Sector Outlook: FOOD

June, 2013

Miguel Mayorga T. Sector Outlook

mmayorga@gbm.com.mx
+52(55) 5480 5718 During the year, our food sample has more than proven its defensiveness

Mauricio Martínez V. when volatility and uncertainty arise, as it has managed to outperform
mmartinez@gbm.com.mx
+52(55) 5480 5800 ext. 4187 most of the sectors within the Mexbol, returning a 27.1% yield vs. the IPC’ s
9.2% decline. What’ s more, even the extraordinary performance that
GRUMA and BACHOCO—both included in our top investment ideas of the
year—have had during the year, we still believe that both companies
continue to be the wisest investments in order to ride Mexico’ s
consumption story, hinting in both cases at attractive returns on current
prices.

Sector Outlook
Lastly, regarding a possible increase in the VAT rate—in
Our long-term view on our sample remains positive, as we Mexico, VAT on foodstuffs have a 0% rate—, we should be
are confident that the undisputable leadership that each expecting a changes in this line in the medium term and in
of the companies has in its industry, their ability to adapt our view, this should represent a short-term impact on
to new consumption trends, their pricing power, and their volumes, as a result of demand elasticity, since most of
vertical integration, along with their global presence, the companies should transfer this increase through
should manage to turn these companies into strong cash- prices to the final consumer.
generation machines in the long run.
GBM Food Sample
During 2013, raw material prices have started to ease,
while the synergies from the integration of recently GBM Rating Price Target
acquired businesses have started to show up moderately.
GRUMA Outperformer $70.00 Top pick
All in all, when looking at companies’ specifics, we would
have mixed thoughts: while in the case of BACHOCO, BACHOCO Outperformer $45.40 Watch list
BAFAR, and GRUMA, we are extremely optimistic given BAFAR Outperformer $32.10
the appealing fundamentals, drivers, and potential that
the companies seem to have in the medium term, on the BIMBO Underperformer $33.40
other hand, BIMBO’ s and HERDEZ’ valuations continue to HERDEZ Underperformer $40.10
be significantly stretched in order to justify an investment
decision, although we acknowledge that both stories have
strong fundamentals in the long run.

As such, despite the extraordinary performance that

GRUMA and BACHOCO have had during the year, we still
believe that both companies continue to be the wisest
investments in order to ride Mexico’ s consumption story,
hinting in both cases at attractive returns on current
prices.

