Download backus - NYU Stern School of Business

Richard Barnes, Dora Morillo, Annie Sun, Rochelle Sinclair, Luis Solis
Agenda
Introduction
Case Value to Students
Peruvian Political History
Social Conditions
Economic Conditions
Peruvian Brewery Industry
Backus Company History
Backus SWOT Analysis
Backus Financial Performance
Backus Relative Valuation
Backus DCF Analysis
Q&A
Introduction
The purpose of this case is to examine the future
performance of Union De Cervecerias Peruanas Backus y
Johnston (UCP Backus), the largest beer supplier in Peru,
given the potential entry of competitors, specifically
Companhia de Bebidas America (AmBev), the fifth
largest brewer in the world; and the political and economic
atmosphere that highly affects the organization’s competitive
response.
Case Value to Students
Reinforcing our knowledge of key financial measures and valuation tools
Learning to measure the distinct risks of investing in companies from
developing countries
Identifying certain financial dynamics that will be essential in our career
development
Appreciating cultural, political and socioeconomic factors that cause an
impact in making business in companies in developing nations
Gaining added confidence in companies managed by nationals in
developing countries
Peruvian Political History
(1992-2002)
1992
Sendero Luminoso’s leader, Abimeal Guzmán, had been captured
after threatening the Peruvian People with guerilla warfare since
1980.
New Constitution was written and instilled, dissolving both the
legislative and judicial branches and allowing presidents to hold
consecutive terms
1998
Peru signed a treaty with Ecuador resolving a contentious 57-yr
old border dispute
Peruvian Political History
(1992-2002)
2000
Top security advisor, Vladimiro Montesinos, was videotaped bribing
opposing Congressmen to switch political sides
Fujimori renounced his presidency and fled to Japan for self-exile, was
declared “morally unfit” to govern, and the Supreme Court issued an
international arrest warrant
2001
Peru held a new presidential election and named Alejandro Toledo the new
president of Peru
Peru received President Bush’s backing to visit to the country and US
Congress approval of ATP (Andean Trade Program) which allows almost
600 Peruvian products to enter US without paying tariffs
Peruvian Political History
(1992-2002)
2002-3
Establishment through free elections of autonomous regional
governments, which resembles US states. Thus converting the
centralized government into a government of transition
Social Conditions
Backus’ performance within the past decades has also been affected
by the Peruvian economic and social conditions.
High levels of unemployment led to civil unrest
In the 1990s, Peru was one of the politically riskiest countries in
Latin America
From increasing levels of poverty, poverty rates increased from 19982000, especially in urban areas which led to high crime rates that took
a toll on Peru’s economy
Security Risk
Many industries declined
In 2000, President Fujimori and the Peruvian government
actively decreased rebel violence and political dissent by
arresting political rebels
Poor social conditions led to poor economic conditions that
took a toll on Backus giving them negative or slow growth rates
during the past two decades
Security Risk Decreases
Peru’s security problems has seen dramatic improvement
Peru is considered one of the safest countries in Latin America
More capital investments poured into the country due to the
decrease in political risk
Social Conditions
Steady population growth from 1997-2002 reached an average
of 1.7% a year
This population rate is projected to remain steady for the next
few years
In 2001, President Toledo increased the education budget by
139%
Educational systems are still inadequate
Leads to lack of good human resources
Economic Conditions in 1980s
During the 1980s Debt Crisis
GDP fell
Inflation accelerated to 7,500%
El Nino ruined the fishing industry
Currency devalued
Economic Growth
(1990s-2003)
In 1990s, Peru underwent economic recovery
Huge increases in capital inflows from investments both
private and public
Consumer confidence grew along with a strong currency
Interest rates fell that spurred credit demand
From 2000-2001, the Peruvian government brought the fiscal
deficit down to just 0.9% of GDP
During 2001-2002, inflation rate was at its lowest in 40 years
Economic Growth
(1990s-2003)
However, at the end of 2001, the deficit widened to 2.5% of the GDP
due failure of keeping expenditures down and revenues declining
