Download Backus - NYU Stern School of Business

Richard Barnes
Dora Morillo
Rochelle Sinclair
Luis Solis
Annie Sun
Professor Mei
Emerging Financial Markets
April 9, 2003
Executive Summary
Case Description:
Union de Cervecerias Peruanas Backus y Johnston SAA (Backus) is the largest beer
supplier in Peru and the sixth largest beer supplier in Latin America. In spite of Peru’s
tumultuous political and economic environment, Backus has performed strongly and dominate
its market. However, the purpose of this case is to examine its future performance given the
potential entry of competitors, specifically Companhia de Bebidas America (AmBev), and the
political and economic atmosphere that highly influences the organization’s success.
Significant Issues:

How the political, economic, and social atmosphere greatly affects the organization

Maintaining market share
Values to students:
We believe that our case will bolster our business learning by:
 Reinforcing our knowledge of key financial measures and valuation tools: Discount Free
Cash flow Models and Relative valuation.
 Learning to measure the distinct risks of investing in companies from developing
countries (such as: Political risk, market risk, credit risk and unsystematic risk).
 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.
The Case
Introduction
The purpose of this case is to examine the future performance of Union De Cervecerias
Peruanas Backus y Johnston, the largest beer supplier in Peru, given the potential entry of
competitors, specifically AmBev and the political and economic atmosphere that highly affects
the organization competitive response.
Political Conditions (1992-2002)
During the early 1990s, Peru was in a state of catastrophe. Politically, the guerrilla warfare was
still in effect with the Sendero Luminoso guerrillas/terrorists as major threats to the Peruvian
people’s safety. Sendero, a Maoist terrorist organization, had been trying to overthrow the
Peruvian state since 1980. For years the government, armed forces and police were stumped
as to how to deal with Sendero Luminoso.
In 1990, Peru elected Alberto Fujimori who ran on the Cambio 90 (Change90) ticket. In two
years, Fujimori implemented a program known as “Fujishock”, which reduced hyperinflation to
manageable levels and also jumpstarted the economy which was left in pieces by Alan Garcia,
Peru’s previous president.1 There were dramatic price rises and even an opening of the
Peruvian market to foreign competition. Also during Fujimori’s presidency, Sendero’s leader,
Abimeal Guzmán, in 1992 thus almost completely ended terrorism in Peru. To effectively try the
captured guerrilla to whom judges were afraid and thus liberated them, Fujimori created the
"Jueces sin rostro" that finally tried them; now almost 98% of the guerrilla is in jail with their
commanders.2
In 1992 another precedent was set when President Fujimori dissolved both the legislative and
judicial branches and suspended the 1979 constitution in a military-backed self-coup.3 Fujimori
staged this coup because there were too many legislative and judicial barriers for free market
reforms and to effectively try the capture guerrilla to whom judges were afraid of then they
liberate them, so he created the "Jueces sin rostro" that finally tried them, now almost 98% of
the guerrilla is in jail with their comanders.4 The public largely supported this action as they were
frustrated with how inefficient and corrupt politicians had become. Immediately after dissolving
the government, Fujimori established a unicameral legislative body, known as the Democratic
Constituent Congress, and also wanted a new constitution to be written. In 1993 the new
constitution (which officially changed Peru's legislature from a bicameral to a unicameral
system) was ratified, allowing the president to serve consecutive terms. The majority of the
Peruvian public supported the suspension of the constitution, because they were frustrated with
the inefficient and corrupt politicians of the past.
Since 1993, the Peruvian government has drastically changed; it is still operating under the
same constitution which allowed Fujimori to serve for a controversial three consecutive terms.
The legislature has been under the control of the same party since 1992. Change90 won
command of the Democratic Constituent Congress in both the 1992 and 1995 elections due to
having tamed inflation and instigating the arrest of Guzmán.5 In 1998, Peru signed a treaty with
Ecuador resolving a contentious 57-yr old border dispute. Fujimori exercised his political
leadership by settling the territorial conflict.
In 2000, Cambio90 remained the dominant party when it again won as part of the coalition
Peru2000. However, the government received complaints of voting fraud. Months later,
Fujimori’s closest advisor and 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. Meanwhile, Congress declares Fujimori “morally unfit” to govern, and
the Supreme Court issues an international arrest warrant. In July 2001, Peru held a new
presidential election and named Alejandro Toledo the new president of Peru. President Toledo
received his College education in the US with a Master in Economy from Stanford University.
Last year he 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.6
The last big political measure was the establishment through free elections of autonomous
regional governments which resembles US states. This converts the centralized government in
a government of transition since January of this year. However, the regional governments need
to transfer money so to really be autonomous. So far the rate of inflation is below 9% and the
growth index is around 3%, which makes Peru second to only Chile in South America.7
There have been few changes in Peru's political system since 1993, but with all these recent
political occurrences, the Peruvian government can be seen as unstable and ever changing.
With the elections of 2006 already in the works, there is much uncertainty as to what the future
will have in store for Peru and its people and investments.
Economic Conditions
Backus’s mediocre performance is due to:
During the 1980s with the return of democracy, there was major economic reform and
liberalization in Peru. However, the Peruvian economy has taken a major toll due to many
factors.
1980s Debt Crisis
Peru underwent a period of economic struggle from the mismanagement of economic policies of
the 1980s. During this time the GDP fell, inflation accelerated to 7,500%, and even nature hit
the country hard with El Nino ruining one of the country’s most popular industry (fishing
industry). In 1985, with the new president, Alan Garcia, the currency was devalued, the wages
were raised, food subsidies were increased, debt servicing was restricted, and many imports
were banned to promote demand-led growth. In 1990, with Fujimori in power, the GDP
decreased by 20% in three years and inflation was running at over 40% per month.
8
Deficit
During the period between December 2000 and July 2001, the Peruvian government focused on
reducing the fiscal deficit to meet the target of 1.5% of GDP establish with the IMF for 2001.
The administration brought the overall deficit down to just 0.9% of GDP in the first half of the
year. However, the central government current revenue declined by 3.5% year on year in real
terms over this period.9 Due to a large number of delayed payments and revenue remaining
depressed, the deficit widened to 2.5% of the GDP at year-end. Regardless of efforts to keep
expenditure down, revenue has fallen in real terms and it is unlikely to meet its future targets.