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2013

GRUMA business in the US, we are increasing our price target to

MARKET OUTPERFORMER P$70.0 while reiterating our Market Outperformer rating.
2013 PT: P$70.00 Possible Catalysts.
GRUMA has been our top pick since the beginning of the  We should highlight that GRUMA’ s valuation is
year, and despite the outstanding performance that the subject to possible risks coming from the
stock has shown so far in 2013 (+44.5% YTD), we continue Venezuela business. We should recall that our
to believe that current prices reflect a clear investment valuation is discounting 50% of Venezuela’ s
opportunity. value. Our estimated value per share for
First, in our view, GRUMA presents a turnaround story in Venezuela’ s operation is P$2.65 per share, or
terms of profitability and returns as a result of a P$3.1 billion.
management overhaul that the company has been GRUMA’ s Valuation
experiencing since the death of Mr. Roberto Gonzalez
2013e
Barrera (GRUMA’ s founder who died in October last year).
EV/EBITDA 8.50x
Since Mr. Gonzalez passed away, many important things
EBITDA 2013e 5,812,079
have happened that have encouraged our thesis. First, the
EV 49,402,673
ADM transaction came into the equation, involving an Net Debt 2013e 16,094,660
important revaluation for GRUMA due to the discount of 1Q13 Minorty Part 2,043,188
the purchase and the capital reduction (around 24% of PBV 2.1x
total shares) that came along with it. 1Q13 Minorty Part * PBV 4,188,535
At the same time, GRUMA’ s top management has been GRUMA's Mkt. Cap 29,119,477
totally renovated (new CEO, CFO), aligned with a strategy Shares 432,749
of consolidating core businesses, increasing profitability, THEORETICAL PRICE PER SHARE GRUMA CONSOLIDATED P$67.29
deleveraging the company, and most importantly,
boosting value for every GRUMA shareholder. Venezuela's Mkt Cap 3,109,013
GRUMA's Ownership 73.9%
The overhaul in managment has started to pay off. During Value per GRUMA Share P$5.31
the past months, GRUMA’ s management stated bold Discount 50.0%
intentions to restructure the company to set a new Value per GRUMA Share post-discount P$2.65
profitability standard across the board. To this day,
GRUMA’ s management has kept its promise of focusing GBM GRUMA's price target P$69.94
on profitability. GBM GRUMA’ s Estimates
For us, the main highlights of this restructure have been: CAGR (02-17)
2012 2013 2014
New Pre
1. GRUMA Corp.'s and MASECA's outstanding -9.9% 5.2%
operating results, both divisions posting sound Volume 4,808 4,331 4,557 1.1% 3.2%
operating and EBITDA margin expansions, on the 2.8% 2.2%
back of the initiatives adopted by the new Net Revenues 52,028 53,497 54,674 3.3% 3.5%
management in order to boost value creation. 2.4% 1.6%
COGS 36,122 69.4% 37,006 69.2% 37,608 68.8% 2.9% 3.3%
2. Wisely, Venezuela has been deconsolidated from -5.9% -0.1%
GRUMA’ s results, and now stands as a SG&A 13,034 25.1% 12,263 22.9% 12,245 22.4% 1.1% 3.0%
discontinued operation in the P&L, while in the 54.4% 13.9%
balance sheet it amounts to P$3.1 billion in the Op. Income 2,770 5.3% 4,277 8.0% 4,873 8.9% 16.2% 8.7%
assets held for sale bracket. 33.0% 10.6%
EBITDA 4,370 8.4% 5,812 10.9% 6,425 11.8% 11.3% 7.0%
In previous weeks, we met with GRUMA’ s management in
order to get more color about the situation and the Net Income n.a. 2,146 3,355
potential of all the changes that have been taking place
during the year. What we got is that we were being quite FCF n.a. 2,489 2,411
conservative on the back of the restructure that is taking
place, mainly within the Tortilla business in the US. As Net Debt 18,569 16,095 13,684
such, after updating our estimates in order to better
reflect this new strategy, and mainly the potential of the Net Debt to EBITDA 4.0x 2.8x 2.1x
restructure that it is taking place within the Tortilla

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2013

we believe that the company should experience a

BACHOCO revaluation to levels similar to those at which the
MARKET OUTPERFORMER industry trades.
2013 PT: P$45.40
BACHOCO’ s Growth For Free Exercise
BACHOCO has been on our watch list since the beginning TTM 2013e
of the year; despite the outstanding performance that the EBITDA 3,319,180 3,623,086
stock has shown so far in 2013 (+19.5% YTD), our outlook Taxes -530,123 -664,471
for BACHOCO is still positive, as we believe that the Maintenance CAPEX -722,556 -734,771
chicken industry cycle within Mexico and the US remains FCF 2,066,501 2,223,844
sound.
WACC 11% 11%
We remain optimistic about the industry’ s dynamism NPV 18,786,373 20,216,762
within Mexico and the US, as strong demand should 1Q13 Net Debt - 3,630,215 - 3,630,215
continue to boost prices in 2013. In addition, we deem Equity Value 22,416,588 23,846,977
that given BACHOCO’ s sound financials, we should not be Minority Part 43,322 43,322
surprised if we witness some M&A activity in order to Shares 600,000 600,000
pursue growth. THEORETICAL PRICE PER SHARE P$37.29 P$39.67
3.6% 10.2%
As for valuation, it remains quite attractive as the Implicit G
company is trading at 4.2x 2014 EV/EBITDA, 10.2x 2013 TTM 2013e
P/E, and 1.1x 2013 P/BV, and shows an appealing WACC 11% 11%
valuation discount versus its international peers. Lastly, it
FCF 2,066,501 2,223,844
is important to highlight BACHOCO’ s balance sheet,
Mkt Cap 21,600,000 21,600,000
which remains as the strongest in the industry, with a net
cash position of approximately 17% of its Mkt. Cap, when Min BV 43,322 43,322
most of its peers remain leveraged. In sum, we believe that Net Debt - 3,630,215 - 3,630,215
BACHOCO’ s history should remain bright, and that it Implied g -0.5% -1.3%
represents a good investment, hinting at a 26.6% upside
yield from current prices. Thus, we reiterate our Market BAFAR
Outperformer rating and our 2013 price target of MARKET OUTPERFORMER
P$45.40. 2013 PT: P$32.10

