Individual
Research Investment Analysis 2018
Title:
VALUATION OF ALICORP S.A.
Sección:
S-002
Lecturer:
Guillermo Dávila Jaramillo
Name:
Last name:
Edwin
Curahua Huaringa
1. Theoretical Framework: Narrative of the Company 1.1. Description of the Company: Core Business, Key people & Products La empresa fue fundada en 1910 cuando el matrimonio británico conformado por José R. Lindley y Martha Stoppanie de Lindley llega al Perú y se establece en el distrito del Rímac, dedicándose a la fabricación de bebidas carbonatadas, donde resalta la marca Inca Kola. Con el pasar del tiempo se ha convertido en la empresa líder del mercado1 teniendo como socio estratégico a Arca Continental, el tercer embotellador más importante del sistema Coca-Cola a nivel mundial. Lindley se beneficia de un fuerte reconocimiento de marca en el mercado de bebidas gaseosas, diversificado portafolio, una fuerte y exclusiva red de distribución, y la alta penetración de mercado que llega a más de 240.000 puntos de venta en todo el país.
1.2. Hechos de importancia Corporación Lindley S.A. es el único embotellador autorizado y distribuidor de marcas registradas de The Coca-Cola Company en todo el Perú, incluyendo Coca-Cola e Inca Kola. La compañía ofrece una amplia gama de bebidas no alcohólicas que consisten en bebidas carbonatadas (gaseosas) y bebidas no carbonatadas. En 1999, The Coca-Cola Company adquirió una participación en Corporación Lindley S.A. En 2004, Corporación Lindley S.A. adquirió a su principal competidor, Embotelladora Latinoamericana S.A., después de lo cual la compañía se convirtió en el embotellador exclusivo de las marcas de Coca-Cola en el Perú. En el 2015, Corporación Lindley concreta la alianza estratégica con Arca Continental que adquirió el 47,52% del total de las acciones de la empresa. La venta del paquete de 308.847.336 acciones comunes emitidas por la corporación y que representa el 53,16% de las acciones con derecho a voto, se dio por US$ 760 millones (Semana Económica.com 2015) y, adicionalmente, el pago de US$ 150 millones por un acuerdo de no competencia , lo cual lleva a un precio de US$ 2,95 por acción. En enero del 2016, Arca Continental realizó una segunda compra de acciones comunes con derecho a voto de Corporación Lindley, pagando US$ 1,57 por acción a la familia Arredondo Lindley. La adquisición fue de 38,4 millones de acciones, que equivalen al 6,62% de las acciones comunes de la embotelladora peruana. Con esta operación, Arca Continental se convierte en titular del 60,25% de acciones con derecho a voto de Lindley (Semana Económica.com 2016). En marzo de 2016, Arca Continental detenta 15.801.752 acciones de inversión de Corporación Lindley, que representan el 21,96% del total de los títulos, y busca hacerse con el 25% de las acciones de inversión de la empresa como parte del plan de inversión en la compañía. Sin especificar cuándo se llevará a cabo, Arca Continental tendría autorizado por su asamblea de accionistas adquirir hasta el 100 % de las acciones de inversión al precio de US$ 0,89, pese a que algunos tenedores de los papeles han manifestado su inconformidad con la oferta (Diario Gestión 2016)
1.3. Growth Rate: In the second quarter of 2017, Alicorp posted a net profit of PEN 128.2 million, which was 71.4% more than the same period of the previous year. According to the CEO, it was due to growth in its three product lines. In the same quarter, a growth of 12.2% in sales amount was achieved, but of 9.5% in volume (quantity of products sold), with
respect to the same period of the previous year. This growth is broken down as follows 1:
Mass Consumption Peru: Sales for 666.8 million PEN in 2Q17, 8.3% more than in 2Q16. This thanks to greater sales in detergents, oils, sauces and softeners. B2B: Sales of 390.2 million PEN in 2Q17, 4.4% more than in 2Q16. This thanks to the growth of the restaurant sector. Aquaculture: Sales of 466.6 million PEN in 2Q17, 43.1% more than in 2Q16. This thanks to higher sales of fish and shrimp feed for a recovery in t his sector.