Unemployment
Peru is comprised largely of peasant farmers and unemployed country dwellers. According to
the 1993 census, 20% of the population was unskilled and 19% were skilled agricultural
workers.10 Of the total 7.1million economically active population, only 10% were professionals,
5% were technicians, and 6% were office managers and workers. The decreasing rate of
employment rates is reflective of the poor domestic economy in 1998. The income distribution
gap grew more with the poorest receiving only 20% of the 5% of national income. 11
Unemployment and Underemployment in Metropolitan Lima
Unemployment
1997
7.7
1998
7.8
1999
7.7
2000
7.4
2001
9.7
By gender
Male
Female
6.8
8.9
6.5
9.3
7.2
8.4
7.3
7.5
8.5
11.2
By age group
14-24
25-44
45-54
55+
13.1
5.9
5.5
5.9
13.5
5.9
4.3
6.5
12.2
6.3
5.3
6.3
13.4
5.5
4.6
6.2
15.0
8.1
7.9
N.A.
Source: BCRP
1990s
In the early to mid-1990s, Peru went through an economic recovery from an increase of capital
inflows from investments. Huge increases in private and public investments raised the
investment/GDP ratio from 16.7% in 1990 to 21.2% in 1994.12 During this year consumer
confidence in the economy grew along with a strong currency and stimulated a consumer boom.
Imported goods and luxuries soared despite high interest rates for consumer durables on
installment plans. However, once the import tariffs fell, demand increased which contributed to
the deterioration in the trade deficit.
Economic Growth 1999-2002
During the first half of 2002, all sectors of the economy were showing signs of growth and the
GDP grew by 4.2%. 13 Interest rates fell over the year which spurred credit demand.
Manufacturing and the commercial sectors are starting to come out of their struggle and are
starting to increase output. The Peruvian economy compared to the rest of Latin America is
starting to see an economic turning point. Throughout 2001 and 2002, the inflation rate has
been the lowest in 40 years. By mid-2002 the consumer price index was at the same level in
the previous year. Unfortunately, as the domestic demand growth increases so will the inflation
rate.
Social Conditions
Backus’s mediocre performance is due to:
Security Risk:
Peru has faced many obstacles of social unrest which has taken a toll on its economic status as
well. Peru was considered one of the riskiest countries in Latin America due to high security
risk. In 2000, led by Alberto Fujimori, the Peruvian government promoted against rebel violence
and political dissent. The citizens who felt the need for economic reforms organized more
rebellious protests against the government.
During the 1990s, terrorism increased from groups such as the Sendero Luminoso (Shining
Path) and Movimiento Revolucionario Tupac Amaru (MRTA) guerrilla groups.14 Terrorist
activities range from isolated attacks in prisons to bombing attacks in the capital, Lima. Fujimori
classifies terrorism as criminal acts as opposed to political rebellion. This became a serious
problem for Peru being one of the politically riskiest countries in Latin America.
Civil unrest was also a major influence on the country’s security risk as a result of continuing
high levels of unemployment. Society saw many protests demanding for higher public wages,
increase in jobs, and better public services. Because of the increasing poverty level, violent
crime rates were high and have risen in recent years. Violent crimes in Lima and tourist centers
such as Cuzco, Arequipa and Puno has seen an increase in street crime within the past few
years.
Although Peru faced with many challenges to resolve many of its security problems with
terrorism, civil unrest, and street crime, it has seen a dramatic improvement within the past
decade compared to its neighboring countries such as Columbia. What was once considered
one of the riskiest countries in Latin America to do business in has transformed itself into one of
the safest. It is highly crucial for a country to be able to manage its people and its crimes for the
security of its citizens as well as its economy.
A country such as Peru that used to have high security risk will lack economic investments,
especially foreign investments. Being that Peru is a developing country it was necessary for
foreign investments to spur any economic growth. Without this growth, many of the industries
will suffer and companies such as Backus will continue to have either negative or very slow
growth rates.
Steady Population Growth:
According to the Instituto Nacional de Estadistica e Informatica (INEI), the estimated population
in Peru was a total of 26,347 million people. The population growth from 1997-2002 reached an
average of 1.7% a year. There were still a large number of Peruvians not accounted for during
the 1993 census that estimated 532,000 persons not contacted and about 60,000 jungledwelling Indians. On average, the overall population growth rate is projected to remain steady
for the next few years.
With the population growth rate remaining steady and assuming the death rate will also be
steady, Backus’s domestic demand will not increase unless its per capital of beer consumption
increases. At this rate, Backus should seek different ways to find a new market in order to
expand and grow its business.
Poverty and Urbanization:
The poverty rates increased dramatically from 1998 to 2000, especially in the urban areas. In
2000, a little less than 50% of the population lives in poverty and this proportion is expected to
rise.15 Within the past 30 years, millions of Peruvians migrated from rural to urban cities in
search for a better standard of living, healthcare, and educational facilities. In 2002, the INEI
estimated that 72.2% of the population lived in urban areas which is a 2.1% increase since
1993. However, this trend toward urbanization has slowed due to many of the families
returning to their original homes after recent years of more peaceful conditions of the
countryside. An increase in government spending on small infrastructure projects and better
roads and communications has improved the living standards in the countryside.
Poverty Rates by Year and Region (%)
Urban
Rural
Metropolitan Lima
1997
1998
1999
2000
29.7
66.3
25.4
29.7
65.9
24.1
34.7
71.8
31.4
36.9
70.0
38.9
Average
42.7
42.4
Source: Instituto Nacional de Estadistica e Informatica (INEI)
47.5
48.4
Education:
The public education standards in Peru are considered the lowest in Latin America. In 2001,
Mr. Toledo addressed the problem of underfunding by increasing teachers’ wages. The
government raised the budget for the Ministry of Education by 139%. However, while
educational expenditure had been rising the increased budget will not suffice and will take years
to raise the level of educational standards.
Primary education is free, compulsory and available to all. However, in 2000, 8% of the
population did not receive any education. Only 30.8% had been educated to primary level,
while 42% had received secondary level, and only 19.2% received some further education. In
many poverty stricken areas illiteracy became a major problem. In the same year, 18.5% of the
population aged over 15 years were living in poverty and illiterate. The illiteracy rate was even
worse at 30% in the rural poverty areas and only 7% in urban areas according to the 1993
census.16
In a time where the global markets and international business had been increasingly crucial to a
country’s economy, it is necessary to develop and maintain high standards of education. Peru’s
low education levels will make it hard for its domestic businesses to compete globally. This is a
problem for Peru having many untrained citizens and lack of good human resources.
