Grupo Aeroportuario Del Pacifico, S.A. de C.V. (PAC)

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Claudio Freitas

www.zacks.com

Grupo Aeroportuario del Pacifico, was founded in 1998 when the Mexican airport system was opened to private investment. Since that time, the company has administered, operated, maintained and developed twelve airports in the Pacific and Central regions of Mexico. Its airports are in the cities of Guadalajara, Hermosillo, Puerto Vallarta, Aguascalientes, La Paz, Tijuana, Los Cabos, Bajio, Morelia, Mexicali, Manzanillo and Los Mochis. The objectives of Grupo Aeroportuario del Pacifico have been stated as:(i) to fund the appropriate levels of infrastructure at our airports (ii) to provide the technology, management methods, and modern operational tools to elevate levels of efficiency and operation (iii) to meet international efficiency standards and, finally, (iv) to maintain the present levels of security. The Group's activities are held to certain economic standards, so that investors receive an attractive rate of return.

The company has two sources of revenue: aeronautical services and non-aeronautical services. Revenue from its aeronautical services is earned from passenger charges, landing charges, aircraft parking charges, charges for airport security services, and charges for the use of passenger walkways. The company's revenue from non-aeronautical services is earned from the leasing of space in its airports to airlines, retailers, and other commercial tenants access fees collected from third parties providing complementary services at its airports and related miscellaneous sources. The company's principal source of revenue remains passenger charges, which are collected from airlines for each passenger. Passenger charges are automatically included in the cost of a passenger's ticket and are generally collected twice monthly from each airline. Below we can see the passenger traffic per airport during the first nine months 2007:

The commercial revenue in the airports remains the most important source of growth for all the airport companies. The real challenge is to expand the commercial are in order to aggregate more income to the existing network. PAC's commercial strategy has been to increase profitability and search for new opportunities in retail spaces within the airports, in order to meet these goals the company has been developing modern and attractive commercial areas in all its airports. In this sense we remain very encouraged by the inauguration of the Terminal 2 of the Guadalajara airport on August 16, 2007. The Guadalajara airport is the most important among all PAC's airports with 32% of the company's passenger traffic. As a result of this new terminal, passenger traffic in the airport could increase even more in the following quarters. The new terminal includes expanded check in areas, final waiting areas (including snack bars and convenience stores), 4 new gates and two revision points.

We believe there is room for continued growth in commercial revenues in the following quarters. During the first nine months of 2007, revenues derived from leasing space to time share developers increased 65.3% year-over-year. Revenues from parking spaces increased 24.3%, and revenues from leasing of commercial spaces increased 25.8%. Overall commercial revenues were up 30.2%. Particularly encouraging was the company's recent announcement that it has successfully completed the process to obtain the concession of the parking areas at the Tijuana airport with 1,555 parking spaces. To date, PAC obtained the parking concession rights for all its 12 airports. The Tijuana concession was particularly important because it is PAC's second largest airport in terms of passenger traffic and the largest one in terms of size. We expect a positive impact in the company's commercial revenues during 2008 from this new parking space.

On September 4, 2007 PAC announced the temporary closing of the Los Cabos and La Paz airports due to Hurricane Henriette. Many of the airlines have suspended flights to the area for meteorological reasons and the company also decided to close the airports as a precautionary measure. However, the Hurricane Henriette was not that strong and airports were opened few days later. The two airports together represent less than 10% of the company's traffic. Thus, third quarter results were not affected at all. In fact, Grupo Aeroportuario del Pacifico has two remarkable advantages if compared to the other two Mexican airport operators Grupo Aeroportuario del Sureste (ASR) and Grupo Aeroportuario del Centro Norte (OMAB). The first advantage is that unlike ASR, the PAC is not heavily affected by hurricanes and the second one in that unlike both ASR and OMAB, PAC's traffic and revenues is less concentrated in one single airport, like Cancun for ASR and Monterrey for OMAB. We believe this fact makes the company less exposed to unpredicted problems.

The less positive economic environment in the U.S. as a result of the subprime mortgage system crisis, may affect the Mexican economy in the following quarters since both economies have very strong ties. We have to admit that in the last months the likelihood of a recession in the U.S. in 2008 has been increasing, in such a situation the Mexican economy would be affected. This is particularly concerning if we consider that most of the recent traffic growth has been focused mainly on domestic passengers. Nevertheless, after the recent sell-off, we believe the company's valuation is now very attractive if we consider the potential earnings growth in the future.

PAC's third quarter results were positive. The company reported higher revenues, strong passenger traffic growth, tight cost discipline, higher EBITDA, and sound net income. We found it quite encouraging that, despite the continued traffic growth and renovation investments, the company was able to keep costs under control and increase its operating margin by 260 basis points year-over-year. The new terminal at the Guadalajara airport was one reason behind those good numbers moreover, it is important to note that Los Cabos and Puerto Vallarta have been increasing its popularity as a main tourist destination among Mexicans. Even better, the passenger traffic for the fourth quarter of 2007 was encouraging. In October 2007, total passenger traffic was up 15.2% in November, it was up 14.4% and in December, it increased 11.1%. All considered, we are changing our current recommendation on PAC from Hold to Buy.

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