Download Minsa`s operating performance was deceivingly strong, as the stellar

2000 First Quarter Results
MINSA
Scott Kolb (212) 484-5222
UNRATED
May 3, 2000
Minsa’s operating performance was deceivingly strong, as the stellar results come on the heels of a quarter when the
company had an operating margin of just 1.3%. Volumes rose 3.8% and average prices fell 9.4%. Importantly, domestic
volumes grew just 2.0%, worse than the increase registered by chief competitor Maseca, while international volumes rose
18.3%, (representing just 12.3% of total volume). Revenues fell 6.0%, as prices fell 8.7% in Mexico, and 13.7% in
international markets (partly due to the decline of the US$). Minsa’s revenue per ton is approximately 4.4% lower than
Maseca’s, so price undercutting is hurting its profitability, and NOT gaining market share. COGS fell 10.7% and 4.0 pp as a
percentage of sales, due to lower corn costs. Operating expenses declined 14.3%, despite higher volumes, due to cost
reducing programs and to operating efficiencies according to the company. As a percentage of sales, these expenses fell 1.6
pp, despite the lower prices. Operating margin came in at 6.9%, 5.6 pp higher than last year, but about 80 bp lower than we
had expected. Operating profit and EBITDA jumped 411.1% and 59.6% respectively. Last year’s financing benefit of Ps
17.4 million turned into a cost of Ps 11.1 million, mainly due to worsening FX results and lower monetary gains. Minsa’s 6.9
EV/EBITDA multiple is expensive compared to Maseca’s 5.8x although the 0.4x P/BV multiple does appear attractive.
Despite the fact that we have operating profit increasing by 60% this year, EBITDA will likely continue to rise substantially
less than that (perhaps 25% in our view). Liquidity is another concern. We think that if one wants to be exposed to the corn
flour sector, the stock to go with is Maseca, and that Minsa, is riskier. Our target price for the stock is Ps 6.9, providing a
potential return of 37.6%. Still, in our view, investors would be wiser to go with more profitable Maseca.
May 03, 2000 Price :
52 Week Range:
Shares Outstanding:
Market Capitalization:
Ps 5.00
Ps 5.08 To 2.20
158.3 Million
US$ 84.7 million
Price/Book:
0.4x
ROE
0.7%
ROA
4.0%
Enterprise Value: US$ 172.6 million
INCOME STATEMENT (thousands of constant pesos as of March 31, 2000)
1Q99
Margin
1Q00
Margin
Net Sales
501,466
100.0%
471,288
100.0%
Cost of Goods Sold
403,847
80.5%
360,434
76.5%
Gross Profit
97,619
19.5%
110,854
23.5%
Operating Expenses
P/E on Mar T12
P/NCE T12
P/EBITDA T12
EV/EBITDA T12
57.0x
7.1x
3.4x
6.9x
Change
-6.0%
-10.7%
13.6%
4Q98
501,466
403,847
97,619
Margin
100.0%
80.5%
19.5%
4Q99
