Equity Research M exico FEMSA Company Note January 22, 2021 www.banorte.com Valuation does not reflect recovery outlook @analisis_fundam ▪ Economic reopening would support a significant recovery in Consumer and Telecom Proximity, Kof, and Fuel results, where the comparison base will also be low following the impact of the pandemic Valentín Mendoza Senior Strategist, Equity ▪ [email protected] However, current valuation do not appear to incorporate this perspective, with Femsa Comercio (Femco) implicitly trading at 11.1x Juan Barbier, CFA FV/EBITDA (~20% discount vs. historical average) Analyst [email protected] ▪ We established a PT2021 of MXN 190.00, which implies an 11.4x BUY FV/EBITDA 2021E, above the current multiple but in line with the 3Y Current Price $150.29 average. In view of the positive outlook we recommend BUY PT 2021 $190.00 Dividend 2021 $3.26 Dividend Yield (%) 2.2% A good combination to invest: recovery at attractive multiples. After the Upside Potential 28.6% strong impact of the COVID-19 pandemic on Femsa's results –having faced ADR Price US$76.89 PT2021 ADR US$96.00 operating restrictions of up to 50% of its units and a beer shortage in 2Q20– Shares per ADR 10 2021 is shaping up to be a recovery year. As a result, we believe that the Max – Mín LTM ($) 181.9 – 112.5 Market Cap (US$m) 24,816.1 reopening of economic activity (although dependent on the epidemiological Shares Outstanding (m) 3,578.2 indicator), just for base effect, should be reflected in an important recovery in Float 60% Daily Turnover US$m 556.9 Oxxo, Oxxo Gas, and Kof, remembering that Proximity and the bottling Valuation metrics LTM company contribute with close to 85% of the consolidated EBITDA. FV/EBITDA 10.5x P/E 131.8x However, in our view, despite the rally that the issuer has had recently, current MSCI ESG Rating* A valuation does not fully incorporate this positive outlook. Femsa is currently trading at a discount of over 25% from the sum of the parts, while Femco's Relative performance to Mexbol LTM multiple is implicitly at 11.1x, which is 20% lower than the 14.0x historical 10% average. Consequently, we see an interesting entry point, considering that 0% there is room for appreciation in valuation parameters. In this context, we -10% updated our sum-of-the-parts valuation model, establishing our PT2021 at -20% MXN 190.00 per linked unit. The latter represents a FV/EBITDA 2021E -30% multiple of 11.4x, above the current figure of 10.5x but in line with the 3Y -40% Jan.-20 Apr.-20 Jul.-20 Oct.-20 Jan.-21 average at 10.9x, justified by the positive outlook. Our rating is BUY. MEXBOL FEMSAUBD Financial Statements Valuation and Financial metrics 2018 2019 2020E 2021E 2018 2019 2020E 2021E Revenue 483,513 506,910 487,389 527,013 FV/EBITDA 11.1x 9.8x 10.8x 9.6x Operating Income 42,184 47,165 40,275 45,624 P/E 22.5x 27.2x 267.3x 31.7x EBITDA 61,927 75,483 70,661 79,314 P/BV 2.1x 2.2x 2.2x 2.2x EBITDA Margin 12.8% 14.9% 14.5% 15.0% Net Income 24,084 19,936 2,027 17,097 ROE 7.2% 6.0% 0.6% 5.3% Net Margin 5.0% 3.9% 0.4% 3.2% ROA 4.2% 3.1% 0.3% 2.4% EBITDA/ interest 6.3x 5.3x 4.1x 4.3x Total Assets 576,381 637,541 710,972 718,203 Net Debt/EBITDA 1.1x 1.6x 2.0x 1.8x Cash 62,047 65,562 115,931 119,394 Debt/Equity 0.4x 0.6x 0.8x 0.8x Total Liabilities 240,839 311,790 393,549 388,058 Debt 131,300 187,257 260,305 259,424 This document is provided for the reader’s convenience only. The translation from the original Spanish version was Common Equity 335,542 325,751 317,422 330,146 made by Banorte’s staff. Discrepancies may possibly arise Source: 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 “Valuación no refleja perspectiva de recuperación” was released on January 18, 2021. 