Mexican Airports

8/2/2019 Mexican Airports

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Important disclosures/certifications are in the Important Disclosures section of this report.

U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.* Employed by a non-US affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under NASD rules.

Latin American Equity Research Sector Report

Mexico City, May 28, 2008 Mexico Aerospace & Transportation

AIRPORT REVIEW MAY 2008Losing Altitude but Not CrashingGonzalo Fernndez* Vivian Salomn*Mexico: Banco Santander S.A. Mexico: Banco Santander S.A(5255) 5269-1931 (5255) [email protected] [email protected]

In this report, we are introducing YE2009 target prices for the Mexican airport groups Asur, GAP, and OMA, and

reiterating our Buy ratings on all three stocks. We are adjusting our estimates and valuations for the sector to take intoaccount the difficult environment the airline industry is facing due to the significant hike in jet fuel prices. Nevertheless, afterthe sharp drop in stock prices in the sector, we believe that most of the negatives are already priced in, and we continue to seevalue in the sector over the medium term. We include an overview of the airline industry in Mexico in order to address the

potential effect that the high oil prices are having on legacy, regional, and low-cost carrier, as well as airport operators.As a result of the significant increase in fuel costs, which has created significant cost pressures over the past few months

Mexican and international airlines have been forced to adjust routes and frequencies. There has been a significanreduction in traffic for Mexican airport operators, and, therefore, we are adjusting our estimates accordingly. We have loweredour estimate for 2008 traffic growth for the three publicly traded airport operators from 10.7% to 6.8%.

The stock prices of the publicly traded Mexican airport operators have been one of the worst-performing groups in the

Mexican market, with OMA losing 23%, GAP 25% and Asur down 18%. The average FV/EBITDA multiple for the sectorhas dropped from 10.0 times in November 2007 to 7.5 times currently. As a result, after adjusting our outlook for traffic to thenew environment, we are setting a YE2009 target price of US$68.00 per ADR for Asur, US$26.00 for OMA, and US$47.00 forGAP, and reiterating our Buy ratings as our new target prices indicate potential upside of 35%, 34%, and 40%, respectively.Compared with international airport operators, the sector in Mexico is trading at a significant 58% discount in terms of

2009E FV/EBITDA and 25% in terms of 2009E P/E. In our opinion, even though we still see some weakness in the sector

near term from lower-than-expected traffic growth (though we believe the downside is limited), we continue to see value in thesector due to high margins and strong free cash flow generation.

In this report, we also present an analysis of the current situation in the Mexican airline industry. In our opiniontraditional carriers Aeromexico and Mexicana will likely need to make adjustments to their routes and costs, and probablyrequire additional capital to compensate for higher costs. Nevertheless, given their market share and international presence, theyshould be able to weather the current turbulence, in our view. Newly created low-cost carriers such as Volaris and Interjet coulddo well, in our opinion, due to the low average age and high efficiency of their fleets. If required, these companies could accessadditional capital from their majority shareholders. Viva Aerobus, Alma, and Avolar could face more difficulties, in our viewbecause their aircraft are older and less efficient. Finally, as the regional carriers created before 2006, such as Aviacsa, theyhave the oldest fleets, we believe that they could be the most vulnerable. In our opinion, we are likely to see adjustments in theiroperations, such as fewer flights and routes, and even route cancellations, keeping only the most profitable operations, with thestronger airlines likely taking the routes given up by the weaker ones. This, in our opinion, could cause a temporary drop in air

traffic. After analyzing their exposure to different airlines and passenger segments, Asur is the most defensive group inthe sector, in our opinion. GAP and OMA could face more difficulties due to their higher exposure to regional carriers.

However, we find attractive upside potential for all three stocks.

Universe of Coverage (U.S. Dollars in Millionsa)Price Target Upside/ Net Earnings P/E FV/EBITDA Mkt.

Company Ticker Rec. May-23 Price Down 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2009E Cap

Asur ASR Buy 50.24 68.00 35% 101 115 123 14.9 13.1 12.3 7.1 6.1 5.5 1,507

GAP PAC Buy 33.65 47.00 40% 135 139 151 13.9 13.6 12.5 7.8 7.0 6.5 1,888

OMA OMAB Buy 19.38 26.00 34% 66 64 69 14.6 15.0 13.9 7.5 6.6 6.0 963

Average 14.4 13.7 12.8 7.5 6.6 6.1a

Except per share/ADR amounts. Sources: Company reports and Santander estimates.


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Losing Altitude - but Not Crashing

Important disclosures/certifications are in the Important Disclosures section of this report.U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918

2

TABLE OF CONTENTS

Airport Review ........................................................................................................................ 1

Recommendations, Target Prices, and EBITDA Estimates..................................................... 3

Investment Case....................................................................................................................... 4

Comparative Valuation Table.................................................................................................. 6

Asur........................................................................................................................................ 15

GAP .......................................................................................................................................23

OMA...................................................................................................................................... 31

Important Disclosures ............................................................................................................ 39

Important Disclosures (Continued)........................................................................................ 41

Sector Research Team

Analyst Name Country Email Telephone

Gonzalo Fernndez Mexico [email protected] (5255) 5269-1931

Vivian Salomn Mexico [email protected] (5255) 5257 8172


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Important disclosures/certifications are in the Important Disclosures section of this report.U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

3

RECOMMENDATIONS,TARGET PRICES, AND EBITDAESTIMATES

Inv Code Target Price 2008E 2009E 2010E

Company From To From

(08YE)

To

(09YE)

From To % From To % From To %

Asur Buy Buy 70.00 68.00 184 180 -2.3 193 197 1.9 207

GAP Buy Buy 60.00 47.00 241 236 -1.7 263 257 -2.2 276

OMA Buy Buy 32.00 26.00 115 107 -6.6 129 119 -7.7 127

All data in US$. Sources: Company reports and Santander estimates.

Figure 1. Mexico Select Economic Projections, 2007-2010E

2007 2008E 2009E 2010E

Real GDP (%) 3.3% 3.0% 3.6% NA

CPI Inflation (%) 3.8% 4.4% 3.8% 3.5%

US$ Exchange Rate (Year-End) 10.92 10.70 11.04 11.47

US$ Exchange Rate (Average) 10.93 10.66 10.90 11.45

Interest Rate (Year-End) 7.4% 7.8% 7.5% NA

Interest Rate (Average) 7.2% 7.6% 7.5% NA

Fiscal Balance (% of GDP) 0.0% 0.0% 0.0% NA

Current Account Balance (% of GDP) -1.2% -1.5% -1.6% NA

International Reserves (US$ Bn) 76.5 78.0 82.9 NA

Total External Debt (% of GDP) 12.8% 12.1% 11.5% NA

NA not available. Source: Santander historicals and forecasts.


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4

INVESTMENT CASEThe price of WTI oil has increased from US$60 per barrel to US$133 per barrel and jet fuel fromUS$80 per barrel to US$160 per barrel over the past 12 months, having a significant negative

impact on airlines and air travel, as fuel represents close to 30% of an airlines operating costs.

Figure 2. Jet Fuel and Crude Oil Price ($/barrel), Jan 2003-May 2008

Source: IATA.

This negative impact has forced Mexican airlines to adjust their operations by reducing

flight frequencies and routes in order to maintain only the most profitable operations . As aresult, traffic growth for the three publicly-traded Mexican airport operators declined

from 17.4% in full-year 2007 to 13.6% in 1Q08 and 0.8% in the month of April . Thestrength in 1Q08 and the slowdown in April are partially explained by the calendar effect ofEaster week, which fell in March this year rather than April, as in 2007. Nevertheless, weaktraffic reports in April have increased concerns regarding the outlook for the sector, resulting in

significant adjustments in stock prices.

As a result, we are reducing our estimated average traffic growth for Mexican airports

from 11% YoY previously to 7% for 2008 and 2009, in line with the historical average (see

Figure 3 on the following page). Despite a more conservative scenario, based on our newYE2009 target prices, the three stocks we cover in the sector offer an average potential upside of27% plus an average dividend yield of 4% per year. As a result, we are maintaining our Buyrecommendations on these three stocks, although we do not rule out further price volatility in thenear term.

Figure 3. Passenger Traffic Growth

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

As ur GAP OMA

Source: Company reports.


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5

Figure 4. Total Domestic and International Passengers (Thousand of Passengers)

22,128 23,40425,473 25,760 25,048

24,05124,846 26,404

27,83029,807

10,727 11,833 12,361 13,652 13,234 13,20514,430

17,119 18,280 18,918

43,52339,27637,834 39,412

32,855 35,237

38,282 37,256

46,11048,725

997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Domestic International TOTAL

CAGR 5.8%

CAGR 4.7%

CAGR 8.3%

Source: Mexican Ministry of Communications and Transport.

VALUATION

As a result of the abovementioned adjustment in the sector, the average 2008E FV/EBITDA hasdropped from 10.0 times in November 2007 (the date of our last report) to 7.5 times at present.

Figure 5. FV/EBITDA Forward Multiples, Nov. 2006-Apr. 2008

6.2

7.2

8.2

9.2

10.2

11.2

12.2

13.2

Nov-06

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

GAP OMA ASUR Average

Source: Santander estimates.


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6

COMPARATIVE VALUATION TABLE

When compared with international airport operators, the sector in Mexico is trading at asignificant 58% discount in terms of 2009E FV/EBITDA and 25% in terms of P/E 2009E. This

confirms our view that the market in Mexico has overreacted to the current situation, and that thestocks still offer attractive valuation levels.

