I've been listening to quite a bit of Monish Pabrai recently and found his TAV thesis interesting, so thought I'd share his perspective in case it's useful...
He seems to be betting that the market is being overly harsh on TAV's emerging market exposure. A few points that caught my attention:
-Currency protection: 75% of revenues are in EUR/USD or USD-pegged, which might soften the Turkish lira volatility you're rightfully concerned about
-The leverage story: While that 4.1x debt/EBITDA definitely raises eyebrows, Pabrai thinks their 10-14% passenger growth guidance could turn that into a tailwind (potentially 24%+ cash flow growth)
-Geographic spread: 15 airports across 8 countries rather than pure Turkey risk
-Valuation: He keeps emphasising they're "very cheap vs other global airport operators"
The Almaty acquisition seems to be his proof point - $120M equity investment already generating $116M EBITDA with more growth expected.
Obviously your quality framework makes total sense, especially around financial stability. I'm curious what you think about his thesis - is there something he might be missing about the structural challenges, or could this be one of those rare times where the market's EM pessimism creates opportunity?
Thanks Rohan for sharing this. I agree with Mohnish's thesis and I also think TAV is undervalued, but I don't own it simply cause at the time of my initial investments in airports, the Mexican airports (ASUR) were at 12x forward earnings while TAV was then at 11x forward earnings. I felt the Mexican airports had lower debt, less currency worry and easier to monitor over a long time. TAV is on my watchlist, I just feel the debt is too high, 1/3 of EBIT goes to net effect of servicing debt.
Problem with airport is you are always going to be beholden to the government as a partner, who has the potential to be irrational and skew incentives. I'd be more interested if you could ever have a 'for profit' 100% publicly owned airport. But how these companies are currently constructed it makes them natural to be placed with big private investors who have the scale and deep pockets to deal with the local governments. As a small public investor, you are stuck hanging in the wind so to speak.
Hi Rick, you make a good point with airports, you're always in partnership with the government. Personally, I don't think an airport could ever be 100% for profit as by nature, these are public services.
Airports, as the gateway to the global economic and social environment, will continue to be a veritable aspect of investment interest. When maturity or a saturation point is reached will be gradual and self-evident to the keen eyes of the avid investor
Yes it is, I like GAP and it's on my shortlist. The valuations were however too high when compared to OMA and ASUR even after factoring their higher quality and growth projections at the start of my research into them. The valuation gap has closed down a bit as at today, so it's something I'm currently monitoring. There's a scenario where I add them to the portfolio as well.
I haven't looked at them in great detail to provide unique thoughts. Not sure of the growth opportunity for the exchange - traditionally, there's been very low activity in the Mexican market, both trading volume and new listings.
True, but things seems shifting recently cus Mexico had the security reform act passed last year and if companies start to ipo again in next decade, that might be getting interesting. Stock market to gdp is really low, as family businesses gradually transfer to younger owners, wish they’ll want to leverage financial market more than their fathers.
How much of airport capex spend is discretionary vs. mandated by governments (depending on the ownership structure)? If a government wants an operator to add a terminal, does operator have any say on the scope, gate fee, etc.
To me, the difficult in valuation work would be estimating the true maintenance capex, given its an asset heavy business but would assume not much in practical depreciation every year.
Hi these are really good questions. We answer these in the part 2 section, deep dive into the Mexican airports so I'll say watch out for it once we upload it.
Interesting article, I look forward to your next one.
One thing though when you say "including Australia" you should actually say "including New Zealand". Australia has no more listed airports since Sydney airport was bought, Auckland Airport is in New Zealand.
Thanks for spotting this! I actually meant to say Australasia rather than Australia as I was looking more region/continent coverage in the geography overview section.
Yes, I included Fraport in the list of 24 listed airports but the 12 airports in the valuation analysis were the higher quality names - I didn't consider Fraport among these 12 airports due to debt, return on capital, profit margins relative to the other names.
I've been listening to quite a bit of Monish Pabrai recently and found his TAV thesis interesting, so thought I'd share his perspective in case it's useful...
