INTERNATIONAL BONDS GRUPO FAMSA RETAIL Instrument Currency Coupon (%) Maturity Original (USDm) Amount outstanding (USDm) Price Yield (%) Z-spread (bps) Rating: M/S&P/F 22 Sr. Unsecured USD 7. 1-Jun-22 14 1.92 6.8 48 NR / B / B- as of 2 November 217. GRUPO FAMSA 3Q17 UPDATE: ASSET MONETIZATION MIGHT BE GOING BETTER THAN EXPECTED HIGHLIGHTS FOR 3Q17 Grupo Famsa (Famsa) recorded EBITDA of MXN 366m during 3Q17, a decline of.9% year-over-year from MXN 389m. The company s US subsidiary, which exhibited EBITDA of MXN -2m, falling YoY from a positive EBITDA of MXN 29m, served as the driver (See Figure 1). This was consistent with the 28.7% YoY decline in same store sales (SSS) for 3Q17, and the 26% decline for 9M17 (See Figure 2). Additionally, the two stores Famsa closed during 3Q17 represented 31% of its floor space as of 2Q17, and were probably the two largest stores it had in the US. As a result, going forward, aside from the SSS dynamic, the decline in overall sales will probably accelerate in the short term. The operations in Mexico, however, yielded a nice surprise, as SSS and sales overall increased by 7.2% and 8%, respectively, despite a real wage decrease during all of 217, given that Famsa usually targets a lower-income segment. Banco Famsa s growing payroll-deductible loan portfolio (which increased by MXN 3m) and continuously declining US sales, as well as jumps in the Mexican benchmark interest rates, have combined to level the composition of revenues towards a / division between commercial operations and interest income. During 3Q17, commercial income was 3% of overall revenue, while interest income was 47%, consistent with the last 12 months (See Figure 3). However, the period of 4Q16-3Q17 marked a significant change from previous quarters, when the closest to / had been 66% from commercial and 34% from interest in both 1Q16 and 3Q16. For the quarter, gross and net loans were MXN 31.9bn and MXN 28.6bn, respectively, increasing 3.8% and 4.% QoQ (See Figure 4 - Figure ). The gross loan portfolio increased in Mexico (.2% for loans to individuals and.7% for commercial), more than offsetting the 11.6% decline in individual loans in the US. The net loan portfolio for individuals in Mexico increased 4.6%, as the company increased the level of provisions to 11.2% from 1.6% in 2Q17. This appeared to break a trend of at least four years, during which provisions for the third quarter of the year were below provisions for the second quarter, only to increase substantially during the final quarter. We hope the company will become more conservative throughout the year, and not only at year-end with the audited financials. Interestingly, for its commercial portfolio, Famsa slashed provisions to only MXN 4m, or.1%, from MXN 89m in the previous quarter. Over the same time period, the allowance for loan losses ended in 3Q17 at 1.4%, a decline from 11%, driven by the commercial portfolio as well as a decrease in loans to individuals in the US to 2.4% from 27%, as lower sales and writeoffs gradually reduced the gross portfolio (See Figure 6). ASSET MONETIZATION: MARKET VALUE > BOOK VALUE Famsa announced the sale of five properties for a total of MXN 63m, and