Aena: A possible post-pandemic stock pick

Vaccines are getting rolled out, and while we unfortunately still see the pandemic causing trouble around the world, it might be time to make your post-pandemic stock picks. One stock you might want to consider adding to your portfolio is Spanish airport operator Aena.

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.

This analysis will be a bit different from what you are used to read in my blog. Aena has only been listed on the stock exchange since 2015, and because of that, I believe it is better to do a discounted cash flow analysis. So instead of using the principles I have learned from my Phil Town workshop, I use the principles I have learned from the GOAT academy. I should also mention that most of the numbers I use in this analysis is from Finbox, which I believe is a great tool to get different numbers from various companies.

I should mention that I do own a little Aena but not in the portfolio that you can choose to copy. I hope that I will be able to add it to my copy portfolio someday at the right price though.

Aena is a Spanish airport operator that operates 46 airports (and 2 heliports) in Spain, 12 in Mexico, 6 in Brazil, 2 in Colombia and 2 in Jamaica, while they also own 51 % of London Luton Airport in the UK. The Spanish state administration owns 51 % of the company while the last 49 % of the shares are in free float. This gives Aena a strong toll moat, as it is hard to believe that any competitors will start bulding airports where Aena has airports. If looking at 2019, Aena was by far the European airport operator with 293,4 million passengers, compared to number two, Groupe ADP's 108 million passengers.

Their 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 sector. Among the positions he has held is as a Chairman of the European Space Agency and 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 been an associate professor in the Economics Department at Carlos III University in Madrid, where he also wrote a book on industrial policy. It is hard to find much information about Maurici Lucena Betriu but since he became the CEO, Aena has certainly performed admirably, and had a ROIC of more than 10 % in both 2018 (10,1 %) and 2019 (11,0 %) for the first time since they got listed. I'm very confident that he has the credentials to drive Aena forward in a post-pandemic world.

I have determined that Aena has a strong toll moat. And I feel rather confident about management as well. To value Aena, I have made a discounted cash flow model. Before I get started, I should mention I have used the numbers from 2019 as 2020 was obviously a horrific year for any airport operator. Hence, I do not believe that 2020 is representative of the company, and I hope we will not experience a year like this again.

To do a discounted cash flow model, I will need some numbers that you can see here. Most of the numbers are the 2019 numbers I could find at Finbox. However, the perpetuity growth rate and the discount rate are numbers I have come up with myself. The reason I chose 4 % as perpetuity growth rate is that it is usually a between the historical inflation rate of 2-3% and historical GDP growth of 4-5%. The chosen discount rate of 10% is because it is usually between 9-12%. Remember that all the numbers made in these calculations are in millions.

I also need to determine how much EBIT, Depreciation & Amortization and Net Working Capital will evolve over the next couple of years. The historical EBIT growth for Aena the last 5 years prior to 2019 has been 13,96 % in average. However, the last two years the growth has been a bit smaller than the first 3 years. Hence, I have determined to use a future EBIT growth of 10 % moving forward. The average Depreciation & Amortization over the last 5 years prior to 2019 has been 793 but smaller in the later years. Nevertheless, I have chosen to use the average of 793 in my calculations. The Net Working Capital was 298,3 in 2019, I decided to multiply this with 10 % and keep that number through the calculations. Once doing my calculations, I found that the intrinsic value of Aena is 230 euros.

Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Aena, I can see that Aena had 3,96 years earnings in debt in 2019. It is a bit higher than you would like but in no way alarming.

There are of course some risks in investing in Aena. The most obvious one is the pandemic, which had unseen consequences for airport traffic. The European air traffic in 2020 was below the level reached in 1995, it means that the pandemic set airline traffic back 25 years! According to Airports Council International, it is not expected that European airport passenger traffic will reach the 2019 levels again until 2025.There are also some macroeconomic and political risks. Spain is one of the most indebted countries in EU (4th after Greece, Italy, and Portugal), and it is still a bit unknown how Brexit will affect travel from the UK to Spain, out of Spain's 83,7 million tourists in 2019,18 million were from the UK. Finally, concentration and competition are a risk as well. Aena's income is very dependent on their two main airports (Madrid and Barcelona, which are also the 4th and 5th largest airports in Europe in numbers of passengers), while they are also dependent on specific airlines such as 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 due to less environmental impact.

It is of course hard to predict how these risks will affect Aena in the future. Regarding the pandemic and the affect, it has had on European air traffic, it is certainly gloomy news. However, according to CAPA - centre for aviation, the air traffic recovery is stronger in Southern Europe than all other regions in Europe except for non-EU Eastern Europe. At the same time, we are seeing less restrictions as people are getting vaccinated, meaning we might see a recovery faster than expected. Prior to the pandemic air traffic had always experienced a growing trend doubling every 15-20 year, and I would personally be surprised to see this trend being reversed. Spain is one of the most indebted countries in EU and is very dependent on tourism, which is obviously a good thing for Aena, as the political risks from the Spanish Government, is probably very small. In 2019 Spain ranked second in the world in international tourist arrivals behind only France. From 2018 Spain saw an increase of 1,1 % in tourism compared to 2018, and more than 80 % of these tourists arrived by plane. It seems like Spain is still a popular destination, and there is no reason to think it won't continue post pandemic. Regarding the Brexit, it is still too early to see how it will affect UK tourism to Spain, as we also have a pandemic that influence the numbers. Concentration is of course something that needs to be monitored and Aena will need to continue having a good relationship with their largest customers, and while competition from other types of transport might be real in the future, very little suggests that it is a problem, as air traffic has always increased up until the pandemic. In the next paragraphs I will compare the numbers of Aena to other airport operators and calculate the intrinsic value of Aena.

The last part of this post, I will elaborate why I like Aena over other airport operators. In 2019 Aena had a higher P/E ratio than Fraport, pretty much the same as Flughafen Zürich and lower than Groupe ADP. However, only valuing a company based on P/E ratio is a bit too simplistic, as the earnings takes depreciation into account. EV/EBITDA excludes those depreciation expenses. When looking at the EV/EBITDA, Aena still lacks Fraport and now also Flughafen Zürich. However, they also have more depreciation and amortization, while also using more on capital expenditures than the two, which makes sense as Aena is a larger company. Nevertheless, looking at these numbers alone Fraport and Flughafen Zürich looks cheaper than Aena.

So, you might wonder why I like Aena so much, as Flughafen Zürich and Fraport looks cheaper at first glance. To explain why I do so, I have picked some key numbers from the 2019 income statements from all of the four companies. The first one that pops up is the gross profit margin, Aena is by far the company with the highest gross profit margin of the four, with a gross profit margin of 85,9%! The next interesting numbers is the operating margin, where Aena once again is by far the best of the four, with an operating margin of 45,1%. It is also interesting to see that Aena has a much higher net income than Groupe ADP, despite Groupe ADP having a larger revenue.

Having investigated Aena as a company, made a discounted cash flow model and compared them to other airline operators, it is evident for me that Aena is a very interesting company. There are obviously a lot of unknown risks for the time being with the pandemic and the speed of the recovery, but I'm quite confident that air traffic will recover and will continuously rise moving forward. Looking at Aena is a company, I'm very intrigued by their high gross profit margin and operating margin, which is much higher than the other airline operators. However, Flughafen Zürich also show great numbers, so it could be an interesting company to investigate as well. I would love to buy more Aena at 115 Euros, as it would give me a 50 % discount to the intrinsic value I calculated in my discounted cash flow model.

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