Quarterly Report GFAMSA Market Performer 12M FWD Price Target P$8.6 Price 7.8 12M Price Range 6.77 / 15.34 Shares Outstanding (Mill) 562 Market Cap (Mill) 4,383 Float 36% Net Debt (Mill) 27,728 EV (Mill) 32,129 Dividend Yield 0.0% 2015 TTM 2016e 2017e Revenues 16,605 17,364 18,279 20,033 EBITDA 1,775 1,731 1,818 1,998 Net Profit 158 264 449 400 Free CF -4,877-3,263-3,969-2,257 EPS 0.3 0.5 0.8 0.7 P/E 27.7 16.6 9.8 11.0 EV/EBITDA 18.1 18.6 18.4 17.9 EV/EBITDA adj 7.7 7.2 6.9 6.8 P/BV 0.5 0.5 0.5 0.5 Luis R. Willard lrwillard@gbm.com.mx +52(55) 5480 5886 Liliana De León ldeleon@gbm.com.mx +52(55) 5480 5800 ext. 4240 2Q16 confirms our thoughts: Higher provisions should take a toll on P&L results. Some background. After the company s ordinary shareholders meeting in April, GFAMSA s auditors required the company to build up additional provisions for P$5.9 billion to cover past due consumption loans originated in Banco Famsa, but ultimately transferred for collection and recovery to GFAMSA Retail after 10 months past due. This led to a write-off of P$6.7 billion (out of the total P$8 billion in these loans), which in turn prompted the majority shareholder to guarantee P$5.09 billion to ensure the company s survival. All in all, 2015 equity suffered a P$2.5 billion write-off. What can we expect from the company going forward? As seen in 2Q16, despite management efforts to diversify its consumer portfolio, we should expect higher provisions from the off-bank loan portfolio as required by auditors. Moreover, we believe that GFAMSA s consolidated portfolio growth should depend on the company s ability to increase deposits to reach a more accurate deposits/loans coverage as there is currently a relevant amount of loans funded externally via debt certificates and bank loans, which causes annual outflows of around P$1 billion, or 50% of EBITDA from working capital. Indeed during this quarter, besides higher provisions, which drove margins below our estimates, GFAMSA reported a slowdown in portfolio growth this quarter the company s consolidated portfolio grew 7.6% vs. 14% TTM, while the strategy addressed to incentive deposits brought a 25% YOY advance. Positively, the latter in the medium term could bring lower working capital needs. In conclusion, we believe the business model will not change; rather, we should witness moderation in the off-banco Famsa loan portfolio growth (stemming from less write-offs at this level), higher provisions, overall lower credit risk (better origination and stronger provisioning), and possibly lower working capital outflows. However, at this point, despite relatively discounted valuations (0.5x P/BV, 7.6x EV/Adj. EBITDA), and given current market volatility, we are staying on the sidelines on the name; thus, we are adjusting our 12M FWD price target to P$8.6 as we are penciling in lower EBITDA estimates for 2016, given higher provision expenses. 2Q16 Report and Conference call Highlights Guidance revision in EBITDA from P$2 billion to P$1.7/1.8billion. Commercial initiatives and promotional activity brought an 8.2% YOY advance in revenues (SSS: 6.9% vs. 7.4% YOYe) /US (SSS: -4.0% VS. - 1% YOYe). NPL increased 40 bps (QOQ) to 9.1%, after a full year of sequential retreats. Higher provisions and commissions related to the payroll credit origination and a non-recurring severance payment of P$19 million affected operating results showing a 120bp dilution (vs. -60 bps). EV/EBITDA FWD 12M PRICE PERFORMANCE VS. IPC P/E 22.0x 21.0x 20.0x 19.0x 18.0x 17.0x 16.0x 15.0x 14.0x 13.0x 12.0x 11.0x 10.0x 7/15 8/15 2/16 4/16 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 07/15 08/15 09/15 11/15 01/16 GFAMSA 02/16 03/16 04/16 IPC 05/16 06/16 60 55 50 45 40 35 30 25 20 15 10 7/15 8/15 2/16 4/16 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.