management said collection of the proceeds would take place between November and December of this year. Additionally, the company expects to close the sale of another five properties for MXN 6m, bringing total sales for 2H17 to 1 properties for MXN 1,23m, and 2 properties for MXN 2,7m in 217 overall. The 1 properties are part of a group of 17 that Famsa planned to sell during 2H17 for MXN 1,1m resulting in a positive surprise that the market values of some of these properties have been above book value. Assuming the average value of the seven unsold properties remains at MXN 64.7m, as we calculated in 2Q17, and the remaining properties can be sold at book value, the total value of the properties could be MXN,674m, exceeding the shareholders contribution of MXN,91m (See Table 1-Table 3). INDEBTEDNESS Famsa s loan from Bancomext may have been a turning point, as it has changed USD 11m in debt into MXN overnight, for a longer tenor and at a lower rate. Among the highlights, long-term time deposits, mostly from retail investors, more than doubled to MXN 6.6bn from MXN 3bn on a QoQ basis, and now the 22s total MXN 2.bn and represent less than 8% of Famsa s funding. But the main change was a QoQ increase in bank debt, driven by the Bancomext loan, which matures in 224, although it has maturities starting in 219. Including Banco Famsa s liabilities, Famsa s short-term debt (excluding accrued interests) was MXN 2.4bn, in which MXN LATIN AMERICA CREDIT RESEARCH RECENT DEBTWIRE COVERAGE Jonathan Szwarc, CFA Senior Credit Analyst +1 212-74-7873 jonathan.szwarc@acuris.com Famsa expects to hedge bond coupons by year-end; NPLs to fall (27-Oct-217) Mexican USD borrowers benefit from Bancomext program to reduce FX risk (6-Sep-217) RESEARCH: Grupo Famsa 2Q17 Update Loan from Mexican BNDES-like bank lifts bonds by 1 points (4 -Aug-217) Credit Update DW-LA 2 November 217 Page 1
FIGURE 1: EBITDA (MXN m) FIGURE 2: SAME STORE SALES (%) 6 4 3 2 1 (1) (2) Other 47 Mexico 34 419 419 4 416 42 389 44 48 2 37 366 428 379 368 34 49 428 386 391 (4) () (116) (28) (11) (9) (1) (2) () USA 4 Q 1 1 Q 1 6 2 Q 1 6 3 Q 1 6 4 Q 1 6 1 Q 1 7 2 Q 1 7 3 Q 1 7 1% 1% % % (%) (1%) (1%) (2%) (%) (3%) (3%) 7.2% Famsa MX Famsa US (28.7%) FIGURE 3: REVENUE BREAKDOWN (%) FIGURE 4: GROSS LOAN PORTFOLIO (MXN bn) 1% 8% 6% Income from commercial operations Income from financial operations 23% 34% 3% 34% 44% 48% 46% 47% 3 3 2 Individuals MX Commercial MX Individuals US 28.2 29.4 29.9 3.8 31.9 2.4.2 26.2 26.7 3.3 3. 3. 2.8 4.4 4.1 4.3 3.7 4. 3.8 4.1 4.1 3. 2.9 3.2 4% 2% 77% 66% 7% 66% 6% 2% 4% 3% 1 1 18.1 18.9 19.9 2.9 22.2 22.8 23.9.1 % 4 Q 1 1 Q 1 6 2 Q 1 6 3 Q16 4 Q16 1 Q17 2 Q 1 7 3 Q 1 7 FIGURE : NET LOAN PORTFOLIO (MXN bn) FIGURE 6: ALLOWANCE FOR LOAN LOSSES (%) 3 3 2 1 1 Individuals MX Commercial MX Individuals US.8.9 26.6 27.4 28.6 2.9 2.6 2.2 2. 1.9 22.6 23.7 24.3 4. 4.2 3.6 3.9 3.7 4. 4. 4.4 2.6 2.6 2.8 16. 16.9 18. 19. 19.6 2.4 21.3 22.3 3% % 2% 1% 1% % % Individuals US 11.% Individuals MX 1.6% Commercial MX 2.2% 27.4% 2.4% 11.2% 1.4%.1% Credit Update DW-LA 2 November 217 Page 2