Access to Education by Level (%)
No education
Primary
Secondary
1996
1997
1998
1999
9.4
29.4
39.9
9.5
30.5
40.8
8.1
30.4
41.3
7.9 8.0
30.4
42.1
2000
30.8
42.0
Higher
21.3
19.2
20.2
19.6
19.2
Health:
From the past recent decades, healthcare levels have improved. Most of the population receive
healthcare from the Ministry of Health and the social security system. There are now currently
more than 300 hospitals, clinics and health centers around the country that provide health
services to 6.5 Peruvians. Until 1995 employers and employees paid for the employees’ health
benefits. Now the employers pays the full contribution while the employees either contribute to
the Oficina de Normalizacion Previsional (ONP, the state pension fund) or to the
Administradoras de Fondos de Pensiones (AFPs, private pension funds). Many private clinics
have grown rapidly in major cities during the 1990s.
With the advancements of healthcare standards the female life expectancy at birth rose from
69.8 years in 1994 to 72.3 years in 2001.17 The infant mortality rate was reduced from 118
deaths per 1,000 live births in 1970 to 44 per 1,000 live births in 2001. However, infant mortality
level variations are reflected in different regions from rural to urban areas. There are
vaccination programs for children to protect them against polio, diphtheria, measles, tetanus,
and tuberculosis. Unfortunately, child malnutrition is still a serious problem, especially in rural
areas where the poverty level is higher.
Life Expectancy (Average Years)
Male
Female
Source: ProInversion
1997
1998
1999
2000
2001
65.8
70.7
66.1
71.0
66.3
71.3
66.6
71.6
66.9
72.3
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.18 Backus is the principal supplier of beer in the northern and
central regions of the country. On the other side, Cervesur is the principal supplier for the
southern region which is made up of the city-states of Arequipa, Cuzco, Puno, Abancay,
Moquegua, and Tacna. The San Juan Brewery is the company that supplies to the Amazon
region and due to its strategic location it gives tributary advantages to the law of promotions of
Amazonic Investments.
Company
UCPBYJ
Cervesur
Boxes (Millions)
61.42
12.41
San Juan
Market Participation (%)
77.54%
15.67
5.38
6.79%
79.21
Total
Source: Union de Cervercerias Peruanas Backus y Johnston
100.00%
In 2002, Backus reached a market participation of approximately 77.54% while Cervesur had
only reached 15.67% and San Juan making up the other 6.79%. This does not include foreign
companies which make up less than 1% of the market. Just like the imports, exports also make
up less than 1% of the national production of beer. Peruvian beer is mainly exported to
Chile(49%), the United States(38%), and Bolivia (4%). 19
Peruvian Markets:
The commercialization of beer in Peru is divided into five regions (Lima, the Northern region,
Southern region, Central region, and the Orient), which are defined by the distribution networks
of the breweries.
Region
Lima
Northern
Participation (%)
42.72%
22.30%
Southern
Central
Orient
Source: El Emisor
14.65%
13.30%
7.03%
Consumption:
In Peru, beer represents the alcoholic beverage that is consumed the most in the country. The
level of consumption per capita in Peru is the second smallest in Latin American countries, and
in 2002 it reached a per capita consumption of 21.97 liters which is an increase from 2001’s
19.9 liters.20
Beer Sales
Total Beer Sales (Year)
Boxes (millions)
100,688
95,048
94,885
86,953
82,242
75,704
69,918
79,216
Year
1995
1996
1997
1998
1999
2000
2001
2002
Source: El Emisor
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
436
255
649
136
420
295
572
124
3.65
13.18%
13.42%
9.79%
13.7%
13.13%
12.69%
12.95%
20.44%
14.27%
26.95%
-100.00%
13.98%
Other
Dark Beers
0
1,475
0
1,412
4.49%
Total
79,216
69,618
13.79%
**Note: Cuzqueña and Arequipeña are Cervesur brands.Source:
El Emisor
Reduction on beer tax
Since December 1, 2001, the Peruvian government reduced the tax on beer from US$0.42 per
liter to US$0.34 per liter, which lowered the tax charge from 67% to 53% of the sale value of
beer.21 Backus took this tax savings and transferred it to the consumers which resulted in a
moderate jump in sales in the last quarter of 2001. With this reduction in beer taxes, Backus
has been working hard on building brand loyalty among its consumers through aggressive
marketing campaigns.
Although the Peruvian government has determined to progressively eliminate the tax distortion
that affects the beer industry, the possibility of any further reductions due to tight fiscal
constraints is minimal. In 2001, the fiscal deficit represented 2.5% of GDP. A tax reduction
from 67% to 53% is still 20% above average for other alcoholic drinks (non-beer) in the country.
22
Low Demand for Beer
The Peruvian beer sector shows a high level of idle capacity and low demand. Any price
increases will not be reflective of high demand, but rather it being parallel to the inflation rate.
According to Santander Central Hispano, their forecasts for inflation for 2002 and 2003 are
2.1% and 2.6% respectively.23 Therefore prices should be relatively stable.
Moderate Recovery of Peruvian Beer Industry
From 1996-2001, local beer production dropped on average of 6.2% per year mainly as a result
of poor performance of private consumption. Fortunately, in 2001, the domestic demand grew
1.1% while GDP per capita decreased by 1.1% from poor performance of the volume produced
by the national beer industry. Moderate recover in beer production began showing signs in
January 2002 where beer production rose 23%. The reduction in tax on beer activated in
December of 2001 was the main driver of this recovery. Also, the progression of improved
economic conditions also helps increase the sale of beer in Peru. The forecast demand for beer
production is at a growing rate of 2.2% and 2.0% for 2002 and 2003 respectively. Therefore,
Backus’s revenues should also rise from 2.6% in 2002 and 2.7% in 2003.24
History of Backus
In 1876, Jacob Backus and Howard Johnston formed an ice factory known as The Backus and
Johnston Brewery Ltd. Currently, Backus Corporation is a strategic alliance of 20 diversified
companies devoted to the industrial, agribusiness and service sectors.25 Throughout its history,
the Backus Group has purchased and established new companies related to the brewery in
different regions throughout Peru. One of its most important mergers occurred on October 25,
1996 when the following companies merged: Cervecería Backus y Johnston S.A., Compañía
Nacional de Cerveza S.A., Cervecería del Norte S.A., and Sociedad Cervecera de Trujillo S.A.
They became Unión de Cervecerías Peruanas Backus y Johnston S.A.A., and the merger
created numerous operative and financial synergies, which have resulted in the optimal
performance of Backus.
On March 17, 2000, Backus acquired competitor Cervesur, providing advantages through
improvements in distribution, selling expenses, and production and administration. Further, this
acquisition resulted in the consolidation of a company capable of competing globally through
economies of scale, better services and a larger range of quality products that bring higher
benefits for the consumer.
