Femsa results proved that sequential recovery is following its way. Meanwhile, sales finally resumed growth, regardless the tighter mobility restrictions faced during the quarter
Future earnings shall reflect strong growth, which in our view should drive a higher valuation. Consequently, we reiterate FEMSA among our top picks 2021
A start of the year of sequential recovery in all businesses. Femsa's report was in line with our estimates at the operating level, confirming that recovery continues in all businesses. We see this as remarkable considering the more astringent mobility restrictions put in place during the quarter. That said, sales resumed growth after three consecutive quarters in contraction. The increase was of 1.8% y/y MXN 124,474 billion, driven by a solid performance in Health (+ 16.0%) and acquisitions in the US, which offset the weakness in Kof, Proximity (-4.8%) and Fuels ( -21.4%) businesses, that regardless of the year-on-year drops continued to recover. Meanwhile, lower profitability at the bottling company (-30bps) and Oxxo's operating deleveraging (-60bps) offset the 140bps expansion in Pharmacies and the 80bps at Oxxo Gas. As such, EBITDA remained virtually flat, standing at MXN 16.974 million (-0.9% y/y) and the corresponding margin fell 40bps to 13.6%. Finally, net income slumped 41.4% year-on-year, impacted by 81.7% lower foreign exchange gains vs 1Q20.
We still see room and catalysts for FEMCO to continue re-rating. Femco implicitly trades at 11.1x FV/EBITDA LTM, with a discount close to 14% when compared to historical averages, while the business’ outlook is positive. Economic recovery coupled with easy comps, should reflect into a strong earnings growth, as soon as 2Q21, and support further re-rating on the stock, in our view.
Performance by business unit
