Equity Analysis /
Mexico

Grupo Mexico: Quarterly Report 3Q22: Strong pressure on profitability continues

  • GMexico posted figures below expectations, due to lower metals prices, the drop in production and a cash cost increase

  • The impact on Mining was partially offset by progress in Transportation and Infrastructure

  • The outlook becomes more complex, which we believe would affect copper demand and the price of the metal

Marissa Garza Ostos
Marissa Garza Ostos

Head of Equity Research

Follow
Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

Follow
Banorte
31 October 2022
Published byBanorte

Strong pressure on profitability continues

  • Lower copper prices, the drop in production and the increase in cash costs were reflected in significant declines and higher-than-expected margin pressures in GMexico's results

  • Challenges in the environment have resulted in a deteriorating growth outlook for the company, which will continue to generate volatility in the stock price, despite the company's financial strength

Impact on Mining partially offset by progress in Transportation and Infrastructure. GMexico posted figures below expectations, with annual sales decline of 14.7% and with EBITDA sliding by 34.7%, as well as a significant contraction in the respective margin of 14.0pp to 45.7%. The Mining segment (AMC) continued to be weak, due to lower prices for most metals ‒copper was down 18.6% y/y‒ and reductions in copper production of 6.6% y/y and in sales volumes of 3.6% y/y, given a generalized decline in the operations of Peru and 'La Caridad' and lower ore grades. In turn, net cash cost rose 66.9% y/y due to the higher costs given the inflationary environment and lower production, impacting profitability by 18.9pp to 43.6%. On the positive side, GMXT showed solid advances, despite lower volumes, highlighting the expansion in margins due to operating efficiencies; and in Infrastructure, EBITDA grew 27.2% y/y, although it recorded lower profitability. Continues to highlight the healthy financial situation (ND/EBITDA of 0.4x), which led it to declare a dividend of MXN 0.75 per share (vs. MXN 1.0 previously), payable on November 25 (annualized yield of ~4%). The outlook becomes more complex. The challenges in the environment, which include high inflation and lower global economic dynamism, with the possibility of a recession next year, we believe will affect copper demand, and therefore the price of the metal, as well as the company's profitability in the coming quarters, which will continue to generate volatility in the stock price. This, coupled with a multiple of 4.7x FV/EBITDA vs. 4.5x sector average, leads us to remain cautious. We reiterate HOLD.