Currently Unión de Cervecerias Peruanas Backus y Johnston S.A. can be described as an
organization that engages in the preparation, manufacturing, bottling, sale, distribution and all
types of business related to malts, non-alcoholic drinks, soft drinks, and beers in cans, bottles,
and barrels. However, Backus also includes a plethora of other services. Through its
subsidiaries, Unión de Cervecerias Peruanas is also engaged in agricultural activities such as
the production, sale and export of fruit juices, including lemon and other tropical juices. It invests
in securities of Peruvian and foreign companies; exploitation of rural property; sale,
industrialization, market and export of agricultural products; and provides advisory services.
Additionally, Backus manufactures plastic and glass containers and packaging products, and is
also engaged in investment in industrial, mining and sales companies and national or
multinational technical and tourist companies. However, beers and carbonated drinks account
for most of the company's revenues; whereas agribusiness and foods, transport services,
bottling and packaging and investment securities make up the remainder. 26
Backus Performance in the Beer Markets and Competitive Advantage
This analysis will identify the present position of Backus in segmented Peruvian beer market,
illustrating the extent of Backus’ dominance in the local market. Furthermore, in order to
ascertain a comprehensive understanding of Backus’ position, we will perform a SWOT
analysis; thus allowing us to assess the internal strengths and weaknesses and the external
opportunities and threats.
Peruvian Beer Markets
Peru’s beer market is divided into five regions: Lima, Northern Peru, Central Peru, Southern
Peru, and the Amazon; and currently Backus dominates in each of these regions. As illustrated
in the graph below, Lima has approximately 45% of total volume of national sales, Northern
Peru has 21%, Southern Peru has approximately 15%, the Central Region with 10%, and the
Amazon Region with about 9% of the national beer market sales.
Lima:
Lima, the capital city of Peru, has the largest beer market in Peru. The six million residents of
Lima represent 33% of the Peruvian population. Considering the substantial demographic
perspective, Lima is considered a critical market for Peruvian brewers. It has been reported that
as of September 1997, Backus “controlled approximately 82% of the Lima market, with
Cervesur taking the remaining 18%”; however, considering that Backus acquired Cervesur, we
can be assured that Backus has a greater share of the Lima market. Therefore, the Backus’s
dominance of this market proves its strong position. 27
Northern Peru:
The northern region is the second largest in Peru, therefore it holds much significance in terms
of national beer sales and is the second most important region after Lima. This region is also
reported to have the highest per capital beer consumption in Peru (reported at 41 liters per
person in 1998, a consumption much higher than the average) Backus also dominates this
region, citing the Cristal brand as the most popular beer.28
Central Peru:
Backus dominates the central region of Peru, probably due to the distribution channels and
presence.
Southern Peru:
The Southern Region of Peru is the second poorest region of the country, with a per capita well
below the national average. Until 1995, Cervesur dominated this market, and had plans of
entering the Lima market. However, after the strategic acquisition, Backus was able to retain
the Southern Region and thus expand its sales.29
Amazon:
The Amazon region, although with 50% of the area of Peru, only has approximately 9% of the
country’s population. Dominating this region in Peru can be attributed to the poor distribution
channels to the Amazon as there is poor infrastructure and inadequate roads.30
SWOT ANALYSIS
Strengths:
High preference and brand loyalty for beer. A study by Apoyo showed that beer is the
favorite alcoholic drink in Peru, with a 79% acceptance rating by the population. This puts
Backus in a strong position because an increase in disposable income will probably translated
into an increase in beer sales. Additionally, through aggressive marketing campaigns, Backus
has built a strong brand loyalty, thus making it more difficult to change people’s drinking
preferences. 31
Peru’s sole beer producer. After completing its acquisition of Cervesur in 2000, Backus has
become the sole producer of beer, which is in keeping with the worldwide consolidation trend in
the brewing sector. Backus has thus been able to benefit due to the greater economies of scale
and other synergies gained from the acquisition. Therefore, Backus’ acquisition of Cervesur
has further altered the competitive environment in the Peruvian brewing industry, as it has
created a beer monopoly in Peru which is permissible by Peruvian law.32
Sophisticated and ample channels of distribution. By achieving a high degree of coverage
of the entire market and point of sales within the country, Backus has access to all of the major
regions in Peru, which provides highly efficient distribution of its products. Backus has exclusive
use of its distributors and provides them with the necessary equipment in order to deliver the
product more effectively.33
Weaknesses:
Share looks overpriced when compared to sector. According to Santander Central Hispano,
Backus trades significantly above the estimated P/E regional average. The bank further states
that “Backus looks expensive, trading at a 9.8x versus the 8.4x for the Latin American universe
We believe that the premium of Backus’s earnings multiples over those of its peers can be
justified by the company’s strong position in the market and the difficulties that other players will
have to face in order to enter Peru’s beer market”. 34
Opportunities:
Potential growth in Peruvian beer market. In Peru, beer per capita consumption is
approximately 22 liters, whereas the average consumption level for other country is Latin
America is above 30 liters. Therefore, if Backus continues to focus its strategy on develop the
company in Peruvian markets rather than abroad, Backus can benefit by exploiting the growth
opportunities in its market. 35
Recovery of consumer purchasing power. The purchasing power of the Peruvian consumer
is expected to recover over a short-term horizon. This increase of consumer purchasing power
will benefit the sales of Backus.
Threats:
Potential competition. Even with a great sense of Peruvian pride and nationalism, Backus
may possibly face the entry of cheaper brands of beer entering the Peruvian market, which will
reduce Backus’ 99% market share. AmBev, the fifth largest brewery in the world is considering
the possibility of establishing a new brewery in Peru.36
Taxes on beer. Peruvian beer tax is approximately 67%. Although the government has
committed to progressively eliminate the excessively high tax that affects the beer industry, this
process will take some time and will continue to affect Backus’ bottom line. Despite the
reported reduction of the Peruvian tax charge from 67% to 53%, this number is still above the
average of the Latin-American sector and the average for other alcoholic drinks in the country.