Change in Estimates 2016 2017 Previous New Previous New MXN YOY% MXN YOY% MXN YOY% MXN YOY% Revenues 17,931 8.0% 18,279 10.1% 19,953 11.3% 20,033 9.6% Operating Profit 1,548 16.3% 1,367 2.8% 1,716 10.9% 1,540 12.6% Op. Margin 8.6% 7.5% 8.6% 7.7% EBITDA 2,026 14.1% 1,818 2.4% 2,206 8.9% 1,998 9.9% EBITDA Margin 11.3% 9.9% 11.1% 10.0% Net Profit 360 NA 449 NA 731 103.0% 400-10.8% Net Margin 2.0% 2.5% 3.7% 2.0% FCF -998-3,969-1,115-2,257 Cloudy, still with chances of rain ahead. The company has properly addressed additional reserves in the loan portfolio outside Banco Famsa. However, we still have little visibility in what we continue to see as GFAMSA s main risk: no FCF generation, and dependence on external funding (ex-deposits) for a relevant portion of the portfolio. Mandated by auditors, higher provisions ahead. As mentioned before, the requirement by auditors to properly recognize the inherent risk of the off-baf portfolio translated into a one-time buildup of provisions for this portfolio (as required by IFRS). Before the requirement, the portfolio outside the bank (consumer loans and bank-to-retail loan transfers) had an average credit risk cost of 9.0%, according to our figures. Now, after the recognition of higher provisions, said ratio rose to over 40%. As the company will continue to perform the bank-to-retail portfolio transfers, we estimate the consolidated allowances for loan losses ratio should normalize at around 10% (vs. 6% previously, where the off-baf portfolio was under-provisioned). The net effect of this could pressure EBITDA figures going forward (larger consolidated provision expense). As a result, we are cutting our 2016 EBITDA margin figures by 140 bps, and reducing our 5-year margin estimate from 12.5% to 11.4%. A higher cost of credit risk should slow down portfolio growth (outside Banco Ahorro Famsa). Our main take is that GFAMSA s consolidated portfolio growth should depend on the company s ability to increase deposits to reach a full deposits/loans coverage as there is currently a relevant amount of loans funded externally via debt certificates and bank loans, which causes annual outflows of around P$1 billion, or 50% of EBITDA from working capital. However, the company will continue to perform bank-to-retail transfers ahead, which should become the most relevant growth driver behind the off-baf portfolio in order to sustain the balance sheet i.e. origination should come primarily from BAF, as opposed to what currently happens.
GFAMSA s A/R & Deposits -Figures in Millions of Pesos. Título del gráfico 30,000 2 2 20,000 20,000 1 1 10,000 10,000 0 0 2009 2010 2011 2012 2013 2014 2015 2016 1 2 3 4 5 6 7 8 Rights+Others A/R Deposits A/R (bank) Collection Retail Historically, GFAMSA has had a significant portion of its A/R s not funded by BAF s deposit base. The mismatch traditionally causes P$1 billion of regular working capital needs. Deposits have accelerated lately due to costlier funding reducing the mismatch. After the portfolio write-off, the balance sheet became more symmetric. Going forward, GFAMSA s consolidated portfolio growth should depend on the company s ability to increase deposits. Working Capital vs. Debt -Figures in Millions of Pesos. 0-1,000-2,000-3,000-4,000 - -6,000 Significant consolidated working capital needs have resulted in additional leverage by the company. Said W/K needs are caused mainly by the off-baf loan portfolio s growth. -7,000-8,000-9,000-10,000 2009 2010 2011 2012 2013 2014 2015 2016 Herein lies GFAMSA s main source of risk: large W/K needs, weak to no FCF generation, absorbing the company s liquidity. Working Capital Debt The company has a heavy dependence on external funding sources, especially debt certificates, where a reduced market appetite could ultimately turn into more liquidity pressures. Furthermore, GFAMSA sources some P$2 billion annually from other banks. GFAMSA has a total debt of P$9.8 billion (35% matures in 2016: P$1.2 billion in debt certificates, and P$2.0 billion in commercial loans). Debt profile -Figures in millions of Pesos 4,500 4,000 3,500 3,000 2,500 2,000 52% 48% 1,500 1,000 500 0 2016 2017 2018 2019 2020 MXN USD Bank Debt Certificates.
