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FEMSA Ongoing Dynamism Despite Low Economic Growth @Analisis Fundam

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FEMSA Ongoing Dynamism Despite Low Economic Growth @Analisis Fundam Equity Research Mexico Company Note December 2, 2019 FEMSA www.banorte.com Ongoing dynamism despite low economic growth @analisis_fundam ▪ Lower interest rates, the arbitration decision which allows KOF to Manuel Jiménez continue distributing Heineken beer in Brazil, and growth at Femsa Director Equity Research [email protected] Comercio, are positive factors amid a very uncertain environment Jorge Izquierdo ▪ Despite an overall low economic growth environment, revenues should Analyst increase 9.9% yoy, while we anticipate an 8.5% annual increment in [email protected] EBITDA BUY Current Price MXN$177.33 ▪ We obtained a PT 2020 of MXN 211.00 and our rating on the stock is PT 2020 MXN$211.00 Dividend 2020e 3.90 BUY. This theoretical value implies a valuation of 10.4x 2020e Dividend Yield (%) 2.2% FV/EBITDA, similar to the current multiple of 10.2x Upside Potential 21.1% Max – Min LTM (P$) 191.42 – 163.7 Market Cap (US$m) 29,811.3 Attractive growth across operations. Despite a scenario of low economic Shares Outstanding (m) 3,578 growth and geopolitical risks, consolidated revenues should grow 9.9% yoy Float 59.3% Daily Turnover (P$ m) 670.1 driven by: (1) growth at the proximity division driven by an increase in the Valuation metrics TTM average ticket above the rate of inflation; (2) volume growth in Brazil and price FV/EBITDA 10.2x P/E 24.7x hikes above the rate of inflation in Mexico and Brazil; and (3) a higher penetration of the retail sector, as the number of OXXO, drugstore and gas station openings Relative performance to Mexbol will continue to grow. As for EBITDA, we anticipate an 8.5% annual growth and LTM 15% a slight decrease of 20bp in the margin to 14.5% due to higher operating expenses 10% at Femsa Comercio. We determined our theoretical value using a Sum of the Parts 5% valuation. The model assumed conservative target multiples for Femsa’s 0% -5% divisions because of local and international uncertainty. In this context, we -10% obtained a PT 2020 of MXN 211.00, which implies a 2020e FV/EBITDA -15% -20% multiple of 10.4x, similar to the current one, and a 22.9% discount to the last- 18/11/29 19/03/29 19/07/29 19/11/29 MEXBOL FEMSAUBD three-year average multiple (13.5x). As a result, we are upgrading the stock to BUY. Financial Statements Valuation and Financial metrics 2017 2018 2019E 2020E 2017 2018 2019E 2020E Rev enue 451,808 483,513 513,018 564,030 FV/EBITDA 12.6x 12.6x 9.8x 8.9x Operating Income 40,510 42,184 47,596 52,778 P/E 15.0x 26.3x 26.5x 22.0x EBITDA 60,284 61,927 75,531 81,923 P/BV 2.5x 2.5x 2.5x 2.4x EBITDA Margin 13.3% 12.8% 14.7% 14.5% Net Income 42,226 24,084 23,940 28,901 ROE 16.9% 9.4% 9.3% 10.7% Net Margin 9.3% 5.0% 4.7% 5.1% ROA 7.2% 4.2% 3.7% 4.2% EBITDA/ Interest 6.3x 8.9x 7.4x 9.5x Total Assets 588,541 576,381 650,394 681,592 Net Debt/EBITDA 0.7x 1.1x 1.1x 0.9x Cash 96,944 62,047 96,992 116,012 Debt/Equity 0.6x 0.5x 0.7x 0.7x Total Liabilities 251,629 240,839 316,678 331,417 This document is provided for the reader’s convenience Debt 138,107 131,300 181,829 186,101 only. The translation from the original Spanish version was Common Equity 250,291 257,053 257,094 269,773 made by Banorte’s staff. Discrepancies may possibly arise Fuente: Banorte between the original document in Spanish and its English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “Mantiene dinamismo a pesar de bajo crecimiento” was released on November 29, 2019. 