Equity Analysis /
Mexico

El Puerto de Liverpool: Quarterly Report 3Q22: Growth accelerates and margins remain stable

  • Expansion remains strong across all formats and profitability remains stable, while Omnichannel furthers

  • The company’s outlook is positive, with a solid financial position an attractive valuation

  • Incorporating quarter's figures and 2023 outlook, we set a PT of MXN 118.00 and a recommendation to BUY

Marissa Garza Ostos
Marissa Garza Ostos

Head of Equity Research

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Banorte
3 November 2022
Published byBanorte

Growth accelerates and margins remain stable

  • Results surprised favorably, driven by a still-resilient demand, which should be well recerived by the market. Highlighting a stable EBITDA margin at 16.3%

  • The company’s outlook is positive, supported by the Ominchannel strategy, with a solid financial position and an attractive valuation FV/EBITDA of 5.3x vs L5Y average of 9.3x

  • By incorporating better figures given all-formats performance and strict expense control, we set a PT of MXN 118.00 (FV/EBITDA of 5.5x). Our recommendation is to BUY

Expansion remains strong across all formats and profitability remains stable, while Omnichannel furthers. The company's figures surprised positively from advances in all business lines, reflecting a 19.6% YoY increase in revenues to MXN 38.1 billion. Commercial sales increased 19.7% YoY to MXN 33.9 billion, highlighting Liverpool’s total growth of 20.3% YoY (+19.3% in SSS), largely explained by an acceleration in the Softline category, while Suburbia increased by 15.9% YoY (16.1% SSS), as result of the good performance in product demand. In turn, Credit division’s revenues amounted to MXN 3.2 million (18.6% YoY) and Leasing revenues reached MXN 944 million (17.1% YoY). EBITDA hit MXN 6.2 billion (18.3% YoY) with the margin at 16.3% (-0.2pp), remaining practically stable due to strong operational advances and good performance in Ominichannel strategies, although the non-performing loan ratio (NPLs) increased to 2.8% in 3Q22 from 2.4% in 2Q22 (stable vs 2.9% in 3Q21). Finally, net income expanded to MXN 3.1 million (35.5% YoY), supported by lower financial expenses (-52.8% YoY). Financial strength, although backdrop risks prevail. Going forward, we will continue to monitor shrinkage control measures and operational efficiencies to limit profitability pressures, we recommend to BUY.

Omnichannel strategies, logistics, and organic growth would partially offset a slowing economic environment

Liverpool's performance has shown a strong resilience in an environment of full social mobility and economic recovery so far in 2022. The good results obtained were drove from commercial strategies, combined with strict expense control, which have led to all-business-lines progress, with an outstanding profitability expansion. Although there are still latent medium-term risks associated with an environment of high inflation and lower growth, given more restrictive monetary policies, the financial structure is sufficiently solid to face backdrop challenges and adapt new strategies, while taking into advantage the opportunities that might arise.

Updated estimates

After the before-mentioned context, we are updating our estimates. For 2022, and integrating the latest figures for the quarter, we expect demand to remain solid for the rest of the year, supported by important progress in Omnichannel strategies and high social mobility. As a result, we anticipate revenues to grow 17. 9% YoY to MXN 178.1 billion, driven mainly by a 17. 8% YoY increase in Commercial division sales (SSS +15.7%e) supported by a 4.7% YoY increase on sales floor. In particular, we project Liverpool division sales will increase 16.1% YoY and Suburbia’s will climb 10.8% YoY. Regarding the financial business, we expect total portfolio to grow by 19.2% YoY, which translates into a 21.1% YoY increase in revenues, explained by a greater economic reactivation during the period and higher interest rates. Finally, in the Real estate segment, we assume a 28.5% YoY hike in revenues, mainly as result of inflationary adjustments in the average rent and an increase in the occupancy rate to 91.1% vs. 89.7% currently.  Based on the above, we anticipate 18.3% YoY advance in EBITDA to MXN 28.3 billion, which reflects the strong progress in all business lines. As a result, EBITDA is expected to be stable at 15.9%, where strict expense control is supporting profitability. In turn, we expect the financial benefit to be higher at MXN 2.3 billion in 2022 vs. MXN 3.1 billion in 2021, driven by a higher interest rate environment and a lower level of debt. Meanwhile, the tax rate at 27.9%, would return to pre-pandemic levels, therefore, on a net basis, we project earnings to grow 19.0% YoY to MXN 15.3 billion.                                                                                                                          

