Earnings Report /
Mexico

Grupo Aeroportuario Centro Norte: OMA, Quarterly Report 1Q21: Positive outlook despite tough year start

  • Oma posted y/y falls, showing some setback to the recovery previously recorded, in view of a complex year start

  • As demand begins to improve, we updated our estimates with positive implications, expecting growth to return in 2Q21

  • Our new PT is MXN 146.00. Given a better recovery outlook and attractive valuation levels, we upgrade to Buy

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

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Banorte
3 May 2021
Published byBanorte
  • Oma posted annual declines on its figures, showing some setback in the recovery previously recorded, in view of a complex start to 2021. Despite this, profitability came better than expected

  • Meanwhile, as demand begins to improve, we updated our estimates with positive implications, expecting growth to return in 2Q21

  • Our new PT is MXN 146.00 vs. MXN 137.00 previous −FV/EBITDA 2021e of 14.5x vs. 14.4x sector−. Given a better recovery outlook and attractive valuation levels, we upgrade to Buy

Sequential improvements are halted, but profitability surprises positively. In 1Q21, Oma's numbers were more affected by the uptick in the pandemic at the beginning of the year, as well as more restrictive measures by the US and Canada on air travelers. Thus, total passengers recorded a 37.8% decline, which was partially offset by a higher revenue per passenger (+5.8%) due to the higher tariffs approved in the 2021-2025 Master Development Program, as well as by a smaller drop in diversification activities (-15.8% y/y). As a result, the sum of aeronautical and non-aeronautical revenues decreased 30.7% y/y to MXN 1.2 billion, in line with the above. On the other hand, taking into account lower revenues and a higher fixed proportion of total expenses, Adjusted EBITDA contracted by 34.8% to MXN 808 million, with a respective margin of 67.9% (-4.3pp y/y), but exceeding expectations, due to cost and expense savings initiatives. At a net level, majority income fell 57.0% y/y due to lower operating income and a lower FX benefit. A healthy financial situation (Adjusted EBITDA of 0.7x) is fundamental for the company for continuing to implement strategies to resume growth, which, coupled with better demand expectations, will result in greater growth.

Estimate update 2021

Oma's March passenger figures exceeded estimates and point to improved demand performance going forward. In addition, expected economic dynamism should favor traffic behavior in the longer term. On the other hand, considering the operating efficiencies shown at the beginning of the year, we now expect higher profitability for the company. The foregoing will be reflected in higher growth, which, as we have already mentioned, will benefit from a very low comparative base. It is important to point out that the relevant advances that we foresee for Oma during the year will depend to a great extent on the recovery speed in the industry, therefore, we must closely follow the vaccination process, which could be a trigger for demand.

Considering the above, we project a 45.0% increase in total passenger traffic (vs. 43.3%e previous), with domestic traffic (89.3% of the total in 2020) showing a better performance, which would also be supported by a greater number of airlines operating at its airports, although the business traveler's performance should be monitored. As a result, we forecast total revenue growth of 46.9% to reach MXN 7.9 billion and 49.4% (+1.5% vs. previous estimate) operating revenue growth to MXN 6.1 billion. We anticipate a solid 58.8% rise in aeronautical revenues, driven by passenger growth and higher fares due to the 2021-2025 MDP, while non-aeronautical revenues are expected to register a smaller 25.6% increase, given the defensive performance of the previous year. We expect Adjusted EBITDA to grow 69.3% (+3% vs. previous) to MXN 4.3 billion, with an 8.3pp margin expansion to 70.2% (vs. 69.2%e prior), mainly as a result of higher operating leverage, given the higher fixed proportion in the cost and expense structure, coupled with the cost discipline and operating efficiencies characteristic of the group. At the net level, we anticipate a 111% growth in majority income to MXN 2.3 billion, mainly driven by operating improvements. Finally, the group is expected to maintain a healthy financial position, with an estimated ND/Adjusted EBITDA ratio for year-end of 0.2x.

One factor that we consider favorable is the resumption of dividend payments to shareholders, which we estimate to be MXN 5.13 per share (a 3.9% yield at current prices). 

Valuation and PT 2021E of MXN 146.00. We recommend BUY

Using the discounted cash flow (DCF) valuation methodology, we raised our target price for Oma from MXN 137.00 to MXN 146.00 per share, which represents a 2021e FV/EBITDA multiple of 14.5x, similar to the national sector average of 14.4x. It should be noted that our target multiple is equivalent to a FV/Adjusted EBITDA 2021e of 13.4x, well below the current 24.8x. In our view, the expectation of a relevant recovery in Oma's numbers should be reflected through a significant reduction in multiples. Based on the above and considering the potential return on our PT of 16.1% (including the estimated dividend yield), we upgrade our recommendation to Buy.

In the DCF model, our assumptions consider a 13.5% discount rate (WACC); average cost of debt of 6.7%; Beta of 1.2; risk-free rate of 6.9% (10-year MBono estimate), a market risk premium of 6.0% and a terminal FV/EBITDA multiple of 13.3x (vs. 12.3x previous), which is the 5-year average for the perpetuity.

Relative Valuation Table

One aspect to consider is that Oma's Adjusted EBITDA does not include maintenance provision as it has no impact on EBITDA.