Delayed Aircraft Deliveries And Rising Costs Will Reduce Future Profits At Frankfurt Airport

Key Takeaways

• Maintenance issues, operational cost increases, and labor expenses could limit Fraport's revenue growth and compress net margins.
  
• Infrastructure expansion contrasts with potential slow passenger recovery, affecting EBITDA and long-term growth.
  
• Strategic capacity expansions and investments in operational efficiency and non-aeronautical revenues position Fraport for robust future revenue and earnings growth.

Catalysts

Owns and operates airports in Germany, rest of Europe, Asia, and the United States.

• Ongoing delays and issues with Lufthansa's new wide-body aircraft deliveries and maintenance problems with Pratt & Whitney engines are expected to limit traffic capacity at Frankfurt, impacting potential revenue growth.
  
• Higher operational costs due to increased German aviation taxes, security costs, and mandatory sustainable aviation fuel quotas are anticipated to compress net margins and earnings, creating financial headwinds for the company.
  
• Despite the expansion at various airports, including the completion of major infrastructure projects like Terminal 3 at Frankfurt and expansions in Lima and Antalya, the expected slow recovery of passenger numbers to pre-COVID levels may limit revenue growth and impact EBITDA.
  
• The potential increase in labor costs due to new collective wage agreements, coupled with high staff costs approaching €1 billion, poses a significant risk to operational expenses and net profit margins.
  
• The decision to halt or delay certain capital expenditure projects, like the refurbishment of Terminal 2, may result in reduced near-term cash outflows. However, this strategy might limit long-term growth potential and fail to substantially alleviate leverage concerns, potentially affecting free cash flow improvement plans.

Fraport Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fraport's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.0% today to 8.8% in 3 years time.
• Analysts expect earnings to reach €420.9 million (and earnings per share of €4.65) by about May 2028, down from €450.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €530 million in earnings, and the most bearish expecting €349 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the GB Infrastructure industry at 15.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.75%, as per the Simply Wall St company report.

Fraport Future Earnings Per Share Growth

Risks

• Despite challenging conditions, Fraport achieved an all-time high EBITDA of €1.3 billion and strong group results, demonstrating financial resilience. This suggests the company may maintain or improve its earnings due to its ability to perform well amidst difficulties.
  
• Fraport's international portfolio, particularly in Greece and Lima, has shown robust passenger growth and a full recovery to pre-COVID levels, which indicates potential strong revenue performance from its international segments.
  
• The upcoming opening of new terminals at Lima, Antalya, and Frankfurt airports is expected to significantly increase capacity, potentially enhancing future passenger numbers and driving revenue growth.
  
• The introduction of new retail spaces in Frankfurt's Terminal 3 is anticipated to increase retail revenues by 50% compared to Terminal 2 by 2027, suggesting potential earnings growth from non-aeronautical sources.
  
• Ongoing investments in customer satisfaction and operational efficiency, such as AI-supported turnaround processes and new CT security scanners, may help improve net margins by reducing operational costs and improving service quality.

Valuation

• The analysts have a consensus price target of €63.756 for Fraport based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €90.0, and the most bearish reporting a price target of just €40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €4.8 billion, earnings will come to €420.9 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 9.8%.
• Given the current share price of €58.25, the analyst price target of €63.76 is 8.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.