In 2002, Peru experienced one of the highest GDP growth in Latin
America and grew by 4.2%
All industries were showing signs of growth
The country is expected to privatize many public institutions.
Currently, Peru is showing signs of stability, global bonds are issued
at 512 basis points away from the US treasury bonds: giving the
country a risk rate of BB/BBB
Peruvian Brewery Industry
Backus is the leader in the Peruvian national beer market
with an installed capacity of 10.25 million hectoliters of
beer a year
Backus is the principal supplier of beer in the northern and
central regions of the country
Company
Boxes
(Millions)
UCPBYJ
61.42
77.54%
Cervesur
12.41
15.67
San Juan
5.38
6.79%
Total
79.21
100.00%
Market Participation (%)
Source: Union de Cervercerias Peruanas Backus y Johnston
Peruvian Brewery Industry
Foreign companies make up less than 1% of the market
Peruvian beer is mainly exported to Chile(49%), the United
States(38%), and Bolivia (4%)
Total Peruvian Beer Sales (Year)
Year
1995
1996
1997
1998
1999
2000
2001
2002
Source: El Emisor
Boxes (millions)
100,688
95,048
94,885
86,953
82,242
75,704
69,918
79,216
National Beer Market Sales
Brand
2001
(Boxes in Millions)
16,217
14,335
6,629
3,476
3,180
421
1,127
2
68,207
Variance (%)
Cristal
Pilsen Callao
Cuzqueña
Arequipeña
Pilsen Trujillo
Real
San Juan
Other
White Beers
2002
(Boxes in Millions)
44,386
16,217
7,470
3,926
3,830
481
1,430
0
77,741
Malta Polar
Malta Morena
Malta Cuzqueña
Malta Arequipeña
Other
436
255
649
136
0
420
295
572
124
0
3.65
13.18%
13.42%
9.79%
Dark Beers
1,475
1,412
4.49%
Total
79,216
69,618
13.79%
13.7%
13.13%
12.69%
12.95%
20.44%
14.27%
26.95%
-100.00%
13.98%
**Note: Cuzqueña
and Arequipeña are
Cervesur brands.
Source:
El Emisor
History of Backus
Created in 1876 as an ice factory, and currently an alliance
of 20 diversified companies
Throughout its history, Backus merged with various
companies to create operative and financial synergies.
In March 2000, Backus acquired competitor, Cervesur
History of Backus
Engages in the preparation, manufacturing, sale, and
distribution of beers, malts, non-alcoholic drinks, and soft
drinks
Additionally involved in agribusiness and foods, transport
services, bottling and packaging, and Peruvian and foreign
securities investment
Beers and carbonated drinks account for most of company’s
revenues
Peruvian Beer Markets
Beer Markets Divided into Five Regions:
Lima, Northern Peru, Central Peru, Southern Peru, & The Amazon
SWOT Analysis
Strengths:
High preference and brand loyalty for beer
After acquisition of Cervesur, Backus has become sole
producer of beer in Peru
Sophisticated and ample channels of distribution
Weaknesses:
Common Share price looks overpriced when
compared to sector
SWOT Analysis
Opportunities:
Potential growth in Peruvian beer market
Recovery of consumer purchasing power
Threats:
Potential competition (AmBev)
Beer taxes (currently 67%)
Financial Performance
Growth
During 2002, revenues grew by 18.3% and net sales by 13.4%
Improvements of gross margin (65.0%), operating margin (32.4%)
and EBITDA (30.8%)
Analysts remain optimistic of the growth potential of the firm in
light of AmBev’s entry
Financial Performance
Asset Utilization
During 2002, Backus increased production capacity by
buying new equipment, bolstered its distribution channels and
broaden its storage capacity in certain plants by almost 80%.
Analysts forecasted a slight increase in sales for 2003.
Leverage
From 1997-2001 leverage has more than doubled
In 2002, Backus’ debt load was reduced by 35.2 million sols
Financial Performance
Liquidity
During 2002, the debt restructuring of nearly 35 million
significantly decrease interest payments.
Financial expenses dropped by an impressive 51% due to
improved efficiencies; leading to relatively larger cash
flows for 2003.
The Competitor- AmBev
Fifth largest worldwide producer, distributor and seller of beers and
soft drinks. Primarily located in Brazil.
AmBev has its brands located all over Latin America, including
Argentina, Uruguay, Chile and Venezuela
Beta is 1.44, 5 year sales growth rate of 19.66%, and an earnings per
share growth rate of 17%.
Five-year profit margins of 43.89% (gross); 32.80% (EBITDA) and an
effective tax rate of 8.34
Average return on assets is 11.53% and average return on equity
27.69%
The Future
AmBev aims to be the most profitable company in the industry
in terms of EBITDA margin and its targets it distribution
channels and leading brands in order to achieve this goal