Possible Catalysts.
 Recently, the Ministry of Economy has made
official unfair practices from US producers in the
Mexican chicken market and imposed
compensatory duties on US producers. The
Ministry of Economy had decided to postpone
these duties as a result of the Influenza outbreak;
however, we expect them to become official in
the medium term.
 At this time, Mexico is banned from exporting
chicken to the US, while the US is able to export it
to Mexico, implying that there is not a fair market
between both countries. If the regulation
between the US and Mexico changes, the
synergies between BACHOCO’ s US and Mexican
operations could be an upside risk to our thesis.
After the company reported sound results in 1Q13, our
outlook for BAFAR remains optimistic going forward.
As we have stated before, low protein consumption in
Mexico on a per capita basis, as well as strong
macroeconomic fundamentals, should translate into
attractive top-line growth. Indeed, per capita
consumption in Mexico for beef, poultry, and pork
registered 11.8, 27.7, and 11.1 kg in 2012—well below
developed countries for beef (14.7 kg), while the US and
Brazil registered 45.4 and 42.3 kg, each, for poultry.
Moreover, the low retail penetration in Mexico leads us to
believe that at the same time as the modern channel
increases its penetration, BAFAR would be able to bring its
products closer to more people; what’ s more, the
company’ s own retail format should boost BAFAR’ s
growth.