37
Financial Performance of Backus
- An Overview from 1997-2001
During the last 5 years, UCP Backus has shown itself to be a financially stable firm, establishing
itself from its local market dominance. The firm has recorded a healthy period of growth and
asset utilization. Although the firm has undergone some debt restructuring in recent times, the
liquidity of the firm is sufficient to keep it out of any financial woes. (See Appendix for 1997-2001
statements and figures)
Growth
During 1997-1998 Net sales growth was very small due to the conflict with Ecuador a lot of
Peruvians decided to keep their money in their pockets in case of a war. Backus has had a very
strong net growth in sales from 1999-2000 the main cause for this is the result of an increase in
consumer purchasing power. As in the cases of most nations during the year before elections
governments tend to give more money to the population in order for the candidate to get
reelected, and in the case of Peru the theory doesn’t change. In 2000 Backus acquired 98% of
the stock of Cervesur: the only competitor in the country leading to an astonish 40% growth in
sales. The sales of Backus in the year 2001 decreased dramatically as a result of the strong
recession of the national market, the reduction of purchasing power of consumers and the 71%
increase in excise tax imposed to beer. This situation definitely had a negative impact on the
company’s sales, as prices tend to increase proportionally to excise tax. However the company
was able offset the negative effects, through the synergies obtained from the acquisition of
Cervesur.
The earnings per share growth has been volatile, but this as result of the main events
happening in the nation and in Backus: During 1997 the company had an EPS growth of
142.67 reflecting the great situation of the company, yet in 1998 the company showed a
negative EPS, and this is a result of low sales. In year 2000 both EPS growth and reinvestment
growth were negative due to the acquisition of Cervesur: the company had to spend a lot of
money. The acquisition of Cervesur has very good impact of the company, not only the
synergies offset the negative effects of tax and low consumption but it also help to increase the
net income growth and net marginal growth, by astound percentage
Backus had a fairly steady profit growth for years 1997 to 1999. In 2000, the presidential
election and the political fiasco with the scandal involving president Fujimori and Gereal
Montecinos caused the economy to fall dramatically leaving Backus and Peru relatively
profitless for the year. The biggest effect of this event can be seen in the tax rate; in 2000, it
climbed to an incredible 103.96% from 24.77% the previous year. This caused the net income
margin to fall to .13 from 14.08. In addition, investors did not get a return as great as previous
years, causing both investors and the company to lose capital. However, even though the year
2000 was a major drawback for Backus, the following year it has come back competitively
proving that the results for that year were completely due to the Political and economic state of
Peru, and not due to bad decisions made by the company.
During 2002, revenues grew by 18.3% and net sales by 13.4% leading to impressive
improvements of its gross margin (65.0%), operating margin (32.4%) and EBITDA (30.8%) over
the third quarter in 2001. Analysts remain optimistic of the growth potential of the firm in light of
anticipated entry of Companhia de Bebidas America (AmBev) in the Peruvian beer market in the
near future.
Asset Utilization
By analyzing the capital expenditures of Backus in relation to its fixed assets, total assets, and
sales, we notice that its capital expenditures were increasing from 1997 until 2000, when they
greatly declined. We also observe that the assets of cash and merchandise decreased in the year
2000 as well. We can attribute this decline in assets and capital expenditures to the political and
economic turmoil that occurred during 2000. However, the decline in assets has not affected the
asset turnover, as it has been steadily increasing since 1998. Therefore, regardless of the political
and economic disorder, Backus has been able to stabilize its assets and liabilities.
During 2002, UCP Backus increased production capacity by buying new equipment, bolstered
its distribution channels and broaden its storage capacity in certain plants by almost 80%. With
these developments in Capital expenditure and asset utilization, analyst forecasted a slight
increase in sales for 2003.
Leverage
According to the total debt-to-equity ratio, the trend from 1997-2001 has been increasing
significantly. The company has more than doubled it leverage within that time period. This can
pose as a potential problem, if not already, if the leverage keeps growing at that rate. The company
has accumulated a large amount of debt, which may threaten its ability to repay its debt, interest
expense, as well as dividends. Backus should conserve cash to meet its obligations. However,
with its dividend payout ratio increasing and its working capital decreasing it might be a challenge to
meet their debt obligations. In 2002, Backus’ debt load was reduced by 35.2 million Nuevo sols.
Liquidity
As a manufacturing firm, Backus is adequately liquid. During the political and economic turmoil
in 2000, it can be inferred that there were fewer cash sales and relatively more sales made on
credit. This is shown in the significant decrease in cash and equivalents from 1999 to 2000.
Regardless of its high leverage, the company has maintained reasonable current and quick
ratios (compared to US sector wide averages of 1.05 and 0.53 respectively). This is reflective of
its net positive cash flows in recent years. Consequently, Backus can cover its short-term debt if
the firm were to liquidate immediately, even though the quick ratio indicates that debt payments
may prove difficult if inventories are hard to sell. This may prove true with a consistent inventory
turnover ratio just below 2, while the US sector average is around 7. This lower turnover may be
a result of the still developing infrastructure that makes the distribution of beer slower. However,
the dominant firm is comprised of smaller subsidiaries that may just liquidate easily. During
2002, the debt restructuring of nearly 35 million significantly decrease interest payments,
improving Backus’ future liquidity. Despite the increase in the beer tax by 13.1%, financial
expenses dropped by an impressive 51% due to improved efficiencies; leading to relatively
larger cash flows for 2003.
The New Competitor- Companhia de Bebidas America (AmBev)
AmBev is the fifth largest brewer in the world and is a worldwide producer, distributor and seller
of beers and soft drinks. Primarily located in Brazil, AmBev operates 11 beer and 14-mixed
beer/soft drink plants with an aggregate annual installed beer production capacity of
approximately 84.1 million hectoliters. Beer is its primary business and AmBev has its brands
located all over Latin America, including Argentina, Uruguay, Chile and Venezuela. AmBev
started its operations in Argentina and Venezuela in 1994.
AmBev has three primary brands of beer: Skol, Brahma and Antarctica. Each of these brands
offers a variety of beers, including pilsner, lager, dark and non-alcoholic beers. Their beer
products are distributed through its primary brands’ third-party distribution networks, as well as
through its own direct distribution network. The remainder of AmBev’s beer sales is attributable
to niche brands, all of which are also proprietary brands, with the exception to Miller and
Carlsberg (both brands accounted for 0.4% of sales volume in 2001), which are produced under
license from third parties. In addition, AmBev exports a small portion of its beer products,
namely Brahma Chopp and Antarctica, which made up less than 1% of its total net sales in
2001. The company's total beer sales outside of Brazil accounted for 6.4% of its total net sales
in 2001, compared to 4.6% in 2000.