AmBev has now set their eyes on Peru
How will Backus compete against a foreign firm who has a
wealth of experience in capturing new markets?
Equity Valuation
Relative and Discounted Cash Flows Models used to price an
‘Investment’ share issued by Backus, currently trading at $0.42 a
share per ADR (as of 4/4/03).
The ADR reflects a more accurate value of Backus’ equity.
Two Scenarios:
I. Current Valuation – Under or Overvalued?
II. AmBev vs. Backus – Sales Erosion
Relative Valuation
Dominant Latin American Breweries:
AmBev, Brahma (Brazil), Femsa (Brazil) and Grupo
Modelo S.A (Mexico).
Competitors have strong presence throughout Latin
America vs. Backus’ sole market in Peru
Earnings Per Share & Book Value per Share
- adjust for relative dominance in markets
Relative Valuation:
Grupo Modelo
Grupo Modelo’s risk, cash flow capabilities and growth characteristics
offer the closest comparison to Backus
I.
Without AmBev
Grupo Modelo’s P/E
16.95 times
Backus EPS
$0.16
Price Per Share (P/E * EPS)
$2.71
Current Backus Price per Share
$0.44 Undervalued
II. With AmBev
Grupo Modelo’s P/E
16.95 times
Backus EPS (25% reduction)
$0.12
Price Per Share (P/E * EPS)
$2.03
Current Backus Price per Share
$0.44 Still Undervalued
Backus can still anticipate growth in its share price even after the entry
of AmBev!
DCF Valuation
Assumptions for DCF Model:
The model is a Free Cash Flow to Equity Model rather than a Discount Dividend
Model. Two Growth Stage assumed.
The cost of equity was derived using the Goldman Integrated Model under
certain assumptions:
The risk free rate was the yield on a 10 year treasury bond
A Peruvian Brady bond with similar maturity to the Treasury bond was used to
calculate the Sovereign Yield Spread.
The beta was based on a regression on the Peruvian stock index.
The (estimated) historic risk premium is that of S&P market returns over a
10-year treasury bond.
Only the equity beta changes between 2 stages . In the terminal stage, beta
would near the industry (alcoholic beverages) beta.
Cost of Equity
High Growth
Stable Growth
Risk Free Rate
4.11%
4.11%
Yield on Peruvian
Brady Bond
8.8%
8.8%
SYS
4.69%
4.69%
Beta
0.81
0.15
Risk Premium
5.17%
5.17%
Cost of Equity
12.98%
9.58%
DCF Assumptions
Growth we expect a constant growth of 6% for
the next five years and a stable growth rate of
4% for terminal.
Net Income: Conservative position - Average of
last two years.
Cap Ex: Will increase.
∆ Working Capital and Debt Ratio: New capital
structure.
Macro-economic Assumptions
Macroeconomic
Assumptions
Exchange Rate s/.to $
GDP Growth
Inflation
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
3.3833
3.49
3.5068
3.5165
3.48
3.54
3.6
3.62
3.68
3.67
0.9
3.1
0.2
5.2
3.8
3.7
4.2
4.3
4.3
4.3
4.20%
3.70%
-0.10%
0.90%
2.10%
2.20%
2.30%
2.20%
2.20%
2.20%
Macro-Economic Assumptions
(currency exchange)
Net sales and the effect of currency exchange
Net sales in US$
Exchange Rate
2000
4
1500
3
1000
2
500
1
0
0
1995
1996
1997
1998
Year
1999
2000
2001
(Soles/US $)
Net Sales in Soles
Millions
Exchange rate to the US$
is expected to be
relatively stable for the
next six years, allowing
Backus to demonstrate
its real growth and
performance: the
company has been
affected by Translation
exposure.
Macro-Economic Assumptions
(Inflation)
The effect of inflation to sales
Net sales in US$
Inflation
2000
14
12
10
8
6
4
2
0
-2
1500
1000
500
0
1995
1996
1997
1998
Year
1999
2000
2001
Consumer price
Index (%)
Net sales in Soles
Millions
Inflation is expected to
remain at very low levels as
a result of the strict and
successful monetary policy
used by the BCRP. The
BCRP has been using
inflation targeting. The low
levels of inflation will
permit Backus to have
flexibility against the
imposed beer-tax.
The Effect of GDP Growth
Millions
2000
4,900
4,800
4,700
4,600
4,500
4,400
4,300
4,200
4,100
1500
1000
500
0
1995
1996
1997
1998
1999
2000
2001
Year
Net Sales in Soles
Net Sales in US$
GDP Per capita (PPP)
US$
The relation of GDP per capita to Net Sales
Political Assumption/Concern
The future of Backus is partially in hands of the government
because the company is highly sensible to the situation of the
country.
We believe as long ex-presidents Alberto Fujimori nor Alan
Garcia are not re-elected our valuation should be accurate.
Peru is a country highly dependable on foreign investment, and
investors do not like the two ex-presidents.
First DCF Model: FCFE
High Growth Rate
2003e
$
2004e
65.24
$
69.15
Stable - T-value
2005e
2006e
2007e
$
$
$
73.30
82.36
85.65
40.0%
40.0%
40.0%
48
50
50
50
60
60
60
60
Net Income