Figure 6. Comparative Valuation of Mexican and International Airport OperatorsPriceUS$ FV/EBITDA PE

Airport Ticker 23-May Mkt Cap 2008E 2009E 2010E 2008E 2009E 2010E

Copenhagen KBHL DC 444.40 3,487.6 11.5 10.9 10.5 19.1 20.2 19.3

Auckland AIA NZ 1.80 2,195.5 13.9 12.7 11.8 29.1 24.9 22.8

Beijing 694 HK 1.04 1,634.1 4.4 3.3 2.7 16.0 15.1 8.7

Vienna FLU AV 120.33 2,526.9 10.0 9.3 8.5 17.6 17.1 15.1

Malaysia MAHB MK 0.93 1,026.4 5.2 4.7 4.5 11.9 9.8 9.4

Fraport FRA GR 68.98 6,315.6 9.3 9.0 8.6 20.5 20.9 22.1

Shangai 600009 CH 3.29 6,337.5 21.0 17.6 14.4 27.3 22.4 19.2

Macquaire Airports MAP AU 3.07 5,272.0 15.3 13.9 12.4 12.9 10.1 7.8

International Average 28,795.6 11.6 15.8 8.7 20.3 18.4 16.7

Asur ASR 50.24 1,507.2 7.1 6.1 5.5 14.9 13.1 12.3

GAP PAC 33.65 1,887.8 7.8 7.0 6.5 13.9 13.6 12.5

OMA OMAB 19.38 962.7 7.5 6.6 6.0 14.6 15.0 13.9

Mexico Average 4,357.6 7.5 6.6 6.1 14.4 13.7 12.8

Mexico vs. International -35.7% -57.9% -30.5% -28.9% -25.4% -24.0%All data in US$. Sources: Company reports, Santander estimates, and Bloomberg estimates for international airports.

ATTRACTIVE DIVIDENDYIELDS

Because of their capacity to generate strong free cash flow, Mexican airport operators are amongthe highest dividend payers in the Mexican public sector. With the sharp adjustment in stockprices over the past months, dividend yields have become even more attractive. GAP will pay thesecond tranche of its 2008 dividend of M$2.00 per share (M$1.54 per share paid on May 26,2008 and M$0.46 per share to be paid on October 31), which represents a yield of 5.6% atcurrent prices. For 2009, we estimate a cash dividend of M$2.10 per share, indicating a 5.7%yield at current prices. OMA will pay quarterly cash dividends of M$0.27 per share on July 15,October 15, and January 15, 2009 and April 15 2009. We estimate a total dividend of M$1.10 pershare for 2009, with dividend yields of 4.6% for 2008 and 4.2% estimated for 2009, based oncurrent prices.. Finally, Asur will pay a cash dividend of M$2.00 per share on May 30, whichrepresents a yield of 3.8%, and we estimate a dividend of M$1.60 for 2009 with a 2.9% yield,based on current prices. All dividends are after taxes.

INDUSTRY OVERVIEWAs we have mentioned in previous reports, the transformation of the Mexican airline industrybegan in 2006 with the privatization of Mexicana and the launch of six low-cost carriers (LCCs),followed by the privatization of Aeromexico in 2007. Before 2006, the industry was comprisedof two legacy carriers that were owned by the government (Aeromexico and Mexicana), alongwith a few regional carriers such as Aviacsa.

As a result of these changes, air fares decreased and competition increased, resulting in

domestic traffic growing 7.1% YoY in 2006 and 18.3% YoY in 2007. Low-cost carriers havebeen consistently increasing their market share, reaching a market share of 34.3% in 1Q08,


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7

largely at the expense of the legacy and regional carriers. The most representative of the latter,Aviacsa, has maintained a consistent market share of 14%. However, this carrier has been themost affected by the recent hike in fuel prices, aggressively reducing frequencies and routes in1Q08, which led to a drop in its market share to 9.3%. According to conversations with themanagement of airport operators, these routes have been gradually taken over by other carriers.

Figure 7. Market Share in Domestic Traffic in Mexico, 2004-1Q08

2004 2005 2006 2007 1Q07 1Q08 05/04* 06/05* 07/06* 1Q08/1Q07

Grupo Aeromexico 39.0% 36.9% 32.9% 28.6% 31.0% 26.5% - 2.10 - 4.00 - 4.32 - 4.59

Grupo Mexicana 28.3% 27.8% 27.0% 24.1% 23.5% 22.1% -0.5 -0.8 - 2.93 - 1.47

Low-Cost Carriers* 0.0% 0.3% 12.9% 26.1% 20.4% 34.3% 0.3 12.6 13.2 13.90

Aviacsa 13.9% 14.7% 14.0% 11.7% 14.1% 9.3% 0.81 - 0.73 - 2.30 - 4.81Source: Mexican Transportation Ministry. LCC include Interjet, ALMA, Avolar, Volaris, and VivaAerobus.

Despite rising fuel prices, the impact on each airline mainly depends on the fuel efficiency of itsfleet, which is largely determined by the fleets age. According to IATA, fuel efficiency hasimproved significantly in the industry since 2002, due to the increasing percentage of newer andmore fuel efficient aircraft in the fleets.

Figure 8. Fuel Consumption per Passenger (Gallon)

26

28

30

32

34

36

38

40

1995

1997

2001

2003

2005

2007

2009E

2011E

-17% -7%

26

28

30

32

34

36

38

40

26

28

30

32

34

36

38

40

1995

1997

2001

2003

2005

2007

2009E

2011E

-17% -7%

Source: IATA December 2007.

Figure 9. Fuel Expenses % of Total Expenses

1995

1997

2001

2003

2005

2007

2009E

2011E

5

10

15

20

25

30

35

+164%

-10%

1995

1997

2001

2003

2005

2007

2009E

2011E

5

10

15

20

25

30

35

5

10

15

20

25

30

35

+164%

-10%

Source: IATA, December 2007.


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8

Figure 10. Fuel Consumption: Tons/Hour

Airlines Aircraft Ton/Hour

Aviacsa, Avolar, VivaAerobus and Magnicharters B737-200 /B737-300 2.8

Mexicana, Interjet, Volaris A319, A320 2.0

Aeromexico B737-700 / B737-800 2.0Aeromexico Connect EMBRAER 145EP 1.3-1.4

Alma Bombardier CRJ 1.4Source: Company reports.

Among the Mexican carriers, regional carrier Aviacsa and low-cost carriers Avolar, and

VivaAerobus, together with charter airline, Magnicharters, are the airlines with the highest

fuel consumption. The traditional carriers Aeromexico and Mexicana and LCCs Volaris andInterjet are in the mid-range in terms of efficiency, while the companies with the most efficientfleets are Aeromexico Connect (a subsidiary of Aeromexico) and Alma. Other characteristics thatimpact costs are labor (higher in traditional airlines) and administrative expenses. In our opinion,the current situation in the industry could lead to consolidation, and we believe that Volaris andInterjet would be the most likely acquirers. Because of the low concentration in the domestic

market, with more than 14 participants and the highest market share held by Aeromexico and itssubsidiary Aeromexico Connect (20%), in our opinion, there is a lot of room for consolidation inthe industry as a result of the current difficult climate for the industry.

Airlines with strong financial support from their controlling shareholders like Aeromexico

(Jose Luis Barraza, Roberto Hernandez and Banamex), Volaris (Carlos Slim and Televisa),

and Interjet (Miguel Aleman) could increase capital if required and could be the

consolidators of the industry. The financial health of Mexicana is one key issue for the airlineindustry in Mexico. Mexicana was acquired in 2006 by Grupo Posadas and holds 18% of thedomestic market (Mexicana + Click) and 57% of the international market, mainly routes to theU.S. and South America. At present, there is no public information regarding the financial healthof Mexicana, and trouble at this airline could have a significant negative impact on the sector.According to recent reports in the Mexican press, Mexicana and Aeromexico are in talks with the

unions in order to reduce labor costs, which is critical to their financial health.


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Figure 11. Main Airline Fleets in Mexico, 2007

Airline Aircraft 2007 Orders

Interjet 11

AIRBUS A-320-214 11

Aerocalifornia 22

DC-9-32 22

VivaAerobs 5

BOEING 737-301 1

BOEING 737-387 4

Alma 18

BOMBARDIER CL-600-2B19 18

AEROVIAS DE MEXICO 74

BOEING 737-700 33 10

BOEING 737-800 6

BOEING 757-200 2

BOEING 767-200 3

BOEING 767-300 1

BOEING 777-200 4

BOEING 787-8 2MD-82 3

MD-83 2

MD-87 10

MD-88 10

AVIACSA 26

BOEING 737-200 14

BOEING 737-205 1

BOEING 737-219 6

BOEING 737-2T4 2

BOEING 737-301 3

AVOLAR 12B737-200 4 B737-300 5

B737-500 3

LINEAS AEREAS AZTECA 8

BOEING 737-300 5

BOEING 737-700 3

MEXICANA DE AVIACION 66

AIRBUS A318 10

AIRBUS A319-100 20

AIRBUS A320 31

BOEING 727-200

BOEING 757-200 3

BOEING 767 2

Volaris 17

AIRBUS 319-132 7 13AIRBUS 319-133 10

Aeromexico Connect 38

SAAB 340B 8

EMBRAER 145EP 5

EMBRAER 145LR 7

EMBRAER 145LU 11

EMBRAER 145MP 4

ERJ 190-100LR 3

Click 17FOKKER AIRCRAFH F28-MK0100 17

Sources: SCT, Boeing, Airbus and Santander.


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10

AIR TRAVEL PRICING SURVEYOur price survey among the two legacy carriers in Mexico (Aeromexico and Mexicana) and

two LCCs (Volaris and Interjet)shows that LCCs continue to offer strong price incentives

versus the legacy carriers. Using the Internet, the data was collected for three routes Mexico/Toluca to Cancun, Monterrey and Guadalajara based on a round trip fare andcomparing the dates of March 1, March 12 to May 20 and May 21.