Their performance, financially, has been sound over the last 5 years. According to the
MultexInvestor website, their beta is 1.44, they boast a 5 year sales growth rate of 19.66%, and
an earnings per share growth rate of 17%. Referring to their leverage, AmBev has a current
ratio of 1.37 and long-term debt to equity is 1.36. Profitability ratios indicate five-year margins of
43.89% (gross); 32.80% (EBITDA) and an effective tax rate of 8.34%. Asset utilizations ratios
show that their average return on assets is 11.53% and average return on equity 27.69%
With a lucrative financial base, AmBev aims to be the most profitable company in terms of
EBITDA margin and its targets it distribution channels and leading brands in order to achieve
this goal. In January 2003, AmBev sold its operations in Argentina, Bolivia, Paraguay and
Uruguay to Quinsa S.A, a brewer in Argentina, Bolivia, Paraguay and Uruguay. As a result of
the transaction, AmBev will hold 36.1% of the voting rights and 37.5% of the economic interest
in Quinsa. AmBev has now set their eyes on Peru, where they recently met with government
officials in Lima to discuss the start of a brewery.
The Future
Amidst past political turmoil, sustained economic growth and challenging social conditions, 1has
managed to thrive and dominate the Peruvian Beer Industry. However a new player has entered
the arena. With a history rich in success as well, AmBev is interested to staking a claim to the
treasure that Backus has claimed for over years. With its competitive advantage only in
Peruvian markets, how will Backus compete against a foreign firm who has a wealth of
experience in capturing new markets? More so, how will the overall macroeconomic and
sociopolitical factors influence the next decisions Backus’ takes?
Teaching Note to the Proposed Solution of the Case
The future response of UCP Backus to the entry of Brazilian giant, AmBev, in the Peruvian
brewery industry presents a unique opportunity to learn just how a dominant company within an
Emerging market responds to new competition. Backus and Peru overall will undergo significant
changes in the future and many factors inherent to the country and the company specifically will
have to be taken into consideration.
In order to properly assess future changes to the value of Backus given AmBev’s arrival into the
beer market, we decided that the value of equity would be the most appropriate measure to
evaluate for the following reasons:

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.

We consider the reader to be a foreign investor interested in the upcoming performance
of Backus. An immediate way to act on this performance would be to invest in Backus
shares available through an ADR.
Consequently, in order to effectively perform a financial valuation on Backus, we considered
both a Relative Valuation and a Discounted Cash Flow Valuation. Firstly we derive current
valuations of the share price in order to perceive whether or not the ADR is undervalued or
overvalued (the first scenario). Once we determine their current position (i.e. whether or nor we
should anticipate growth or reduction in price), we can determine what changes to expect in
price per share after AmBev enters the market and erodes Backus sales and earnings (second
scenario).
Both these methods sought to evaluate the equity in Backus; specifically the price of an
‘Investment’ share issued by Backus, currently trading at $0.42 a share per ADR (as of 4/4/03).
Relative Valuation:
In order to valuate Backus & Johnston, we have compared the Peruvian brewery company to
dominant Latin American breweries, namely AmBev, Brahma (Brazil), Femsa (Brazil) and Grupo
Modelo S.A (Mexico), the makers of Corona. Although, Backus & Johnston is the biggest
brewery in Peru, all the firms have strong international presence throughout Latin America and
some US markets. Given this issue, we still performed the valuation because, based on
production capabilities, these firms are comparable and international exposure is a decision that
Backus is in the financial position to make (See Appendix for valuations). The adjustment for
international exposure is somewhat met by using indicators (such as earnings and book value of
total equity) divided by the number of shares of the specific company.
Be that as it may we chose to focus on Grupo Modelo because its risk, cash flow capabilities
and growth characteristics offer the closest comparison to UCP Backus. Although the firms are
similar, there are still differences that need to be controlled by using relative valuation. The
dominance of both these firms relative to their markets can be conveyed in the prices of their
shares. Unfortunately, data on Modelo’s Price/ Book Value per Share ratio was not available.
By comparing the betas of both companies, it is apparent that both firms have relative similar
risks. Currently, Backus has a beta of .87 and Grupo Modelo has a beta of .68. Backus does
have a higher beta or risk; however, it is relatively close to the beta of Grupo Modelo. In terms
of EPS growth, Backus has a history of negative growth. However, in 2002 Backus’s recorded
growth in net earnings of 50.3% due to higher sales volume in an expanding market. On the
other hand, Grupo Modelo’s EPS growth in 2001 is 15%. Also, in 2002, Backus’s Current
Ratio is 79.7% whereas Grupo Modelo’s Current Ratio is 22.4%. Even though this is a clear
indication that Grupo Modelo is more liquid than Backus. Both firms appear to be fairly liquid.
Furthermore, both firms share similar Returns on Equity (ROE) for 2001. Backus has a value of
5.59% and Grupo Modelo has a ROE value of 8.78%. Backus has a lower ROE than Modelo
mainly due to prior years of negative growth. Lastly, by comparing the current Price/Earnings
ratio, Backus’s P/E is 2.43 which is significantly lower than Modelo which has a P/E of 16.95.
Grupo Modelo’s market cap of $71,603.75 million shows that it is a larger firm than Backus with
only $9,014.20 million. Grupo Modelo deals with more international markets that exports the
major brand, Corona, and distributes for Anheuser-Busch beers. Therefore, the P/E of Grupo
Modelo reflects a premium for having shares for a bigger firm compared to Backus, which has a
much lower P/E.
Referring to the relative valuation of Grupo Modelo’s P/E of 16.95% and Backus’s EPS of $0.16
we find that the price per share of Backus should be valued at $2.71. However, the current
price of a Backus share is $0.38. Thus, Backus is currently undervalued considerably.
Grupo Modelo’s P/E
Backus EPS
Price Per Share (P/E * EPS)
Current Backus Price per Share
16.95 times
$0.16
$2.71
$0.44
Undervalued
However, if we assume that AmBev’s entry into the market will reduce our net sales and thus
reduce our earnings per share by a conservative estimate of 25% (from 0.16 to 0.12) then our
new prices are as follows:
Grupo Modelo’s P/E
Backus EPS
Price Per Share (P/E * EPS)
Current Backus Price per Share
16.95 times
$0.12
$2.03
$0.44
Undervalued
A reduction of earnings per share by 25% still left the Backus’ share undervalued.
Consequently, Backus could still anticipate its share price growing and would not have to be
greatly concerned with a loss in growth potential.
Concerns in Relative Valuation

There was not enough data on Latin American breweries to perform a sector wide
regression to derive a more effective multiple.

Grupo Modelo registered a higher current growth in EPS than their return on equity;
implying that their retention ratio is higher than 1. This made it difficult to derive a
fundamental PE since the multiple measures violated a key assumption in deriving a
retention ratio less than 1.
