GBM | PREVIEWS

2Q18

Solid increase in revenues and EBITDA; not enough for net pro t, that is set to decrease.

The rally in raw material prices should propel an 8.3% YOY top-line growth across our sample. While we reckon F/X would be one of the main reasons behind the expansion, the inorganic factor should also prompt a ~2.0% increase. As such, the main segments of our sample are expected to present positive operating results (organic growth of 6.3 and 6.9% YOY in top line and EBITDA, respectively).

Top line is set to rise 8.3%, mainly driven by price increases across all the materials.

Industrials and Mining should be the main drivers of the 8.3% expansion in top line. Particularly remarkable are the positive gures expected from the Chemicals sector, on the back of the M&A activity performed in the last twelve months (+20.2% YOY, of which +8.4% is organic). Meanwhile, the sectors that should grow at a slower pace are Bottlers and Media &Telecom.

EBITDA margin is poised to show a slight expansion YOY.

While we expect our Auto and Airlines companies to underperform our entire sample in EBITDA growth when compared to the previous year, the overall improvement in EBITDA should come from a positive performance in some of our Industrial sectors (Chemicals and, more speci cally, Mining, whose strong pricing dynamics led top line to grow above SG&As). All in all, we are penciling an EBITDA margin of 19.5% (+10 bps YOY). This time, recent acquisitions appear not to be the main propeller of EBITDA margin.

Net pro t should take a hit and decrease in the double digits.

Mostly hampered by the performance of the M&T sector, the overall net pro t is expected to decline by 16% YOYeven with the offset of an improved inorganic pro tability. After the 2Q18 earnings season, our sample is trading at 8.9x EV/EBITDA and 19.2X P/E, both slightly below the levels at which the sample has been trading in LTM. GBM Sample Sales 1,300 1,408 8.3% 6.3% EBITDA 255 278 8.9% 6.9%

Revenues EBITDA Net Income EV/EBITDA P/E
Company Total Consensus Organic Total Consensus Organic Total Consensus Organic TTM TTM
2Q17 2Q18 YOY% YOY% YOY% 2Q17 2Q18 YOY% YOY% YOY% 2Q17 2Q18 YOY% YOY% YOY% PRE POST 2018e PRE POST 2018e
FOOD, BEVERAGES AND CONSUMER STAPLES
FOOD
BACHOCO 15,116 16,530 9.4% 2.8% 3.4% 2,597 2,251 -13.3% -14.1% -16.1% 1,721 1,622 -5.8% -11.3% -7.9% 6.0x 6.2x 5.9x 11.0x 11.3x 12.1x
BIMBO 65,115 69,388 6.6% 9.1% 4.0% 6,892 7,915 14.8% 14.2% 10.8% 1,497 1,502 0.3% 22.7% -8.2% 9.4x 9.1x 8.7x 24.8x 25.8x 27.7x
GRUMA 17,437 18,166 4.2% 6.0% 4.2% 2,835 2,962 4.5% 12.2% 4.5% 1,432 1,675 17.0% 16.2% 17.0% 10.5x 10.2x 9.5x 16.0x 15.7x 15.7x
HERDEZ 4,876 5,154 5.7 % % 5.7% 2,835 825 0.2 % % 0.2% 823 232 5.7% % 5.7% 10.2x 10.0x 9.3x 16.9x 17.1x 17.0x
LALA 14,968 18,406 23.0% 24.7% 4.0% 2,096 2,162 3.2% 10.7% -6.6% 1,126 690 -38.7% -26.2% -10.4% 8.4x 8.9x 8.0x 20.5x 19.5x 15.2x
BACHOCO BIMBO GRUMA HERDEZ LALA AC KOF CUERVO