We separated the airfare and the tax portion of the ticket price in order to evaluate thecomposition of the full fare. LCCs, compared to traditional airlines, offer fares that were anaverage of 27% lower on the Mexico to Cancun routes, 28% lower for flights between

Mexico and Monterrey, and 31% lower between Mexico and Guadalajara. Surprisingly,

despite the difficult environment for airlines, ticket prices continue to fall because of

competitive pressures. Nevertheless, we believe that airlines will start to raise prices or addextra fees related to fuel, so that they can pass this additional cost on to the passenger. Mexicanairlines, including legacy and LCCs, have started taking measures to reduce fuel consumption,from using lighter materials in their equipment to limiting the number of carry-on bags and the

weight of checked baggage in order to reduce the weight in the plane. We expect to see more ofthese measures in the short term if oil prices remain at current levels or continue to rise.

As an example of these measures, on May 27, 2008 Volaris announced an extra fuel charge forpassengers in the range of US$35 on the shortest routes to US$50 on the longest one (Mexico Tijuana). In our opinion this charge does not imply a significant increase in the fare and thesensitivity of traffic should be small. We believe that other airlines will apply similar chargesover the near term.


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11

Figure 12. Market Share in Domestic Fights in Mexico

Mexico/Toluca - Cancun Ticket (P$)

vs.

Avg. Taxes (P$)

vs.

Avg. Total (P$)

vs.

Avg.

Tax %

Total

Pricing Chg %

May 19 vs. Mar 7Aeromexico 2,698 3% 770 -16% 3,468 1% 22% -9.0%

Mexicana 3,548 36% 893 -2% 4,441 30% 20% 8.2%

Average Traditional 3,123 831 3,954 0 -0.1%

Interjet 2,266 -13% 634 -31% 2,900 -15% 22% 4.8%

Volaris 1,440 -45% 1,443 58% 2,883 -16% 50% -0.6%

Average LCCs 1,853 1,039 2,892 2.0%

LCCs / Traditional -41% 25% -27%

Average 2,615 914 3,423 29%

Mexico/Toluca - Monterrey Ticket (P$) vs Avg. Taxes (P$) vs Avg. Total (P$) vs Avg.Tax %Total

Aeromexico 1,500 25% 643 -1% 2,143 16% 30% -40.6%

Mexicana 1,390 16% 626 -4% 2,016 9% 31% -42.9%

Average Traditional 1,445 635 2,080 -41.7%

Interjet 832 -31% 519 -20% 1,351 -27% 38% -17.7%

Volaris 820 -32% 825 27% 1,645 -11% 50% 5.5%

Average LCCs 826 672 1,498 -6.4%


Average 1,197 650 1,847 37%

Mexico/Toluca - Guadalajara Ticket (P$) vs Avg. Taxes (P$) vs Avg. Total (P$) vs Avg.Tax %Total

Aeromexico 1,118 -7% 596 -10% 1,714 -8% 35% -49.8%

Mexicana 1,833 53% 706 6% 2,539 36% 28% -23.0%

Average Traditional 1,476 651 2,126 -36.6%

Interjet 877 -27% 547 -17% 1,424 -23% 38% -22.4%

Volaris 684 -43% 813 23% 1,497 -20% 54% 4.4%Average LCCs 781 680 1,461 -10.6%


Average 1,198 663 1,860 39%Source: Santander using company data.

IMPACT ON MEXICAN AIRPORT OPERATORS

The abovementioned adjustments in routes and frequencies in the sector will likely have differenteffects on the three Mexican airport groups, depending on their exposure to regional carriers orcarriers with the oldest fleets, as well as the nature of their passenger traffic (tourism, business,regional, etc). In our opinion, business and tourism traffic should be the most resilient passenger

segments.


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12

Figure 13. Domestic Airlines - Market Share of Domestic Flights

Aerounion

0%

Alma

10%

Aeromexico

Connect

17%

Click

8%

Volaris

6%

Interjet

5%

Aeromexico

13%

Aeromar

5%

Aviacsa

9%

Mexicana

10%

Others2%

Avolar

4%

VivaAerobus

3%

Aerocalifornia

8%

Source: Ministry of Communications and Transport.

Figure 14. Domestic Airlines - Market Share of International Flights

Aeromexico

26%

Mexicana

57%

Aeromexico

Connect

6%Aerounion

1%

Interjet

1%

Click

4%

Others

3%

Aviacsa

2%

Source: Ministry of Communications and Transport.

ASURIn our opinion, because of the diversification of the airlines it serves, exposure to tourism,

and low exposure to regional carriers (Avicacsa only represents 4% of traffic), Asur could

be the most defensive airport group in Mexico. Tourism represents 88% of total traffic forAsur and Cancun represents 73% of total traffic. In our opinion, the strength of the euro is asignificant advantage for Cancun in terms of tourism from the U.S. and Europe, and thisdestination is also showing signs of a recovery in tourism from Canada and South America,particularly Brazil. Traffic is well diversified between airlines, thus routes and frequencies


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13

cancelled could be taken over by other airlines, and charter carriers represent a significantproportion of traffic that could easily be substituted by other operators. Finally, regional trafficfor Asur is served by Interjet, which is, in our opinion, among the healthiest LCCs in Mexico.

Figure 15. Airline Participation - Asur vs. Passenger Segment

Others,

60%Click, 4%

Aviacin

Comercial

Especializa

da, 3%Aviacsa,4%

American Airlines, 6%

Aeromexico, 6%

Continental, 5%

Mexicana, 9%

Aviation Support , 3%

Petroserviciosde Mexico, 1%

Tourist,

88%

Regional,

11.8%

Source: Company Reports

GAP

Among Mexican airports, GAP is the most diversified in terms of mix of airports and type

of passenger.Nevertheless, LCCs represent a higher percentage of traffic at GAPs airportsthan at those of Asur and OMA, thus its airports can be more negatively affected by

regional and low-cost carriers adjusting their routes and schedules. YTD, the largemetropolitan cities represent 47.8% of GAPs total traffic, tourist destinations represent 34.4%,and regional air traffic accounts for 17.8%. Among all operators, GAP has been most affected by

the cancellation of routes and frequencies by both regional carriers and LCCs, due to its higherexposure to domestic traffic and regional carriers.

In our opinion, GAP could be hardest hit if fuel costs keep rising, further affecting the

operation of LCCs and regional airlines that we believe are most sensitive to higher fuel

costs. In the month of April, in addition to negative calendar effects, GAP was affected by adecline in operations of airlines such as Aviacsa, Aeromexico, Aeromexico Connect, and Avolar,causing GAPs total traffic to decrease 5.3%. In full-year 2007, Aviacsa represented 7% ofGAPs total traffic. In April 2008, total departing flights operated by this airline decreased 32.2%in four of GAPs airports. Problems faced by Aviacsa and Avolar have been related to the cost offuel, as both airlines have older aircrafts with higher fuel consumption. Aeromexico has beencanceling routes in focus on the more profitable routes. In our opinion, some of these cancelledroutes could be taken by other operators, thus, we expect to see a recovery in air traffic in thecoming months. We expect total traffic for GAP to increase 4.7% YoY in full-year 2008(4.5% domestic and 5.2% international).


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Figure 16. Airline Participation - GAP vs. Passenger Segment

Volaris, 9%

Alaska, 4%

Alma, 4%

Avolar, 7%

Others, 8%

Aeromexico,

14%

Interjet, 3%

American,

3%

Delta, 3%Us Airways ,

2%

Vivaerobus,

1%

Mexicana, 14%

Aerocalifornia, 7%

Aviacsa, 7%

Connect, 6%

Continental, 4%Regional

18%Tourist

34%

Metropolitan

48%


OMA

OMAs passenger traffic is more concentrated in metropolitan areas, with Monterrey

accounting for 44% of its total traffic in the January-April 2008 period. As of 1Q08, 43% ofpassengers left from or flew to large metropolitan cities, 23% were tourists, 26% were regionalpassengers, and 8% originated from or flew to border cities. In our opinion, regional and borderairports are the most likely to be affected by the cancellation of routes. However, in ouropinion, Monterrey could be less affected because it mainly serves business travelers.Aeromexico and Mexicana have the highest market share of passengers at OMAs airports(25.7% and 13.5%, respectively), followed by Aviacsa (11.9%) and VivaAerobus (11.7%). Inaddition, as Aviacsas hub is in Monterrey, if its route and schedule cancellations continue,traffic will likely continue to decrease at that airport until other airlines take over these routes.