Discounted Cash Flow Valuation
Assumptions for DCF Model:

The model is a Free Cash Flow to Equity Model rather than a Discount Dividend Model
because our research found that Backus pays varying amounts of dividends irregularly.
A two-stage, FCFE model provided more consistent estimates (see excel spreadsheet.)

The cost of equity was derived using the Goldman Integrated Model under certain
assumptions (refer to table below):

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 used was provided by Bloomberg research and is based on a
regression on the Peruvian stock index. Although the Goldman model calls for
the share to be regressed against a US index; this regression proved to be
statistically insignificant. Consequently, we assumed that the change in risk
that the Backus Share would add to a diversified Peruvian portfolio would be
the best estimate the beta on a US portfolio.

The (estimated) historic risk premium is that of S&P market returns over a 10year treasury bond.

The only changes anticipated over the two stages were changes to the equity
beta. In the latter stage, we assumed that the beta would near the industry
(alcoholic beverages) beta.
High Growth Stage
Stable Growth Stage
Risk Free rate
4.11%
4.11%
Yield on Peruvian Brady Bond
8.8%
8.8%
Sovereign Yield Spread
4.69%
4.69%
0.81
0.15
Historic Risk Premium
5.17%
5.17%
COST OF EQUITY
12.98%
9.58%
Beta
More Considerations:
When evaluating Backus, we found that a few political and economic assumptions must be
made in order to assess what is in store for Backus in the future. First, Backus is currently
working on issuing bonds worth $100 million through Citigroup. This debt issuance will
significantly increase Backus’ current assets for the following years.
Secondly, in 1995 Backus’ net income was very high due to an increase of 17% in consumer
purchasing power. However, the following year Backus had a decrease in its net income
because of a high increase in SG&A expenses. Taking all of this into consideration, we have to
be aware that the fluctuations in the statements were not significantly high in the first years.
Keeping this in mind, we are assuming that fluctuations in the exchange rate have made our
numbers decrease. However, we made another assumption that the exchange rate will remain
very stable since exports to the US have increased periodically. This assumption is based on
the fact that the Ñuevo Sol has been the second most stable currency against the dollar for the
past 2 years.
Additionally, we are assuming that growth is expected to be higher if two events happen: Toledo
is re-elected president and the project for Peru and Bolivia to provide natural gas to the United
States goes through. Te Peruvian belief is that foreign investors will only be willing to keep
investments in Peru if Toledo is re-elected. Therefore, if reelection occurs, the growth rate will
increase due to foreign investor interest in Toledo’s presidency. On the contrary, if ex-president
Fujimori joins the race and wins, it is very likely to see foreign investors pull investments out of
Peru.
Finally, our last assumption is that the tax rate in 2002 is above the normal for Backus, since it
is safer to have a higher rate in order to hedge some risks. This number is smaller than the
usual American corporate tax rate, but is somewhat alleviated by having a product tax of 53%.
With all of this taken into consideration, we have found that the value of the share is
undervalued due to the fact that we expect a higher net income than most analysts.
Assumptions for the second DCF model: Bad scenario for Backus.
Net Income:
We have used 47.59 because it is the average of the net income of the last two years; if we
used the last net income it would be taking a very optimistic position, which cannot be taken
after knowing that Peru and Brazil should sign an agreement of free trade in the early months of
next year.
This free trade agreement will facilitate AmBev to have their products be imported without any
major constraint. We believe that the entrance of AmBev could cause a price war which could
start due to the decrease in the price of beer and the decrease in net Income.
Depreciation:
The depreciation number was estimated from reports that were able to obtain enough and
sustainable data to estimate the numbers.
Cap Ex:
In the case of capital expenditure we have estimated an increase, based on the fact that AmBev
will be penetrating the Peruvian market in less than a year and Backus should be investing
more money in advertising campaigns. Advertising expenditure should increase dramatically
due to the fact that although Backus has strong customer brand loyalty the company has
promoted the increase in consumption of beer and not the consumption of Backus' beers due to
the fact that Backus holds the monopoly.
∆ Working Capital and Debt Ratio:
Backus is currently working on issuing bonds worth $100 million through Citigroup. This debt
issuance will significantly increase Backus’ current assets and debt ratio for the following years.
The new debt is the main reason why we assume an increase of debt ratio to 58% and the high
changes in ∆ working capital.
Macro-economical Assumptions
Exchange rate:
Based on the research made on Backus for the last 8 years we have found that the sales of
Backus and the exchange rate have a correlation. Negative correlation is seen until a stable
exchange rate is reached; in that scenario an increase in sales is also achieved. The main
reason why we believe that exchange rates have an influence in the case of Backus is because
the Peruvian economy is partially dollarized and 38% of Backus exports go to the US. It is worth
to mention that the depreciation of the currency can reduce the real growth obtained by the
company. Therefore by having a steady exchange rate Backus will be able to reflect its real
growth.
Net Sales to Exchange Rate (1995-2002)
4
600.0
3.5
500.0
Sol/US$
3
Mil US$
400.0
2.5
2
300.0
Net Sales
Exchange Rate
1.5
200.0
1
100.0
0.5
0
0.0
1995 1996 1997 1998 1999 2000 2001 2002
Year
Inflation:
Based on our research we have seen that inflation and Backus net sales are negatively
correlated. * The parts were inflation and net sales had a positive correlation was due to an
increase in GDP per capita. If inflation remains low net sales could potentially increase: the
increase in sales from Backus is affected several Macro-economical factors such as inflation.
Net Sales to Inflation (1995-2002)
Net Sales
Inflation
Mil US$
Consumer Price Index (%)
600.0
500.0
14
12
10
8
6
4
2
0
-2
400.0
300.0
200.0
100.0
0.0
1995
1996
1997
1998
1999
2000
2001
2002
Year
GDP growth:
Growth is still expected to be higher based on the economic policies of the president elected.
Second, we expect exports to increase due to several factors and strategies that the
government has approached. It is expected the natural gas project to be approved.
The GDP growth (per capita) is a very important assumption for this valuation, due to the fact
that based on numbers collected from the past years GDP per capita and Net Sales have a
positive correlation. We have to take into account that this graph shows that high preference for
beer consumption in Peru.
