Corporate Financial Analysis El Corte Latino, S.A. de C.V

Corporate Financial Analysis
El Corte Latino, S.A. de C.V.

Contenido
Table of Contents............................................................................................ ¡Error! Marcador no definido.
Executive Summary........................................................................................................................................ 3
Stockholder Analysis ...................................................................................................................................... 3
Risk and Return .............................................................................................................................................. 4
Measuring Investment Returns .................................................................................................................... 7
Optimal Capital Structure ............................................................................................................................. 8
Mechanics of Moving to the Optimal .......................................................................................................... 9
Dividend Policy & Framework for Analyzing Dividends ......................................................................... 10
Valuation and Conclusion ........................................................................................................................... 10
Executive Summary
El Corte Latino, an industry leader in processed meats in El Salvador, is a private company that
is rewarding its shareholders with a Return on Capital of 22.87% vs. its WACC at 21.39%. The
managers of this company have not shown shareholders their ability to increase firm value.
While the company has an importante share of the market, it has not been able to grow topline
and profitability faster than competitors. The Company has a lot of macroeconomic (political,
country risk) variables that affects its cost of equity and therefore its WACC. Currently ECL
shares may be trading at a 32% premium vs. their fair value.
Stockholder Analysis
El Corte Latino (ECL) is largely dominated by family investors (3 shareholders). José Andrés
Gómez, his brother José Francisco Gómez and their mother, Roberta de Gómez owns (overall)
94.64% of the total shares in ECL. José Andrés Gómez is the General Manager of ECL. This
company is an example that illustrates special challenges associated with managing and
investing within a family group.
The Board of Directors at ECL is made up with 6 Board Members, 3 of them are shareholders
(the mother and sons), and the President is the actual Financial Manager; therefore, the control
of the firm lies inside stockholders. The top management constitute an important part of the
Board of Directors, but obviously there is a conflict of interest.
The structure: ECL is a private Salvadorean company, founded by the late husband of Roberta
de Gómez in 1960. Therefore, every piece of information was given by the owners and
managers of the ECL.
The legal system: El Corte Latino S.A. de C.V. (Sociedad Anónima de Capital Variable) is
constituted under a denomination, which is form freely with no limitations other than that of
being different from any other existing company and will be immediately followed by the
words "Sociedad Anónima" or its abbreviation "S.A." and “C.V.” (Capital Variable) signifies that
is a company that can modify the variable part of their capital by increasing or decreasing it,
complying with the only requirement of granting a resolution at the Extraordinary General
Meeting of Shareholders in accordance with the law or the articles of incorporation.
Overall, the board at ECL and ECL shareholders are dominated by family investors. It is highly
likely that the informal marginal vote resides with key stakeholders.
Risk and Return
ECL operates only in El Salvador, with projections to expand his production and export to all
Central América and Mexico in 2023. At the end of the year 2000, the Salvadorian government
made a unilateral decision to dollarize their economy, the law fixed the exchange rate at 8.75
colones per dollar, therefore the riskfree rate that we use in the analysis should be in the same
currency, in this case, the rate on a 10 year US Treasury bond (December 14) in US dollars =
1.44%1.
For the calculation of the Country Risk, El Salvador is perceived to have default risk, and so, the
government bond rate will have a default spread component in it and not be risk free. In
December 2021, the local currency rating from Moody´s was Caa12 and the default spread for
a Caa1 rated country bond is 6.29 %, adding this default spread to the US CRP, th total Equity
Risk Premium for ECL is 10.67%.
Country
Moody’s Risk Default Equity Risk
Country Currency
Rating Premium Spread Premium
US
El Salvador US dollars Caa1 4.38% 6.29% 10.67%
Adjusting for Non-Diversification
With private firms, the owner, in this case ECL, is the only investor and thus can be viewed as
the marginal investor. Consequently, it can be argued that betas will understate the exposure
to market risk in these firms.
The research of comparable public companies in the Packaged Meats Industry, the beta
unlevered median is 0.50.
Beta Marginal
Company Name Industry D/E Beta Unlevered
Levered Rate %
BRF S.A. (BRFS) Packaged Meats 1.22 290% 34.0% 0.42
China Xiangtai Food Co., Ltd. (PLIN) Packaged Foods 0.47 68% 25.0% 0.31
Hormel Foods Corporation (HRL) Packaged Foods 0.42 20% 21.0% 0.36
Tyson Foods, Inc. (TSN) Farm Products 0.82 64% 21.0% 0.55
NH Foods Ltd. (NI6.F) Packaged Foods 0.67 25% 36.5% 0.58
WH Group Limited (0WH.F) Packaged Foods 0.66 10% 17.4% 0.61
Sanderson Farms, Inc. (SAFM) Packaged Foods 0.68 5% 24% 0.66
BRF S.A. (BRFS) Packaged Meats 1.22 290% 34.0% 0.42
Median 0.71 0.50
4
1
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield Diciembre, 14 2021.
2 https://diario.elmundo.sv/moodys-degrada-nota-de-el-salvador-a-bonos-con-alto-nivel-especulativo/
3Source for Food Processing market: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/totalbeta.html
Levered, this beta becomes 0.62 as a result of factoring in the debt/equity ratio of El Corte
Latino.
Company Unlevered Beta Marginal tax rate % D/E ratio Levered beta
El Corte Latino 0.50 30% 31.13% 0.61
The stockholders have all of their wealth invested in this private business and is completely
undiversified and is exposed to all risk in the firm and it is not just the market risk (which is what the
beta measures). There is a simple adjustment that can allow us to bring in this non-diversifiable risk
into the beta computation. To arrive at this adjustment, we assumed that the standard deviation in
the private firm´s equity value (which measures total risk) is σj and that the standard deviation in the
market index is σm. To measure exposure to total risk (sj), we could divide the market beta by Rjm:
𝑅𝑗𝑚 = 𝜎𝑗 ⁄ 𝜎𝑚 Total Beta = 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑒𝑡𝑎 / 𝑅𝑗𝑚