FOOD

2Q18 PREVIEWS Valuation Ratios
Revenues EBITDA Net Income EV/EBITDA P/E
2Q17 2Q18e Total Organic 2Q17 2Q18e Total Organic 2Q17 2Q18e Total Organic TTM TTM
Company Report Opinion P$ P$ % YOY % YOY Consensus P$ P$ % YOY % YOY Consensus P$ P$ % YOY % YOY Consensus Pre Post 2Q18e Pre Post 2Q18e
FOOD
BACHOCO Neutral 15,116 16,530 9.4% 2.8% 3.4% 2,597 2,251 -13.3% -14.1% -16.1% 1,721 1,622 -5.8% -11.3% -7.9% 6.0x 6.2x 5.9x 11.0x 11.3x 12.1x
BIMBO Neutral 65,115 69,388 6.6% 9.1% 4.0% 6,892 7,915 14.8% 14.2% 10.8% 1,497 1,502 0.3% 22.7% -8.2% 9.4x 9.1x 8.7x 24.8x 25.8x 27.7x
GRUMA Neutral 17,437 18,166 4.2% 6.0% 4.2% 2,835 2,962 4.5% 12.2% 4.5% 1,432 1,675 17.0% 16.2% 17.0% 10.5x 10.2x 9.5x 16.0x 15.7x 15.7x
HERDEZ Negative 4,876 5,154 5.7 % % 5.7% 2,835 825 0.2 % % 0.2% 823 232 5.7% % 5.7% 10.2x 10.0x 9.3x 16.9x 17.1x 17.0x
LALA Negative 14,968 18,406 23.0% 24.7% 4.0% 2,096 2,162 3.2% 10.7% -6.6% 1,126 690 -38.7% -26.2% -10.4% 8.4x 8.9x 8.0x 20.5x 19.5x 15.2x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

FOOD: M&A to keep boosting results for most of our sample

Resilient demand in Mexico should continue, while pricing actions should ease this time. In the US, results may be aided by F/X, although pressures from retailers may continue to limit price increases. Mixed results in profitability, with MXN depreciation having a certain impact on dollarized cost structures.

BACHOCO: Strong chicken prices to boost revenue growth; profitability faces tough comps.

OPINION

Main revenue growth drivers should be solid chicken prices in the Mexican market and inorganic matters in the US. After a strong recovery in Mexicos chicken prices during 1Q18, BACHOCO should capitalize the positive trend that has prevailed during the second quarter. As for the US, results should be propelled by the consolidation of AQFs figures and the positive F/X translation effect. All in all, consolidated top line is expected to post a sound 9.4% YOY growth.

Profitability faces a tough comparison. This quarter should present a margin similar to that of the previous quarter. We expect a 360bp contraction in EBITDA margin (13.6%), since part of the positive seasonality effect was absorbed during 1Q18, and because corn and soybean meal prices posted significantly higher levels than the previous year. Despite this effect, consolidated EBITDA margin for 1H18 should stand at 13.6% (+40 bps).

Net pro t is expected to decrease by 6% YOY. A lower consolidated effective tax rate paired with a positive F/X change bene t should not be able to offset the difficult comparison of operating results.

Lastly, we estimate a P$900 million FCF generation, explained by the solid operating results.

2Q17 2Q18 % YOY
Sales 15,116 16,530 9.4%
Op. Profit
EBITDA 2,597 2,251 -13.3
Net Profit 1,721 1,622 -5.8
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA 6.0x 6.2x
P/E 11.0x 11.3x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

BIMBO: M&A to boost top-line results. Tough quarter for the US.

OPINION

Top line to be mainly propelled by inorganic matters after the EBB acquisition. In the case of Mexico, we expect top-line growth (+6.6%) this quarter, backed by healthy volumes and pricing actions in line with in ation. For the US, F/X and M&A should be behind a 4.6% YOY top-line increase, as pricing actions and volume growth should be challenged by a erce competition and pressures from retailers for lower prices. All in all, consolidated top line is set to advance 6.6% YOY (4.0% organic), boosted by inorganic matters in EAA, where we expect a 46% increase YOY.

Pro tability improvements on most fronts, but the US. The higher wheat prices and low pricing power in the latter region should lead to an EBITDA margin of 9.3% (-70 bps YOY). In the case of Mexico, pricing actions and more favorable F/X hedges should propel a YOY margin expansion of 70 bps (18% EBITDA mg.), whereas EAA and LatAm should post EBITDA mg. of 0.5% and 5%, respectively, boosted by the higher margin of EBB in Europe and operating ef ciencies in LatAm. All in all, consolidated EBITDA margin should stand at 11.4%, implying an 80bp YOY expansion.

Net income is expected to increase by a mere 0.3% YOY, aided by the effect of the USD appreciation on the companys dollarized debt.