GDP per capita
($ at PPP)
600.0
Mil US$
Net Sales
5,200
500.0
5,000
400.0
4,800
300.0
4,600
200.0
4,400
100.0
4,200
0.0
4,000
1995
1996
1997
1998
1999
2000
2001
($ at PPP)
Net Sales to GDP per capita
2002
Year
Political Concerns:
The next president:
The future of Backus is partially in hands of the government because the company is highly
sensible to the situation of the country. The main concern for us is who will be next president of
Peru? As long as neither ex-presidents Alberto Fujimori nor Alan Garcia are not re-elected our
valuation should be accurate. The main motive why we feel this way is because Peru is a
country highly dependable on foreign investment, and investors do not like the two expresidents for major reasons: Alberto Fujimori is considered one of the most corrupted expresidents in Latin America. Under Alan Garcia, the government defaulted on the external debt,
leaving the economy with inflation in the 7000’s %, and closed the economy during the late 80’s.
If in the elections 2006 neither Garcia nor Fujimori win, we should expect a constant growth in
the country as in the sales of Backus because as it has been shown in the chart above GDP per
capita and Backus’s net sales are positively correlated.
The difference between the two scenarios:
Net Income:
In the first DCF model the rumors of AmBev going to Peru were very vague so we did not take
into consideration that AmBev had real plans to penetrate the Peruvian market, knowing that
Peru and Brazil have plans to sign a free trade agreement; therefore we estimated that Backus
net income for the next five years will remain at a constant growth rate of 6%. The second DCF
model takes into account the entrance of AmBev, the potential free trade agreement of Peru
and Brazil, and the reduction of net income, yet the growth of net income will remain to be 6%.
Depreciation and Capital Expenditure:
Depreciation had no major changes across the two scenarios. In the second DCF model capital
expenditure was reduced because the numbers used in the first model implied that with higher
net income the company will spend more money in advertising campaigns to counter AmBev
marketing strategy. It is worth mentioning that the change in CAPEX is not very significant but in
order to give a more accurate advice this action has to be stated.
∆ Working Capital and Debt Ratio:
There were no modifications in the ∆ working capital because the main reason to change our
numbers in the DCF model was the entrance of AmBev to the Peruvian market. The
percentage in debt ratio was changed due to the fact that Backus has issued a $100 million, and
the prices of the common shares have inflated the value of equity. The proportion of money
paid by Bavaria to acquire Backus common shares gives us reasons to believe that the only
reason why Bavaria paid more than 100% premium for these shares was to hold the strategic
position of major shareholder. Since we believe that the equity value of the firm was inflated we
increased the amount of debt ratio to 58%, while in the first DCF model it was 49%.
*Macro-economic assumptions and political concerns did not change across the DCF
models.
Final Thoughts
Backus Expected Performance:
We believe that the company will manage to increase internal efficiencies and therefore reduce
costs while maximizing sales. Acknowledging that AmBev will build a $38 mil plant and
contribute to penetrate the market, we look forward to Backus creating competition obstacles;
which will to lead to the reduction in pace for AmBev’s plans. We anticipate that AmBev will use
the strategy of low price in order to penetrate the market, and although this will affect Backus’s
revenues because the price of beer will be reduced, we foresee that consumers will prefer
Backus’s beer because of the strong brand loyalty and the nationalistic sentiment of Peruvian
consumers. Due to the high nationalistic sentiment that beer embraces; low beer prices in Peru
should mean more beer; therefore, Backus should be able achieve a growth in sales of 6% in
the next five years. We also expect that the presence of Bavaria (another major Latin American
brewer) as a major shareholder in the company should put pressure in Backus management to
have a better performance during the coming years.
Net Sales, not Net Income:
Many people will ask why we have measured the relationship of Net sales and macroeconomical factors instead of net income. The main reason why net sales were used was that
consumption per capita is measured by the volume sold divided by the population; therefore, a
better way to estimate Backus performance will be by using Net revenues because this process
allows the investor to have a better look at Backus volume sales and know their real growth.
Another contributing factor for using net sales is due to tax rate fluctuation, which
inappropriately affects net income. By using net sales we can independently understand the
volume of sales without being affected by the multiple changes in beer tax.
The Result:
After having all these assumptions in placed we have found that the value of the Backus I
shares is undervalued by two cents ($.02) due to the fact that we expect a higher net income
than most analysts. The latest price of the share was $.42, which was obtained in April 8. We
feel that our assumptions are valid and thus should be taken into careful consideration by
investors.
We maintain our target price at $.44 and Buy recommendation for Backus I shares.
1
PERU: The Party System from 1963 to 2000. Orsini, Christina. July 2000. Northwestern U. 5 Apr. 2003.
http://www.janda.org/ICPP/ICPP2000/Countries/3-SouthAmerica/37-Peru/Peru63-00.htm.
2 Ibid.
3 Gestion National Page. April 5, 2003. http://www.gestion.com.pe.
4 Ibid.
5 CountryWatch. April 5, 2003.
http://www.countrywatch.com/cw_country.asp?vCOUNTRY=136.
6
Peruvian Graffiti Page. April 5, 2003 http://www.gci275.com/peru/.
Ibid.
8 “Country Profile: Peru.” The Economist Intelligence Unit. http://www.eiu.com/schedule. 2002
9 ibid.
10 ibid.
11 ibid.
12 ibid.
13 ibid.
14 The Economist Intelligence Unit.
15 Ibid.
16 Ibid.
17 Ibid.
18 Programa de Bonos Corporativos de Backus. Bentín Peral, Elías. Bolsa de Valores de Lima. 14 March
2003. www.bvl.com.pe. 5 April 2003.
19 Ibid.
20 Ibid.
21 “Backus & Johnston: Latin American Equity Research.” Santander Central Hispano. May 3, 2002.
22 Ibid.
23 ibid.
24 Ibid.
25 www.backus.com.pe
26 Internet Securities, Inc., Backus, Company Profile,
http://site.securities.com/ci/cp.html?pc=PE&cmpy=BACKUAC1
27 Bear Stearns, Emerging Markets Equity Research, January 23, 1998
28 Ibid.
7
29
Santander Central Hispano, Latin American Equity Research, Lima, May 3, 2002
30
Ibid.
Santander Central Hispano, Latin American Equity Research, Lima, May 3, 2002
31
32
BBV Continental SAB, Company Report, UCP Backus y Johnston: Securing Profitability via
Consolidation, April 10, 2000
33 Bear Stearns, Emerging Markets Equity Research, January 23, 1998
34
35
36
37
Santander Central Hispano, Latin American Equity Research, Lima, May 3, 2002
Centura Sab, IVQ02 Review, February 27, 2003
Ibid.
Santander Central Hispano, Latin American Equity Research, Lima, May 3, 2002