Figure 17. Airline Participation - OMA vs. Passenger Group

Interjet,

7.1%

Continental ,

4.5%

Alma, 3.0%

Aviacsa,

11.9%

Volaris, 2.7%

VivaAerobus,

11.7%

Aeromexico,

15.7%

Aeromexico

Connect,

10.0%

Aerocalifornia,

3.6%

Mexicana

+Click,

13.5%

Regional,

26%

Tourist, 23%

Border, 8%

Metropolitan,

43%



15/42

15Important disclosures/certifications are in the Important Disclosures section of this report.U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

ASUR BUY

The Most Defensive PlayGonzalo Fernndez* Vivian Salomn*(5255) 5269-1931 (5255) [email protected] [email protected]

(05/23/08)CURRENT PRICE:US$50.24/M$54.41TARGET PRICE:US$68.00/M$73.00

Whats Changed/Initiation of CoverageRating: Unchanged at Buy

Price Target: Introducing TP2009 US$68.00

EBITDA Estimates

(US$):

08From 184 to 180 million

09 From 193 to 197 million

Introducing 10 at 207 million

Company StatisticsBloomberg ASR

52-Week Range (US$) 44.18 - 62.65

2008E P/E Rel to the IPC Index (x) 0.92

2008E P/E Rel to the A&T Sector (x) 0.96

Mexbol (US$) 2,704.0

3-Yr EBITDA CAGR (2007-10E) 9.8%

Market Capitalization (US$ Mn) 1,507

Float (%) 70

3-Mth Avg Daily Vol (US$000) 10.2Shares Outst - Mn (ADR 10:1) 300

Net Debt/Equity (x) -0.13

Book Value per ADR (US$) 44.30

Estimates and Valuation Ratios2007 2008E 2009E 2010E

Net Earn (M$ Mn) 522.4 1,079.2 1,251.3 1,397.7

Current EPS 1.74 3.60 4.17 4.66

Net Earn (US$ Mn) 47.9 101.1 115.0 123.0

Current EPADR 1.60 3.37 3.83 4.10

P/E (x) 31.5 14.9 13.1 12.3

P/Sales (x) 5.9 5.1 4.7 4.5

P/CE (x) 10.7 9.0 8.8 8.5

FV/EBITDA (x) 8.5 7.1 6.1 5.5

FV/Sales (x) 5.2 4.3 3.8 3.4

FCF Yield (%) 5.9 7.9 8.8 9.0

Div per ADR (US$) 0.69 1.90 1.47 1.41

Div Yield (%) 1.4 3.8 2.9 2.8Sources: Bloomberg, Company reports, and Santander estimates.

Investment Thesis: We are introducing a YE2009 target price ofUS$68.00 per ADR for Asur (M$73.00 per share) and reiterating ourBuy rating on the stock (we will no longer refer to our YE2008 targetprice of US$68.00). We believe that Asur has the most defensive mix ofairports, with the highest exposure to tourist destinations andinternational traffic, which should allow it to better handle the currentdifficult environment for airlines. Asurs defensive strength has shown

in the performance of the stock price and a reduction of the discounversus its peers, which has narrowed to a 7.2% discount compared withan average historical FV/EBITDA discount of 20%.

Reasons for Change to Rating/Price Target/Estimates:

Asur has been posting the strongest growth in passenger trafficamong the Mexican airport operators year to date, for both domesticand international passengers. In our opinion, this is explained by thefact that Asur experienced the positive effect of LCCs later thanOMA and GAP. As a result of tougher comparison bases goingforward and the current difficulties in the industry, we areestimating a more conservative traffic growth rate of 9.8% in fullyear 2008E and 7.3% in 2009E.

Based on this estimate, we are expecting the EBITDA margin toremain flat, estimating an EBITDA growth of 12.7% YoY in 2008and 11.5% in 2009, in nominal peso terms. In 2009, Asurs tariffswill be revised; we expect that its tariffs will be lower, given thepressures from airlines to reduce tariffs charged by the airports.

Valuation and Risks: Our YE2009 target price is based on adiscounted free cash flow valuation with a 11.1% discount rate and a2.5% terminal growth rate and implies a target FV/EBITDA of 8.9 timefor 2009E. Despite more conservative estimates, our target price impliesa potential upside of 35% from current levels plus an estimated 2.7%dividend yield, compared with our benchmark upside of 14.5% forMexico. Therefore, we are reiterating our Buy rating on the stock. Themain risks for Asur are (1) that it could be barred from bidding for theconstruction of the airport in the Mayan Riviera, which would competewith Asurs Cancun airport, and (2) the upcoming revision of its 2009-2013 Master Development Plan in 2008. In our opinion, there arepressures from Mexicos Antitrust Commission to lower aeronauticacharges in this revision and forbid Asur from bidding for the MayanRiviera airport. Other risks would be a lower-than-expected growth intraffic, natural disasters (such as hurricanes), terrorist threats (whichcould affect the tourism industry), and increases in operating costs andinsurance, as well as high oil prices that could impact negatively theoperation of airlines.


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16

Grupo Aeroportuario del Sureste (ASUR) owns a 50-year renewable concession to operate, maintain, and developnine airports in the southeastern region of Mexico. The concession was initially granted in November 1998 andincludes the operation of Cancuns International Airport, Mexicos number-one tourist destination, and the second-busiest airport in Mexico in terms of passenger traffic. Asurs other airports are in Cozumel, Mrida, Oaxaca,

Veracruz, Huatulco, Villahermosa, Tapachula, and Minatitlan.

INVESTMENT THESISWe are introducing a YE2009 target price of US$68.00 per ADR for Asur (M$73.00 per

share), and reiterating our Buy rating on the stock. We believe that Asur has the mostdefensive mix of airports, with the highest exposure to tourist destinations and internationaltraffic. In 2007, 89.5% of total traffic came from the U.S. and Canada. However the strength ofthe Euro and the Brazilian real could have a positive impact on tourism to Mexico, andparticularly Cancun, which is Asurs main airport.

In light of the current difficult environment the airline industry is facing, we are being

more conservative in our traffic estimates for Asur, even though it has posted the highestyear-to-date growth in both domestic and international traffic among the Mexican

operators we cover. We believe that Asur posted impressive year-to-date growth, while otherssuffered, due to the positive effect of LCCs operating out of Asurs airports. GAP and OMAbegan experiencing this positive effect more recently. Therefore, we believe that Asur could facetougher comparisons with it competitors starting in 3Q08. We have increased slightly our totaltraffic growth estimate for 2008 from 9.3% to 9.8% and reduced 2009 from 8.4% to 7.3%. Thus,given the difficult environment that airlines are experiencing, we believe Asur will maintain thehighest growth in traffic as compared to its peers, as it has lower concentration on the domesticside. For domestic traffic, we are forecasting a 12.1% growth in 2008E and 7.9% in 2009E, forinternational traffic we are expecting a 7.9% and 6.8% YoY growth, respectively.

The negotiations for the Master Development Plan (new maximum tariff and capex) for the

period of 2009-2013 will conclude this year. These negotiations for the maximum tariff

should consider all current events that might affect passenger traffic. The process todetermine tariffs is based on a discounted free cash flow that takes into account trafficexpectations, costs, and mandatory capex and should result in a return consistent with the cost ofequity in Mexico. In our opinion, there will be strong pressures from airlines to reduce tariffsconsistent with the downward trend in the cost of equity in Mexico. Nevertheless, lower trafficgrowth expectations should work in favor of Asur. The consideration of the construction of theRiviera Maya airport and Asurs participation in the bidding process should be key issues in thenegotiation of the Master Development Plan.

As a result, we estimate that aeronautical revenue will grow 7.0% YoY in real terms in 2008 and4.2% YoY in 2009, below traffic growth due to expectations for lower tariffs. On the other hand,we expect commercial revenue will continue to grow at a steady pace in 2008 and 2009.Considering the additional commercial space at Terminal 3 in Cancun, we estimate commercial

revenues per passenger of US$4.63 in 2008 and US$4.73in 2009. We forecast that EBITDAwill grow 12.7% in 2008 and 11.5% in 2009, both in nominal terms, assuming flat EBITDA

margin in 2008 and an EBITDA margin of 61.9% in 2009.

Under the new Mexican accounting standards NIF B10, the monetary position (REPOMO) waseliminated starting January 1st 2008. Mexican Airport operators have high net cash positions.Therefore, they previously posted significant monetary losses. This accounting policy, togetherwith the new fiscal reform, which lowers tax rates for airport operators, should benefit netincome. For Asur, we are expecting a net margin of 34.4% in 2008E and 36.1% in 2009Eand net income growth of 107% and 15.9% respectively.


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17

Regarding the Riviera Maya Airport, at the last World Economic Forum on April 23, 2008,the Mexican Minister of Communications and Transportation mentioned that Asur would beallowed to take part in the bidding process. However, the company is still waiting for theMexican Antitrust Commissions decision on this matter. The tender offer will probably be madeby 2H08. We have not included the Riviera Maya Airport in our estimates, as the release of theterms and conditions of the tender has been postponed since last year.

Figure 18. Asur - Operating Summary (Million Passengers and Million Pesos), 2006-2009E2007 2008E 2009E 2010E

Traffic (Million PAX)

Total Traffic 16,239 17,826 19,134 20,510

Growth 17.8% 9.8% 7.3% 7.2%

Cancun 11,340 12,384 13,224 14,164

Other Airports 4,899 5,442 5,910 6,347

Domestic 7,181 8,049 8,689 9,278

Growth 24.5% 12.1% 7.9% 6.8%

International 9,058 9,777 10,446 11,232

Growth 13.0% 7.9% 6.8% 7.5%

Millions of Nominal M$ PesosTotal Revenues 2,785 3,135 3,462 3,826

Real Growth 19.9% 7.8% 6.4% 6.8%

Aeronautical 1,890 2,112 2,283 2,508

Real Growth 14.7% 7.0% 4.2% 6.1%

Non Aeronautical 895 1,023 1,179 1,318

Real Growth 32.5% 9.5% 10.98% 8.0%

Commercial 744 883 999 1,116

Commercial Rev per Pass 45.8 49.5 52.2 54.4

Commercial per Pass US$ 4.20 4.63 4.73 4.75

Cost of Services 744 838 908 1,005

Administrative Expenses 104 110 114 142

Technical Assistance Fee 92 109 123 133

Concession Fees 139 157 173 191

Depreciation & Amortization 541 603 621 661

Total Costs and Expenses 1,620 1,816 1,940 2,132

Operating Profit 1,165 1,319 1,522 1,694

Operating Margin 41.8% 42.1% 44.0% 44.3%

EBITDA 1,706 1,922 2,143 2,355

EBITDA Margin 61.3% 61.3% 61.9% 61.5%

Net Fin. Cost 15 162 193 247

Income Before Taxes 1,179 1,480 1,714 1,941

Taxes 657 401 463 544

Net Income 522 1,079 1,251 1,398

Net Margin 18.8% 34.4% 36.1% 36.5%Sources: Company reports and Santander estimates.

