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Aena: A High-Flying Investment Opportunity

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Aena is the world's largest airport operator based on passenger traffic. Aena also delivers higher profit margins than its European peers. Like other companies in its industry, Aena has a significant competitive advantage, strengthened by the fact that the Spanish Government owns 51% of the company. This ownership structure makes it improbable for other airport operators to challenge Aena's dominance in Spain. Thus, there are many positive aspects to appreciate about Aena, but the question remains: is it a good investment? This is what I am going to investigate in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.7

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Aena. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Aena either. Thus, I have no personal stake in Aena. If you want to purchase shares (or fractional shares) of Aena, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Aena is the largest airport operator. It was founded in Spain in 2010 and is headquartered in Madrid. Aena engages in the operation, maintenance, management, and administration of airport infrastructures and heliports in Spain (46 airports and 2 heliports), Brazil (17 airports), the United Kingdom (1 airport), Mexico (12 airports), Colombia (2 airports), and Jamaica (2 airports). The company also oversees commercial spaces in airport terminals and a network of parking lots. It leases areas in airport terminals for duty-free shops, specialty shops, food and beverage establishments, commercial operations, advertising, financial services, luggage wrapping machines, other vending machines, and regulated services. The company also leases office buildings, warehouses, hangars, and cargo storage facilities to airlines, air cargo operators, handling agents, and other airport service providers. Aena has four business segments: Aeronautical (55,6% of revenue), Commercial (30,2% of revenue), Real Estate (2,1% of revenue), and International Operations (12,0% of revenue). In aeronautics, Aena generates revenue through landing and takeoff fees, passenger fees, aircraft parking fees, and security fees. In commercial, Aena generates revenue from rental income from shops and restaurants, advertising revenue within the airport premises, and car parking services. In real estate, Aena generates revenue by leasing airport properties, including cargo facilities, logistics areas, and office spaces. In international operations, Aena generates income from airports outside Spain in a manner similar to its operations in Spain, through aeronautical, commercial, and real estate activities. Aena has a strong moat, as it is unlikely that other companies will compete with Aena in Spain, especially because the Spanish Government owns 51% of Aena.

The CEO is Maurici Lucena Betriu. He became the CEO of Aena in 2018. He has a bachelor's degree in Economics and Business Science from Pompeu Fabra University in Barcelona, and a master's degree in Economics and Finance from the Banco de España Centre for Monetary and Financial Studies in Madrid. Prior to joining Aena, he held various executive positions in both the private and public sectors. Among the positions he has held are Chairman of the European Space Agency, Director of Equity and Prudential Management, and Director of Prudential Regulation and Public Policy at Banco Sabadell. He has been a member of the Parliament of Catalonia and an associate professor in the Economics Department at Carlos III University in Madrid, where he also authored a book on industrial policy. We don't have much information about Maurici Lucena Betriu, but he successfully led Aena through the pandemic. Aena has not only recovered its business but has also surpassed its performance in 2019. I also believe he has the right credentials to lead Aea moving forward. I am confident in Maurici Lucena Betriu leading Aena moving forward.

