Model Portfolio rmcduff:RMG1

by Randolph McDuff, m10 & mFOLIO Master

Grupo Aeroportuario Del Sureste (nyse: ASR) is the fastest growing airport manager in Mexico, operating 9 airports, including Cancun International. The majority of revenues are earned from serving the Atlantic/Caribbean coast of Mexico, focusing on the highly profitable international passenger market.
Until late 2005, ASR sold for a premiere valuation well-deserved, based on the company's revenues and EBITDA when compared with its publicly-traded Mexican peers, Pacific Airport (NYSE: PAC) and North Central Airport Group (NASDAQ: OMAB). ASR was in the right place at the right time as the growth of tourism to the Caribbean has traditionally outpaced the Pacific coast, which was largely served by PAC and OMAB.

Hurricanes aren't all Bad!

But then Hurricane Wilma dulled the luster for ASR's near-term prospects. Many hotels in the Cancun, Cozumel and Mayan Riviera corridor were damaged or destroyed, severely reducing airport revenues for both fiscal 2005 and 2006.

Consequently, ASR's shares fell to valuation levels equal to/below that of PAC and OMAB, where they have remained for more than a year.
However, a silver lining has emerged from that black cloud. Many outdated pre-Wilma resorts put their insurance proceeds to good use, rebuilding their hotels to more expansive properties with higher standards, resulting in a 20% increase in available accommodations for the tourist trade. And I'm happy to report firsthand that Cancun looks better than ever.

Fortunately, I'm not the only pleased traveler. By the first quarter of 2007, ASR reported that traffic growth at its airports has once again surpassed that of PAC and OMAB. In the first 4 months of 2007, passenger counts throughout the ASR system increased by 1.1365 million persons overall, or up almost 20% year over year.

But that's not the only catalyst to ASR's earnings. . .

The Opening of Cancun International's Terminal 3 Promises BIG Growth for ASR

In 2006, the Cancun International airport processed 9.728 million passengers 7.3 million international and 2.4 domestic passengers. The advent of Terminal 3 which opened last month will boost international capacity by a whopping 7.5 million passengers more than double the airport's previous capacity!

What that means for ASR is more money, via a three-pronged strategy:

1. 150,000 square feet in new retail, advertising and boarding zones will increase commercial revenues, which will filter into ASR's coffers through a fixed rent as well as a percentage of retail sales.
2. Capacity bottlenecks, which prevented time for passenger shopping and dining and which I believe to be the primary culprit behind the 10% decline in ASR's commercial revenues from 2005-2007 will be alleviated.
3. New gates will allow Cancun International Airport to handle almost 50% more daily arrivals/departures, improving traffic flows and reducing passenger transfer costs (as a result of transporting them via the prior archaic tarmac-to-buses-to terminal operation.

For 2006, ASR's average net revenue and EBITDA per person were $16.12 and $10.69 per person, respectively, compared to the $12.45 and $4.46, respectively, earned at ASR's other 8 airports. The reason for this dichotomy: 71% of revenues generated at the Cancun airport came from international passengers, while the passenger mix at the other 8 airports was 18% international and 82% domestic. With ASR's international passengers set to double at Cancun International, that spells a tremendous opportunity for top- and bottom-line expansion perhaps as much as $120 million and $70 million in annual revenues and incremental EBITDA, respectively.

A Possible Blockbuster Airport Concession in Playa Del Carmen

Chances are that ASR along with OMAB and PAC would be an invited bidder for the building and operation of the Mexican government's proposed new 15-20 million passenger international airport in the growing Playa Del Carmen tourist area.

But ASR's prospects improve considerably due to another new proposed airport in Mexico City, which would more than likely be awarded to either OMAB or PAC, since that is their regional area of operation. Because the Mexican government probably would not want to hand two new airports to one operator, the winning bidder for Mexico City would effectively be eliminated as one of ASR's competitors from the Playa Del Carmen bidding wars.

ASR's CEO New Tender Offer is Intriguing

Mr. Chico has publicly declared his desire to increase his holdings of ASR to as much as 52% (an increase of 42%) of the outstanding shares. What is intriguing is that he has provided an offering document that clearly states that in his capacity as chairman, he has routinely been given access to "non-public" management budgets with respect to the possible future performance of ASR, and as a result of my information, I'm offering to buy more shares and take a controlling stake in the company."

Additionally, the document announces a new $275 million corporate credit facility. With its winding down of a major capital spending program, nearly $50 million of current assets total liabilities, the potential to generate more than $330 million of EBITDA over the next 24 months, and only $100 million of new capital spending during that time, a large cash balance should build up by 2009. Unless ASR plans to build a brand new airport, there seems to be no use for this credit facility.

Each of these developments bode well for ASR's future growth. All else being equal, I feel that ASR has the potential to deliver superior performance among the three publicly-traded Mexican airport managers and presently deserves a premium valuation vs. its peers. My 2007-2009 forecast suggests that EBITDA may rise by up to 65%, on a revenue growth forecast of up to 50%. And at 12X my 2008 estimate EV/EBITDA, a fair value would suggest a price of up to $76 US per share.

These shares may have a place within a diversified account which seeks to capitalize on global growth trends.

Disclosure: I personally own shares in ASR (ASR) as well as PAC, but do not own OMAB. RMG#1 owns shares of ASR.