471,288
360,434
110,854
Margin
100.0%
76.5%
23.5%
Change
-6.0%
-10.7%
13.6%
91,221
18.2%
78,157
16.6%
-14.3%
91,221
16.6%
-14.3%
1.3%
32,697
6.9%
411.1%
6,398
18.2%
0.0%
1.3%
78,157
6,398
32,697
6.9%
411.1%
Integral Cost of Financing
Interest Expense
Interest Income
Foreign Exchange Loss
Monetary Loss
(17,378)
28,629
2,759
(34,577)
(8,671)
-3.5%
5.7%
0.6%
-6.9%
-1.7%
11,075
30,854
1,083
(15,540)
(3,156)
2.3%
6.5%
0.2%
-3.3%
-0.7%
#N/A
7.8%
-60.7%
-55.1%
-63.6%
(17,378)
28,629
2,759
(34,577)
(8,671)
-3.5%
5.7%
0.6%
-6.9%
-1.7%
11,075
30,854
1,083
(15,540)
(3,156)
2.3%
6.5%
0.2%
-3.3%
-0.7%
#N/A
7.8%
-60.7%
-55.1%
-63.6%
Other Financial Expenses
Pretax Income
Taxes
0
23,776
886
0.0%
4.7%
0.2%
(1,264)
22,886
57
-0.3%
4.9%
0.0%
#N/A
-3.7%
-93.6%
0
23,776
886
0.0%
4.7%
0.2%
(1,264)
22,886
57
-0.3%
4.9%
0.0%
#N/A
-3.7%
-93.6%
Non-Cons. Subsidiaries
Extraordinary Items (gains)
Minority Interest
Net Income
Earnings Per Share
0
0
0
22,890
0.145
0.0%
0.0%
0.0%
4.6%
0
0
0
22,829
0.144
0.0%
0.0%
0.0%
4.8%
#N/A
#N/A
#N/A
-0.3%
0
0
0
22,890
0.145
0.0%
0.0%
0.0%
4.6%
0
0
0
22,829
0.144
0.0%
0.0%
0.0%
4.8%
#N/A
#N/A
#N/A
-0.3%
EBITDA
EBITDA Per Share
36,800
0.232
7.3%
58,731
0.371
12.5%
59.6%
36,800
0.232
7.3%
58,731
0.371
12.5%
59.6%
Operating Profit
BALANCE SHEET (thousands of constant pesos as of March 31, 2000)
Mar-99
% of T.A.
Mar-00
% of T.A.
Total Assets
3,478,679
100.0% 3,090,160
100.0%
Cash & Equivalents
60,068
1.7%
49,889
1.6%
Other Current Assets
1,437,526
41.3% 1,121,588
36.3%
Long Term
22,668
0.7%
22,669
0.7%
Fixed (Net)
1,438,410
41.3% 1,314,377
42.5%
Deferred
513,199
14.8%
561,969
18.2%
Other
6,808
0.2%
19,668
0.6%
Total Liabilities
1,438,189
41.3% 1,085,548
35.1%
Short Term Debt
754,586
21.7%
496,861
16.1%
Other Current Liabilities
135,748
3.9%
210,236
6.8%
Long Term Debt
547,855
15.7%
373,510
12.1%
Other Liabilities
0
0.0%
4,941
0.2%
Shareholders Equity
2,040,490
58.7% 2,004,612
64.9%
Minority Interest
0
0.0%
0
0.0%
FINANCIAL ANALYSIS
Current Ratio
Short Term Debt to Total Debt
Foreign Liab. to Total Liab.
Net Debt to Total Equity
Total Liab. to Total Equity
Mar-99
Mar-00
1.7x
1.7x
57.9%
57.1%
57.3%
59.3%
60.9%
40.9%
70.5%
54.2%
1Q99
1Q00
A/R Turnover (days)
81
93
Inventory Turnover (days)
43
60
A/P Turnover (days)
19
45
WC net of debt to Sales
68%
51%
Interest Coverage Ratio
1.4x
1.9x
Total Debt to annualized EBITDA
8.8x
3.7x
ENTERPRISE VALUE (EV) = Mkt cap. + Net Debt + Minority Int.
NCE = Net income + Monetary Loss + Fx Loss + Depreciation
ROA=T12m Op Profit to Avg. Assets; ROE=T12m Net Profit to Avg. Equity
The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA
BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.