He seems to be betting that the market is being overly harsh on TAV's emerging market exposure. A few points that caught my attention:
-Currency protection: 75% of revenues are in EUR/USD or USD-pegged, which might soften the Turkish lira volatility you're rightfully concerned about
-The leverage story: While that 4.1x debt/EBITDA definitely raises eyebrows, Pabrai thinks their 10-14% passenger growth guidance could turn that into a tailwind (potentially 24%+ cash flow growth)
-Geographic spread: 15 airports across 8 countries rather than pure Turkey risk
-Valuation: He keeps emphasising they're "very cheap vs other global airport operators"
The Almaty acquisition seems to be his proof point - $120M equity investment already generating $116M EBITDA with more growth expected.
Obviously your quality framework makes total sense, especially around financial stability. I'm curious what you think about his thesis - is there something he might be missing about the structural challenges, or could this be one of those rare times where the market's EM pessimism creates opportunity?
Thanks Rohan for sharing this. I agree with Mohnish's thesis and I also think TAV is undervalued, but I don't own it simply cause at the time of my initial investments in airports, the Mexican airports (ASUR) were at 12x forward earnings while TAV was then at 11x forward earnings. I felt the Mexican airports had lower debt, less currency worry and easier to monitor over a long time. TAV is on my watchlist, I just feel the debt is too high, 1/3 of EBIT goes to net effect of servicing debt.
Problem with airport is you are always going to be beholden to the government as a partner, who has the potential to be irrational and skew incentives. I'd be more interested if you could ever have a 'for profit' 100% publicly owned airport. But how these companies are currently constructed it makes them natural to be placed with big private investors who have the scale and deep pockets to deal with the local governments. As a small public investor, you are stuck hanging in the wind so to speak.
Hi Rick, you make a good point with airports, you're always in partnership with the government. Personally, I don't think an airport could ever be 100% for profit as by nature, these are public services.
Airports, as the gateway to the global economic and social environment, will continue to be a veritable aspect of investment interest. When maturity or a saturation point is reached will be gradual and self-evident to the keen eyes of the avid investor
Great job! Any thoughts on Bangalore Airport valuation, which is majority owned by FIH?
Grupo aeroportr dl pcfco has highest return among 3 Mexico airports?
Yes it is, I like GAP and it's on my shortlist. The valuations were however too high when compared to OMA and ASUR even after factoring their higher quality and growth projections at the start of my research into them. The valuation gap has closed down a bit as at today, so it's something I'm currently monitoring. There's a scenario where I add them to the portfolio as well.
Nice! How do u like Bolsaa which is Mexican stock exchange?
I haven't looked at them in great detail to provide unique thoughts. Not sure of the growth opportunity for the exchange - traditionally, there's been very low activity in the Mexican market, both trading volume and new listings.
True, but things seems shifting recently cus Mexico had the security reform act passed last year and if companies start to ipo again in next decade, that might be getting interesting. Stock market to gdp is really low, as family businesses gradually transfer to younger owners, wish they’ll want to leverage financial market more than their fathers.
Great summary of the space, thanks!
One follow-up:
How much of airport capex spend is discretionary vs. mandated by governments (depending on the ownership structure)? If a government wants an operator to add a terminal, does operator have any say on the scope, gate fee, etc.
To me, the difficult in valuation work would be estimating the true maintenance capex, given its an asset heavy business but would assume not much in practical depreciation every year.
Hi these are really good questions. We answer these in the part 2 section, deep dive into the Mexican airports so I'll say watch out for it once we upload it.
Interesting article, I look forward to your next one.
One thing though when you say "including Australia" you should actually say "including New Zealand". Australia has no more listed airports since Sydney airport was bought, Auckland Airport is in New Zealand.
Hi Christopher, the final bit has been uploaded now. Hope you enjoy it.
Thanks for spotting this! I actually meant to say Australasia rather than Australia as I was looking more region/continent coverage in the geography overview section.
Is there a reason why Fraport is missing in the valuation analysis?
Yes, I included Fraport in the list of 24 listed airports but the 12 airports in the valuation analysis were the higher quality names - I didn't consider Fraport among these 12 airports due to debt, return on capital, profit margins relative to the other names.
This guy does not miss! Looking forward to pt 2.
We were a bit late but the second part has now been uploaded.