I have determined that Aena has a strong moat. And I feel rather confident about management as well. Now, let us analyze the numbers to determine if Aena meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. Aena made their IPO in February 2015, so we don't have the numbers from 2014, while the 2015 numbers don't reflect a full year. Aena has only managed to achieve a Return on Invested Capital (ROIC) above 10% in two out of the past nine years. It was in 2018 and 2019, after Maurici Lucena Betriu became CEO, and during the years preceding the pandemic. Aena had a hard time during the pandemic, which explains the poor performance, especially in 2020 and 2021. Even in 2022, Aena was still affected as it did not fully recover until 2023. The Return on Invested Capital (ROIC) in 2023 is still underwhelming. This is partly because Aena acquired 11 airports in Brazil for about €468 million, and the company's substantial debt is also impacting the ROIC. Later in the analysis, I will share the return on equity (ROE), which is not affected by the high debt, and you will see much better numbers. Nonetheless, I would like to see the Return on Invested Capital (ROIC) in the top 10% in 2024.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. As previously explained, we do not have numbers from 2014 as Aena conducted its IPO in 2015. Aena has managed to increase its equity every year except for 2020 and 2021, which were significantly impacted by the pandemic. It is encouraging that Aena managed to surpass its pre-pandemic level of equity in 2022, even though it has not fully recovered its passenger levels to pre-pandemic levels. Another promising sign is that Aena achieved its highest level of equity ever in 2023, and hopefully, it will increase further in 2024.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Aena has generated a positive free cash flow in every year except for 2020 and 2021, which were impacted by the pandemic. It is encouraging that Aena managed to reach its highest level of free cash flow again in 2023. The levered free cash flow margin has not yet reached pre-pandemic levels, but it is encouraging that it increased from 2022 to 2023. A levered free cash flow margin above 33% is something many companies fail to achieve. The free cash flow yield is above the nine-year average but decreased from 2022 to 2023. However, with a free cash flow yield of 6,8%, it suggests that Aena shares are not overly expensive. This is a point we will revisit later in the analysis.

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon calculating Aena's financials, I have determined that Aena has 5,0 years of earnings in debt. It is a bit higher than I would prefer, but I do not see it as a high risk because the Spanish government owns 51% of the company. This ownership structure makes it unlikely that debt will be a major issue for Aena. However, debt does affect the ROIC, which has been underwhelming in most years. Below, I have shared Aena's Return on Equity (ROE) over the past ten years, which provides an indication of how Return on Invested Capital (ROIC) would be without the high debt.

Based on my findings so far, I believe that Aena is an intriguing company. However, no investment is without risk, and Aena also has its fair share of risks. Macroeconomics. The global economic situation remains subject to risks such as persistent inflation or the tightening of monetary policy, along with rising interest rates. These macroeconomic factors could affect travel, as more people will have less disposable income and may choose to spend less on non-essential expenses such as traveling. It would affect tourist flows to Spain, which will impact Aena because 4 out of 5 international tourists arrive in Spain by air. It may result in fewer flights and fewer passengers, affecting both Aena's aeronautical and commercial revenue, which depend on both flights and passengers. Laws and Regulations. Aena operates in a heavily regulated sector, and it will need to comply with these regulations. Furthermore, there may also be new laws that will affect Aena in the future. For instance, some political parties in Spain have proposed an initiative to promote a reduction of domestic flights on routes with rail alternatives lasting under 2,5 hours maximum to help reduce carbon emissions. Given that Aena generates the majority of its revenue from its Spain network, the company could face a headwind if the initiative succeeds. Another example is that the Spanish government plans to progressively reduce the 40-hour workweek without reducing wages over the next two years, which may impact staff costs for Aena. Thus, changes in regulations and uncertainty regarding the interpretation of legislation arising in various matters, such as ESG, and the need to adapt to new and ongoing legal requirements may affect Aena in the future. Concentration and competition pose risks as well. Aena's income is heavily reliant on its two main airports, Madrid and Barcelona, which are the 5th and 7th largest airports in Europe in terms of passenger numbers. Additionally, Aena is dependent on specific airlines such as the IAG group and Ryanair. Regarding competition, it is mainly due to other means of transportation, such as high-speed trains, that some customers might prefer in the future because of their lower environmental impact. With more economies of scale and technological improvements, we may also see competition from new modes of transportation in the future, such as air taxis that will take off from vertiports. Vertiports are infrastructures designed for the vertical take-off and landing of aircraft. Located in areas near cities or, if permitted by the city, within them, these infrastructures are expected to be fully operational in the near future.

