International Passenger Boom And Critical Leases Propel Aviation Growth

Key Takeaways

• Strong international passenger growth from North and South America will enhance commercial and aeronautical earnings.
  
• Successful lease renegotiation and expansion of non-aeronautical services will boost future revenue and improve profit margins.
  
• Rising operating expenses and potential regulatory changes may challenge revenue growth, compounded by financial strains from exchange rate risks and debt obligations.

Catalysts

Engages in the operation, maintenance, management, and administration of airport infrastructures and heliports in Spain, Brazil, the United Kingdom, Mexico, and Colombia.

• Passenger traffic is expected to continue growing, with projections for 2024 set at 306.7 million passengers, representing an 8.3% growth. This should positively impact revenue through increased aeronautical and commercial revenues.
  
• With strong growth in international passenger traffic (15.7% from South America and 17.3% from North America), Aena could see a boost in revenue from services catering to international travelers, enhancing both aeronautical and commercial earnings.
  
• The successful renegotiation and tendering of commercial leases, with some Minimum Annual Guarantees (MAGs) increasing by over 120%, is likely to drive future revenue growth, improving margins in the commercial segment.
  
• Continued expansion and improvement in non-aeronautical revenue streams, such as VIP services and parking, which have shown substantial growth, is expected to further enhance revenue and contribute to higher net margins.
  
• Reduction in net financial debt and improvement in debt-to-EBITDA ratio from 2.06x to 1.6x could lead to lower interest expenses and stronger net earnings, supporting future profitability.

Aena S.M.E Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aena S.M.E's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 34.2% today to 34.7% in 3 years time.
• Analysts expect earnings to reach €2.3 billion (and earnings per share of €14.78) by about November 2027, up from €1.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2027 earnings, up from 15.5x today. This future PE is greater than the current PE for the GB Infrastructure industry at 8.9x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.55%, as per the Simply Wall St company report.

Aena S.M.E Future Earnings Per Share Growth

Risks

• Rising operating expenses, particularly those related to labor, professional services, and regulatory compliance, may erode net margins despite revenue growth.
  
• Potential changes in air travel taxes in Spain could lead to higher flight prices, negatively impacting passenger traffic and thus future revenues.
  
• Challenges in scaling food and beverage operations compared to specialty shops may limit commercial revenue growth potential in this sector.
  
• Exchange rate risks and costs associated with overseas investments, particularly in Brazil, could affect overall earnings stability.
  
• Capital expenditures and debt obligations, including upcoming significant outflows, may strain cash flow and impact net profit margins.

Valuation

• The analysts have a consensus price target of €206.63 for Aena S.M.E 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 €234.0, and the most bearish reporting a price target of just €129.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €6.5 billion, earnings will come to €2.3 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 10.5%.
• Given the current share price of €200.8, the analyst's price target of €206.63 is 2.8% 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.