I estimated the market beta of the sector by looking at publicly traded firms in the business. We
can obtain the correlation coefficient by looking at the same sample and use it to estimate a total
beta for a private firm.
This is a relative standard deviation measure, where the standard deviation of the private firm´s
equity value is scaled against the market index´s standard deviation to yield what we will call a
total beta.
The total beta will be higher than the market beta and will depend upon the correlation between
the firm and the market, the lower the correlation, the higher the total beta. You can see the sample
of betas in the same industry below:
Average Correlation
Company Market Beta Total beta
with the Market %
El Corte Latino 0.61 24.71%3 2.45
With a Total Levered beta of 2.51, the total cost of equity for ECL is at 28.1%.
Company Risk Free Rate Total Beta Risk Premium Cost of Equity
El Corte Latino 1.44% 2.45 10.67% 27.6%
An Caa1 rating from Moody’s and a risk free rate of 1.44% result in a higher cost of debt for
ECL. The interest coverage ratio for ECL is 32.44, which puts it an AAA, resulting in a default
spread of 0.60%, according to the synthetic rating estimation described as follows:
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For smaller and riskier firms
If interest coverage ratio is
greater than ≤ to Rating is Spread is
-100000 0.499999 D2/D 14.00%
0.5 0.799999 C2/C 10.50%
0.8 1.249999 Ca2/CC 8.00%
1.25 1.499999 Caa/CCC 6.50%
1.5 1.999999 B3/B- 5.50%
2 2.499999 B2/B 4.50%
2.5 2.999999 B1/B+ 3.75%
3 3.499999 Ba2/BB 3.00%
3.5 3.9999999 Ba1/BB+ 2.50%
4 4.499999 Baa2/BBB 1.60%
4.5 5.999999 A3/A- 1.25%
6 7.499999 A2/A 1.10%
7.5 9.499999 A1/A+ 1.00%
9.5 12.499999 Aa2/AA 0.80%
12.5 100,000 Aaa/AAA 0.60%
Moodys Rating Caa Risk Free Default Cost of Tax

1 Rate Spread Debt
1.44% 0.60% 2.04 % 30
%
After tax Cost of 1.43 %
Debt
Finally, to look at the cost of capital, the structure of ECL debt is as follows:
Type Amount (millions)
Short Term Borrowings -
Long Term Borrowings (sept/2021) 785,725
Total Borrowings 785,725
The breakdown of these debt obligations, September 2021:
Conditions: Loan A Loan B Total

Debt $691,629 $94,096 $785,725
Period (years) 8 8 8
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1
Market Value of Debt (US$)
Interest Expense (sept 2021) 18,425
Pre Tax Cost of Debt 2.04%
Total Borrowings 785,725
Period (years) 8
Market Value of Debt 803,248
Total Market Debt 803,248
The total market value of debt at ECL is therefore $803,248 dollars. There is no market value
of equity in a Private Company, only book value of equity for the same period (September
2020) of $2,580,042. The total equity and debt percentages, a total cost of capital of 21.03% is
calculated for ECL.
Equity (US$) $2,580,04