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2000 First Quarter Results
MINSA
UNRATED
Operating Results
Minsa’s results for 1Q00 were strong, but this was because of a low comparison base. The domestic volume increase was just 2%, while Maseca’s
was almost 4%. The Central America plant has started operations and we estimate that volume in this region was between 1500 and 2000 tons,
representing 8 or 9% of the total international volume sold. As a percentage of sales, COGS dropped substantially, 4 pp, mainly due to lower costs
of corn, according to the company. As a result, gross profit per ton rose 9.4%. Operating expenses fell 14.3%, due to the implementation of special
cost reducing programs during this quarter. This level of expense is lower than Maseca’s as a percentage of sales, a surprise, particularly with a
lower average price On a per ton basis, these costs fell 16.0%. We think the company should continue with its efforts in cutting costs and
controlling expenses, as investment in the market will have to increase for it to successfully compete in the new environment. However, if the
strategy is to undercut Maseca on price, AND not invest as much in the market, we would advise against it. Operating profit soared over 400%,
392.5% per ton. On the net level, results were basically stable.
With lower corn prices now, corn flour tortilla manufacturers will be able to reflect this in their pricing, while tortilleros will likely not lower their
prices. This makes corn flour more prices competitive, and could spur a return to conversion. Still, we are not certain of this. Average revenue per
ton fell 9.4%, as a result of a 8.9% drop in domestic prices and a 13.7%% decline in international prices respectively (partially due to the peso’s
appreciation). We wonder if Minsa is using the same low price strategy in the US that it appears to be using in Mexico. It did say it had gained
market presence in the US. With respect to 2000, we expect pricing to be slightly down in real terms, primarily due to corn costs and competitive
pricing in the market. Margins however, should increase at least 300 basis points, and volumes should go up between 4 and 5%. If these
assumptions are incorporated into our model, operating profit rises 60%, and EBITDA goes up 25%.
Financing Activities
The company registered a Ps 11.1 million financial expense, which compares unfavorably to last year’s Ps 17.4 million gain. This was mainly due
to worsening results on the FX line and lower monetary gains. Interest expense rose 7.8% however, despite lower levels of both short and long
term debt. The transactions by which Hicks Muse bought 32.275% of Minsa’s shares, and Minsa sold its interest in Almacenadora Centro
Occidente resulted in a reduction in liabilities of US$ 41.6 million according to the company. As this was used to pay down debt, and the peso
appreciated, the increase in interest expense puzzles us somewhat. The company’s balance sheet is now healthy, with leverage of just 54.2%, and
interest coverage of 1.9x. We did not see any provision for the D-4 bulletin, and have been unable to contact the company. Also, taxes did not
reflect any higher rate, rather they were almost 0, another puzzling issue.
Minsa’s capacity utilization rate was around 60% for the quarter, and the company maintains that it did not make any capital expenditure. It
emphasizes that it stands ready to continue its expansion program when market conditions dictate this necessity. We would hope that no capital
expenditure does not mean that it is not maintaining its plants and replacing depreciated equipment.
Outlook
Minsa’s operating results were artificially inflated because of a very weak 1Q99. In the long term, we think the big picture is favorable, as the
subsidy has been eliminated, and the industry now competes freely. We see volumes recovering around 5% this year, due to the low base. With a
good corn crop expected, we think prices will continue to be subject to pressure, although since corn flour producers can reflect this in their
product sales prices, tortilla makers likely will not, corn flour may become a better, more profitable alternative. This could induce higher
conversion to the corn flour method. The company has stated that it will compete in quality and service but not in price, and although last quarter
(4Q99) it had higher per ton revenue for the first time than Maseca, in 1Q00 it reverted to undercutting its competitor on pricing. On an
EV/EBITDA basis, Minsa is more expensive than Maseca. We don’t think the company deserves this premium, as from a profitability standpoint,
Minsa has much upon which to improve. With the sector set to rebound, and large increases in operating profits to be recorded throughout the year,
we think Maseca offers a better, less risky, and more liquid option to the investor.
Scott Kolb: [email protected]
The information contained herein has been obtained from sources that we believe to be reliable, but we make no representation as to its accuracy or completeness. Neither CASA DE BOLSA
BANORTE, S.A. DE C.V. nor AFIN SECURITIES INTERNATIONAL accepts any liability for any losses arising from any use of this report or its contents.
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