VALUATIONOur YE2009 target price is based on a discounted free cash flow valuation using a 11.1%discount rate and a 2.5% terminal growth rate and implies a target FV/EBITDA of 8.9 times for2009. Our target price offers a potential upside of 35% from current levels plus an estimated2.9% dividend yield, thus we are reiterating our Buy rating on the stock. Compared with GAPand OMA, Asur is trading at a discount in terms of 2009E FV/EBITDA of 12.7% and 7.5%

respectively. In our opinion, the discount is justified by the potential negative impact associatedwith the Mayan Riviera airport, Asurs higher exposure to hurricanes, and the renegotiation of itsmaximum tariffs.


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18

Asurs defensiveness is evident in its forward multiples, as it is now trading at a 7.2% discountcompared to its 20% average in terms of FV/EBITDA and is flat in terms of P/E when comparedto its average discount of 26% versus the airport sector.

Figure 19. Asur Free Cash Flow, 2010E-2019E (U.S. Dollars in Millions)

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Terminal

Sales 336 363 390 417 442 469 497 526 553 580

EBITDA 207 224 240 257 273 289 307 326 343 361

Taxes (Cash) 7 16 29 31 33 35 37 39 41 43

Capex 61 66 71 76 81 86 91 96 101 90

Chg in Wk Cap 3 3 2 8 13 14 15 16 17 17

FCF 136 139 138 142 146 155 165 175 184 210 2,452


Figure 20. Asur - Discounted FCF, 2010E-2019E (U.S. Dollars in Millions)

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Termi

Present Value 122 112 101 93 86 83 79 76 72 74 859

Firm Value 1,756Net Cash 2009E -297

Equity Value 2,053

Curr Price (US$) 50.24

09 TP/ADR (10:1) 68.00

Upside 35%

Dividend Yield 09E 2.9%

Total Return 38.0%Source: Santander estimates.

Figure 21. Asur FV/EBITDA Forward Multiple vs. Historical Average

5

6

7

8

9

10

Jan-06

Feb-06

Mar-06

Apr-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Dec-06

Jan-07

Feb-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Apr-08

May-08

ASUR FV/EBITDA Avg Source: Santander estimates.


19/42


19

RISKS TO INVESTMENT THESIS

In its 2007-2012 infrastructure plan, the Mexican government stated its intention tobuild an airport in the Mayan Riviera region, south of Cancun . According to thegovernment, the airport would be put out for tender offer bids during 1Q08 and would servetourism in the Mayan Riviera region, which currently is managed through Asurs Cancunairport. Although Asur management has stated its intention to take part in this biddingprocess, it is our understanding that Mexicos Antitrust Commission is against Asursparticipation in order to promote competition. As a result, we expect that Asur will lose sometraffic in Cancun after the opening of this new airport scheduled for 2010.

Asurs Master Development Plan for the 2009-2013 period is expected to be revisedduring 2008. The plan will establish maximum aeronautical charges and mandatory capexfor the above-mentioned period based on an estimated internal return rate consistent with thecost of capital in Mexico, according to Asurs concession title. In the last revision in 2004,aeronautical charges went up 6%, and the efficiency factor was set at 0.75% per year.

Nevertheless, based on the higher-than-expected increase in traffic and a reduction inMexicos cost of capital, we expect the upcoming revision to be tougher in terms of tariffs.Furthermore, during 3Q07, the Mexican Antitrust Commission published a report stating thataeronautical tariffs in Mexico are among the highest worldwide (a statement which theairport groups do not agree with), and is pushing to increase competition in the sector inMexico. As a result, we expect a tougher negotiation of aeronautical tariffs estimating areduction of 3% in 2009 and the maintenance of a 0.75% efficiency factor going

forward. Mandatory capex could be lower because major improvements at the airports,including a second runway and a new terminal building, have been made at Cancun over thelast few years, and this would allow Asur to reach the minimum return rates determined inthe concession title. In addition, Asur should be compensated in some way for the loss intraffic to the new airport close to Cancun.

As Cancun is located in a hurricane zone, Asur will continue to be exposed to negativeeffects caused by future hurricanes. In addition, the company could be affected by changesin tourism preferences, competition from other tourism destinations, problems in the airlineindustry, and terrorism, among other factors. The impact of low-cost carriers on trafficalso is uncertain, as none of them have been operating very long.

ASUR management announced in a press release on November 5, 2007, that, due to theflooding in the City of Villahermosa, and throughout approximately 80% of the

Mexican state of Tabasco, passenger traffic at Villahermosa airport will be

negatively affected. Although the company is currently unable to estimate the fullpotential impact of this natural disaster on passenger traffic. Villahermosa airport represents5.4% of total traffic for Asur and, at this point in time, it is difficult to estimate the potentialnegative impact of this event. It is important to mention that the airport's infrastructure

was not damaged by the flooding.

Asur also is exposed to terrorist threats that could increase security measures at theairports. In 2006, Asur had to make an extraordinary investment of approximatelyUS$30 million to acquire baggage-screening equipment to comply with tighter internationalstandards. Insurance costs also have increased after the impact of Hurricane Wilma in 2005.Finally, other terrorist threats could increase security measures, implying additional costs orlower revenues for Asur.


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20

ESTIMATE REVISIONSFigure 22. Asur Estimate Revisions, 2008E-2010E (U.S. Dollars in Millions

a)

2008E 2009E 2010E

Previous Current Change Previous Current Change IntroducingRevenue 301 294 -2.5% 319 318 -0.3% 336

Op. Profit 124 124 -0.4% 136 140 2.8% 149

Op. Margin 41.2% 42.1% 0.9% 42.7% 44.0% 1.3% 44.3%

EBITDA 184 180 -2.3% 193 197 1.9% 207

Net Income 87 101 16.4% 97 115 18.6% 123

EPADR 2.90 3.37 16.4% 3.23 3.83 18.6% 4.10aExcept per share data. Sources: Company reports and Santander estimates.


21/42


21

FINANCIAL STATEMENTSFigure 23. Asur Income Statement, Balance Sheet, and CF Statement, 2007-2010E(U.S. Dollars in Millions)

Income Statement 2007 % 2008E % 2009E % 2010E %

Sales 255 100% 294 100% 318 100% 336 100%

Cost of Sales - 0% - 0% - 0% - 0%

Gross Profit 255 100% 294 100% 318 100% 336 100%

Oper. and Adm. Expenses 148 58% 170 58% 178 56% 187 56%

Operating Profit 107 42% 124 42% 140 44% 149 44%

Depreciation 50 19% 57 19% 57 18% 58 17%

EBITDA 156 61% 180 61% 197 62% 207 62%

Financing Costs 1 1% 15 5% 18 6% 22 6%

Interest Paid (0) 0% (0) 0% - 0% - 0%

Interest Earned 10 4% 15 5% 17 5% 22 7%

Monetary Gain/Loss (9) -3% - 0% - 0% - 0%

FX Gain/Loss 0 0% (0) 0% 1 0% (0) 0%

Other Financial Operations - 0% (0) 0% (0) 0% (0) 0%

Profit before Taxes 108 42% 139 47% 158 50% 171 51%Tax Provision 60 24% 38 13% 43 13% 48 14%

Profit after Taxes 48 19% 101 34% 115 36% 123 37%

Subsidiaries 0 0% - 0% - 0% - 0%

Extraordinary Items 0 0% - 0% - 0% - 0%

Minority Interest - 0% - 0% - 0% - 0%

Net Profit 48 19% 101 34% 115 36% 123 37%

Balance Sheet 2007 % 2008E % 2009E % 2010E %

Assets 1,528 100% 1,646 100% 1,690 100% 1,728 100%

Short-Term Assets 226 15% 301 18% 364 22% 428 25%

Cash and Equivalents 176 12% 234 14% 297 18% 359 21%

Accounts Receivable 26 2% 46 3% 46 3% 49 3%

Inventories 1 0% - 0% - 0% - 0%

Other Short-Term Assets 23 1% 21 1% 21 1% 20 1%

Long-Term Assets 1,302 85% 1,345 82% 1,327 78% 1,299 75%Fixed Assets 537 35% 592 36% 626 37% 660 38%

Deferred Assets 765 50% 753 46% 700 41% 639 37%

Other Assets - 0% - 0% - 0% - 0%

Liabilities 199 13% 214 13% 187 11% 164 9%

Short-T. Liabilities 27 2% 26 2% 11 1% 11 1%

Suppliers 2 0% 2 0% 2 0% 2 0%

Short-Term Loans - 0% - 0% - 0% - 0%

Other ST Liabilities 26 2% 25 2% 9 1% 9 1%

Long-Term Loans - 0% - 0% - 0% - 0%

Deferred Liabilities 343 22% 188 11% 176 10% 153 9%

Other Liabilities - 0% - 0% - 0% - 0%

Majority Net Worth 1,329 87% 1,432 87% 1,504 89% 1,564 91%

Net Worth 1,329 87% 1,432 87% 1,504 89% 1,564 91%

Minority Interest - 0% - 0% - 0% - 0%Cash Flow 2007 % 2008E % 2009E % 2010E %

Net Majority Earnings 48 101 115 123

Non-Cash Items 94 66 58 58

Changes in Working Capital (2) (0) (1) (3)

Capital Increases/Dividends (21) (57) (44) (42)

Change in Debt - - - -

Capital Expenditures (61) (56) (57) (61)

Net Cash Flow 58 54 71 74

Beginning Treasury 164 180 235 297

Ending Treasury 176 235 297 359Sources: Company reports and Santander estimates.