2Q17 2Q18 % YOY
Sales 65,115 69,388 6.6%
Op. Profit
EBITDA 6,892 7,915 14.8
Net Profit 1,497 1,502 0.3
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA 0 9.1x
P/E 0 25.8x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

GRUMA: Sound demand in Mexico; the US, helped by F/X.

OPINION

Pricing actions in Mexico and FX in the US propelling top line growth. In Mexico we expect positive volume and pricing actions to lead to a 6.8% increase in sales, while the US this time should be driven by positive volumes better mix and the effect of the MXN depreciation, translating into a 4.9% revenue increase. Lastly, while operations in Europe (Sales +13.5% YOY) should be boosted by the EUR appreciation, consolidated top line should advance 4.2% YOY.

Flat pro tability levels despite tough comps. The ongoing shift towards a better and more pro table product mix coupled with fewer extraordinary expenses this time should be enough to offset the steady prices in the overall US portfolio, leading to an EBITDA margin of 17.6% attish YOY. As for Mexico, despite the higher corn prices, hedging activity and pricing actions should lead to an EBITDA margin of 16.5%. All in all, on a consolidated basis, pro tability should remain virtually unchanged YOY, with a 16.3% EBITDA margin.

Net income to increase 17.0% YOY, propelled by a lower effective tax rate.

2Q17 2Q18 % YOY
Sales 17,437 18,166 4.2%
Op. Profit
EBITDA 2,835 2,962 4.5
Net Profit 1,432 1,675 17.0
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA 0 10.2x
P/E 0 15.7x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

HERDEZ: Sluggish demand in Preserves and gradual improvements in Frozen should continue.

OPINION

Net revenues should increase by 5.7% YOY. We expect sluggish demand to continue for Preserves volumes. Nonetheless, top line should post a 5.1% YOY growth, mainly driven by pricing actions. In the case of Frozen, favorable weather conditions should contribute to a 7% revenue advance.

Pro tability setbacks due to a deteriorating mix. The trend towards a less pro table mix seen in the previous quarter should continue to take a toll on Preserves pro tability, leading to a slight 20bp margin contraction. Nevertheless, in Frozen, operating ef ciencies may be offset by extraordinary expenses and tough comps, prompting an EBITDA margin of 11.1% for the division (-650 bps YOY). All in all, the consolidated EBITDA margin may end the quarter at 16% (-90 bps YOY).

Net income to increase 6% YOY, due to less interest expenses and a sound quarter for Megamex.

2Q17 2Q18 % YOY
Sales 4,876 5,154 5.7 %
Op. Profit
EBITDA 2,835 825 0.2
Net Profit 823 232 5.7
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA 0 10.0x
P/E 0 17.1x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

LALA: Pro tability setbacks due to Brazils incorporation and tough comps in Mexico

OPINION

Top line to be driven by volumes in Mexico and M&A activity. While we expect positive volumes to boost top line in Mexico, the negative effect of a change in the mix towards Nutrileche will take its toll on revenue growth, ending the quarter with a 4.1% YOY revenue increase. Moreover, although the US sales (+3.6% YOYe) should be helped by the MXN depreciation, operations in local currency may struggle to improve. Lastly, despite a negative F/X impact, the incor- poration of Brazil should give way to inorganic growth, contributing with P$2.8 billion. All in all, consolidated top line should soar 23.0% YOY.

Pro tability setbacks due to the incorporation of Brazil and tough comps in Mexico. Despite more comfortable F/X hedges this time, a 15% margin in 2Q17 should present a tough comp this quarter. As such, we are penciling in an EBITDA margin of 13.5% for Mexico (-150 bps YOY). In the US, the lower volumes and the ongoing restructuring pro- cess should continue to take a toll on pro tability, leading to a negative mid-single digit EBITDA margin. Lastly, despite the lower milk prices in Brazil, results for the region should be tainted by the truckers strike, which affected opera- tions for 10 days (7.2% EBITDA Mg.). All in all, consolidated margin should stand at 11.7% (-230 bps).

Net income to slump by 39% YOY, affected by the challenging situations that affected operating results, and the higher interest paid following the sharp debt increase.

