Equity Research Me xico CHDRAUI Quarterly Report May 3, 2019 www.banorte.com A start to the year with no surprises @analisis_fundam . On an IFRS 16 adjusted basis, Chedraui reported in line with our estimates, showing pressures in profitability as growth in expenses Valentín Mendoza Auto Parts/ Consumer Discretionary / offset gross margin gains Real Estate/ Retail [email protected] . SSS growth in Mexico exceeded that of Walmex (5.7% vs 4.7%), which coupled with El Super’s 1.9% increase and the acquisition of BUY Fiesta Mart, led to a +33.6% TS expansion (-2.8% vs BNTe) Current Price $37.46 PT 2019 $49.00 . The lease liabilities over leverage effect (+MXN$22.6 billion qoq), Dividend 2019 Dividend Yield (%) elevated the company’s ND/EBITDA ratio to 4.7x from 1.3x in 4Q18 Upside Potential 30.8% Max – Min LTM (MXN$) 50.00 – 35.51 EBITDA margin pressures in Mexico and in Bodega Latina. On an IFRS Market Cap (US$m) 1,893.9 Shares Outstanding (m) 963.9 16 adjusted basis, Chedraui reported 1Q19 figures that were in line with our Float 15.8% forecasts in operating terms but came out weaker at net level. LfL sales Daily Turnover (MXN$ m) 11.0 Valuation metrics TTM growth in Mexico (+5.7% vs 5.4%e and 4.7% from Walmex), coupled with an EV/EBITDA 9.7x additional 1.9% from El Súper and a 19.2% sales floor increase, boosted TS P/E 18.8x by 33.6% yoy to MXN$31.1 billion (-2.8% vs BNTe). Meanwhile, improved gross profitability by El Súper and a stable margin in Mexico -despite Relative performance to Mexbol commercial aggressiveness- supported a 50bps gross margin expansion to LTM 30% 21.6%, resulting in a 36.7% profit increment. However, the expansion of units 25% 20% in Mexico (still not mature), a negative Easter Week calendar effect and a 15% 10% higher contribution from Bodega Latina to the company's results- with a 5% 0% higher expenses structure- rose expenses by 45.2%, pressuring the EBITDA -5% -10% margin by 80bps to 6.0%.Thus, EBITDA grew 16.9% year-on-year to -15% -20% MXN$1.8 billion (-0.2% vs BNTe). Finally, net profit fell 24.2%, hit by a -25% abr-18 jul-18 oct-18 ene-19 abr-19 156% higher Net Interest Expense resulting from higher interest payments and MEXBOL CHDRAUIB greater FX losses. Financial Statements Valuation and financial metrics MXN, million 2017 2018 2019E 2020E 2017 2018 2019E 2020E Revenues 94,583 116,031 137,220 148,444 EV/EBITDA 9.5x 9.7x 8.7x 7.8x Operating Income 4,418 4,547 5,093 5,881 P/E 18.9x 19.0x 16.5x 14.7x EBITDA 6,039 6,541 7,737 8,576 P/Book 1.3x 1.2x 1.1x 1.0x EBITDA Margin 6.4% 5.6% 5.6% 5.8% Net Income 2,079 2,064 2,399 2,733 ROE 7.5% 7.1% 7.5% 7.6% Net Margin 2.2% 1.8% 1.7% 1.8% ROA 3.8% 3.0% 3.0% 3.3% EBITDA/ Interest expenses 6.9x 6.9x 7.9x 7.9x Total Assets 55,006 68,244 79,027 83,940 Net Debt/EBITDA 0.7x 1.4x 1.2x 0.8x Cash 1,522 1,737 1,998 2,560 Debt/Equity 0.2x 0.4x 0.3x 0.3x Total Liabilities 26,574 38,680 44,702 44,702 Debt 5,775 10,990 11,590 9,711 This document is provided for the reader’s convenience only. The translation from the original Spanish version Common Equity 28,432 29,564 34,325 37,240 was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish Source: Banorte with data from MSE 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 “Un inicio de año sin sorpresas” was released on April 30, 2019. 