Finally, Alicorp in 2Q17 reported a t otal sales of 1,827.4 million PEN. In the third quarter of 2017, Alicorp achieved sales of 1,823.5 million PEN and a growth of 4.2% with respect to the same period of the previous year. The growth in volume (quantity sold) was 5.7% with respect to 3Q16. This growth was due to the simultaneous growth of its three product lines. The breakdown of the growth obtained is shown below2:
Mass Consumption Peru: Sales for 709.9 million PEN, 7.8% more than in 3Q16. This thanks to greater sales in detergents, sauces, pastas and cookies. In addition, thanks to the launch of a new category of preserves. B2B: Sales for an amount 11.9% higher than 3Q16. Aquaculture: Sales for an amount 5.7% higher than 3Q16.
The International Mass Consumption business recorded a decrease in its revenues of 14.8% compared to 3Q16. This is mainly due to lower sales in Argentina given the continued contraction of the market subject to the decline in purchasing power, together with still high levels of inflation and the depreciation of the currency. 3 Finally, the consolidated net profit was 116.4 million PEN in 3Q17, 28.7% higher than that registered in 3Q16. Among other additional data that may be relevant for the valuation we have the following:
1
Alicorp will invest USD 20 million to increase its production. The company in question plans to consolidate its investments in Peru and feels optimistic about the evolution of that economy, given that it is effectively avoiding the international financial crisis. 4 Fitch rating agency considering Alicorp's solid financial profile in 1Q17 and analysts' estimates indicated that the company had the potential to grow 5% this year, where EBITDA would grow between 12% and 13%. On the other
Information retrieved from Diario El Comercio: "Alicorp's profits soar in the second quarter" (07/26/17). https://elcomercio.pe/economia/negocios/ganancias-alicorp-disparan-segundo-trimestrenoticia-445350 2 Information retrieved from Diario El Comercio: "Alicorp: Sales reached S / .1,823.5 million during 3Q17" (10/30/17). https://elcomercio.pe/economia/negocios/alicorp-ventas-alcanzaron-mlls-3t2017noticia-469969 3 Information retrieved from the main page of Alicorp in Alicorp News: Services for Investors. https://www.alicorp.com.pe/alicorp-ir/public/informacion-financiera/noticias/alicorp-incrementa-susventas-ebitda-y-utilidad-neta-en-el-3t2017.html 4 Information retrieved from Diario Gestión: "Alicorp will invest US $ 20 million to increase production" (11/22/17). https://gestion.pe/noticia/287798/empresa-alicorp-invertira-us-20-millones-incrementarproduccion
hand, Alicorp estimates that its revenues grow an average 6.5% annually to 2019 while its EBITDA margin reaches a range of among 13.5% to 14.5%. 5 Among other factors to be taken into account, 62% of Alicorp's revenues come from Peru, according to the source in footnote number 5.