There are also numerous reasons to invest in Aena. One reason is the increase in passenger traffic. Aena suffered during the pandemic as passenger traffic decreased. However, passenger traffic continues to increase through 2023. Management mentioned that Aena started the first quarter of 2023 at 101,6% compared to 2019. The number of passengers reached 108,6% in the last quarter compared to 2019. The improvement has been ongoing throughout the entire year of 2023. Management has mentioned that the tailwinds they observed in traffic for most of 2023 have continued into 2024. Management expects the number of passengers in Spain to be around 294 million in 2024, approximately 300 million in 2025, and about 310 million in 2026, compared to the 283 million passengers in 2023. And not only is passenger traffic increasing, but passengers are also spending more money in the airports. Management has mentioned that commercial sales in 2023 exceeded those in 2019 by 17%, while the sales per passenger ratio was 14% higher than in 2019. International growth. Aena was awarded an additional 11 airports in Brazil in late 2023. The airports acquired by Aena are superior to comparable airports in Brazil based on passenger traffic metrics. Aena now handles approximately 20% of Brazil's passenger traffic, which is a significant amount. Thus, management has mentioned that they are focusing on their Brazilian business, which they believe will be a very good investment for both Aena and its shareholders. However, management has also mentioned their intention to increase the international EBITDA derived from international activities. Thus, they explore other international opportunities, which may bode well for investors as Aena's investments in the UK, Colombia, and Mexico have been successful. Dividends. Many investors buy Aena because of the dividends. Aena's dividend payout is at 80% of the net income. Aena's dividend increased from €4,75 per share in 2023 to €7,66 per share in 2024, representing a Compound Annual Growth Rate (CAGR) of 23%. As Aena's business and financial results continue to grow, it will lead to an increasing dividend. Management is optimistic that they will be able to continue increasing their dividend for the benefit of shareholders.

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,87, which is from 2023. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 10% in the next five years. Additionally, I have selected a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on Aena's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be 139,38. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Aena at a price of 69,69 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.220, and capital expenditures were 545. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 381,5 in our calculations. The tax provision was 521. We have 150 outstanding shares. Hence, the calculation will be as follows: (2.220 – 381,5 + 521) / 150 x 10 = 157,30 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Aena's Free Cash Flow Per Share at 11,17 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is 140,51.

I believe that Aena is an intriguing company. We don't have much information about the management, but I believe they have done a good job. ROIC hasn't been as high as I would like, but I expect it to increase in the future. I really like that Aena has a huge moat, which sets it apart from most companies. However, there is a slight risk that Aena may sometimes operate in the interests of Spain rather than shareholders due to the ownership structure. Macroeconomics poses a risk for Aena, as the company's performance is closely tied to the volume of flights and the number of passengers. Thus, if we see prolonged economic headwinds, it may affect Aena for the foreseeable future. Aena operates in a highly regulated industry and will need to comply with regulations. Additionally, new laws and regulations may be introduced. Aena has a history of complying with and adjusting to laws and regulations, and nothing suggests they won't in the future. However, it is something worth monitoring. Another aspect worth monitoring is technological progress, which may lead to new competition for Aena, such as air taxis or high-speed trains, making trains a viable alternative to planes. Concentration is also a risk for Aena, as the company generates most of its revenue in Barcelona and Madrid and relies on a few large customers. Aena expects to continue increasing the number of passengers for years to come, which should boost revenue, especially since passengers are spending more money at the airport compared to before. Aena is expanding its international presence and currently manages 20% of Brazil's passenger traffic. Brazilian airports are already making contributions to both the top and bottom line. Aena's dividend payout is 80% of the net income. Thus, as net income increases, dividends will also increase, making it a favorable investment for dividend-seeking investors. I really like Aena, and I think it will be a great investment below the Ten Cap price of €157.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the Botswanan cheetah. Botswana is home for 30 % of the earth's remaining cheetahs, and as there are less than 100.000 cheetahs left in the world, they need your help. If you have enjoyed the analysis and want some good karma, I hope that you will donate a little to the Botswanan cheetah here. Even a little will make a huge difference to save these wonderful animals. Thank you.

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