Central North Airport Group (Grupo Aeroportuario del Centro Norte) — FY2017 Form 20-F Summary
Business context and reporting period
The filing is an annual Form 20-F for the year ended December 31, 2017, rather than a standalone 2017 fourth-quarter filing. The company operates 13 Mexican airports under 50-year concessions beginning November 1, 1998, and also operates hotels, cargo logistics and airport-related real estate businesses. Financial statements are prepared under IFRS and reported in thousands of Mexican pesos; U.S. dollar translations use Ps.19.7354 per U.S.$1.00 solely for convenience.
Passenger traffic was 19.662 million terminal passengers, up 4.8% from 2016. Domestic passengers represented approximately 87.6% of terminal traffic. Monterrey remained the principal airport, representing approximately 49.7% of passenger traffic and 44.7% of aeronautical plus non-aeronautical revenues.
Financial and operating metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenues | Ps.7,129,827 | Ps.5,550,269 | +28.5% |
| Aeronautical revenues | Ps.4,347,031 | Ps.3,872,735 | +12.2% |
| Non-aeronautical revenues | Ps.1,456,338 | Ps.1,332,762 | +9.3% |
| Construction revenues | Ps.1,326,458 | Ps.344,772 | +284.7% |
| Operating income | Ps.3,239,119 | Ps.2,783,554 | +16.4% |
| Operating margin | 45.4% | 50.2% | Down 480 bps |
| Net income | Ps.2,137,442 | Ps.1,876,501 | +13.9% |
| Net margin | 30.0% | 33.8% | Down 380 bps |
| Operating cash flow | Ps.2,921,333 | Ps.2,386,146 | +22.4% |
| Capital expenditures | Ps.1,581,959 | Ps.529,393 | +198.8% |
| Cash and equivalents | Ps.2,333,007 | Ps.3,005,792 | Down 22.4% |
| Total liabilities | Ps.6,971,485 | Ps.6,858,343 | +1.6% |
| Total debt | Ps.4,633,272 | Ps.4,693,865 | Down 1.3% |
Passenger charges were Ps.3,723,290 thousand and represented 85.7% of aeronautical revenue. Aeronautical revenue per workload unit increased 7.0% to Ps.210.5, while non-aeronautical revenue per terminal passenger increased 4.3% to Ps.74.1. Construction revenue and the corresponding construction cost are generally non-cash and largely offset each other.
Net interest expense increased 72.0% to Ps.225,532 thousand, and net foreign-exchange loss increased 116.2% to Ps.63,072 thousand. The effective tax rate was 27.6%, compared with 28.5% in 2016. Basic and diluted earnings were Ps.5.4046 per share and Ps.43.2368 per ADS.
Liquidity remained positive, with current assets of Ps.3,498,622 thousand versus current liabilities of Ps.1,104,273 thousand. Management stated that working capital was sufficient for present requirements. The company had Ps.350,000 thousand of unused short-term credit lines as of April 20, 2018.
Material changes versus the prior comparable period
- Revenue growth was driven by higher passenger traffic, tariff effects and expansion of commercial and diversification activities.
- Construction activity accelerated substantially, increasing construction revenue and cost by Ps.981,686 thousand year over year.
- Operating costs increased 40.6%, principally because of construction costs, higher utilities and maintenance, concession taxes, technical assistance fees and depreciation.
- Reported operating and net margins declined because construction revenue and cost increased disproportionately; excluding construction revenue, management reported that the operating margin increased from 53.5% to 55.8%.
- Operating cash flow increased, but investing cash outflows rose to Ps.1,542,776 thousand as capital spending increased to Ps.1,581,959 thousand. Financing cash outflows were Ps.1,979,135 thousand, including Ps.1,575,083 thousand of dividends and Ps.350,499 thousand of interest.
- The company paid a Ps.4.00-per-share dividend in May 2017 and repurchased 324,507 Series B shares. Shareholders subsequently approved a Ps.4.06-per-share dividend for payment by June 20, 2018.
- The NH Collection Hotel’s occupancy increased from 79.0% to 86.3%, and its revenue increased 10.0%. Hilton Garden Inn occupancy increased from 73.0% to 75.9%.
