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Signum Research

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Signum Research

Signum Research es una empresa independiente de análisis financiero y bursátil conformada por analistas y expertos de amplia experiencia en el medio y por un consejo de asesores integrado por personalidades de alto reconocimiento en los mercados financieros. Signum Research cuenta con la más avanzada tecnología y sistemas que le permiten realizar sus cálculos y modelos analíticos de manera eficiente, en tiempo real, y publicarlos oportunamente en su portal de análisis financiero.<br /> Nos hemos establecido como meta el producir el mejor análisis bursátil independiente: un análisis oportuno, sencillo, confiable, asequible e interesante, de manera que los mercados financieros puedan ser intelectualmente accesibles a una mayor parte de la población. Nuestro objetivo final es, a través de nuestro análisis, encontrar la señal detrás del ruido cotidiano en los mercados, una señal que fundamente sólidamente nuestras recomendaciones de inversión.<br /> En Signum Research sabemos que los mercados financieros son una importante herramienta de desarrollo, Signum Research busca contribuir en la difusión de una cultura financiera y de inversión que permita a quien carezca de experiencia –pero que tenga el interés- participar del progreso que brindan los mercados financieros.<br /> Signum Research se ha asociado con The Competitive Intelligence Unit, una empresa de consultoría estratégica especializada en áreas de análisis de oportunidades de negocio, telecomunicaciones, regulación y economía para desarrollar y publicar análisis sectoriales y en materia de regulación.
24.jan.18

Signum Perspective

2018 Prospects for the TELECOM and Frequent Consumption Sectors

TELECOM/MEDIA SECTOR

We believe that mobile telecommunication companies will continue to experience low subscriber growth. The data business should continue to grow driven by greater SmartPhone penetration and internet use. The voice business on the other hand should continue its downtrend. Furthermore, we expect an ongoing slight decrease in postpaid and prepaid plan prices, which translates into ongoing modest growth rates in sector revenues. We expect a slight improvement in AMX’s margin, as the company was authorized to charge interconnection fees again starting this year. As a result, there should be a decrease in the profitability of AT&T and Telefónica’s operations.

We expect zero growth in the number of lines in the fixed telephony segment with the exception of cable TV operators. Tariffs should continue to trend lower.

In the pay TV segment, we expect low growth in the number of subscribers due to the high penetration of such services. As in previous years, the internet business should be the focus of growth. Due to high penetration, video and broadband internet tariffs should begin to decrease for the first time in a number of years in nominal terms.

With respect to open TV, sector revenue growth should be underpinned by the World Soccer Cup.

Potential impact from the cancellation of NAFTA

The cancellation of NAFTA would likely trigger a strong depreciation of the peso. However, some sector companies (AMX, TELEVISA) have dollar-denominated income, which would act as a buffer. Other companies (AXTEL, MEGACABLE) do not have dollar-denominated income while a percentage of their costs is in foreign currency.

Mergers and Acqusitions

We expect AXTEL to finally sell its residential fiber-to-home business in order to focus on the business segment. Once this occurs, AXTEL will probably be acquired by AT&T or Telefónica.

AT&T’s acquisition of Time Warner is subject to a US Department of Justice court proceeding on March 19th. If the transaction is approved by the US authority and Anatel, the Brazilian telecommunication regulatory body, AT&T may decide to sell its Latin American pay TV operations, possibly with the exception of Mexico. We estimate that it could obtain around US$8 million, which would contribute to bringing down debt.

On December 20th, the Brazilian company Oi, reached an agreement to restructure US$19 billion in debt. The agreement includes a 75% dilution for extant shareholders. Once Oi has completed the restructuring, it could be sold to another international operator like AMX or China Telecom either as a whole or in parts.

Sector top picks

AXTEL (BUY, TP P$4.20): We project that AXTEL’s business segment revenues will continue to increase. The company could also be acquired by another larger telecommunications operator like AT&T or Telefónica this year.

AMX (BUY, TP P$18.50): AMX has upbeat 2018 prospects, as its data business should continue to record double-digit growth rates, the company will be able to charge interconnection tariffs in Mexico starting this year, and regulatory risk has significantly eased. AMX will also continue to focus on lowering debt and could acquire another telecommunications company or part of one, like Brazil’s Oi.

TELEVISA (BUY, TP P$85.0): We expect TELEVISA’s revenues to improve as of Q118 due to the World Soccer Cup broadcast, the change in its sales plan, from a fixed price per spot to a cost per rating point as well as higher royalties charged to Univision. We expect TELEVISA to generate US$110-140 million in additional revenues as a result. However, TELEVISA’s costs will also increase, as the company will use around 50% of that funding to cover the World Soccer Cup and Presidential elections as well as new Isaac Lee productions. Furthermore, INE can use government slots throughout the day.

FOOD SECTOR

Several food and beverage sector companies undertook acquisitions in 2017, which in most cases should continue to benefit their operations in 2018. In the case of LALA, the acquisition of Vigor Alimentos should put pressure on margins and ROE and increase leverage.