1 Document for distribution among public CHDRAUI – Results 1Q19 Revenue & EBITDA Margin MXN, million MXN, million Diff% vs Concept 1Q18 1Q19 Chg % 1Q19e Estim. Revenue 23,289 31,125 33.6% 32,030 -2.8% 7.4% 40,000 8.0% Operating Income 1,174 1,407 19.9% 1,202 17.1% 6.8% 35,000 7.0% Ebitda 1,594 2,292 43.8% 1,867 22.7% 5.5% 5.6% Net Income 573 434 -24.2% 648 -33.0% 30,000 5.0% 6.0% Margins 25,000 5.0% Operating Margin 5.0% 4.5% -0.5pp 3.8% 0.8pp 20,000 4.0% Ebitda Margin 6.8% 7.4% 0.5pp 5.8% 1.5pp 15,000 3.0% Net Margin 2.5% 1.4% -1.1pp 2.0% -0.6pp EPS $0.59 $0.45 -24.2% $0.67 -33.0% 10,000 2.0% 5,000 1.0% 0 0.0% Income Statement (Million pesos) 1Q18 2Q18 3Q18 4Q18 1Q19 Year 2018 2018 2019 Change Change Revenue EBITDA Margin Quarter 1 4 1 % yoy % qoq Net Revenue 23,289.2 34,534.1 31,125.0 33.6% -9.9% Cost of goods sold 18,369.3 27,580.9 24,401.7 32.8% -11.5% Gross profit 4,919.9 6,953.2 6,723.2 36.7% -3.3% General expenses 3,745.3 6,129.4 5,315.8 41.9% -13.3% Net Income & ROE Operating Income 1,174.3 1,093.9 1,407.4 19.9% 28.7% MXN, million Operating Margin 5.0% 3.2% 4.5% (0.5pp) 1.4pp Depreciation 419.5 630.3 884.3 110.8% 40.3% EBITDA 1,593.8 1,724.2 2,291.7 43.8% 32.9% 700 7.7% 7.8% EBITDA Margin 6.8% 5.0% 7.4% 0.5pp 2.4pp Interes income (expense) net (287.6) (530.3) (740.8) 157.6% 39.7% 600 7.4% 7.6% Interest expense 63.9 198.8 473.0 >500% 137.9% 500 7.3% 7.4% Interest income 18.1 9.5 9.9 -45.1% 5.0% 400 Other income (expenses) (230.1) (334.1) (215.1) -6.5% -35.6% 7.0% 7.0% 7.2% Exchange Income (loss) (11.7) (6.8) (62.6) 432.9% >500% 300 7.0% Unconsolidated subsidiaries N.A. N.A. 200 Income before taxes 886.7 563.6 666.7 -24.8% 18.3% 100 6.8% Income taxes 301.5 162.8 229.7 -23.8% 41.1% Discontinued operations N.A. N.A. 0 6.6% Consolidated Net Income 585.2 400.8 437.0 -25.3% 9.0% 1Q18 2Q18 3Q18 4Q18 1Q19 Minorities 12.3 (26.5) 2.9 -76.4% N.A. Net Income 572.9 427.4 434.1 -24.2% 1.6% Net Income ROE Net margin 2.5% 1.2% 1.4% (1.1pp) 0.2pp EPS 0.594 0.443 0.450 -24.2% 1.6% Balance Sheet (Million pesos) Total Current Assets 14,904.6 18,411.3 17,914.4 20.2% -2.7% Net Debt & Net debt to EBITDA ratio Cash & Short Term Investments 2,247.7 1,737.4 1,567.7 -30.3% -9.8% MXN, million Long Term Assets 40,617.5 49,832.7 69,773.3 71.8% 40.0% Property, Plant & Equipment (Net) 30,676.2 34,475.9 34,137.6 11.3% -1.0% 4.7x Intangible Assets (Net) 519.9 2,600.0 2,531.9 387.0% -2.6% 40,000 5.0x Total Assets 55,522.1 68,244.1 87,687.7 57.9% 28.5% 35,000 4.5x Current Liabilities 18,611.2 23,560.7 23,410.3 25.8% -0.6% 4.0x 30,000 Short Term Debt 563.4 507.4 3,706.9 >500% >500% 3.5x Accounts Payable 16,791.0 22,081.6 18,622.3 10.9% -15.7% 25,000 3.0x Long Term Liabilities 8,074.6 15,119.7 36,707.5 354.6% 142.8% 20,000 2.5x Long Term Debt 4,993.1 10,482.5 31,936.8 >500% 204.7% 2.0x 15,000 1.4x 1.2x 1.3x Total Liabilities 26,685.8 38,680.4 60,117.8 125.3% 55.4% 1.5x 10,000 Common Stock 28,836.3 29,563.7 27,569.9 -4.4% -6.7% 0.5x 1.0x Noncontrolling Interest 12.3 (26.5) 97.4 >500% N.A. 5,000 0.5x Total Equity 28,149.5 29,323.6 27,472.5 -2.4% -6.3% 0 0.0x Liabilities & Equity 55,522.1 68,244.1 87,687.7 57.9% 28.5% 1Q18 2Q18 3Q18 4Q18 1Q19 Net Debt 2,853.5 8,577.0 34,076.1 >500% 297.3% Net Debt Net Debt to EBITDA Cash Flow (Million pesos) Operating Cash Flow before tax 1,434.7 2,731.7 533.7 Cash Flow from Operating Activities 1,434.7 2,731.7 (383.5) Cash Flow from Investing Activities (452.0) (3,154.7) (1,064.0) Cash Flow from Financing Activities (346.4) (831.0) 1,781.7 Change in Cash Balance 2,071.0 1,477.7 867.8 Source: Banorte, MSE.