Description

Summary

On Feb 7th, the Greeks IPO’d 20% of the Athens International Airport (AIA) as part of its privatization. This asset has been a solid performer TTM, as tourism to Europe has boomed and the airport has reverted to its pre-Covid earnings power. As the largest airport in the Country, it basically has a monopoly on travel into Greece and to the Greek islands and as a privatization, it has a management team that has never been incentivized with the liquidity of a public market. At EUR 378m of FY23 EBITDA on 953m of debt, 245m of cash (after some dividend adjustments), and 300m shares this is trading at under 9x compared to other European airports which trade in the low-to-mid teens. Going forward, AIA should continue to grow top-line similar to or better than its peers and will benefit in the long-term from all the operational efficiencies that come from a business shifting its ownership from that of a government bureaucracy to public shareholders.

Business

AIA operates two businesses. The first is called “Non-Air Activities” and is essentially CRE. They lease space for commercial and retail services, car parking, off-terminal real estate, etc. Beyond the basic leasing component of this business, they also have a large portfolio of retail concession contracts which allows them a percentage of the revenue earned by their lessees subject to an annual minimum guaranteed fee which gives them nice upside to both inflation and an increasing passenger count as well as some downside protection.

Importantly, as anyone who has been in an airport can attest, stores and restaurants have true pricing power here. Once you pass security you’re locked in and forced to shop at whatever’s near your gate. Under government ownership, this segment has been under monetized as their revenue per passenger numbers are materially lower than their peers. We expect significant value and growth to be unlocked now that the shares are publicly traded.

The second segment is “Air Activities” and is 74% of revenues. Here, AIA charges airlines fees for landing, taxiing, air traffic control, parking, security, and other services. There are some moving pieces to this business, as it has a government mandated ROE cap that limits it to a return equal to 15% of initial equity adjusted for inflation, which it has been able to greatly exceed recently due to a carry forward from underearning during Covid, and it charges a EUR 15/passenger fee to airlines that will step-down to EUR 3/passenger at the beginning of November which makes up 22% of YTD revs.

We do not see the passenger fee being an issue, as management can offset the reduction by raising the other fees it charges to airlines, which we believe it can accomplish as they haven’t raised these fees since 2019 and net-net, the airlines will be paying the same amount as before.

The earnings cap is the biggest issue, as once they’ve exhausted the remaining 86.3m carry forward, earnings will naturally have to decrease as they are currently earning a return equal to 30% vs the cap at 15%. Obviously, this represents a big drop in income when the carry forward runs out in late 2024 or early 2025 and the lack of visibility into earnings growth in 2025 and beyond is likely why the shares trade at such a discount. Management states that EBITDA margins will drop “modestly” in the short-term and then stabilize and, on the face, it seems like additional growth investment will increase depreciation expense as they expand the airport’s capacity so a decline in EBITDA is offset.

Based on where this trades relative to its peers on P/E the market seems to expect that earnings will fall by 50% in the near-future, no doubt because of the confusion around the cap.

We don’t believe that this is the case for a couple reasons. First, management has outlined an aggressive long-term growth plan focusing on doubling the capacity of the airport by 2045 and second, the PE owners increased their ownership from 40% to 50% during the IPO, paying 9.77/share or 19% above the IPO price.

We believe that any drop in earnings from Air Activities as a result of the ROE cap will not prove permanent as the business invests to grow earnings and revenues from Non-Air to levels closer to their earnings from Air, which would be more consistent with their peers. To that end, the first stage of their growth plan focuses on this segment by aiming to expand their commercial real estate footprint by 60% and is already underway. Further, passenger traffic continues to grow incredibly quickly and as tourism is 20% of Greek GDP, it’s possible that the Greek government led by Mitsotakis is susceptible to lobbying efforts by the PE owners and/or management and tweaks the rule under the guise of ensuring continued tourism growth.

Valuation

Compared against other European airports, AIA has higher margins, comped 10% over 2019 traffic for 2023, and has greater FCF conversion. Aeroports de Paris (ADP FP) and AENA (AENA SM) are the largest peers, are still at or slightly below 2019 traffic levels, and trade in the low teens for TTM EV/EBITDA and 18-20x TTM EPS. Both have continued to show earnings momentum as ADP FP just reported its FY23 results and handedly beat its EBITDA guidance by 10%, up 15% y/y.

We think it’s likely that AIA ends up reporting around 400-420m of EBITDA and 80-85c of EPS in FY24. They just released their first corporate deck, the website barely works, and there seems to be little attention from the street on this name as their earnings call had only two sell-side analysts in attendance. As their investor relations gets built out, they should get more attention.

At a 11x EBITDA multiple and a 15-18x PE you get a share price of 12.5-14 or about 40-60% higher on FY24E numbers. Assuming the absolute worst-case scenario (ex Covid 2.0) on the earnings cap and earnings drop to 45c at 8.80 this would be 19.5x, or roughly in-line with comps.

Conclusion

We believe that this business is supported by tailwinds from strong Greek tourism, is a monopoly, trades at a discount to its peers, and should benefit from the spin-off like business improvements inherent in a privatization.

"Nothing in this post should be construed as recommendation to purchase any investments and nothing should be interpreted as investment advice of any kind.  Additionally, no representation or warranty is made or can be given with respect to the accuracy or completeness of the information."

Catalyst

Comfort around the ROE earnings cap

Continued growth

Better IR