1 Document for distribution among the general public FEMSA – Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Income Statement 540,000 16% Year 2018 2019 2020e 2021e CAGR 15.0% 520,000 14.9% Net Revenue 483,513 506,910 487,389 527,013 2.9% 500,000 14.5% 15% Costs of goods sold 304,163 315,347 299,581 325,899 2.3% 480,000 Gross profit 179,351 191,562 187,808 201,115 3.9% 14% General expenses 135,444 141,869 145,699 153,627 4.3% 460,000 13.3% Operating Income 42,184 47,165 40,275 45,624 2.6% 440,000 12.8% Operating Margin 8.7% 9.3% 8.3% 8.7% -0.3% 13% Depreciation 19,742 28,319 30,386 33,690 19.5% 420,000 EBITDA 61,927 75,483 70,661 79,314 8.6% 400,000 12% EBITDA Margin 12.8% 14.9% 14.5% 15.0% 2017 2018 2019 2020e 2021e Interest Income (Expense) net (7,363) (13,500) (12,541) (16,135) 29.9% Interest expense 9,848 14,141 17,053 18,311 23.0% Revenue EBITDA Margin Interest income 2,903 3,171 2,332 1,450 -20.7% Other income (expense) (176) (59) 289 280 -217% Foreign exchange gain (loss) (242) (2,470) 1,891 447 -223% Unconsolidated subsidiaries 6,252 5,467 1,930 7,064 4.2% Income before taxes 40,508 33,375 29,473 36,553 -3.4% Net Income & ROE Income taxes 10,537 10,480 13,630 12,183 5.0% MXN, million Discontinued operations 3,201 Consolidated Net Income 33,172 27,286 6,652 24,371 -9.8% Non-controlling interest 9,088 7,349 4,624 7,273 -7.2% 16.9% Net Income 24,084 19,936 2,027 17,097 -10.8% 50,000 18% Net Margin 5.0% 3.9% 0.4% 3.2% 16% EPS 6.731 5.572 0.567 4.778 -10.8% 40,000 14% 12% Balance Sheet 30,000 6.0% 7.2% 10% Total Current Assets 177,607 172,579 221,048 236,695 10.0% 8% Cash & Short Term Investments 62,047 65,562 115,931 119,394 24.4% 20,000 5.3% 6% Long Term Assets 398,774 464,962 489,923 481,509 6.5% 4% Property, Plant & Equipment (Net) 108,602 114,513 102,157 93,597 -4.8% 10,000 0.6% Intangible Assets (Net) 107,183 104,483 104,067 104,067 -1.0% 2% Total Assets 576,381 637,541 710,972 718,203 7.6% 0 0% Current Liabilities 101,464 136,534 135,147 130,500 8.8% 2017 2018 2019 2020e 2021e Short Term Debt 14,079 35,737 26,375 26,339 23.2% Accounts Payable 65,669 76,676 60,089 62,086 -1.9% Net Income ROE Long Term Liabilities 139,375 175,256 258,402 257,558 22.7% Long Term Debt 117,222 151,520 233,930 233,086 25.7% Total Liabilities 240,839 311,790 393,549 388,058 17.2% Common Stock 335,542 325,751 317,422 330,146 -0.5% Non-controlling interest 78,489 73,762 73,646 80,919 1.0% Net Debt & Net Debt to EBITDA ratio Total Equity 257,053 251,988 243,777 249,227 -1.0% MXN, million Liabilities & Equity 576,381 637,541 710,972 718,203 7.6% Net Debt 69,253 121,695 144,374 140,031 26.5% Cash Flow 2018 2019 2020e 2021e 160,000 2.0x 2.4x CF from Operating Activities 48,378 61,639 24,774 37,976 140,000 1.8x 1.6x 2.0x CF from Investing Activities (57,663) (14,132) (21,110) (23,926) 120,000 CF from Financing Activities (23,011) (38,433) 30,198 (29,959) 1.6x 100,000 FX difference in cash & equivalents (2,602) (5,559) 16,507 19,371 1.1x Change in Cash Balance (34,897) 3,515 50,369 3,462 80,000 1.2x 60,000 0.7x 0.8x 40,000 0.4x 20,000 0 0.0x 2017 2018 2019 2020e 2021e Net Debt Net Debt/EBITDA Source: Banorte, BMV. 2 2021 Estimates As we have discussed, 2021 is shaping up to be a recovery year for Femsa, especially after the strong impact of the COVID-19 pandemic on its results. Consequently, we believe that the reopening of economic activity (although dependent on the epidemiological indicator), just for base effect, should be reflected in a significant recovery in Oxxo, Oxxo Gas and Kof, recalling that Proximity and the bottling company contribute with about 85% of consolidated EBITDA. In this sense and based on our projection model, we estimate that the consolidated revenue of Fomento Económico Mexicano (Femsa) will grow 8.1% y/y to MXN 527.0 billion in 2021. Such performance would be explained by an 8.5% year-over-year advance in Proximity (37% of total sales), reflecting the reopening of economic activity and an easy comparison base after the confinement.