22/42



22

Figure 24. Asur Income Statement, Balance Sheet, and CF Statement, 2007-2010E(Millions of Mexican Pesos)


Sales 2,786 100% 3,135 100% 3,462 100% 3,826 100%

Cost of Sales - 0% - 0% - 0% - 0%

Gross Profit 2,786 100% 3,135 100% 3,462 100% 3 ,826 100%Oper. and Adm. Expenses 1,620 58% 1,816 58% 1,940 56% 2,132 56%

Operating Profit 1,166 42% 1,319 42% 1,522 44% 1,694 44%

Depreciation 541 19% 603 19% 621 18% 661 17%

EBITDA 1,707 61% 1,922 61% 2,143 62% 2,355 62%

Financing Costs 15 1% 162 5% 193 6% 247 6%

Interest Paid (4) 0% (1) 0% - 0% - 0%

Interest Earned 110 4% 164 5% 185 5% 249 7%


FX Gain/Loss 2 0% (1) 0% 8 0% (2) 0%

Other Financial Operations - 0% (2) 0% (2) 0% (2) 0%

Profit before Taxes 1,179 42% 1,480 47% 1,714 50% 1,941 51%

Tax Provision 657 24% 401 13% 463 13% 544 14%

Profit after Taxes 522 19% 1,079 34% 1,251 36% 1,398 37%

Subsidiaries 2 0% - 0% - 0% - 0%Extraordinary Items 2 0% - 0% - 0% - 0%


Net Profit 522 19% 1,079 34% 1,251 36% 1,398 37%


Assets 16,676 100% 17,616 100% 18,662 100% 19,818 100%

Short-Term Assets 2,462 15% 3,222 18% 4,016 22% 4,915 25%

Cash and Equivalents 1,926 12% 2,505 14% 3,275 18% 4,120 21%


Inventories 7 0% - 0% - 0% - 0%

Other Short-Term Assets 250 1% 229 1% 229 1% 229 1%

Long-Term Assets 14,214 85% 14,395 82% 14,646 78% 14,902 75%

Fixed Assets 5,860 35% 6,337 36% 6,914 37% 7,571 38%

Deferred Assets 8,354 50% 8,058 46% 7,732 41% 7,331 37%

Other Assets - 0% - 0% - 0% - 0%

Liabilities 2,171 13% 2,294 13% 2,063 11% 1,879 9%


Suppliers 17 0% 19 0% 19 0% 21 0%

Short-Term Loans - 0% - 0% - 0% - 0%


Long-Term Loans - 0% - 0% - 0% - 0%

Deferred Liabilities 3,743 22% 2,011 11% 1,944 10% 1,754 9%



Net Worth 14,506 87% 15,322 87% 16,599 89% 17,939 91%


Cash Flow 2007 % 2008E % 2009E % 2010E %

Net Majority Earnings 522 1,079 1,251 1,398

Non-Cash Items 1,030 707 629 658

Changes in Working Capital (19) (7) (8) (36)


Change in Debt - - - -


Net Cash Flow 637 579 770 845

Beginning Treasury 1,793 1,926 2,505 3,275

Ending Treasury 1,926 2,505 3,275 4,120Sources: Company reports and Santander estimates.


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23Important disclosures/certifications are in the Important Disclosures section of this report.U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) 583-4629/ (212) 350-3918.

GAP BUY

Is It That Bad?Gonzalo Fernndez* Vivian Salomn*(5255) 5269-1931 (5255) [email protected] [email protected]


Whats ChangedRating: Unchanged at Buy

Price Target: Introducing YE2009 TP of

US$47.00

EBITDA Estimates

(US$):

08 From 241 to 236

09 From 263 to 257

Introducing 10 at 276

Company StatisticsBloomberg PAC

52-Week Range (US$) 33.65 - 57.63



Mexbol (US$) 2,704.0

3-Yr EBITDA CAGR (2007-10E) 13.5%

Market Capitalization (US$ Mn) 1,887.8

Float (%) 853-Mth Avg Daily Vol (US$000) 20.0

Shares Outst - Mn (ADR 10:1) 56.10




Net Earn (M$ Mn) 1,402.8 1,446.9 1,517.8 1,720.1

Current EPS 2.50 2.58 2.71 3.07

Net Earn (US$ Mn) 128.5 135.5 139.2 151.2

Current EPADR 2.29 2.41 2.48 2.70

P/E (x) 14.7 13.9 13.6 12.5

P/Sales (x) 5.9 5.3 4.9 4.6

P/CE (x) 15.6 14.0 13.6 12.6

FV/EBITDA (x) 8.4 7.8 7.0 6.5

FV/Sales (x) 5.6 5.1 4.7 4.3

FCF Yield (%) 3.8 2.0 7.1 6.6

Div per ADR (US$) 1.89 1.89 1.92 1.90

Div Yield (%) 5.6 5.6 5.7 5.7

Sources: Bloomberg, Company reports, and Santander estimates.

Investment Thesis: After lowering our traffic growth estimates forGAP for 2008 from 9.9% to 4.7% and from 7.6% to 5.7% for 2009 dueto the difficult environment for airlines, we are setting a YE2009target price of US$47.00 per ADR/M$52.00 per share (well below

our previous target price of US$67 per ADR for YE08). However,

we are maintaining our Buy recommendation, based on the

potential upside of 37% from current levels implied by our YE09

target price, compared with the our benchmark upside of 14.5% forMexico.Reasons for Change to Price Target/Estimates:

Year to date, GAP has been the Mexican airport group mosaffected by the re-organization of routes by airlines due to higherfuel costs, as it is more exposed to regional and LCCs with theoldest fleets. As a result, traffic has increased a modest 7.0% YTDwell below our expectations, and traffic in April decreased 5.3%YoY. As a result, we are lowering our estimate of traffic growth for2008 and 2009 and our estimate for EBITDA from US$241 millionto US$236 million and from US$263 to US$257 millionrespectively.

Nevertheless, in our opinion, after a 25% year-to-date decline in the

stock price, Gap is now trading at what we believe is a significandiscount to its fair value, and most of the negatives already appearto have been priced in. In our opinion, despite our lower trafficgrowth expectations, GAP should maintain the highest EBITDAand net margins in the sector and report strong free cash flowgeneration., which are the main reasons we have a positive outlookfor the company and its stock.

After the sharp drop in GAPs stock price, it is now trading at aforward FV/EBITDA of 7.6 times for 2008E, or at a 25% discountcompared to its historical average, and 33% below our sample ofinternational airport operators. Thus, even though the difficultenvironment could continue for the sector in the near term, we

consider the current price level an attractive entry point.Valuation and Risk: Our YE09 target price is based on a discountedfree cash flow (DCF) valuation with a 10.1% discount rate and a 2.5%terminal growth rate, which implies a target FV/EBITDA of 9.9 timesfor 2009E. On this basis, the stock offers a potential upside of 40% fromcurrent prices, plus an estimated 5.7% dividend yield. Risks includelower-than-expected passenger traffic at GAPs airports; changes inregulations that imply lower tariffs or higher capital expenditurechanges in travel preferences; terrorist or natural disasters that couldaffect airline traffic; and continued high oil prices that could negativelyaffect the airlines operations in general.


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Grupo Aeroportuario del Pacfico (GAP) has a 50-year renewable concession to operate 12 airports in NorthwesternMexico. GAP operates airports in two large metropolitan cities (Guadalajara and Tijuana), four tourist destinations(Puerto Vallarta, Los Cabos, La Paz, and Manzanillo), and six medium-sized cities (Hermosillo, Bajio region,

Morelia, Mexicali, Aguascalientes, and Los Mochis). Six of GAPs airports are among the top-ten busiest airports in

Mexico in terms of passenger traffic, with Guadalajara being the third-largest (5.6 million passengers in 2007) andTijuana the fifth-largest (3.5 million). During full-year 2007, GAP handled 23.6 million passengers and generatedrevenues of approximately M$3.8 billion (US$311 million), reported an EBITDA of M$2.6 billion (US$237 million),and a net income of M$1.4 billion (US$151 million).

INVESTMENT THESISAmong Mexican airports, GAP is the most diversified in terms of mix of airports and type

of passenger. Nevertheless, LCCs and regional carriers represent a higher percentage of traffic atGAPs airports compared with OMA and Asur, and thus, it is more negatively affected by theadjustments made by regional and low-cost carriers. YTD, the large metropolitan cities haveaccounted for 47.8% of total traffic, tourist destinations 34.4%, and regional 17.8%. GAP has

been the most affected by the cancellation of routes and frequencies, both by legacy carriers andLCCs, due to its higher exposure to domestic traffic and regional carriers.

In our opinion, GAP could face the most problems if fuel costs continue to rise, affecting theoperation of LCCs and the regional airlines that we believe are most sensitive to higher fuelcosts. In the month of April, in addition to the negative calendar effect, GAP was affected by adecline in operations of airlines such as Aviacsa, Aeromexico, Aeromexico Connect, and Avolar,leading to a 5.3% decline in GAPs total traffic. In full-year 2007, Aviacsa accounted for 7% ofGAPs total traffic, and, in April 2008, the total departing flights operated by this airlinedecreased 32.2% at GAPs four airports. Problems faced by Aviacsa and Avolar have been relatedto the cost of fuel, as both airlines have older aircraft that consume more fuel. In our opinion,some of these routes could be taken by other operators, thus we expect a recovery in trafficvolumes over the coming months. Aeromexico has also been canceling routes and transferring

aircraft, personal and other resources to more profitable routes. We expect total traffic for GAPto increase 4.7% in full-year 2008 (4.5% domestic and 5.2% international). As a consequence ofa more conservative passenger traffic growth, we are estimating 5.2% real growth in revenues in2008, 3.3% growth in EBITDA, and flat net income.