2
Market Value of Debt (US$) $803,248
% Equity 76.26%
% Debt 23.74%
Cost Of Equity 27.6%
Cost of Debt 1.43%
Cost of Capital 21.39%
Measuring Investment Returns
Given the cost of capital, this section looks at Return on Capital and Economic Value Add for
ECL. ECL is a company with more than 50 years of presence and has a 17% market share. It is
a company that has not reinvested its capital in high-level technology to maintain itself as a
market leader, nor has it generated new brand launches. Its competition (Sigma,
Multiinversiones Corporation or Walmart) has gained share through low prices and a variety of
products. As of September 2021, ECL invested $ 600 thousand in new machinery and plant
adaptation, as well as the launch of 2 new brands without changing the production processes.
Return on EBIT (1-Tax Rate) BV of BV of Cash BV of ROC
Capital Debt Equity Capital
El Corte Latino $760,75
$595,895 $785,725 $2,580,042 $2,605,012 22.87%
5
EVA $38,637
Based on the 2021 September report, ECLs ROC is 22.87%, while its EVA US$38,637 vs. a
WACC of 21.39%. This 1.49% excess return may be partially driven due to the increased
positioning of sales in the supermarket channel, which during the pandemic sought to boost.
Another An advantage of ECL is that its brand is well positioned in the minds of Salvadoran
families and its low prices make it attractive to competitors. They are currently looking to launch
7
1
a new healthy brand based exclusively on turkey meat, which is in line with the nutritional trend
in the industry.
Capital Structure Choices

Currently, at September 2021 ELC has 76.3 % capital and 23.7 % debt, based on book value
of equity, owners equity. Comparing to the industry, where the average D/E ratio for Meat
Processing and Meat related product companies in the world is 20.12%, it would seem that
ECL is a a bit over leveraged at 23.7%.
Capital Structure Choices
BV of Interest Bearing Debt $785,725
MV of Interest Bearing Debt $803,248
Type of
Debt
Bank Debt 100%
Debt
Maturity
> 5 Year 100%
Currency
Domestic Currency 100%
Structure
Floating Rate Debt 100%
Optimal Capital Structure
According to the following results, to maximize the firm value, ECL can further leverage itself.
Using the corporate structure optimization model and market value of equity, we see that ECL
can maximize enterprise value by increasing its debt to capital ratio by 23.74%, to 80%.
RESULTS FROM ANALYSIS

Current Optimal Change
D/(D+E) Ratio = 23.74% 80.00% 56.26%
Beta for the Stock = 2.45 7.65 5.20

Cost of Equity = 27.60% 83.07% 55.47%
Rating on Debt Not rated
After-tax cost of Debt = 1.43% 1.71% 0.28%
WACC 21.39% 17.98% -3.41%

Implied Growth Rate = 1.44%
Enterprise value $2,622,536 $3,162,936 $540,401
Value/share (Perpetual Growth) = $25.80 $31.20 $5.40
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At 80% Debt and 20% equity, ECL will still maintain its Synthetic Bond Rating while reducing its
WACC to 17.98 %.
Debt Ratio Beta Cost of Equity Bond RatingInterest rate on debt Tax Rate Cost of Debt (after-tax) WACC Enterprise Value
0% 2.0136 22.92% Aaa/AAA 2.04% 30.00% 1.43% 22.92% $2,435,398
10% 2.1702 24.59% Aaa/AAA 2.04% 30.00% 1.43% 22.28% $2,510,864
20% 2.3660 26.68% Aaa/AAA 2.04% 30.00% 1.43% 21.63% $2,591,157
30% 2.6177 29.37% Aaa/AAA 2.04% 30.00% 1.43% 20.99% $2,676,755
40% 2.9533 32.95% Aaa/AAA 2.04% 30.00% 1.43% 20.34% $2,768,201
50% 3.4231 37.96% Aaa/AAA 2.04% 30.00% 1.43% 19.69% $2,866,116
60% 4.1278 45.48% Aaa/AAA 2.04% 30.00% 1.43% 19.05% $2,971,212
70% 5.3024 58.01% Aa2/AA 2.24% 30.00% 1.57% 18.50% $3,066,592
80% 7.6516 83.07% A1/A+ 2.44% 30.00% 1.71% 17.98% $3,162,936
90% 28.7942 308.64% A2/A 2.54% 30.00% 1.78% 32.46% $1,686,377
Operating at an 80% debt ratio is too risky for the Company. ECL is a company with a high level
of risk for many reasons: it is a private company, where the owners are not diversified, affecting
the beta: 2.53. It is a Salvadoran company that for political and economic reasons has a very
low risk rating of Caa1, increasing the Equity premium risk to 10.67%; and therefore the cost
of equity is high: 21.39%. A company that faces large macroeconomic risks, in a market with
many competitors, must guard against additional risks that could lead to bankruptcy, such as
increasing its debt level to 80%. ECL must increase its value by increasing his market share and
reducing costs. The company has the potential to grow in the wellness market and make more
efficient its production process.
Mechanics of Moving to the Optimal
In 2021 ECL increased its level of indebtedness to 23% for the purchase of high-tech
machinery. The company has a synthetic rating of AAA and an excellent credit record against
banks, so it can be funded with good credit conditions. ECL’s new debt should be tied to useful
life of a project. Majority of the projects ECL would invest in would be:
1. New Product Innovation in the wellness market, 1-2 year term, local currency and
production, fixed rate.
2. Plant, Manufacturing facility, long term, local currency of country in which plant,
etc. will be based, floating rate (hedged for interest rate risk)
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1
Dividend Policy & Framework for Analyzing Dividends
ECLs total FCFE from 2018 – 2020 has been $1,905 million. No Dividends or buy backs in the
whole period. However, the stockholders The stockholders withdraw cash from the company
through salaries and not dividends.
Analysis of Past Dividends