2. Financial Statement Analysis: Assumptions & Projections It is worth to mention that all the figures shown in all the tables are in millions of USD. On the other hand, given that according to S & P Capital IQ the projected growth of Alicorp for 2017 is 9% in sales, this figure will be taken as an assumption, but in addition it will take 6.5% as the growth for the years 2018 and 2019. , a summary of the results of Alicorp is shown below in table 1:
Table 1: Summarized Income Statement of Alicorp from 2012 to projected 2017 results Period
2012
2013
Total Revenue
1,752.3
Cost Of Goods Sold Gross Profit
Selling General & Admin Exp. Other Operating Expense (Income) Other Operating Exp., Total Operating Income
Net Interest Exp. EBT Excl. Unusual Items
Other Gain (Loss) EBT Incl. Unusual Items
Income Tax Expense Other Gain (Loss) Net Income
2014
2015
2016
2017
2,080.9
2,102.7
1,932.0
1,977.6
2,164.6
1,269.5
1,514.4
1,529.5
1,382.8
1,376.9
1,481.7
482.9
566.5
573.2
549.2
600.7
683.0
278.9
356.7
383.7
369.5
393.3
435.4
73.9
12.5
13.4
19.7
16.8
(9.3)
295.8
347.4
457.6
382.0
406.8
455.1
187.1
219.1
115.6
167.2
193.9
227.8
(10.5)
(42.3)
(53.9)
(56.3)
(34.7)
175.9
132.6
17.1
67.9
4.3
3.7
2.9
0.5
180.2
136.3
20.1
68.4
138.1
184.1
58.7
45.0
15.9
22.2
48.0
59.1
16.5
22.4
138.0
113.7
(0.6) 3.5
(1.1) 45.1
145.7
(22.7)
(7.6)
0.1 90.2
189.6
(5.5)
(0.1) 124.9
Source: S&P Capital IQ This can be complemented with the vertical analysis shown in table 2, where it can be seen what each item represents as a percentage of sales. Thanks t o this, we can make the following assumptions that will be relevant for the valuation:
5
Historically the cost of goods sold is around 70% of sales, therefore, it will be considered with that percentage.
Information recovered from Semana Económica: "Fitch: Alicorp is in a position to grow inorganically". http://semanaeconomica.com/article/sectores-y-empresas/consumo-masivo/225426-fitch-alicorp-estaen-posicion-para-crecer-inorganicamente/
It will be assumed that accounts grow at the same rate of growth as sales do, since their estimate is based on a percentage of this account. Sales will be projected for 7 years and after that, an organizational growth equivalent to the growth of the economy will be assumed. It assumes a growth of 9% for 2017, 6.5% for 2018 and 2019 and 4.7% (average growth in sales for the period between 2013 and the projected result of 2017) from 2020 to 2023. From 2024 it will be considered growth according to the economy.
Table 2: Vertical Analysis of Alicorp from 2012 to projected 2017 results Period
2012
2013
2014
2015
2016
2017
Total Revenue
100% 100% 100% 100% 100% 100%
Cost Of Goods Sold
72%
73%
73%
72%
70%
68%
Gross Profit
28%
27%
27%
28%
30%
32%
Selling General & Admin Exp.
16%
17%
18%
19%
20%
20%
Other Operating Expense (Income) Other Operating Exp., Total
1% 17%
0% 17%
4% 22%
1% 20%
1% 21%
1% 21%
Operating Income
11%
11%
5%
9%
10%
11%
Net Interest Exp.
-1%
-2%
-3%
-3%
-2%
-1%
EBT Excl. Unusual Items
10%
6%
1%
4%
7%
9%
0%
0%
0%
0%
0%
0%
10%
7%
1%
4%
7%
9%
Income Tax Expense
3%
2%
1%
1%
2%
3%
Other Gain (Loss)
1% 8%
1% 5%
0% 0%
0% 2%
0% 5%
0% 6%
Other Gain (Loss) EBT Incl. Unusual Items
Net Income
Source: S&P Capital IQ The estimation of the effective tax rate and Opex in tables 3 and 4 is shown below: Table 3: Effective Tax Rate Estimation without considering 2014 (one-time effect) 2012 Tax 33% Source: S&P Capital IQ
2013 33%
2014 79%
2015 32%
2016 35%
2017 32%
Average 33%
Average 19%
Table 4: Operating Expenditure Estimation 2012
2013
2014
2015
2016
2017
Opex 17% Source: S&P Capital IQ
17%
22%
20%
21%
21%
Due to Opex's upward trend, a percentage point will be added to the average estimate of this, taking it from 19% to 20%. Now that all the necessary factors are present, the EBIT estimate after Taxes is presented in table 5: Table 5: EBIT after Taxes Estimation from 2018 to 2023
Growth Sales Cogs
2018 2019 2020 2021 2022 2023 6.50% 6.50% 4.70% 4.70% 4.70% 4.70% 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3 1,613.7 1,718.6 1,799.4 1,884.0 1,972.5 2,065.2
Opex 438.0 EBIT 253.6 Tax 83.7 EBIT(1-t) 169.9 Source: S&P Capital IQ
