved dividend yield of 5% to the December 31st, 2016 closing price (MXN$9.5 per share) payable in May 2017, upside including dividends is +20.07%, so we have upgraded the stock to BUY.