1) In Q217, AC undertook the successful merger of Southwest Beverages, triggering a strong increase in sales and EBITDA as of then. We expect the benefits of this acquisition to be reflected over the next two quarters.

2) BACHOCO – The company used its solid financial structure and high cash generation to acquire Albertville Quality Foods" (AQF), a supplier of value-added protein products to food service, retail and national accounts, for US$140 million (July 2017) and "La Perla”, a pet food producer, for P$440 million (July 2017). The acquisition of AQF helped cement its position in the U.S. market. We expect these two acquisitions to drive BACHOCO’s results for three more quarters.

3) GRUMA – In July last year, GRUMA bought a 14.29% interest in its Gimsa subsidiary, taking its total stake in Gimsa to 99.79%. Although GRUMA’s leverage rose slightly from 1.0 times in Q217 to 1.4 times in Q317, the company reduced the minority interest in its financial statements.

4) BIMBO – The company acquired Stonemill Bakehouse in Canada and Groupe Adghal in Morroco. However, the size of these transactions is relatively low compared to BIMBO.

5) LALA – On October 26th, the company acquired Vigor Alimentos. Although we view the transaction as strategically important for LALA, as it will become one of Latam’s largest diary companies, in our view, Vigor’s valuation was very high. Furthermore, LALA’s debt significantly increased while its margins and ROE will decrease. Furthermore, LALA has not managed to turn its U.S. operations, which are smaller than Vigor’s, around.

Possible impact of NAFTA cancellation

The cancellation of NAFTA could translate into a weaker peso and higher duties, which would impact the input costs of the Mexican operations of most companies in this sector. However, this negative impact might be more than offset by the dollar-denominated revenues of companies with large operations outside Mexico, such as AC, BIMBO, BACHOCO and GRUMA.

GRUMA is a company with an international presence; its U.S. subsidiary accounts for 53% of its operations, which means it would benefit if NAFTA were cancelled. However, it should be noted that 20% of the corn GIMSA (the Mexico subsidiary) uses is imported from the U.S. and that the cancellation of NAFTA would imply duties. This situation would force the subsidiary to pay a higher price for corn, or look to other countries, like Brazil or Argentina, for its corn supply. Nevertheless, GIMSA has taken out exchange rate hedges at P$18.20 to the dollar, which represent 50% of its 2018 corn needs and can also transfer higher consumer costs within a period of one to two months. GIMSA’s exports to the U.S., which include corn flour and tostadas, account for just 5% of the subsidiary’s sales, so there would be no material fallout from NAFTA.

LALA would be affected by the cancellation of NAFTA because only 4% of its revenues are in dollars. Furthermore, 20% of the company’s costs are in dollars, which includes the powdered milk the company imports to Mexico.

BACHOCO is somewhat vulnerable to NAFTA. On the one hand the company would benefit from peso depreciation, as its U.S. operations represent around 30% of consolidated revenues. However, 40% of its costs are denominated in dollars and the company imports around 50% of its grain needs from the U.S. This means that the cancellation of NAFTA would imply higher input prices. In the event of an increase in production and raw material costs, the company has hedges and can pass on higher costs to end consumers within six months.

BIMBO is defensive with respect to NAFTA, as the U.S. subsidiary accounts for half of its operations. However, costs in Mexico could increase if the peso depreciates.

AC’s U.S. operations account for almost 50% of the company’s revenues. As a result, the company’s results benefit from a weaker peso against the dollar. Furthermore, exports from Mexico to the U.S., which include the Topo Chico and Coca-Cola “nostalgia” brands, represent less than 1% of sales. If NAFTA is cancelled, they could be subject to export duties of around US$0.20 per unit case. Likewise, one of the main inputs of its products in Mexico is fructose, which is imported from the U.S. However, last year the Sugar Agreement, which set the prices of this input, came into effect, so cancellation of NAFTA would not pose such a big risk. 25% of total costs are in dollars. In the event of peso depreciation, higher costs would be more than offset by higher sales in the U.S.

Sector top picks

BACHOCO (BUY; TP P$107.0): We like BACHOCO as we expect revenues and EBITDA to grow at healthy rates in 2018 and 2019 due to last year’s acquisitions and organic growth driven by higher chicken and egg consumption in Mexico. Furthermore, BACHOCO has a solid financial structure and generates a large amount of free cash flow, so we believe it will continue acquiring more poultry sector companies. Finally, we believe BACHOCO is attractively valued as its multiples are the lowest of the Mexican food sector.

AC (BUY; P$150.0): AC is a defensive company because it participates in the beverages sector. Also, around one third of its revenues comes from Southwest Beverages, and is therefore dollar denominated. AC’s shares are trading below historical average levels. The only risk is that AC’s Mexican operating margins would be affected by the cancellation of NAFTA as fructose is imported.

If NAFTA is cancelled, GRUMA (HOLD; TP P$265.0) could become a top pick, as most of its revenues are in dollars.



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