Investing in the IBEX 35 — Aena
An introduction to Aena
Aena is to me one of the most interesting companies in the IBEX 35. It is Spain’s airport operator and has stakes in other international airports detailed below. It is naturally in a monopoly position that a priori makes it look like an attractive investment as there aren’t any competitors it should worry about. However, in the following analysis, the reliance on the Spanish economy and a Covid-19 recovery are key factors investors need to bear in mind when looking at this stock.
Aena is down about 30% since its December highs trading at about €121.3 per share. It’s key to understand its shareholding structure, as this was a state owned firm and currently 49% of the firm is free floating on the stock market whilst the other 51% is owned by Enaire, the State Administration. The firm made €4,5bn in revenue, €712.29m net income and had 293.2m passengers through its airports in 2019, a very different picture from what awaits post pandemic. Luckily, in April 2020, Aena had almost 3 billion EUR in liquidity through cash and credit facilities, which combined with its cost saving efforts could maintain the company afloat for the next 2 years under the current situation, which is unlikely to persist for that long.
One of the first things to look at is at Aena’s airport configuration, both domestically and internationally. Aena gives you the exposure to 46 Airports in Spain, 51% of London’s Luton airport, 12 airports in Mexico, two in Jamaica and two in Colombia. In March 2019, Aena acquired six airports in north-east Brazil. Digging below the surface concessions appear, which is the length of time Aena has per contract in each airport to operate its services. Whilst Luton airport is a major source of passengers and revenue from abroad, its concession expires in 2031, not too far considering usual timelines.
As most airports, the business model consists not only of air traffic related activities but also on commercial and other activities on the ground.
It is good to see which are the key airline clients for Aena. As Covid-19 has made some seek for bankruptcy protection and others from not falling into that thanks to government support, the following table gives us an idea of the risk of losing the revenue from these customers that pay for airport slots for example. Ryanair, Iberia and AirEuropa stand out as key customers given the low cost, touristic orientation of many of Spain’s destinations.
A hidden asset Aena possesses is the available land on its airports which could be converted to logistics centres and warehouses for interested players which could include Amazon, DHL or FedEx. They currently have 1 million square meters but they could develop that by an additional 4.2 million square meters over the coming decades. Interest in such real estate could be a key revenue source in the future. Adding onto this, the company’s strategy relies on global traffic at least doubling in the next two decades. Whilst Covid-19 has paralyzed this, it is the recovery road and a long-term mindset that could make Aena return to its €170/180 highs previously hit. Of course, how long the pandemic lasts and changing consumer patterns to spend more at home and travel less could also delay that recovery from 1–2 years to 3–5.
Looking into the financials we can get an idea of how robust this business is.
Aena has posted high margins where the net profit margin over the past years was constantly around 30% with a FCF of over €1bn since 2013, key for its 6.5% dividend pay-out and to keep investing into its airports. To put it into perspective, FCF’s are 50% of revenues. In this sense, cash flow yield in comparison to its €17bn market cap is of 9%, which looks very interesting. Regarding the dividend, pay-out from FCF has increased from 59% in 2018 to 75% in 2019. Aena has to be careful with such generous pay-outs that have attracted investors as the current challenging situation and the standard accepted pay-out of 60–70% are key points to consider.
Whilst debt should stands at 6.5 billion EUR, it should not be a problem on the 1.5 billion of free cash flows in a good year. Plus, interest rates in Europe are very low making its financing much easier.
Also, with an interest coverage ratio of 21.70 in 2019 and attractive ROE of 23.18% in 2019 the company came in robust into the pandemic and shows it can provide great returns over the long-run.
Of course, we need to take into account risks of investing in this stock. They include a deep recession hitting Europe and especially Spain, one of the most indebted countries, slow Covid-19 recovery, cut in dividend payouts, reliance of Spain on tourist sector (represents 12% of GDP). However, the quick development of a vaccine and the monopolistic nature of this industry in Spain play in favour of the stock over the long term.
Personally, if the stock keeps moving horizontally and I see significant improvement of the situation over the end of the year, it could be an attractive option. However, if things remain uncertain as winter is approaching, several quarantine and international travel restrictions sit in place and Spain reports daily Covid-19 cases topping 10,000, which is the same level that was reported at the height of the pandemic, I will wait. We will have to see.