1 Document for distribution among public FEMSA– Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Year 2017 2018 2019e 2020e CAGR 600,000 14.7% 15% Net Revenue 451,808 483,513 513,018 564,030 7.7% 14.5% Cost of goods sold 285,361 304,163 319,634 351,880 7.2% 500,000 Gross profit 166,447 179,351 193,384 212,150 8.4% 400,000 14% General expenses 125,185 135,444 143,687 158,392 8.2% 13.7% Operating Income 40,510 42,184 47,596 52,778 9.2% 300,000 Operating Margin 9.0% 8.7% 9.3% 9.4% 1.4% Depreciation 19,774 19,742 27,934 29,145 13.8% 200,000 13.3% 13% EBITDA 60,284 61,927 75,531 81,923 10.8% 100,000 12.8% EBITDA Margin 13.3% 12.8% 14.7% 14.5% Interest income (expense) net (2,380) (7,363) (8,912) (7,502) 46.6% 0 12% Interest expense 11,108 9,848 14,198 14,898 10.3% 2016 2017 2018 2019e 2020e Interest income 1,512 2,903 3,949 6,294 60.8% Revenue EBITDA Margin Other income (expenses) 2,290 (176) (88) (88) -133.7% Exchange Income (loss) 4,926 (242) 1,424 1,190 -37.7% Unconsolidated subsidiaries 7,924 6,252 6,194 9,308 5.5% Net Income before taxes 47,308 40,508 40,542 54,584 4.9% Provision for Income taxes 10,495 10,537 12,180 16,375 16.0% Discontinued operations 211 3,201 Net Income & ROE Consolidated Net Income 37,024 33,172 32,141 38,209 1.1% MXN, million Minorities (5,202) 9,088 8,202 9,308 -221.4% Net Income 42,226 24,084 23,940 28,901 -11.9% Net Margin 9.3% 5.0% 4.7% 5.1% 50,000 16.9% 18% EPS 11.801 6.731 6.690 8.077 -11.9% 40,000 16% Balance Sheet (Million pesos) 14% Total Current Assets 181,188 177,607 205,705 234,892 9.0% 30,000 Cash & Short Term Investments 96,944 62,047 96,992 116,012 6.2% 9.4% 10.7% 10.0% 12% Long Term Assets 407,353 398,774 444,689 446,700 3.1% 20,000 9.3% Property, Plant & Equipment (Net) 116,712 108,602 113,187 115,167 -0.4% 10% Intangible Assets (Net) 112,935 107,183 104,521 104,521 -2.5% 10,000 8% Total Assets 588,541 576,381 650,394 681,592 5.0% Current Liabilities 105,022 101,464 141,346 152,011 13.1% 0 6% Short Term Debt 17,552 14,079 28,258 28,456 17.5% 2016 2017 2018 2019e 2020e Accounts Payable 66,163 65,669 74,493 69,538 1.7% Net Income ROE Long Term Liabilities 146,607 139,375 175,332 179,406 7.0% Long Term Debt 120,555 117,222 153,571 157,646 9.4% Total Liabilities 251,629 240,839 316,678 331,417 9.6% Common Stock 336,912 335,542 333,716 350,175 1.3% Non-controlling Interest 86,621 78,489 76,623 80,402 -2.5% Total Equity 250,291 257,053 257,094 269,773 2.5% Net Debt & Net Debt to EBITDA ratio Liabilities & Equity 588,541 576,381 650,394 681,592 5.0% MXN, million Net Debt 41,163 69,253 84,837 70,089 19.4% Cash Flow (Million pesos) 2017 2018 2019e 2020e 120,000 2.4x Cash flow from operating activities 40,135 48,378 62,775 67,622 1.9x 100,000 2.0x Cash flow from investing activities 31,417 (57,663) 7,336 (19,793) Cash flow from financing activities (21,539) (23,011) (32,602) (28,809) 80,000 1.1x 1.6x FX effect on cash 3,294 (2,602) (2,564) 1.1x Change in cash balance 53,307 (34,897) 34,945 19,020 60,000 0.9x 1.2x 0.7x Source: Banorte, MSE 40,000 0.8x 20,000 0.4x 0 0.0x 2016 2017 2018 2019e 2020e Net Debt Net Debt/EBITDA 2 Valuation and PT 2020E of MXN 211.00 Sum of the parts valuation. Our 2020 target price is MXN 211.00 per BD unit, which translates into upside potential of 21.1% on current prices and a 2020E FV/EBITDA target multiple of 10.4x, below the last-three-year average multiple (13.5x) and similar to the LTM FV/EBITDA multiple (10.2x). Our model estimates a value for each of Femsa’s divisions based on estimated 2020 EBITDA and a FV/EBITDA target multiple. To arrive at the total value, the result was altered by the participation of FEMSA in each division. In the case of KOF, we included our EBITDA and target multiple of 7.7x corresponding to the PT 2020. SUM OF THE PARTS VALUATION Figures in millions EBITDA 2020E P$m FV/EBITDA Firm Value P$m Share TOTAL P$/unit Coca-Cola Femsa $ 41,444 7.7x $ 319,119 47.2% $ 150,624 $ 42.09 Proximity division $ 28,687 13.0x $ 372,925 100.0% $ 372,925 $ 104.22 Health division $ 6,994 9.0x $ 62,949 100.0% $ 62,949 $ 17.59 Strategic business division $ 2,583 6.5x $ 16,789 100.0% $ 16,789 $ 4.69 Fuel division $ 2,215 6.0x $ 13,289 100.0% $ 13,289 $ 3.71 Value sum of the parts $ 616,577 Net Debt Femsa (70,089) (19.59) Total FEMSA $ 546,488 Heineken $ 207,917 $ 58.11 Equity value FEMSA $ 754,405 Number of units outstanding 3,578 PT 2020e $ 210.83 Source: Banorte, Bloomberg 1) Proximity division.
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