466.5 270.1 89.1 180.9
488.4 282.8 93.3 189.5
511.4 296.1 97.7 198.4
535.4 310.0 102.3 207.7
560.6 324.5 107.1 217.4
Since you have the estimate of EBIT after taxes. Work Capital and CAPEX will be projected. Table 6 shows the DPO, DSI and DSO ratios that will be useful for the following assumptions considering their simple arithmetic average as the estimated future of their growth. Table 6: Computing of DPO, DSI and DSO including projected 2017 results 2012 2013 DPO 16% 16% DSI 23% 19% DSO 17% 16% Source: S&P Capital IQ
2014 22% 22% 16%
2015 28% 21% 15%
2016 27% 17% 15%
2017 31% 19% 13%
Average 23% 20% 15%
Now in table 7 the calculation of Working Capital is shown: Table 7: Working Capital Estimation from 2018 to 2023 2018 2019 2020 2021 2022 2023 Sales 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3 Cogs 1,613.7 1,718.6 1,799.4 1,884.0 1,972.5 2,065.2 A/P 377.3 401.8 420.7 440.5 461.2 482.8 Inventory 325.4 346.5 362.8 379.9 397.7 416.4 A/R 351.8 374.7 392.3 410.8 430.1 450.3 WC 299.9 319.4 334.4 350.1 366.6 383.8 185.7 19.5 15.0 15.7 16.5 17.2 WC Source: S&P Capital IQ Now we go to estimate the CAPEX. It is known that the growth of the company can be estimated as the product of the impact of its assets on the generation of sales (or the effective use of the company's assets) and the ratio of reinvestment of profits in the following way:
= ( ) = ( − ) In this way, considering that we already have the historical ROA of the company in the historical information and the organizational growth rate, we will consider the amount of the CAPEX as the Reinvestment Rate of each year. Historically, the Net Income average between sales is 4.4%. This figure will be used to estimate the Net Income for the following years and will be assumed as constant. Likewise, a reinvestment ratio of 69% of the Net Income was found, which will also be assumed permanent. According to table 8, we can see the calculation of this as an estimated percentage of other accounts: Table 8: Capital Expenditure Estimation as a percentage of 2018
2019
2020
2021
2022
2023
Sales 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3 Net Income 100.6 107.1 112.1 117.4 122.9 128.7 CAPEX 69.4 73.9 77.4 81.0 84.8 88.8 Source: S&P Capital IQ Now we will proceed to the estimation of depreciation. The duration of the assets will be considered 20 years from the projected results of 2017. Table 9 shows the calculation: Table 9: Depreciation computing for around 20 year fos Net Assets of 2017 Accounts Amount Gross Property, Plant & Equipment 1,042.7 Accumulated Depreciation 468.6 Net Property, Plant & Equipment 574.1 Average Depreciation 57.4 Source: S&P Capital IQ Since all the necessary components are already available to form the Cash Flow, the discount rate will be calculated. The W ACC calculation will be done in the next tables:
Table 10: Breakdown of the debt according to the bank Amount Share
Rate
Wheighing
BBVA Continental
96,429
34.13%
4.95%
1.69%
Bank of America
80,252
28.40%
3.70%
1.05%
The Bank of Tokyo
76,970
27.24%
3.25%
0.89%
Scotiabank Perú
15,552
5.50%
5%
0.28%
Citibank
8,434
1.63%
3.50%
0.06%
BDMG
4,593
2.98%
3.93%
0.12%
318
0.11%
4.50%
0.00%
Banco do Brasil
282,548 4.08% Source: Superintendencia de Mercado de Valores (Peruvian Regulatory Agency of Capital Markets) Table 11: Beta computing
1 2 3 4 5 6 7 8
Companies Procter & Gamble Co Unilever NV Nestle SA Danone SA Mondelez International Inc Kellogg Co J&J Snack Foods Corp Treehouse Foods Inc
Levered Beta Unlevered Beta 0.619 0.788 0.946 0.516 0.811 0.601 0.811 1.081 0.604 0.92 1.08
0.601 0.451 0.808 0.530 0.452
9 10 11 12
B&G Foods Inc Tootsie Roll Industries Inc Cal-Maine Foods Inc PepsiCo Inc Average Alicorp's Beta Source: Bloomberg
0.661 1.043 0.798 0.676
0.738 0.468 0.611 0.722 0.607
1.014
The annualized risk free rate is 2.34% 6. The annualized rate of return of the market is 13.16%, considering the daily variation of the IGBVL 7. In this way we can estimate the CAPM:
= . % + . (. % − . %) = . % The following table presents the calculation of the WACC, where the debt rate is already deducted from taxes.