- Advertising revenue declined 12.1% to Ps.106,045 thousand after termination of the SSL Digital contract in December 2017. The company reported an outstanding SSL balance of Ps.45,527 thousand and expected temporary pressure on advertising revenue.
- The company completed or advanced major airport expansion projects, including projects at Acapulco, Monterrey, Chihuahua, San Luis Potosí and Reynosa.
Debt, capital commitments and outlook
Total debt consisted primarily of Ps.3,000,000 thousand of fixed-rate notes maturing in 2021, Ps.1,500,000 thousand of fixed-rate notes maturing in 2023, and U.S. dollar-denominated export-credit facilities. Approximately 96.9% of debt carried fixed rates and 3.1% variable rates at December 31, 2017. The company reported compliance with debt covenants and no debt default.
Committed master development program investments for 2018–2020 totaled Ps.3,554,823 thousand, including expected 2018 spending of Ps.2,377,074 thousand, partly for projects not completed in 2017. Management expects to fund commitments through operating cash flow and, if necessary, additional debt.
Management expressed reasonable expectations that passenger traffic would continue to increase, but provided no formal numerical revenue or earnings guidance. Maximum regulated rates are established through 2020 and include a 0.70% annual efficiency reduction. Aeronautical revenue represented approximately 61.0% of total revenue and 74.9% of aeronautical plus non-aeronautical revenue in 2017.
Management commentary, risks, contingencies and unusual items
- The business is highly dependent on passenger traffic, Mexican economic conditions, U.S. travel demand, airline capacity, fuel prices, tourism and Mexico City International Airport connectivity.
- Four airline groups represented approximately 75.1% of aeronautical revenue from airline customers: Grupo Aeroméxico 24.2%, VivaAerobus 19.4%, Volaris 16.7% and Interjet 14.8%.
- Regulated maximum rates, concession obligations, possible changes in Mexican aviation and competition regulation, and the risk of concession sanctions or revocation constrain operating flexibility.
- The peso’s movement affects U.S. dollar-denominated international passenger charges, foreign-currency debt and reported exchange losses. U.S. dollar liabilities were approximately U.S.$15.6 million at year-end.
- The company’s concessions, airport infrastructure and operating rights are subject to potential government reversion, termination or requisition under specified circumstances. Airport assets generally revert to the Mexican government at concession expiration.
- Pending matters include municipal property-tax claims, land-ownership disputes involving the Ciudad Juárez and Monterrey airports, and other administrative proceedings. Management reported that no provision was recorded because an economic outflow was not considered probable.
- The Ciudad Juárez land dispute included a claimed alternative remedy of U.S.$120.0 million; a July 2017 decision favored the plaintiffs against the Mexican government, and the government’s amparo remained pending as of April 20, 2018. The company stated that the government would bear the economic impact under the concession agreement.
- The September 2017 earthquake temporarily suspended NH Collection Hotel operations until September 25, 2017; the hotel reported no structural damage and subsequently resumed normal operations.
- The company identified potential impairment indicators for the NH Collection Hotel but recorded no impairment loss. The airport concession cash-generating unit also had no recorded impairment.
- IFRS 9 and IFRS 15 became effective in 2018; management expected no material impact. The potential effect of IFRS 16, effective in 2019, had not yet been determined.
- The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Most important facts an investor should verify
- Reconcile reported total revenue growth with the large, largely non-cash increase in construction revenue and assess operating performance using cash-generating aeronautical and non-aeronautical revenue.
- Verify the timing, scope and cost of the Ps.3,554,823 thousand of remaining 2018–2020 master development investments, including the elevated 2018 spending plan.
- Review debt maturities, fixed-versus-variable-rate exposure, foreign-currency liabilities and covenant requirements, particularly the 2021 and 2023 note maturities.
- Monitor passenger traffic, regulated maximum rates, airline concentration and the effect of any route reductions or airline financial distress.
- Track the replacement of the terminated advertising contract and collection of the Ps.45,527 thousand SSL receivable.
- Follow the Ciudad Juárez and Monterrey land disputes, Reynosa property-tax claims and any potential government indemnification or concession consequences.
- Assess the sustainability of dividends and whether distributions remain compatible with capital expenditures, liquidity and additional borrowing needs.
- Confirm the effect of IFRS 16 adoption and any subsequent changes to the NH Collection Hotel’s lease, occupancy assumptions or impairment analysis.