2Q17 2Q18 % YOY
Sales 14,968 18,406 23.0%
Op. Profit
EBITDA 2,096 2,162 3.2
Net Profit 1,126 690 -38.7
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA 0 8.9x
P/E 0 19.5x
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

AC: Positive volumes in Mexico and pressures on COGS should prevail.

OPINION

Mild revenue growth on a consolidated basis. After a full year of the Southwest consolidation, net revenues may struggle to grow this time, because of the F/X in Argentina and slight volume declines in Peru, which should lead to a 4.9% revenue drop in South America. As for Mexico, positive volumes should continue to outperform the industry and this, coupled with pricing actions, should translate into a 6.5% YOY sales increase. Moving on to the US, sales should post a high single-digit increase, supported by the inorganic effect of Great Plains acquisition. All in all, consolidated top line may rise by a 5% YOY.

Pro tability setbacks on most fronts. In Mexico, the still high sugar and concentrate prices should continue to dete- riorate pro tability, albeit to a lesser extent this time, leading to an EBITDA margin of 24.9% for the division (-50 bps YOY). Moreover, while EBITDA margin in SA should retreat around 50 bps, the US may contribute with a 30bp margin contraction, driving the consolidated margin to stand at 19.1% (-50 bps YOY).

Bottom line is poised to rise 55% YOY, mostly aided by lower taxes this quarter and the currency hedging losses posted in 2Q17. Lastly, the company is expected to generate P$1 billion in FCF despite the weaker operating results.

2Q17 2Q18 % YOY
Sales %
Op. Profit
EBITDA
Net Profit
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA
P/E
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

KOF: Brazil with gradual improvements; Mexico, still pressured by sugar prices.

OPINION

Top line to be propelled by pricing in Mexico. Volumes in Mexico should maintain a sluggish growth pace (+0.5%) this quarter, although price increases above in ation could bring a 6.2% revenue advance for the division. In SA, F/X in Brazil and Argentina should take a toll on revenue growth (Sales -6% YOY), partially offset by volume increases in Brazil and the COP appreciation. As for the Philippines (Sales +11%; Vol. -6%), pricing actions following the recently imposed excise tax should fully offset volume declines and F/X translation. All in all, after the deconsolidation of Venezuela, consolidated revenues should only grow 1.9% YOY.

Pro tability in Mexico to push margins down. Despite a certain correction, sugar prices remain a signi cant pres- sure, which coupled with the higher concentrate prices should continue to hamper pro tability, albeit to a lesser ex- tent this time (22.7% EBITDA mg.; -30 bps YOY). In South America, lower sugar and PET prices should drive a 90bp EBITDA margin expansion (16.6%e). Lastly, we forecast a sharp contraction in the EBITDA margin of the Philippines (9.9%; -800 bps YOY) following the decline in volumes and the higher sugar prices. As a result, the consolidated EBITDA margin should end the quarter at 18.9% (-60 bps YOY).

Net income to grow 37% YOY, boosted by a comparison stemming from an extraordinary Venezuela-related expense in 2Q17.

2Q17 2Q18 % YOY
Sales %
Op. Profit
EBITDA
Net Profit
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA
P/E
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.

CUERVO: Hefty growth in US volumes due to easy comps.

OPINION

Strong growth in top line, mainly coming from the US. The inventory built up in 4Q16 that led to depressed volumes in 2Q17 should set the tone for an easy comparison base this quarter. The latter, coupled with the USD appreciation, lead us to estimate a 33% increase in sales that would mainly come from a 25% volume hike. In Mexico, volumes and product mix are poised to keep improving, which should bring an 8.6% pickup in sales. All in all, we expect consolidating top line to advance 27% YOY in 2Q18.

Agave prices may continue to pressure pro tability levels. Despite an improved product mix and a growing ver- tical integration, a decrease in the use of own agave and the rise in agave prices should take a toll on pro tability, translating into an EBITDA margin of 26.8% for the quarter (-580 bps YOY).

Net income is expected to soar 74% YOY, propelled by the effect of the USD appreciation on the companys cash balance.

2Q17 2Q18 % YOY
Sales %
Op. Profit
EBITDA
Net Profit
Op. Mg.
EBITDA Mg.
Net Mg.
– Figures in MXN Million
PRE POST
EV/EBITDA
P/E
Valuation multiples consider proforma majority figures, and exclude non-recurring and non-cash items.