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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA
14.mar.17

Signum Perspectives

Alsea Day

Alsea had originally planned to hold Alsea Day for analysts in New York in November 2016, but in view of Trump’s presidential victory, the company decided there was too much uncertainty at the time to be able to present a five-year scenario, and therefore opted postpone the meeting.

Following that decision and the expected impact of currency depreciation on the company’s results, the share price suffered a severe beating followed by a rebound, albeit not to levels reached prior to November of last year.

Following the impact on the share, management released its 2017 guidance and set a date of March 8th to provide a more complete outlook for the company along with five-year guidance.

During the event, Renzo Castillo, a former Walmart director, was introduced as the company’s new CEO. He has ample experience in the retail sector and demonstrated solid knowledge and understanding of Alsea’s strategy.

Alberto Torrado is still the Chairman of the Board. Diego Gaxiola is CFO, Fabián Gosselin heads the international division, and Federico Tejado is in charge of Alsea México. The reason for the change in CEO is to treat Alsea as a public company rather than a family business whose decisions could stymie growth potential.

COMPANY STRUCTURE

The company closed the year with 3,195 operating units, 78% of which are corporate units and 22% franchises.

Alsea has 14 brands, 7 of which are global and rank first or second in the market, and 7 of which are Alsea’s own brand and also segment leaders. Generally speaking, they are leading brands in Mexico, South America, and Spain.

International operations have been increasing their share of total sales. Sales growth has been especially strong in Spain and South America, but in recent quarters, the South American region has benefitted relatively more from forex movements that increase amounts converted into pesos.

Management’s original expectation was that Mexico and the international division would represent 50% of total sales, but we believe this will take longer to materialize.

According to management, Mexico continues to represent a strong growth opportunity, as Alsea still lacks presence in segments like chicken, beef, or Mexican food, and is actively seeking investment opportunities.

The company continues to post very favorable performance in all of its operating segments and benefit from a growing middle class that was hitherto underserved, a gap that Alsea has filled, thus enabling it to remain the number one operator.

The company’s strategy is based on achieving higher sales growth driven by same-store sales.

In 2016, total sales rose +16.8% and same-store sales +8.9% YoY.

All brands registered annual growth in same-store sales. The main driver was Domino´s Pizza, which has strongly benefited from the new App and on-line sales, which have proven very successful.

In view of this, the company’s strategy will have a strong focus on technology and on providing easy purchase options for clients using a friendly platform, which should boost sales.

The perception of US companies in Mexico was damaged at the beginning of the year following Trump’s election. One of the most affected brands was Starbucks. Although sales were initially impacted, Alsea launched an advertising campaign highlighting the benefit of having Mexican employees and their Mexican coffee purchases.

Sales have begun to return to normal, especially as such events gradually lose their impact.

One of the biggest challenges facing retail companies in Mexico is the lack of trained employees and high staff turnover.

Alsea is strongly focused on finding a way to institutionalize knowledge, and to that end has created the administrative owner concept, which consists of serving the store, its staff and customers as if they were its own family.

The company has also introduced an employee compensation improvement scheme, which has increased productivity, same-store sales growth, Ebitda margin expansion, and market share.

Alsea believes there is still room for increasing market share, especially with respect to international operations.

A year ago, the company created a rewards card called WOW, which currently has 580,000 users with rewards at 1,300 restaurants, and has resulted in 30% growth in the average ticket.

New stores are another factor that drives sales, and there will be a strong focus on growth via franchises.

A market can have between 5 and 6 brands with franchises, which are provided with distribution, operational and know-how support. Alsea also offers funding for the acquisition of franchises.

The franchises contribute more revenues as well as income from royalties and opening fees. Domino’s and Foster’s are the franchises that are expected to be the main growth drivers.

Alsea expects to open 220-250 units this year, which would be a record number. 170-190 of them will be corporate units and 50-60 will be franchises.

Final remarks

We believe that Alsea has good growth potential. In a year in which consumption could come under pressure, the company continues to register above-sector growth and high profitability.

Although extraordinary expenses will exert pressure, the expectation is that profitability will increase in the out years.

The main risk is greater exchange rate depreciation having a direct impact on Ebitda generation. However, the share price has been severely punished and is inexpensive, and we therefore see a good entry point.

Our 2017 target price is P$63.5 and our rating is BUY.



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