ASR

Business Context and Reporting Period

Company: Southeast Airport Group (Grupo Aeroportuario del Sureste, S.A.B. de C.V. or ASUR)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standard: International Financial Reporting Standards (IFRS)
Reporting Currency: Mexican Pesos (Ps.)

ASUR operates nine airports in the southeast region of Mexico under 50-year concessions. The group's primary revenue driver is Cancún International Airport, which accounted for 77.5% of total revenues in 2015. The company also holds a 50% joint venture interest in Aerostar, which operates the Luis Muñoz Marín (LMM) International Airport in Puerto Rico.

Key Financial Metrics (2015)

*USD translations based on the year-end exchange rate of Ps.17.195 per USD.

Material Changes vs. Prior Period (2014)

• Revenue Growth: Total revenues increased 53.0% to Ps.8,994.6 million. This was primarily driven by a 345.1% surge in construction services revenue (Ps.2,580.7 million) due to major capital projects at Cancún Airport (Terminal 3 expansion and Terminal 4 commencement). Aeronautical revenues rose 18.1% and non-aeronautical revenues rose 25.9%, aided by a 13.5% increase in passenger traffic and the depreciation of the Mexican peso.
• Profitability: Net income increased 27.6% to Ps.2,913.7 million. Operating income grew 28.9% to Ps.4,072.9 million. However, the net margin decreased from 38.8% in 2014 to 32.4% in 2015, largely due to the high volume of construction costs which are recognized at cost (zero margin) under IFRS.
• Exchange Rate Impact: The Mexican peso depreciated 16.6% against the U.S. dollar in 2015. This resulted in a net comprehensive financing loss of Ps.109.9 million (compared to Ps.115.0 million in 2014) due to the increased peso value of U.S. dollar-denominated debt. Conversely, the depreciation boosted commercial revenues derived from dollar-denominated contracts.
• Capital Expenditures: Investments in concessioned assets increased 151.4% to Ps.2,906.6 million, focused on Cancún Airport infrastructure.

Guidance, Outlook, Risks, and Contingencies

Outlook and Management Commentary: Management expects passenger traffic to continue increasing, supported by the economic recovery in the United States, which is the primary source of international passengers (61.1% of international traffic in 2015). The company is actively constructing Terminal 4 at Cancún Airport to accommodate future growth. Dividends of Ps.5.10 per share were paid in 2015.

Key Risks:

• Concentration Risk: Cancún International Airport generated 77.5% of revenues and 75.0% of passenger traffic in 2015. Any disruption to this airport or the tourism sector in the Mayan Riviera would have a material adverse effect.
• Regulatory Risk: Revenues are subject to a "dual-till" price regulation system with maximum rates set by the Ministry of Communications and Transportation. Exceeding these rates can result in fines or concession termination. The peso's depreciation increases the risk of exceeding these peso-denominated maximum rates.
• Foreign Exchange Risk: Approximately 66.0% of liabilities were dollar-denominated as of December 31, 2015. Further peso depreciation would increase debt service costs.
• Customer Concentration: The top three airline customers (American Airlines, United Airlines, Aeroméxico) accounted for approximately 12.2% of revenues in 2015. The insolvency of a major carrier poses a credit risk.

Contingencies:

• Tax Dispute: An appeal is pending regarding the amortization rate of the Cancún concession for tax purposes. If lost, the company estimates an additional liability of Ps.116.0 million related to employee statutory profit sharing.
• Legal Proceedings: The company is involved in various legal proceedings, including labor claims (approx. Ps.116.0 million) and property tax disputes with municipalities. Management does not believe these will have a material adverse effect.

Important Facts for Investor Verification

• Construction Revenue Accounting: Verify the impact of the 345% increase in construction revenue on net margins. Under IFRS, these revenues are recognized at cost (equal to expenses), inflating top-line revenue without contributing to operating profit.
• Exchange Rate Sensitivity: Monitor the peso-to-dollar exchange rate. A 5% depreciation of the peso would increase long-term debt by approximately Ps.185.0 million and increase revenues by Ps.94.7 million.
• Debt Covenants: The company has a U.S.$215.0 million credit facility (amended to U.S.$300.0 million commitment) with covenants requiring a consolidated leverage ratio of 3.50:1.00 and an interest coverage ratio of 3.00:1.00. Breach of these covenants restricts dividend payments.
• Joint Venture Exposure: ASUR holds a 50% interest in Aerostar (LMM Airport). While not consolidated, ASUR has provided a U.S.$100.0 million subordinated loan to Aerostar. Monitor Aerostar's ability to service its own debt and make interest payments on the shareholder loan.
• Regulatory Maximum Rates: Confirm that the company remains within the maximum revenue per workload unit limits set by the Mexican government, as exceeding these limits carries significant regulatory risk.