Earnings Report /
Mexico

Alsea: ALSEA, Quarterly Report 1Q21: Greater than expected impact of the pandemic

  • Alsea's report was weak, with the impact of the sanitary measures being greater than expected

  • We believe the hardest times are behind us. Economic recovery and vaccination progress should support the recovery

  • We set a PT of $39.00 (7.8x FV/EBITDA 2021E, below current multiple). However, given a limited return our rating is HOLD

Valentin III Mendoza Balderas
Valentin III Mendoza Balderas

Senior Equity Research Analyst, Consumer & Telecoms

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Juan Barbier
Juan Barbier

Equity Research Analyst

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Banorte
5 May 2021
Published byBanorte
  • Alsea's report was weak, with the impact of the sanitary measures being greater than expected. However, the recovery observed in March points to a more favorable outlook going forward

  • We believe the hardest times are behind us. The economic recovery and the progress in vaccine distribution should support the recovery, which should be reflected in significant growth

  • We set a PT of MXN 39.00 (FV/EBITDA 2021E of 7.8x below current multiple). However, given a limited return after the recent rally, we downgrade our rating to HOLD

The pandemic impacted profitability in Europe more than expected. In the face of the reinforced sanitary measures in all regions, implementing temporary (and some permanent) unit closures, as well as time and capacity restrictions, figures for the quarter were below our estimates. Revenues declined 15.6% y/y to MXN 10.212 billion, as a result of a 13.3% y/y decline in consolidated SSS (Mexico: -8.4%; Europe: -29.2%; South America: +4.9%), reflecting the effects of a heavy snowfall in Spain, an adverse FX effect, and the closure of 122 units in the LTM. On the other hand, despite operational weakness, Starbucks, Domino's Pizza and Burger King (which are the most relevant in the portfolio) continue to stand out for their good performance. Meanwhile, an aggressive cost-cutting strategy (achieving MXN 880 million in savings), government support in Europe and efficiencies in the Southern Cone were not enough to offset the operating deleveraging caused by sales decline. EBITDA reached MXN 2.045 million (-18.0% y/y) and the respective margin contracted 60 bps to 20.0% (Mexico: -5.3pp; Europe: +20.9pp; South America: +9.4pp). Finally, at the net level, a loss of MXN 312 million was recorded as a consequence of the fragility at the operating level. Recovery in sight. As soon as 2Q21, when comparative fundamentals will start to be easy, the reactivation of economic activity should support significant growth. We raise our PT to MXN 39.00; but given the limited upside potential after the rally, we recommend HOLD.

2021 Estimates

In view of the strong recovery observed in March ‒which accounted for ~60% of EBITDA for the quarter‒, with more relaxed health measures, we incorporated new estimates to our valuation model, anticipating a pronounced recovery driven by the economic improvement, as well as figures boosted by a favorable base effect. In this regard, we anticipate that consolidated same-store sales will increase 54.8% y/y this year, with increases of 51.0% in Mexico, 63.8% in South America, and +38.9% in Europe. We also project a 2.0% growth in the number of stores to 4,276 units, bringing consolidated sales to MXN 48.229 billion, after a 25.3% year-over-year increase. By region, revenues in Mexico would increase 24.4% y/y, while in Europe they would rise +20.9% y/y and +46.2% y/y in South America. Once again highlighting that this would be supported by an easy comparative base in view of the strong impact of the pandemic on the 2020 results, as well as by a positive FX effect. On the other hand, we estimate consolidated EBITDA to grow 51.8% y/y to MXN 10.511 billion, while EBITDA margin would improve 381 bps to 21.8%, driven by higher operating leverage and the company's aggressive efforts to reduce costs and expenses. Meanwhile at the net level, we project a loss of MXN 97 million, vs. -MXN 3.186 billion in the prior year, as a result of operating recovery and a 6.9% decline in CFC mainly attributable to foreign exchange gains that compare favorably to the 2020 loss. Finally, we expect a CAPEX of MXN 2.14 billion (+60.9%), resuming capital expenditures after measures implemented to maintain the company's liquidity.

Valuation and PT of MXN 39.00

Through a discounted cash flow (DCF) valuation model, based on free cash flow to the firm (FCFF), we determined a new PT of MXN 39.00 per share, from MXN 27.00 previously. For its calculation, we assumed a weighted average cost of capital (WACC) of 11.2%, for which we estimated a cost of capital (CAPM) of 15.6%, a cost of debt of 4.5% and a 35% debt/equity ratio (normalized for the pandemic conjuncture). For the CAPM we assumed a 1.4 beta, a 6.9% risk-free rate (2021E closing 10-year M bond by our Fixed Income and FX analysis team), and a 6.0% market premium. In addition, for the residual value calculation, we used an exit FV/EBITDA  of 7.0x, below the current multiple at 13.0x and below the 1-year average (ex ante the pandemic) at 8.0x. We consider the use of pre-pandemic levels to be more appropriate, due to the distortion this has created in valuation parameters. With this, our PT at MXN 39.00 represents a 2021E FV/EBITDA multiple of 7.8x, again in line with last year's average (excluding 2020) and at a 59% discount ‒lower than the current ~70% discount‒ vs. the average of global restaurant operators in 2021, according to Bloomberg.

However, despite the company's positive outlook going forward, supported by the economic recovery and a simple comparable base, we believe the recent rally in Alsea's price has already incorporated a large part of these expectations, limiting the upside potential that can be generated from the stock. Therefore, we downgrade our rating to HOLD.