FRA.F - Fraport AG

[Guest Schwab711]

Fraport AG owns 4 airports, has a controlling stake in 5 more, and a minority stake in 4 additional airports. The largest and most important holding in their portfolio is their perpetual ownership of the airport in Frankfort, Land Hessen, Germany, the 4th largest airport in the world. See below for an outline of their holdings.

 

Spekulatius may be able to correct me, but the Frankfort airport appears to be the Atlanta airport of Europe and the main hub for Lufthansa.

 

 

Fraport trades at roughly 2/3 the multiple (14x FCF, 9x EBITDA) of their peers with perpetual ownership in a major international airport. Fraport hasn't traded at these multiples since 2011/2012. There are many airport stocks trading at lower multiples but with finite concessions. Fraport is expected to earn approximately 10% ROE, which should be sustainable for a few years. Fraport has 20% of their debt maturing this year with a coupon of 5.25%. They will likely re-issue the debt at ~1.5% and could save the company another $28m. Fraport has various other smaller loans with lower coupons that will likely be re-issued at lower rates, but with less material effects on the bottom line.

 

 

Best I can tell, Fraport is cheap. They should earn 10% or so over time with a possibility for multiple expansion to the long-term average FCF multiple of 18x-20x.

[petec]

How do you think about the expiring concessions?

[Guest Schwab711]

How do you think about the expiring concessions?

 

Fraport's or generally? Fraport doesn't have any material maturities for next 20 years or so. Boston was roughly 2% of EBIT. I don't expect expiring concessions to affect the valuation of Fraport during my holding period.

 

Generally, the amortization of finite concessions are true costs and there's risk associated with losing a concession renewal or renewal concessions terms being less favorable in future periods. In my limited experience looking at concessions (whether airports, tolls, or whatever else), the finite-lived concessions operators seem to have investment costs pushed on them to offset any periods of outsized returns. Country risk is pretty critical since these are usually critical assets for sovereignty.

 

Although hard to quantify, consider the risks section of one of the Mexican airport operators.

[petec]

How do you think about the expiring concessions?

 

Fraport's or generally? Fraport doesn't have any material maturities for next 20 years or so. Boston was roughly 2% of EBIT. I don't expect expiring concessions to affect the valuation of Fraport during my holding period.

 

Generally, the amortization of finite concessions are true costs and there's risk associated with losing a concession renewal or renewal concessions terms being less favorable in future periods. In my limited experience looking at concessions (whether airports, tolls, or whatever else), the finite-lived concessions operators seem to have investment costs pushed on them to offset any periods of outsized returns. Country risk is pretty critical since these are usually critical assets for sovereignty.

 

Although hard to quantify, consider the risks section of one of the Mexican airport operators.

 

I was thinking generally, but with specific reference to your use of an FCF multiple to value the stock. I wouldn't pay 20x FCF for a 20-year concession, for reasons I hope are obvious. That's not a criticism, I'm just trying to get my head around what those concessions are worth if they have to reinvest most of the FCF in prolonging the concession.

[Guest Schwab711]

It really depends on the specific terms. Many toll roads end at the end of the concession and the company must have $0 liabilities. Obviously your concern about valuation multiples is present. Airport operators I've looked at pay an up-front fee, pay a royalty + shoulder some investment costs. There it gets trickier to say definitively yay or nay.

 

When I wrote this, mentioning the ownership terms was my way of setting up the use of a multiple and to highlight why the valuation gap is better than it looks imo. Maybe I could have been less subtle about it.

[John Hjorth]

... Spekulatius may be able to correct me, but the Frankfort airport appears to be the Atlanta airport of Europe and the main hub for Lufthansa. ...

 

I have no knowledge about Atlanta, and I'm not Spekulatius, but here is : Wikipedia : List of the busiest airports in Europe. I can confirm that Frankfurt is the main hub for Lufthansa.

[Spekulatius]

I bought some Fraport shares as well a few days and I agree it’s cheap. Their largest source of income (66%) are from the German airports and those are wholly owned and not concessions. Peru will expire in 2041 and is important (15% earnings contribution) and Greece is just ramping up and has potential (~4%) and runs though 2057.

 

I regard an wholly owned airport as a nice moaty  piece of real estate benefiting from increases in air travel.

[petec]

Lima is a phenomenal airport which I use regularly. I suspect they will get an opportunity to extend in return for investing to grow it.

[whistlerbumps]

I think one issue here is that its terminals are reaching capacity and the company has to invest a significant amount of capital in Terminal 3 without getting tariff relief

[Guest Schwab711]

I think one issue here is that its terminals are reaching capacity and the company has to invest a significant amount of capital in Terminal 3 without getting tariff relief

 

Nice to have some pushback on the idea. Can you expand on what you mean with tariff relief comment? Are you referring to this?

 

https://www.fraport.com/content/fraport/en/business-partner/airlines-cargo/airport-charges.html

[Spekulatius]

FRA.DE is down 7% today on concerns about Capex spent on Terminal 3, as “Own the Rails” has alluded too. Results look pretty good to me. I added some more today.