Aena, the Spanish airport operator giant, has seen impressive growth in Q1 2024. Traffic is booming, commercial revenues are soaring, and the company is awash in cash. A casual glance at the transcript from their recent earnings call paints a picture of success. But a deeper dive, specifically into the performance of their Brazilian holdings, reveals a financial specter that may be quietly eroding their long-term profitability.

This specter is IFRIC 12, an accounting standard that deals with service concession arrangements. While the standard itself isn't new, its impact on Aena's financials has become increasingly significant due to the completion of major expansion projects in their original Brazilian concession, ANB, and the recent acquisition of the BOAB portfolio, which includes the coveted Congonhas Airport in São Paulo.

IFRIC 12 requires Aena to recognize revenue and expenses related to construction services differently than under traditional accounting methods. In essence, the standard pushes the recognition of construction-related revenue into the early years of a concession, while the associated expenses are spread out over the concession's lifetime. This creates a 'margin boost' in the initial years, masking the true profitability of the concession over the long term.

The IFRIC 12 Effect: A Tale of Two Margins

Here's where the ghost comes in. As construction winds down at ANB, Aena's reported EBITDA margin has jumped dramatically, from 15.5% in Q1 2023 to 36.4% in Q1 2024. However, the company notes that 'excluding the impact of IFRIC 12, the margin would reach a number of 58.7%.' This reveals a startling 22.3% difference between the reported and 'true' EBITDA margin, a gap directly attributable to the accounting treatment of construction services under IFRIC 12.

The BOAB concession, still in its infancy, has not yet begun its major capital expenditure program. Consequently, its Q1 2024 EBITDA margin of 56.4% is closer to the 'true' margin, unaffected by IFRIC 12 adjustments. However, as the large-scale CapEx program kicks off, likely by late 2024 or early 2025, we can anticipate a similar pattern to emerge, with IFRIC 12 inflating reported margins and obscuring the underlying profitability of the concession.

The Danger of Inflated Expectations

The danger here is twofold. Firstly, investors may be lulled into a false sense of security by the inflated margins, overestimating the long-term earnings power of Aena's Brazilian operations. Secondly, the company itself may fall victim to the same illusion, making strategic decisions based on distorted financials.

While Aena is transparently disclosing the impact of IFRIC 12, the sheer magnitude of the margin distortion warrants closer scrutiny. It raises several critical questions:

These questions, largely overlooked by analysts focusing on the headline growth figures, point to a potential blind spot in the Aena narrative. The ghost of Congonhas, in the form of IFRIC 12, may be a benign financial apparition for now, but it has the potential to become a formidable financial foe in the years to come. Only time will tell if Aena can exorcise this accounting specter and ensure its Brazilian expansion is a truly profitable endeavor.

Q1 2024 Earnings Call Transcript

Company Information

Aena S.M.E., S.A. (OTCPK: ANYYY)

Market Cap: $29.08 billion

Fun Fact: The Impact of IFRIC 12

IFRIC 12 can have a significant impact on the reported profitability of companies involved in service concession arrangements. Investors need to be aware of this accounting standard and its potential to distort financial results, especially in the early years of a concession.