1 2 3
Net Income $765,372.34 $875,135.84 $635,408.00
- (Cap. Exp - Depr) ($74,675.00) ($55,899.00) ($102,853.00)
- ∂ Working Capital $371,060.66 $98,669.62 $250,000.00
Free CF to Equity (pre-debt) $468,986.68 $832,365.22 $488,261.00
+ Net Debt Issued ($26,797.00) $18,250.00 $158,261.00
= Free CF to Equity (actual debt)$442,189.68 $850,615.22 $646,522.00
Free CF to Equity (target debt ratio)
$539,353.46 $842,519.66 $523,196.10
Dividends
+ Equity Repurchases
= Cash to Stockholders
Dividend Ratios
Payout Ratio
Cash Paid as % of FCFE
Overall, the current dividend policy not to pay dividends -> it keeps family investors happy
through much larger salaries, and until 2021 the company is able to use the excess cash
generated to invest in technology and product innovation.
Valuation and Conclusion
In conclusion, ECL is a family run company whose current ROC is 1.49% higher than its WACC
and therefore a good investment. The company will have to find new ways to increase the ROC
in the future. Finally, based on the assumption of 10% YOY growth in the short term, based on
its current capital structure, the firm may be trading at 32% higher than its fair value of
$24.24/per share.
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1
Terminal cash flow $ 1,408,343.39
Terminal cost of capital 10.00%
Terminal value $ 15,648,259.87
PV(Terminal value) $ 3,015,348.77
PV (CF over next 10 years) $ 4,533,782.58
Sum of PV $ 7,549,131.36
Probability of failure = 0.00%
Proceeds if firm fails = $3,774,565.68
Value of operating assets = $ 7,549,131.36
- Debt $ 785,724.82
- Minority interests $ -
+ Cash $ 760,754.54
+ Non-operating assets $ -
Value of equity $ 7,524,161.08
- Value of options $0.00
Value of equity in common stock $ 7,524,161.08
Number of shares 100,000.00
Estimated value /share $ 75.24
Price $ 24.24
Price as % of value 32.22%
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Corporate Financial Analysis El Corte Latino, S.A. de C.V

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Corporate Financial Analysis

El Corte Latino, S.A. de C.V.

Adjusting for Non-Diversification

𝑅𝑗𝑚 = 𝜎𝑗 ⁄ 𝜎𝑚 Total Beta = 𝑀𝑎𝑟𝑘𝑒𝑡 𝐵𝑒𝑡𝑎 / 𝑅𝑗𝑚

El Corte Latino 1.44% 2.45 10.67% 27.6%

Moodys Rating Caa Risk Free Default Cost of Tax

The breakdown of these debt obligations, September 2021:

Conditions: Loan A Loan B Total

Equity (US$) $2,580,04

Measuring Investment Returns

Capital Structure Choices

Optimal Capital Structure

RESULTS FROM ANALYSIS

Beta for the Stock = 2.45 7.65 5.20

WACC 21.39% 17.98% -3.41%

Mechanics of Moving to the Optimal

Analysis of Past Dividends

Valuation and Conclusion

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