Table 12: WACC computing Amount
Share
Rate
WACC
Debt
889.7
51%
2.94%
1.50%
Equity
865.8
49%
13.31%
6.52%
1,755.50 Source: S&P Capital IQ
8.02%
It will be considered a growth of the economy of 3% because this figure is the most representative of the last decade according to BCRP statistics (Peruvian Central Bank). This will be used to calculate the terminal value in the next table: Table 13: Enterprise Value computing 2018
2019
2020
2021
2022
2023
EBIT(1-t)
169.90
180.95 189.45 198.36 207.68 217.44
WC
185.67
19.49
15.01
15.72
16.46
17.23
CAPEX
69.38
73.89
77.36
81.00
84.81
88.79
Depreciation
57.41
57.41
57.41
57.41
57.41
57.41
Cash-Flow
-27.74
144.97 154.48 159.05 163.82 168.83
NPV
-25.68
124.24 122.57 116.82 111.39 106.27
Enterprise Value
Terminal Value
3,622.72
2,111.09
2,666.69
Millions of Shares 847.19 Price per Share 3.15 Sources: S&P Capital IQ, MarketWatch and Reuters 6
Information retrieved from MEF Daily Bulletin to November 23, 2017. https://www.mef.gob.pe/dnep/reporte/2017/boletin_diario_23_11_17.pdf 7 A daily index data was considered from November 24, 2015 to November 25, 2017. https://es.investing.com/indices/lima-stock-exchange-general-historical-data
Considering a PEN / USD exchange rate of 3.25, the price of the Alicorp share would be around 10.23 PEN. Currently, the share price is from 10.35 to November 25, 2017. As a conclusion of the valuation, there is sufficient financial evidence to affirm that Alicorp's stock is above its intrinsic value, for which it would be recommended to sell it, waiting for the market to correct said error and buy it at a lower price in the market, so that the investor achieves a profit from said operation.
3. Financial Indicators: Multiples & Comparison In the following table 14, Alicorp will be compared with other companies with available data in Bloomberg and more actualized as possible: Table 14: Multiples comparison among Alicorp and comparable companies Companies PER 1 Procter & Gamble Co 23.23 2 Unilever NV 23.70 3 Nestle SA 28.18 4 Danone SA 23.88 5 Mondelez International Inc 20.10 6 Kellogg Co 15.30 7 B&G Foods Inc 20.02 8 PepsiCo Inc 22.52 Average 22.12 Alicorp 19.45 Sources: S&P Capital IQ and Bloomberg
EPS 3.92 2.04 3.01 2.94 2.11 4.23 1.81 5.11 3.15 0.17
EV/EBITDA EV/SALES 15.00 3.84 14.16 2.78 17.19 3.13 15.83 2.60 19.76 3.06 15.50 2.30 13.48 2.46 14.60 2.92 15.69 2.89 9.36 1.25
As a result, Alicorp’s multiples are all under the average, what just means that its shares would be overvalued, the exact same result obtained in the tables above. It corroborates the past conclusion and leads to the recommendation for investors to star selling before the price drops.
