Description

Corporación América Airports

Corporación América Airports (“CAAP”) is a collection of limited lived, marquee airport concessions trading at significant discount to DCF-derived intrinsic value today.

The company has a $731 million market cap but is 82% owned by A.C.I. Airports (controlled by the Eurnekian family) so the free float is only $131 million.  It has $915 million of Net Debt (2.2x LTM EBITDA), most of which is at subsidiaries and is not recourse to the ParentCo.

While Argentina comprises the majority of EBITDA (though less than half of intrinsic value given key concession ending in 2028), I think you can make an argument the equity stakes in the other airports are worth more than the current market cap.  So counterintuitively for an Argentine airport company, I think you can view Argentina in some ways as a free option. 

Background

Corp America was founded in 1998 after the company successfully acquired Argentina’s AA2000 airport concession.  Over the past 20 years, the company— under the leadership of Eduardo Eurnekian and now his nephew Martin Eurnekian— has acquired airport concessions across Italy, Brazil, Ecuador, Uruguay, Peru and Armenia.  See the chart below for the remaining duration of the concessions. 

The concessions can be broken down by region:

• Argentina
  • ~81.25% ownership
  • Operates 3 concessions covering the two largest airports, Ezeiza and Aeroparque, and 35 others nationwide, ~40 million annual passengers (>90% of market traffic), $676 million in LTM revenue, $289 million in LTM EBITDA.  Main airport operators with barriers to entry and no competing hubs
  • Details of AA2000 concession below
• Armenia
  • 100% ownership
  • 2 airports (main international airport with Asia-Europe traffic and LCC-focused airport), 2.9 million passengers, $117 million revenue, $49 million EBITDA, single-till regulation (reviewed every 5 years)
• Uruguay
  • 100% ownership
  • 2 airports (main international airport, key tourist airport), $115 million LTM revenue, 2.3 million passengers, $58 million EBITDA, dual-till (regulatory review every 5 years)
• Brazil
  • 51% ownership
  • 2 airports (local hub with exposure to domestic traffic), 20.3 million passengers (>90% traffic share), $119 million revenue, $14 million EBITDA,
  • Brazil doesn’t operate an allowable return on RAB model.  Rather the concessions’ tariffs are adjusted annually by inflation and regulatory review every 5 years focuses on the company’s maintenance of facilities and investments
• Italy
  • 46.7% ownership
  • 2 airports (Pisa and Florence, tourist traffic + LCC exposure), 8.2 million passengers, $135 million revenue, $37 million EBITDA, dual-till (regulatory review every 4 years)
• Ecuador
  • ~75% (50% ownership of Guayaquil Airport, 100% ownership of Galapagos Seymour Airport)
  • 2 airports (key hub in Ecuador’s largest city, touristic airport), 4.4 million passengers, $93 million revenue, $24 million EBITDA, dual till (regulatory review not required)
• Peru
  • 50% ownership
  • 5 airports (domestic network in the south of Peru), 3.4 million passengers

AA2000 Concession

CAAP’s AA2000 concession represents 96% of traffic in Argentina.  Per the Final Memorandum Agreement from December 2007 (original 1998 contract renegotiated due to Argentina’s 2001/2002 economic crisis), the AA2000 concession is single-till, but is granted a real, unlevered, guaranteed 16.45% local-currency return, reviewed annually and expiring in 2028.  There is also an option to extend for up to 10 years if approved by the ORSNA (Organismo Regulador del Sistema Nacional de Aeropuertos, Argentine regulatory agency under the authority of the Ministry of Transportation).  On the flip side, the government has a call option to buy back the concession at 1.1x book for all unamortized aeronautical investment, with all other unamortized investment bought back at 1x book.

Under this agreement CAAP must comply with the investment commitments in the master plan (formulated as part of the AA2000 concession agreement) for both aeronautical and non-aeronautical activities.

In practice, economic equilibrium is established through a simple financial projection (available on CAAP’s website and as an appendix to the 20-F) for the duration of the concession (1998 to 2028).  To achieve the required return, the government can reestablish equilibrium in the contract through changing fees paid to the government, fees charged on aeronautical services, required CapEx or contract duration.

CAAP has requested a 10-year extension of the AA2000 concession with ORSNA in exchange for ~$1 billion of investment concentrated in the next 5 years.  There’s been no update here as it hasn’t exactly been the government’s top priority. Once CAAP agrees to an amount to spend on CapEx, in theory discussions should take place on re-balancing the contract.  CAAP has already spent most of the amount approved in the initial Investment Plan through 2028 and the Ezeiza and Aeroparque airports are operating near capacity. In a base case, it seems like the government should allow the 16.5% return on whatever CapEx CAAP commits to for the remainder of the contract.  However, there is obviously the risk that under the new administration they don’t agree to these terms. By the end of this year CAAP will have spent ~$300 million of the $1 billion and will not spend any more unless terms are negotiated with the regulator.

DCF-Derived Fair Value

Using a 20.5% “risk-free” rate for Argentina (10-year sovereign in USD), and appropriate WACCs for cash flows in other markets, I get to a fair value of ~$11.06/share (142% upside).  This assumes CAAP gets a return on the ~$1 billion of incremental Argentine CapEx deployed and assumes no 10-year extension of the AA2000 concession.

What makes this investment potentially exciting is on top of the upside to the DCF value you likely see a declining cost of capital in Argentina over time and potentially get a 10-year extension for AA2000. 

Equity Value ex-Argentina

Running an unlevered DCF on CAAP’s ownership of the various concessions outside of Argentina, subtracting out proportionate debt for each of the non-Argentine subsidiaries and fully burdening with the NPV of all corporate overhead, I get to a fair equity value of roughly $1 billion, or $6.33/share (39% above the current share price of $4.57).

Other Notes / Considerations

• CAAP’s AA2000 guaranteed IRR was signed in 2007 under the original (Néstor) Kirchner government
  • In a negative sign for corporate governance but possibly a positive sign for how the company will be treated under the current administration, there were rumors that members of the Eurnekian family donated money to Cristina Fernández de Kirchner’s campaign in the past (part of the “Notebooks” scandal).  The current CEO maintains the family and company is 100% apolitical.
  • http://www.panarmenian.net/eng/news/263755/Notebook_scandal_Argentine_police_search_Eduardo_Eurnekians_homes
• CAAP’s Argentine operations have USD-linked revenues (~90%) and mostly ARS-linked costs
• ~58% of total debt is denominated in U.S. dollars
• Note CAAP’s shares are ordinary shares, not ADRs. They trade only on the NYSE and the company is incorporated in Luxembourg
• The company earlier in the year received approval for a large and attractive expansion plan at the Florence airport but this has since been delayed as certain municipalities lodged petitions to overturn the earlier positive environmental assessment

Key Risks

• Capricious Latin American governments
• Global recession

Catalyst

• Clarity around Argentina's political situation and the AA2000 concession
• Better-than-feared handling of Argentina's debt reprofiling / restructuring