Latent operating risks still provide downside risks. According to management, Banco Ahorro Famsa will continue to transfer loans to the retail operation in order to sustain BAF s credit risk, and in particular, to provide accounting flexibility to the bank s balance sheet when the portfolio begins to deteriorate (after 10 months). Although the company deems the current portfolio to be well provisioned (discarding further equity impacts), we believe that the transfer strategy still hides an inherent risk in the operation. GFAMSA s Valuation --Figures in Millions of Pesos EBITDA 12M FWD 1,833,929 EV/EBITDA 8.0x EV 14,671,428 (Net Debt 2Q16) 7,985,591 FCF FWD -1,830,379 (Minority Equity) 34,176 PBV 0.53 MARKET CAP. 4,837,358 Shares 561,976 Price $ 8.61. GBM s estimates Financials (P$ Mill) 2015 TTM 2016e 2017e 2018e Operating Data 2015 TTM 2016e 2017e 2018e P&L SSS MX -2.8% 9.7% 8.9% 5.8% 5.0% Revenue 16,605 17,364 18,279 20,033 21,907 SSS US 2.1% -0.8% -3.2% 3.5% 3.5% Var (%) 11.8% 11.1% 10.1% 9.6% 9.4% Gross Profit 7,696 7,948 8,409 9,229 10,354 Gross Mg. 46.3% 45.8% 46.0% 46.1% 47.3% Valuation 2015 TTM 2016e 2017e 2018e Operating Profit 1,331 1,295 1,367 1,540 1,858 EPS 0.28 0.47 0.80 0.71 0.95 Operating Mg. 8.0% 7.5% 7.5% 7.7% 8.5% P/E 27.7x 16.6x 9.8x 11.0x 8.2x EBITDA 1,775 1,739 1,818 1,998 2,362 EV/EBITDA 18.1x 18.6x 18.4x 17.9x 14.2x Var (%) 19.1% 19.7% 2.4% 9.9% 18.2% EV/EBITDA adj. 7.7x 7.2x 6.9x 6.8x 6.4x EBITDA Mg. 10.7% 10.0% 9.9% 10.0% 10.8% P/B 0.5x 0.5x 0.5x 0.5x 0.4x Interest 751 836 893 1,031 1,186 P/Sales 0.3x 0.3x 0.2x 0.2x 0.2x Taxes (42) (284) (109) 90 173 Net Profit 158 264 449 400 533 Return 2015 TTM 2016e 2017e 2018e Var (%) -57.3% -25.8% 183.5% -10.8% 33.1% ROA 0.4% 0.6% 1.1% 1.0% 1.3% Net Mg. 1.0% 1.5% 2.5% 2.0% 2.4% ROE 1.7% 6.2% 9.9% 8.5% 10.7% Balance Sheet ROIC 3.7% 3.6% 3.4% 3.5% 4.0% Cash 2,194 1,695 1,695 1,944 1,944 FCF Yield -111.3% -120.4% -51.5% -18.4% -15.7% Accounts Receivable 23,127 24,020 24,905 27,313 29,859 Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% Inventory 2,453 2,582 2,381 2,984 2,819 Buyback Yield 1.5% 0.6% 0.6% 0.6% 0.6% Fixed Assets 2,065 1,985 4,033 3,417 2,941 Total Assets 40,222 42,733 37,066 40,364 42,575 Leverage 2015 TTM 2016e 2017e 2018e Accounts Payables 2,773 2,549 1,053 3,078 1,124 Debt/Equity 2.1x 1.8x 1.4x 1.8x 1.7x Debt 17,219 15,769 12,255 16,578 17,134 Net Debt/EBITDA 8.5x 8.1x 5.8x 7.3x 6.4x Deposits 14,862 18,385 21,367 22,530 24,659 Interest Coverage 1.8x 1.5x 1.5x 1.5x 1.6x Total Liabilities 32,081 34,154 33,622 39,108 41,793 Equity 8,141 8,579 9,028 9,428 9,961 Turnover (Days of) 2015 TTM 2016e 2017e 2018e FCF Accounts Receivable 505 531 521 475 473 Operating Profit 1,331 1,295 1,367 1,540 1,858 Inventory 95 96 95 93 92 +Depreciation 444 444 451 458 458 Payables 56 55 60 58 59 -Interests 751 836 893 1,031 1,186 Cash Conversion 544 571 556 510 506 -Cash tax 48 56 61 99 107 -Working Capital 787-220 -2,673-1,176-1,164 Liquidity 2015 TTM 2016e 2017e 2018e -CAPEX 396-372 362 498 546 Current Ratio 13.8 16.0 31.4 12.0 35.3 Free Cash Flow -4,877-5,276-2,257-805 -687 Quick Ratio 9.1 10.1 25.3 9.5 28.3
17.0 15.0 13.0 11.0 Stock Price Performance vs Analyst Estimates GFAM SA 16/09/2015 15.50 M arket Outperformer GFAM SA 17/09/2015 15.50 M arket Outperformer GFAM SA 04/04/2016 15.50 M arket Performer GFAM SA 11/05/2016 14.50 M arket Performer GFAM SA 29/07/2016 8.60 M arket Performer 9.0 7.0 5.0 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Price Price Target Important Disclosures: 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 expressing specific recommendations or views in this report. This report has been prepared by GBM and is subject to change without notice. GBM and employees shall have no obligation to update or amend any information contained herein. This report is for informational purposes only, based upon publicly available information, which we believed is reliable, but its accuracy and completeness cannot be guaranteed. GBM makes no express or implied representations or warranties that such information is accurate or complete and, therefore, GBM and employees shall not in any way be liable for related claims. This report does not constitute an offer to buy or sell any security or participate in any trading strategy. The information and analyses contained herein are not intended as tax, legal, or investment advice and 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 herein and should consult their own tax, legal, investment, or other advisors, to determine such suitability. This report may discuss numerous securities, some of which may not be qualified for sale in certain countries or states therein and may therefore not be offered to investors in such countries or states. This report or any portion hereof may not be reproduced, reprinted, sold or distributed without the written consent of GBM.