Figure 25. GAP Operating Summary (Thousand of Passengers and Million Pesos)

2007 2008E 2009E 2010E

Domestic Pax 15,737 16,447 17,565 19,106

Growth 26.1% 4.5% 6.8% 8.8%

International Pax 7,828 8,235 8,519 9,050

Growth -2.6% 5.2% 3.4% 6.2%

Total Pax 23,566 24,683 26,084 28,156

Growth 14.9% 4.7% 5.7% 7.9%

Regulated Revenues 2,813 3,060 3,325 3,661

Real Growth 13.4% 4.2% 4.7% 6.4%

Regulated Rev per Pax 119.4 124.0 127.5 130.0

Real Growth -1.3% -0.5% -0.9% -1.5%

Commercial Revenues 664 759 883 1,038

Real Growth 17.4% 9.4% 12.1% 13.5%

Comm Rev per Pax 28.2 30.7 33.9 36.9

Real Growth 2.2% 4.4% 6.1% 5.2%

US$ per Pax 2.58 2.87 3.07 3.21

Growth 5.0% 11.2% 6.8% 4.8%

Total Revenues 3,477 3,818 4,208 4,699

Real Growth 14.2% 5.2% 6.2% 7.9%Sources: Company reports and Santander estimates.


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Figure 26. GAP Income Statement (Million Pesos)

2007 2008E 2009E 2010E

Total Revenues 3,477 3,818 4,208 4,699

Real Growth 14.2% 5.2% 6.2% 7.9%

Operating Costs

Cost of Service 841 966 1,043 1,149Technical Asstanse Fee 126 141 155 178

Concession Fees 173 191 210 235

Depreciation & Amortization 754 770 806 826

Total Costs 1,894 2,067 2,215 2,388

Operating Profit 1,583 1,751 1,994 2,311

Operating Margin 45.5% 45.9% 47.4% 49.2%

EBITDA 2,337 2,521 2,800 3,137

EBITDA Margin 67.2% 66.0% 66.5% 66.8%

CIF 97.34 81.21 66.42 106.75

Other Financial Expense (1.57) (2.49) (2.59) (2.68)

Tax Provision 277.58 370.09 539.72 695.35

Tax Rate 16.5% 20.4% 26.2% 28.8%

Net Income 1,402.8 1,446.9 1,517.8 1,720.1

Sources: Company reports and Santander estimates.

VALUATION

Our YE2009 target price is based on a discounted free cash flow valuation using a 10.1%discount rate and a 2.5% terminal growth rate. Based on our target price, the stock at currentprices offers a potential upside of 40% plus an estimated 5.7% dividend yield; thus, we reiterateour Buy rating on the stock.

Figure 27. GAP Free Cash Flow, 2010E-2019E (U.S. Dollars in Millions)

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Terminal

ValueSales 413 446 478 512 543 575 610 640 672 706

EBITDA 276 300 321 344 365 386 410 430 454 476

Cash Taxes 61 60 58 56 52 55 58 61 64 67

Capex 83 75 80 86 91 97 102 108 113 119

Working Capital 8 9 10 10 11 12 12 13 13 25

FCF 124 155 173 192 211 224 237 249 263 264 3,501Source: Santander estimates.

Figure 28. GAP - Discounted FCF, 2010E-2019E (U.S. Dollars in Millions)

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Terminal

Value

Present Value 112 128 130 131 131 126 121 116 111 101 1,343

Firm Value 2,551

Net Cash 09 -79

Market Cap 2,045

Shares Outs. 56.1

YE09 TP (US$) 47.00

Current Price 33.65

Upside 40%

Dividend Yield 5.7%

Total Return 46%Source: Santander estimates.


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In our opinion, the tougher than expected environment and lower growth prospects for GAP arealready priced in after the sharp correction in the stock price. GAPs forward FV/EBITDAmultiple has decreased from 13.0 times by October 2007 to 7.6 times at present, below theaverage since the IPO of 10.1x. At present, GAP is trading at a 33% discount compared to ouruniverse of international airport operators, while, on the other hand, GAP ranks among the

airport operators with the highest EBITDA and net margins and stronger free cash flowgeneration.

Figure 29. GAP FV/EBITDA Forward Multiple vs. Historical Average

6

7

8

9

10

11

12

13

14

Feb-06

Apr-06

May-06

Jun-06

Jul-06

Sep-06

Oct-06

Nov-06

Jan-07

Feb-07

Mar-07

May-07

Jun-07

Jul-07

Aug-07

Oct-07

Nov-07

Dec-07

Jan-08

Mar-08

Apr-08

May-08

GAP FV/EBITDA Avg


RISKS TO INVESTMENT THESIS In our opinion, the saturation levels being reached at Mexico City and Toluca airports

could represent a bottleneck for the ongoing development of low-cost carriers based at

these airports. At present, the Mexican government is working on the expansion of bothairports to allow for the further growth of these airlines. And these expansions are expected

to be completed during 2008. However, the saturation at these airports could be a positivefactor for GAP, as it could encourage other airlines to set up their operational bases at eitherTijuana or Guadalajara airports, which are still a long way from reaching saturation levels.

Traffic at GAPs airports is not controlled directly by the company and could,therefore, be affected by changes in prevailing economic conditions, particularly in the

U.S. and Mexico. Changes in leisure travel preferences, consumer spending, exchange rates,and comparative costs of international tourism could also affect traffic to GAPs touristdestinations. In addition, air travel is highly sensitive to terrorist acts and natural disasterslike hurricanes, earthquakes, etc.

GAP could also be affected by the economic health of domestic and internationalairlines, which could be influenced by declining air traffic, increased fare competition,higher fuel prices, labor costs, among other factors. Since the negative effects of September

11, 2001, the worldwide airline industry, including Mexican airlines, has staged a significantfinancial recovery. However, should the industry be rocked by another wave of financialturbulence, this could result in a reduction in the number of routes flown and flightfrequencies, as well as lower air traffic for GAP.

In our opinion, the launch of low-cost airlines in Mexico should be a positive for GAP,as the increased competition should lead to an increase in domestic air travel . The low-cost nature of these carriers could put some pressure on the tariffs currently charged by GAP.The continued increases in fuel costs could hurt profitability of both low-cost and regularairlines. This could imply increases in air fares or lower frequencies that could result inlower traffic for GAP.


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As GAP operates under a concession granted by the Mexican government, its businessis regulated. The government sets the maximum tariffs that GAP can charge, as well as aminimum capital expenditure program under a five-year master development plan. Anegative revision of GAPs tariffs and capex could impact its financial results and FCFgeneration going forward. At the end of 2003, the government approved GAPs masterdevelopment plan for the 2005-2009 period, setting what we believe are favorable terms forGAP. The next revision is scheduled at the end of 2009 and the Mexican AntitrustCommission could put some pressure on Mexican airports to lower their tariffs. A negativeoutcome in the revision of Asurs MDP during 2008 could set a negative precedent for

GAP.

ESTIMATE REVISIONSFigure 30. GAP Estimate Revisions, 2008E-2010E (U.S. Dollars in Millions

a)

2008E 2009E 2010E

Previous Current Change Previous Current Change Introducing

Revenue 353 358 1.5% 385 386 0.3% 413Op. Prof it 180 164 -9.0% 205 183 -10.9% 203

Op. Margin 51.1% 45.9% -5.3% 53.4% 47.4% -6.0% 49.2%

EBITDA 241 236 -1.7% 263 257 -2.2% 276

Net Income 125 135 8.4% 146 139 -4.7% 151

EPADR 2.23 2.41 8.4% 2.60 2.48 -4.7% 2.70aExcept per ADR data. Sources: Company reports and Santander estimates.


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FINANCIAL STATEMENTSFigure 31. GAP Income Statement, Balance Sheet, and CF Statement, 2007-2010E(U.S. Dollars in Millions)


Sales 319 100% 358 100% 386 100% 413 100%

Cost of Sales - 0% - 0% - 0% - 0%

Gross Profit 319 100% 358 100% 386 100% 413 100%

Oper. and Adm. Expenses 174 54% 194 54% 203 53% 210 51%

Operating Profit 145 46% 164 46% 183 47% 203 49%

Depreciation 69 22% 72 20% 74 19% 73 18%

EBITDA 214 67% 236 66% 257 67% 276 67%

Financing Costs 9 3% 6 2% 6 2% 9 2%

Interest Paid (2) -1% (6) -2% (7) -2% (5) -1%

Interest Earned 16 5% 13 4% 13 3% 16 4%


FX Gain/Loss (0) 0% (1) 0% (0) 0% (1) 0%

Other Financial Operations (0) 0% (0) 0% (0) 0% (0) 0%

Profit before Taxes 154 48% 170 48% 189 49% 212 51%

Tax Provision 25 8% 35 10% 50 13% 61 15%

Profit after Taxes 129 40% 135 38% 139 36% 151 37%

Subsidiaries - 0% - 0% - 0% - 0%

Extraordinary Items - 0% - 0% - 0% - 0%


Net Profit 129 40% 135 38% 139 36% 151 37%


Assets 2,522 100% 2,679 100% 2,748 100% 2,786 100%

Short-Term Assets 212 8% 206 8% 277 10% 330 12%

Cash and Equivalents 149 6% 133 5% 185 7% 228 8%


Inventories - 0% - 0% - 0% - 0%

Other Short-Term Assets - 0% - 0% - 0% - 0%

Long-Term Assets 2,310 92% 2,473 92% 2,471 90% 2,457 88%Fixed Assets 291 12% 145 5% 204 7% 272 10%

Deferred Assets 2,018 80% 2,327 87% 2,267 82% 2,185 78%

Other Assets - 0% - 0% - 0% - 0%

Liabilities 107 4% 136 5% 168 6% 190 7%


Suppliers 33 1% 24 1% 41 1% 43 2%

Short-Term Loans 8 0% 13 0% 13 0% 13 0%


Long-Term Loans 45 2% 72 3% 94 3% 114 4%




Net Worth 2,415 96% 2,542 95% 2,580 94% 2,596 93%


Net Majority Earnings 129 135 139 151


Changes in Working Capital 15 (38) (2) (8)


Change in Debt 53 30 25 24


Net Cash Flow 52 (11) 57 49

Beginning Treasury 97 144 133 185

Ending Treasury 149 133 185 228Sources: Company reports and Santander estimates.


