Business Context and Reporting Period
Company: Southeast Airport Group (Grupo Aeroportuario del Sureste, S.A.B. de C.V.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2007
Accounting Basis: Mexican Financial Reporting Standards (Mexican FRS), restated in constant pesos as of December 31, 2007. U.S. GAAP reconciliations are provided.
Operations: The company operates nine airports in the southeast region of Mexico under 50-year concessions. Cancun International Airport is the primary revenue driver, accounting for approximately 75.7% of total revenues in 2007.
Key Financial Metrics (2007)
| Metric | Value (Mexican FRS) | Value (U.S. GAAP) |
|---|---|---|
| Total Revenues | Ps. 2,785,891 thousand | Ps. 2,771,216 thousand |
| Net Income | Ps. 522,361 thousand | Ps. 257,274 thousand |
| Operating Income | Ps. 1,166,170 thousand | Ps. 1,253,490 thousand |
| Operating Margin | 41.9% | 45.2% |
| Cash and Marketable Securities | Ps. 1,925,697 thousand | Ps. 1,870,675 thousand |
| Total Assets | Ps. 16,676,081 thousand | Ps. 8,579,690 thousand |
| Total Liabilities | Ps. 2,170,554 thousand | Ps. 546,042 thousand |
| Stockholders' Equity | Ps. 14,505,527 thousand | Ps. 8,033,648 thousand |
| Operating Cash Flow | Ps. 1,622,626 thousand | Ps. 1,726,341 thousand |
| Capital Expenditures | Ps. 665,160 thousand | Ps. 364,250 thousand (Net investing outflow) |
Note: Significant differences between Mexican FRS and U.S. GAAP exist primarily due to the treatment of airport concessions, rights to use airport facilities, and deferred taxes. Under U.S. GAAP, the value of airport concessions is significantly lower.
Material Changes vs. Prior Period (2006)
- Revenue Growth: Total revenues increased 19.9% to Ps. 2.79 billion (Mexican FRS). This was driven by a 14.8% increase in aeronautical services and a 32.5% increase in non-aeronautical services.
- Traffic Volume: Total passengers increased 17.8% to 16.2 million. Air traffic movements increased to 262.3 thousand.
- Net Income Decline: Despite revenue growth, Net Income (Mexican FRS) decreased 4.7% to Ps. 522.4 million. This was primarily due to a significant increase in the provision for income taxes (including deferred flat rate business tax) resulting from new Mexican tax laws (IETU) effective January 1, 2008.
- Operating Expenses: Total operating expenses increased 10.8%. Notable increases included the technical assistance fee (up 24.7%) and government concession fees (up 20.1%), both linked to higher earnings and revenues.
- Capital Projects: The company opened Terminal 3 at Cancun Airport in May 2007, doubling international passenger capacity. Construction on a second runway at Cancun began in 2007.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Commercial Growth: Management anticipates that future growth in commercial (non-aeronautical) revenues will eventually exceed the growth rate of aeronautical revenues.
- Investment Strategy: The company intends to fund investments through cash flow from operations, though it may incur debt in the future. A second runway at Cancun is expected to be completed in 2009.
- Dividends: The company intends to continue paying yearly dividends. A dividend of Ps. 0.77 per share was paid in 2007.
- Regulatory Risk: The company is subject to a "dual-till" price regulation system. Maximum rates are set by the Ministry of Communications and Transportation. Exceeding these rates can lead to penalties or concession termination. New rates for 2009-2014 were under review at the time of filing.
- Concentration Risk: Cancun International Airport generated 75.7% of revenues in 2007. The business is highly dependent on tourism in the Mayan Riviera and the U.S. economy (66.7% of international passengers travel to/from the U.S.).
- Natural Disasters: The region is prone to hurricanes. Hurricane Wilma (2005) and Hurricane Dean (2007) have previously impacted operations and infrastructure.
- Customer Concentration: The top four airline customers (Mexicana, Aeromexico, American Airlines, Continental Airlines) accounted for approximately 21% of revenues in 2007.
- Taxation: The introduction of the Flat Rate Business Tax (IETU) in 2008 created significant deferred tax liabilities and impacted net income.
Important Facts for Investor Verification
- Accounting Differences: Verify the reconciliation between Mexican FRS and U.S. GAAP. Net income under U.S. GAAP (Ps. 257 million) is significantly lower than under Mexican FRS (Ps. 522 million) due to the amortization of airport concessions and deferred tax treatments.
- Concession Terms: Confirm the status of the renegotiation of maximum rates for the 2009-2014 period, as this directly impacts future revenue ceilings.
- Second Runway Progress: Monitor the completion timeline and cost of the second runway at Cancun Airport, expected in 2009, as delays could limit growth.
- Competitive Landscape: Assess the potential impact of a new airport concession being bid for in the Mayan Riviera region, which could compete with Cancun.
- Related Party Transactions: Review the technical assistance agreement with ITA (Inversiones y Tecnicas Aeroportuarias), which requires a fee of 5% of earnings before financing, taxes, and depreciation, or a fixed dollar amount, whichever is greater.