Aena SME SA Shares Drop After UBS Downgrade

Shares of Aena SME SA (BME:AENA) saw a decline on Wednesday following UBS's decision to downgrade the stock from a "buy" to a "neutral" rating.

Factors Behind Downgrade

UBS analysts revised their outlook citing several issues that diminish optimism about Aena's near-term growth and valuation potential, despite a 23% increase in share price year-to-date.

The report raised concerns regarding Aena's future profitability and growth trajectory, projecting the lowest EBITDA compound annual growth rate among European airports for fiscal years 2024-2028, at just 2%.

Challenges Ahead

Analysts pointed to anticipated tariff reductions of approximately 3% annually starting in 2027 under the DORA III regulatory framework. These adjustments aim to balance current over-earnings related to regulated returns, but could negatively impact margins.

Additionally, UBS highlighted potential complications arising from increased capital expenditures under DORA III, set to begin in 2027. This involves large-scale construction projects for new terminal facilities, which have execution risks and may lower free cash flow yields.

By 2027, Aena's FCF yield is projected to fall to 4.3%, below the pre-COVID historical average of 6%.

Valuation Perspective

While Aena's valuation metrics suggest a 20% discount compared to historical pre-COVID levels, with an estimated EV/EBITDA ratio of 9.6x for 2025, UBS analysts are doubtful about a significant re-rating in the near future. This cautious view is influenced by slower-than-previous EBITDA growth, regulatory uncertainties, and high bond yields.

Positive Aspects

Despite the downgrade, UBS noted some positive factors, such as expected increases in retail revenue from renovations of Madrid duty-free shops and added airside space in Palma de Mallorca. However, these gains may be offset by reduced minimum annual guarantee revenues from retail operations.

Conclusion

Aena continues to be a major player in the global aviation industry, managing Spain's network of 46 airports and two heliports, as well as international operations in the UK, Brazil, and more. Despite its strong market position and a competitive 5.5% dividend yield, UBS's cautious outlook resulted in a slight increase in the 12-month price target to €215 from €210, while maintaining the "neutral" downgrade.