Closed at P$50.4, 3.2% gain in 21 days (Mar, 10, 2016, 12:28 ET)
Trade Idea: Short BIMBO on YTD rally, rich valuation, and FX impact
(Price on Feb 18: P$52.05)
We see the world’s largest bread maker and Mexico-based Grupo BIMBO S.A.B. (BIMBOA) overpriced and believe that shorting the stock could yield 1.5% to 6.4% (MXN50.5-48/share) in the short term vs last price (MXN51.27) with limited downside from the trade. BIMBO is expected to report strong 4Q15 results on February 25, however, we see that BIMBO shares’ strong performance have already incorporated positive expectations. We believe that 4Q15 results present downside risk from higher USD-denominated debt, which will likely more than offset USD-denominated EBITDA from the North America division. Finally, we see BIMBO’s current valuation as rich trading at a significant premium to comparable local and North American peers and, therefore, favor a short position on the name.
1) Strong performance YTD
- Rally of 11.58% YTD vs 1.41% of MEXBOL.
- RSI of 61 hints overbuying.
- 1-Year return of 21.67% vs % 1.23% of MEXBOL and despite 19.05% depreciation of Mexican peso vs USD.
2) Rich Valuation
- BIMBO trades at a 91% premium to local peer Gruma and 124% premium vs. international peers’ average P/E multiple (TTM).
- BIMBO trades at TTM P/E of 51.6x vs 26.8x of MEXBOL and 23.0x of international peers’ average.
3) FX Impact
- Practically all of BIMBO’s debt is foreign currency-denominated and most of it, or 75%, is USD-denominated, with the rest issued in CAD.
- As of 9M15, BIMBO’s USD-denominated revenues accounted for 46% of total and USD EBITDA was 39% of total. Although a significant operating flow from the Company is generated in USD, we believe BIMBO’s bottom line is likely to be pressured, in 4Q15 and going forward, due to greater debt burden and financial costs from 1-year MXN depreciation vs. USD in the order of 19%, magnified by BIMBO´s current leverage Net debt/ EBITDA ratio of 3.1x, as of 3Q15.
Source: LATAM PM with Company reports and Bloomberg data. Prices as of February 17, 2016.
DISCLOSURE: The analyst or analysts responsible for this report may or may not have active positions on the stocks and securities mentioned before, as of the date or after publishing. This report is for informational purposes only, based upon publicly available information. Accuracy and completeness of the information cannot be guaranteed. LATAM PM is not in any way be liable for claims related to this report. The information and analyses may not be suitable for your specific circumstances. Each investor shall make their own determination of the suitability of an investment of any securities referred to in this report.