 BACHOCO’ s lack of liquidity represents an

important issue for investors. If this fact changes,

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2013
In addition, we are expecting margin expansions for 2013,
on the back of lower raw material prices and strong prices
in the overall protein sector in Mexico.
Possible Catalysts.
 A stronger than expected growth in protein
consumption in Mexico should translate into
attractive increases in top line.
 Penetration of the modern channel should boost
the company’ s top line.
 Margin expansions on the back of lower raw
material costs, coupled with strong protein prices
in Mexico.
BIMBO
MARKET UNDERPERFORMER
2013 PT: P$33.4
Although BIMBO’ s profitability margins should continue
to show improvements versus 2012, our negative outlook
for the company remains, as the company should face a
tough consumption environment in Brazil, coupled with
the business restructure there, which we believe should
continue to take a toll on the consolidated figures.
Moreover, integration of the Sara Lee business should
require further expenses, and although we are expecting
synergies for the remainder of the year, profitability
margins are far from returning to those seen before the
Sara Lee acquisition. What’ s more, we are expecting more
write-downs from the Multiemployer pension plan in the
US.
We reiterate our worries about capital expenditures that
the company is allocating in the US and LatAm, whose
ROE and ROA remain unclear, and which could be
implying value destruction.
In terms of valuation, BIMBO is one of the most expensive
in our sample while standing at record levels; ’ 13
EV/EBITDA and P/E are trading at 12.9 and 37.3x, each—
versus our sample’ s averages (excluding BIMBO) of 9.3
and 14.3x, respectively.
In sum, any good news seems to be priced in, while
important risks for the company’ s future results are in the
skyline. Moreover, we continue to believe that BIMBO’ s
2013 rally should be reflecting inflows from international
investors that want to invest in Mexico’ s consumption
story through a blue chip company, notwithstanding
expensive valuations. As such, current prices do not hint
an attractive yield to justify an investment thus, we are
reiterating our 12M price target of P$33.4 and our Market
Underperformer rating.
GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Possible Catalysts.
 Greater than expected synergies within the Sara
Lee business could boost BIMBO’ s profitability
and change to positive perspective in the medium
term.
 A successful restructure in Brazil’ s business could
move operating results in LatAm into the black.
 Further write-downs from the Multiemployer
pension plans in the US business could taint
BIMBO’ s profitability and equity structure.
 Mexico’ s VAT reform could hamper the
company’ s profitability and volume in the
medium term after its approval.
HERDEZ
MARKET UNDERPERFORMER
2013 PT: P$40.1
HERDEZ started to consolidate its figures without the
proportional method in joint businesses since 1Q13 in
order to comply with the new IFRS 11. With this change,
its partnership with KUO—Herdez Del Fuerte—is now fully
consolidated in the company’ s figures, while the US-
based partnership between Herdez Del Fuerte and Hormel
Foods—Megamex—is included as non-consolidated
subsidiaries.
However, after accounting changes took place, our thesis
remains unchanged, as we continue to believe that
current prices are already pricing in all good news around
the block. We are positive on HERDEZ’ s decision to enter
the growing frozen yogurt industry, which is the most
promising segment within the ice cream industry.
Moreover, we found NUTRISA’ s acquisition attractive on
the back of the company’ s leadership in this segment, as
well as the potential synergies in the distribution
network, resulting in a strong positioning in the retail
channel of the NUTRISA brand, coupled with an
acceleration in the opening of the own brand format
stores.
In addition, as we have stated before, we remain bullish
for companies focused on the Mexican or Hispanic
population in the US, as well as on the Anglo-focused
ethnic food. Thus, the Hispanic population should register
the higher compounded annual growth rate at 2.5% while
their purchasing power should increase going forward; in
turn, the Anglo population has shown an important
interest in Mexican food, positioning Mexican food as one
of the most consumed types in the US.
Sector Outlook
June, 2013

However, although HERDEZ’ s price has adjusted in the I. Higher planted acres for corn in the US, as the
last month, the name seems to be fairly priced and leaving USDA reported an estimate of 89.5 million acres
a limited yield in order to justify an investment decision. for the new cycle from 87.4 million in 2012.
Thus, we are leaving our Market Underperformer rating II. Higher ending stocks, as we are estimating 42.23
on the name with our 12M price target of P$40.1. million metric tons (mmt), from 19.54 mmt
registered by the USDA in the previous cycle.
Possible Catalysts. III. Days of inventories for wheat unchanged from the
previous estimated figure early this year, leaving
 Higher than expected synergies in the NUTRISA it at 82 days.
acquisition, as well as a faster growth in this
business. As such, if our thesis matches reality, we should witness
 Mexico’ s VAT reform could hamper the sharp declines in prices in the second half of the year, and
company’ s profitability and volume in the a healthy recovery in ending stocks for the main grains—
medium term after its approval. corn and wheat.
Estimated ’ 13 Price for Corn at Certain US Ending Stocks
GBM Food Sample EV/EBITDA Levels
15.0x —Corn price figures in USD per bushel
14.5x
14.0x —Ending Stocks figures in millions of metric tons
13.6x 50,000 7.00
13.0x 12.9x 48,000
12.0x 6.50
46,000
44,000
11.0x 6.00
10.6x 42,000
10.0x 9.8x 40,000 5.50
9.0x 38,000
8.6x 5.00
36,000
8.0x
34,000
4.50
7.0x 32,000
2013e 2014e
30,000 4.00
GBM
GBM Food Sample Bimbo Herdez est.