Tax rate

40.0%
40.0%
40.0%
Depreciation

47.27
47.27
Capital Expenditure 
60
60
∆Working Capital

$108
Debt Ratio

49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
$3.66
$3.70
$4.60
$6.20
$8.41
$1,478.32
year 1
$
$
115.60
year 2
3.25
$
PV of Equity
$
122.70
year3
2.91
$
$
77.70
2008e
130.20
year4
3.20
$
$135
year 5
3.81
$
$ 824.04
Value of share (target Price)
$.053
Current Price as of 03/28/03
$.38
$
140.20
year 6 + T-Value
4.59
$
806.29
Reason for a Second DCF
Valuation
Quantitative data obtained in the last days.
AmBev decision to penetrate the Peruvian market.
Future Agreement of Free Trade between Peru and Brazil.
Bavaria becoming the major shareholder of Backus
common shares w/ voting rights.
Difference between DCF
Valuations
Net Income
Depreciation and Capital Expenditure
∆ Working Capital and Debt Ratio
*Macro-economic assumptions and political concerns did not
change across the DCF models.
Final DCF Valuation: FCFE
High Growth Rate
2003e
2004e
Stable
2005e
2006e
2007e
2008e
Net Income

50.44
53.47
56.67
60.07
63.68
66.23
Tax rate

40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
Depreciation

47.27
47.27
48
50
50
50
Capital Expenditure 
55
55
55
55
55
55
∆Working Capital

$108
Debt Ratio

58.0%
1.83
year 1
$
115.6
$
58.0%
$
1.67
2.20
year3
1.31
PV of Equity
$
130.2
58.0%
$
year 2
1.62
122.7
58.0%
$
3.29
year4
1.53
$135
$
58.0%
4.88
1187.1
6 + T-Value
2.66
$ 694.79
Value of share (Target Price)
$.44
Current Price as of 04/03/03
$.42 UNDERVALUED
(share outstanding 1,564,152,448)
140.2
58.0%
year 5
2.03
$
685.64
Conclusion
After utilizing macro-economic assumptions, firm
dominance, relative valuation, and FCFE analysis, UCP
Backus’ performance will not be significantly deterred due
to the entry of AmBev into the market.
Our relative, DCF valuations indicate that even after the
entry of AmBev, the ADR will still be UNDERVALUED;
indicating growth capabilities due to strong brand loyalty
and dominance over distribution channels.
We maintain our target price at $.44 and
Buy recommendation for Backus I shares.
Any Questions??
The “L” Factor
Final results are not calculated by formulas… but by
rumors and government policies.
In order to have an accurate estimation, you have to
become a Sherlock Holmes.
Bavaria
Backus
Ambev
The Valuation
To assess future changes, look at the changes to the value of
equity:
The value of the share is usually one of the most sensitive
financial indicators to both external and internal changes to a
company’s performance.
Share information is usually the most readily available data
set to find and analyze.
Share data is not readily affected by discrepancies in
accounting standards across financial markets.