Meanwhile, for 2023, although we foresee a very complex start of the year, based on a scenario where inflation could persist and consumption could show signs of depletion, largely driven from a high interest rate scenario and underpinning an economic recession, we expect the second half of the year to show signs of greater recovery and cost pressures begin to ease. Based on the above, we are conservatively positioning revenues to increase just 4.6% YoY to MXN 18.3 billion, explained by a 3.9% YoY expansion in sales of the Commercial division (SSS of 2.0%e), and considering a 2.6% YoY increase on sales floor. In particular, we anticipate a 4.4% YoY increase in Liverpool sales (SSS of 2.8%e), as well as an increase in Suburbia of 4.5% YoY. In addition, in the financial business we anticipate a 4.5% YoY variation in total portfolio, under an environment of lower economic dynamism, although interest income would increase by 9.4% YoY, favored by higher interest rates. On the other hand, we expect leasing revenues to increase 4.9% YoY and an occupancy rate to 91.1%, like previous year. As a result, EBITDA would show an increase of 6.6% YoY to MXN 30.1 billion, reflecting a margin of 16.2% (+30bp), where we assume that operating costs would be decreasing due to lower energy costs and a lower impact from supply chain disruptions, which would be reflected in a gross margin of 31.5% in Liverpool (+0.1pp) and 32.0% in Suburbia (-0.5pp). In turn, we expect financial income to reach MXN 1.7 billion in 2023 vs MXN 2.3 billion in 2022, favored by higher interest rates.  Thus, we expect net income to increase 10.2% YoY to MXN 16.9 billion.

Solid capital structure will continue

Currently, Liverpool has a total debt of MXN 25.6 billion (52% peso-denominated or 48% peso-hedged at a fixed rate), with an average interest rate of 7.84%, and an average maturity of 5 years. Regarding the leverage indicator, we anticipate that by the end of 2022 the company will have a Net Debt/EBITDA ratio of 0.1x (vs 0.3x in 2021) and -0.2x in 2023, contributing to the company's financial strength outlook. The dividend in 2022 amounts to MXN 2.45, which represents a yield of 2.7%, while for 2023 we expect a dividend of MXN 1.56, reflecting a yield of 1.7%. Finally, the total CapEx for 2023 is allocated at MXN 8.4 billion, where we expect the opening of 20 new stores vs 26 in 2022.

Company strategies for coming years

An important part of the company's long-term strategy is to achieve an Ecosystem Strategy by 2025, through loyalty programs and a greater number of services, where e-commerce is expected to increase to more than 40% (vs. 2 2% currently). In addition, PLAN (Plataforma Logistica Arco Norte), which started 1Q22 with 1.6 million m2 enabled space, seeks to generate efficiencies in white goods and furniture deliveries, as well as a long-term value proposition in cost and delivery.  Among the ESG objectives, the company expects to reduce CO2 emissions to zero by 2040 and to recycle up to 100% of possible waste. It will also seek to find a better balance in water use to avoid unnecessary waste.

We set a PT of MXN 118.00, recommending BUY

We maintain a conservative stance, foreseeing a year with considerable obstacles to growth, as well as the possibility of economic recession. However, financial strength and business strategies should favor valuation. To calculate the theoretical value of Liverpool’s shares, we used a Discounted Cash Flow (DCF) valuation model, obtaining a PT of MXN 118.00 for the company's shares. At that level, Liverpool would trade at 5.5x 2023E FV/EBITDA (vs 5.3x currently), below the L5Y average of 9.3x, as well as below the LatAm comparable companies average of 6.5x and global average of 7.6x, recalling that we consider a scenario of economic adversity. In our DCF model we used a WACC of 11.8%, which was calculated with a Beta of 0.7, Risk Free Rate of 9.7% (estimated 10-year bond of Mexico), and market premium of 6.0%. Residual value was calculated using a FV/EBITDA exit multiple of 7.6x, similar to the global peer’s average. In our view, we believe that the write-down on the company is exaggerated, especially when considering that, even assuming a conservative stance, the upside potential is 27.1% over current prices; therefore, our recommendation is to BUY. We believe that, given the high interest rate environment a further revaluation would be limited for the time being, although some recovery cannot be dismissed.