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Figure 32. GAP Income Statement, Balance Sheet, and CF Statement, 2007-2010E(Millions of Mexican Pesos)


Sales 3,477 100% 3,818 100% 4,208 100% 4,699 100%

Cost of Sales - 0% - 0% - 0% - 0%

Gross Profit 3,477 100% 3,818 100% 4,208 100% 4 ,699 100%

Oper. and Adm. Expenses 1,894 54% 2,067 54% 2,215 53% 2,388 51%

Operating Profit 1,583 46% 1,752 46% 1,994 47% 2,311 49%

Depreciation 754 22% 770 20% 806 19% 826 18%

EBITDA 2,337 67% 2,521 66% 2,800 67% 3,137 67%

Financing Costs 97 3% 81 2% 66 2% 107 2%

Interest Paid (20) -1% (47) -1% (78) -2% (62) -1%

Interest Earned 179 5% 134 4% 145 3% 179 4%


FX Gain/Loss (2) 0% (6) 0% (1) 0% (10) 0%

Other Financial Operations (2) 0% (2) 0% (3) 0% (3) 0%

Profit before Taxes 1,680 48% 1,817 48% 2,058 49% 2,415 51%

Tax Provision 278 8% 370 10% 540 13% 695 15%

Profit after Taxes 1,403 40% 1,447 38% 1,518 36% 1,720 37%

Subsidiaries - 0% - 0% - 0% - 0%

Extraordinary Items - 0% - 0% - 0% - 0%


Net Profit 1,403 40% 1,447 38% 1,518 36% 1,720 37%


Assets 27,526 100% 28,662 100% 30,339 100% 31,965 100%

Short-Term Assets 2,313 8% 2,204 8% 3,060 10% 3 ,782 12%

Cash and Equivalents 1,632 6% 1,419 5% 2,046 7% 2,610 8%

Accounts Receivable 682 2% 785 3% 1,015 3% 1,172 4%

Inventories - 0% - 0% - 0% - 0%

Other Short-Term Assets - 0% - 0% - 0% - 0%

Long-Term Assets 25,213 92% 26,458 92% 27,279 90% 28,183 88%

Fixed Assets 3,181 12% 1,556 5% 2,251 7% 3,118 10%

Deferred Assets 22,032 80% 24,902 87% 25,028 82% 25,065 78%

Other Assets - 0% - 0% - 0% - 0%

Liabilities 1,165 4% 1,460 5% 1,857 6% 2,180 7%


Suppliers 363 1% 262 1% 450 1% 489 2%

Short-Term Loans 86 0% 135 0% 139 0% 144 0%


Long-Term Loans 493 2% 766 3% 1,036 3% 1,306 4%




Net Worth 26,362 96% 27,202 95% 28,482 94% 29,785 93%


Net Majority Earnings 1,403 1,447 1,518 1,720


Changes in Working Capital 166 (410) (18) (89)

Capital Increases/Dividends (1,172) (1,122) (1,178) (1,212)

Change in Debt 579 323 270 270

Capital Expenditures (932) (1,340) (770) (940)

Net Cash Flow 571 (247) 627 565

Beginning Treasury 1,061 1,666 1,419 2,046

Ending Treasury 1,632 1,419 2,046 2,610Sources: Company reports and Santander estimates.


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NOTES


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31Important disclosures/certifications are in the Important Disclosures section of this report.U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212)583-4629/ (212) 350-3918.

OMA BUY

Reaching Very Attractive Valuation LevelsGonzalo Fernndez* Vivian Salomn*(5255) 5269-1931 (5255) [email protected] [email protected]


Whats Changed/Initiation of CoverageRating: Unchanged at Buy

Price Target: Introducing TP09 US$26.00EBITDA Estimates

(US$):

08From 105 to 107

09 From 129 to 119

Introducing 10 at 127

Company StatisticsBloomberg OMA

52-Week Range (US$) 18.00 - 31.00



IPC (US$) 2,704.0

3-Yr EBITDA CAGR (2007-10E) 9.3%

Market Capitalization (US$ Mn) 962.69

Float (%) 44

3-Mth Avg Daily Vol (US$000) 5.9

Shares Outst - Mn (ADR 8:1) 397.40




Net Earn (M$ Mn) 31 703 699 796

Current EPS 0.08 1.77 1.76 2.00

Net Earn (US$ Mn) 2.9 65.8 64.1 69.2

Current EPADR 0.06 1.32 1.29 1.39

P/E (x) NM 14.6 15.0 13.9

P/Sales (x) 5.5 5.0 4.6 4.4P/CE (x) NM 14.7 15.1 14.1

FV/EBITDA (x) 8.2 7.5 6.6 6.0

FV/Sales (x) 4.6 4.2 3.8 3.5

FCF Yield (%) -1.4 -2.3 6.8 7.8

Div per ADR (US$) 0.81 0.89 0.81 0.80

Div Yield (%) 4.2 4.6 4.2 4.1NM not meaningful. Sources: Bloomberg, Company reports, andSantander estimates.

Investment Thesis: We are introducing a YE2009 target price of

US$26.00 per ADR (M$35.00 per share) for OMA, replacing our

YE2008 TP of US$32.00 per ADR, and reiterating our Buy rating

on the stock. OMAs stock liquidity has been affected since it wasremoved from the Mexican IPC index in February 2007. This, coupledwith rising concerns regarding the airline industry and a slowdown in

traffic growth, has resulted in a sharp drop in the stock price. At presentthe stock is trading at its IPO price, which is 37% lower than its 52-week high on October 18, 2007. Despite using a more conservativescenario, OMA is currently trading at an estimated FV/EBITDA of7.5x for 2008 and 6.6x for 2009, with a significant discount

compared to international airport operators and a potential upside

of 34% to our target price

Reasons for Change to Rating/Price Target/Estimates:

We have lowered our traffic growth estimates for OMA, based onthe ongoing pressures faced by the Mexican airline industry becauseof high fuel costs. We decreased our traffic estimate for 2008 from

12.6% to 6.8%, in line with the companys guidance of 6%-10%and in 2009 from 8.9% to 7.8%.

Nevertheless, YoY, we estimate revenue growth of 8.5% in nominapeso terms on 2008 and 13.2% in 2009, and EBITDA growth o9.3% in 2008 and 13.4% in 2009, in nominal terms, with margins o56.6% and 56.7%, respectively.

Valuation and Risks.

Our YE2009 target price is based on a DCF valuation, using a 9.7%discount rate and a 2.0% terminal growth rate, and implies a targeFV/EBITDA multiple of 9.4 times for 2009. At current prices, the stockoffers a potential total return of 34% plus a 4.2% dividend yieldcompared toour benchmark upside of 14.5% for Mexico. As a resultwe are reiterating our Buy rating on the stock. Risks include: the effecon air traffic at OMAs airports from terrorist acts; natural disasters; andthe suspension of flight frequencies and routes. In addition, aeronauticatariffs and mandatory capex are set by the Mexican government andrevised every five years. Unexpected changes in these variables couldaffect our estimates and valuation. Rising oil prices could negativelyaffect Mexican airlines by reducing frequencies and increasing thenumber of routes cancelled.


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The Mexican Government first granted Grupo Aeroportuario del Centro Norte (OMA) a 50-year renewable

concession to operate 13 airports in the year 2000, mainly in the Central and Northern regions of Mexico. OMAclassifies its airports into four categories: (1) those serving large metropolitan cities (Monterrey), which accounted

for 46% of total traffic in 2007; (2) three tourist destinations on the Pacific coast (Acapulco, Mazatlan and

Zihuatanejo), which accounted for 18% of total traffic; (3) seven medium-sized cities in Northern Mexico (Chihuahua,Culiacn, Durango, San Luis Potos, Tampico, Torren, and Zacatecas), with 28% of total traffic; and (4) two citieson the border with the U.S. (Ciudad Juarez and Reynosa), with 8.0% of total traffic. During 2007, OMA airports

served 14.3 million passengers and the group generated revenues, EBITDA, and net income of US$174 million,US$97 million, and US$2.9 million, respectively.

INVESTMENT THESIS

We are introducing a YE2009 target price of US$26.00 per ADR (M$35.00 per share) for OMA,replacing our YE2008 TP of US$32.00, and reiterating our Buy rating on the stock. Even thoughwe continue to see a positive long term outlook for Mexicos air travel industry, due to thestructural transformation of industry that would produce lower fares and increased air travel, the

overall traffic growth rate has slowed down from 2007 rates due to the significant increase in fuelprices that have forced airlines to eliminate some of the less profitable routes and reducefrequencies.

Despite a more conservative scenario, we are estimating total revenue for OMA to grow 8.5% in2008 and 13.2% in 2009, both in nominal terms. Aeronautical revenue growth would be more inline with traffic growth as the incentives that OMA gave to the different airlines have terminatedwith the exception of VivaAerobus. We expect this airline to start flying internationally, whichwill increase revenues since international flights have higher tariffs than domestic flights. Weexpect comm

Documents

Mexican Airports