Grupo Aeroportuario Del Centro Norte Stock Remains Attractive (NASDAQ:OMAB)

In September 2023, I put a buy rating on OMAB stock and while I do believe airport stocks do offer compelling investments capitalizing on long-term trends in the air travel markets, the stock lost around 20% of its value. The decline in stock prices was driven by regulatory changes to the tariff rules that would see some pressure on passenger tariffs and separately concession taxes were increased from 5% to 9% to be recognized in tariff negotiations from 2026 to 2030. In this report, I will be discussing the most recent financial results, discuss the risks and restate my price target for NASDAQ:OMAB stock.

What Are The Opportunities And Risks For Central North Airport Group?

The big opportunity I see for the airport group is the nearshoring trend that should see an increase in manufacturing activity in Mexico, and my view on that remains unchanged. Increased manufacturing and economic activity will have a positive impact on air travel demand. The nearshoring trend is a tangible one backed by solid plans. Tesla (TSLA) will start construction of its Gigafactory near Monterrey in March and with the construction of the Gigafactory, supply chains will also establish activity in the Monterrey area. Apple (AAPL) supplier Foxconn has also announced a $500 million investment to increase its manufacturing capacity in the state of Chihuahua. So, there is a strong trend backed by investments that is likely to benefit Grupo Aeroportuario del Centro Norte.

There are also several risks for OMA Group. The most global one is that stalling economic growth can affect manufacturing output or alter the trajectory of the nearshoring trend. Other risks are more specific to airport operators or airport operators in Mexico. The changed tariff rules did result in a 10% reduction to the Tarifa de Uso de Areopuerto or TUA and Airport Use Fee from November onwards with pre-scribed inflation correction applied in January. I don’t believe that we will see more cuts, but the cut in the per passenger fee does provide for a more challenging comp as a 10% reduction in per passenger fees does mean that OMA Group has to see passenger volumes rise to offset the lower fees partially offset by inflation correction.

Another risk centers on the problems with the Pratt & Whitney geared turbofans. Through 2026, hundreds of airplanes will experience downtime, and the most prominent airlines in Mexico are affected by this. Essentially, this is a capacity cut for those airlines and this will affect airport operators as well. Since airplane manufacturers can also not build airplanes fast enough to meet demand, the impact of the GTF powered airplanes is even more pronounced. Furthermore, cuts to the capacity of Mexico City International airport from 53 airplanes per hour to 42 airplanes per hour has an impact on connectivity with other airports in Mexico as well. For the OMA group, there was a 9% decline in passengers on routes connecting airports in the OMA Group portfolio with Mexico City International Airport. On the plus side, the capacity constraints at Mexico City International Airport, which is not part of OMA’s portfolio, can drive additional traffic to airports that are in the portfolio as some airlines will be looking to connect directly with OMA airports rather than indirectly through Mexico City International Airport.

For the fourth quarter, revenues excluding construction revenues increased 13.5%. Total passenger traffic rose 5.2% consisting of 5.1% growth in domestic passenger traffic and 5.6% in international passenger traffic. Despite the cut to the passenger fees, domestic passenger charges grew 14.6% and international passenger charges grew 9.1%. So despite the cut to the passenger fees, we still saw solid growth in passenger charges and aeronautical revenues. Non-aeronautical revenues grew 13.9% driven by 13.5% growth in Hotel Services, 19.4% growth in freight services and 52.4% growth in real estate services. Overall, diversification revenues grew by 14.9% growing faster than the overall revenue growth. Cost declined by 10.5%, which coupled with the higher revenues resulted in operating margin expanding from 47.7% to 53.6%. Excluding construction costs, costs grew 13% driven by higher maintenance costs, depreciation and amortization, concession taxes and technical assistance fees. Adjusted EBITDA margins expanded from 75.8% to 77.7%. For the full year, revenues excluding construction costs grew 24.5% on 21.2% passenger growth, while total costs grew nearly 9% and 8.4% excluding construction costs.

So, overall 2023 was a strong year for OMA Group with 27.8% growth in adjusted EBITDA outpacing revenue growth of 24.5%. Management, however, did point out that margin expansion opportunities are not expected for 2024:

based on our current expectation of traffic and the inflationary increases that Ricardo just mentioned that applied starting January and the cost inflation pressures as well, we don’t see an expansion opportunity for next year.

Grupo Aeroportuario del Centro Norte Stock Is Still A Buy

After processing the balance sheet data and the forward projections, the implied price target for OMAB stock for 2024 would be $111.70 coinciding with the high end of the price targets Wall Street analysts have. I do recognize that there is some uncertainty regarding the eventual tariffs, but even if we would limit the upside to half of what is projected, there would still be 29% upside to roughly $91.50. As a result, I am maintaining my buy rating for the stock and also note that the company has no debt maturing in the coming years.

Conclusion: Despite Setback, OMAB Stock Remains A Compelling Investment Opportunity

The 2023 results were good despite the discount to the passenger fees implemented in the final two months of the year. Going forward, the comp will be more challenging as we will be seeing the annualized effect of the cut to the passenger fee, but when implementing all balance sheet data, forward projections and keeping the risk factors in mind, I do believe that OMAB stock provides a compelling opportunity for investors.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.