Ending Stocks Corn USD per bushel Current Price

RAW MATERIAL OUTLOOK Source: GBM with USDA data

In May, the USDA published positive corn and wheat

worldwide production figures. All in all, we are leaving our
current forecast unchanged (corn US$6.07 per bushel;
wheat US$7.13 per bushel), since we are entering into an
extremely volatile period in which weather will play a key
factor in order to determine the coming yield of the
season. As such, it is important to track June and July
weather as these months are very important for corn yield
in the US.
All in all, we remain bearish on corn and wheat prices, as
planted acreage for corn did not decrease as expected,
after the planting was delayed during the season in the
US. Indeed, we believe wet weather should improve soil
moisture in the US, following one of the worst droughts in
the US witnessed in 2012, and boosting yield this year.
In sum, our main drivers for corn and wheat cycles in 2013
are:

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2012

PRICE TARGET

BACHOCO
Stock Price Performance vs Analyst Estimates

50.0

45.0

40.0
31/07/2012 34.00 M arket Outperfo rmer
35.0 24/10/2012 37.10 M arket Outperfo rmer

30.0 08/01/2013 38.70 M arket Outperfo rmer

25/04/2013 45.40 M arket Outperfo rmer
25.0

20.0
Jun-12

Jul-12

Aug-12

Sep-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13
Oct-12

Price Price Target

BAFAR
Stock Price Performance vs Analyst Estimates

34.2
32.2
30.2
28.2
26.2
22/02/2013 26.40 M arket Outperfo rmer
24.2
26/04/2013 32.10 M arket Outperfo rmer
22.2
20.2
18.2
16.2
Jun-12

Jul-12

Aug-12

Sep-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13
Oct-12

Price Price Target

BIMBO
Stock Price Performance vs Analyst Estimates

43.0
41.0
39.0
37.0
35.0 25/07/2012 33.40 M arket P erfo rmer
33.0 22/08/2012 33.40 M arket Outperfo rmer
31.0
26/10/2012 33.40 M arket Underperfo rmer
29.0
27.0
25.0
Sep-12
Jul-12

Aug-12

Dec-12

Feb-13

Mar-13

Apr-13

May-13
Jun-12

Nov-12

Jan-13

Jun-13
Oct-12

Price Price Target

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2012

GRUMA
Stock Price Performance vs Analyst Estimates

69.5

64.5
31/07/2012 37.40 M arket Outperfo rmer
59.5
24/10/2012 39.40 M arket Underperfo rmer
54.5
26/10/2012 43.40 M arket Outperfo rmer
49.5
14/01/2013 44.02 M arket Outperfo rmer
44.5
28/02/2013 51.90 M arket Outperfo rmer
39.5
28/03/2013 63.60 M arket Outperfo rmer
34.5
18/06/2013 70.00 M arket Outperfo rmer
29.5
Sep-12
Jul-12

Aug-12

Dec-12

Feb-13

Mar-13

Apr-13

May-13
Jun-12

Nov-12

Jan-13

Jun-13
Oct-12

Price Price Target

HERDEZ
Stock Price Performance vs Analyst Estimates

51.4

46.4

41.4
31/07/2012 34.60 M arket P erfo rmer

36.4 26/10/2012 38.40 M arket P erfo rmer

01/03/2013 40.10 M arket Underperfo rmer
31.4

26.4
Jun-12

Jul-12

Aug-12

Sep-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13
Oct-12

Price Price Target

GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.
Sector Outlook
June, 2012

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The analyst or analysts involved in the creation of this document hereby certify that the views expressed in this document
accurately reflect their personal opinions and that they have not and will not receive direct or indirect compensation for
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GBM Grupo Bursatil Mexicano, S.A. de C.V., Casa de Bolsa (“GBM”), and its affiliates, may carryout and seek to do
business with companies covered in its research reports. Investors should not consider this report as a single factor in
making their investment decisions. These materials do not constitute an offer to buy or sell any security or participate in
any trading strategy.