TABLE 1: AS OF 1Q17 CONFERENCE CALL TABLE 2: AS OF2Q17 CONFERENCE CALL TABLE 3: AS OF 3Q17 CONFERENCE CALL Avg. price per property Avg. price per property Avg. price per property Sold 1Q17 (1) MXN 827m MXN 82.7m Sold 1Q17 (1) MXN 827m MXN 82.7m Sold 1Q17 (1) MXN 827m MXN 82.7m In the process of being sold () MXN 2,8m MXN 9.3m In the process of being sold (17) To be sold hopefully in 218 (8) MXN 1,1m MXN 64.7m MXN 1,18m MXN 144.8m Sold 3Q17 () MXN 63m MXN 126.m To be sold 4Q17 () To be sold hopefully in 218 (1) MXN 6m MXN 12.m MXN 1,611 MXN 17.4m Contributed (2) MXN 2,6m MXN 1.3m () MXN,91m MXN 92.6m Contributed (2) MXN 2,6m MXN 1.3m () MXN,91m MXN 92.6m Contributed (2) MXN 2,6m MXN 1.3m () MXN,674m MXN 13.2m 17.9bn corresponded to Banco Famsa, while the remaining MXN 2.4bn was at the group level, corresponding to MXN 1.4bn in domestic bond issuances and MXN 1bn in bank debt. With the proceeds from the asset sales, the company will primarily seek to replace domestic issuance, according to Famsa s COO. We must remember that out of the remaining MXN 4.9bn in bank debt, the loan from Bancomext represents MXN 2.6bn (3%), which Famsa will probably not rush to prepay, but will simply comply with the amortization schedule (See Figure 7). Although not a game-changer, in an effort to continue reducing the exposure to fx, Famsa intends to hedge the December 217 and June 218 coupon payments on the 22s, while evaluating whether to hedge the entire principal. TRADING: Z-SPREAD CLOSE TO RECORD LOW Famsa s 22 bonds trade at a Z-spread of 48bps, and at a spread to sovereign (Mexico 221) of 47bps (See Figure 8 - Figure 9). FIGURE 8: 223s SPREAD TO SOVEREIGN (MEXICO 223) (bps) 2, 1,9 1,8 1,7 1,6 1,74 1, 1,4 1,3 1,2 1,14 1,1 1, 9 8 7 6 716 48 4 Nov-16 Dec-16 Jan-17 Mar-17 May-17 Jun-17 Jul-17 Sep-17 Oct-17 FIGURE 7: INDEBTDENESS AMORTIZATION SCHEDULE (MXN bn) FIGURE 8: 223s SPREAD TO SOVEREIGN (MEXICO 223) (bps) 2 1 1 2.4 17.9 Local issuances (MXN) 7. Banco Famsa (MXN) 22 bond Bank debt (MXN & USD) 2.9 2. 6.6.4.2 1.4 2. 1. 2..4.4.4.2 < 1 1< <2 2< <3 3< <4 4< < + YEARS 1,9 1,8 1,7 1,6 1, 1,484 1,4 1,3 1,2 1,86 1,1 1, 9 8 7 6 688 47 4 3 Nov-16 Dec-16 Jan-17 Mar-17 May-17 Jun-17 Jul-17 Sep-17 Oct-17 Credit Update DW-LA 2 November 217 Page 3
FINANCIAL SUMMARY (MXN m) GRUPO FAMSA RETAIL FY1 FY16 LTM 3Q16 LTM 3Q17 Δ % (LTM 3Q16 LTM 3Q17) Δ % (3Q16 3Q17 ) revenue 16,377 18,39 17,32 17,764.1% 4,7 3,84 4,311 4,1,391 3,979 4,268 4, 3.2% Retail sales 11,784 11,318 11,963 9,624 (19.6%) 3,663 2,37 3,33 2,73 2,89 2,1 2,36 2,248 (17.7%) Interest on loans 4,821 6,72,296 8,641 63.2% 1,32 1,33 1,278 1,39 2,744 1,928 1,962 2,7 43.9% Cost of sales (8,68) (9,867) (8,396) (9,928) 18.3% (1,968) (1,968) (2,299) (2,16) (3,89) (2,74) (2,386) (2,379) 1.1% Selling and administrative expenses (,991) (6,977) (6,449) (6,937) 7.6% (1,392) (1,66) (1,742) (1,79) (1,82) (1,63) (1,666) (1,81) 6.2% Operational expenses (,446) (6,6) (6,22) (6,624) 1.% (1,28) (1,478) (1,6) (1,61) (1,823) (1,26) (1,61) (1,714) 6.% Depreciation and amortization (46) (417) (427) (413) (3.3%) (17) (128) (92) (99) (97) (19) (16) (11) 1.7% Other income (net) 61 111 12 29 14.% 26 6 34 () 37 4 24.3% Financial expense (net) (1,213) (1,9) (1,3) (2) (48.2%) (27) (167) (36) (26) (362) 82 () (18) (28.9%) Income tax 237 298 292 6 (77.8%) 21 34 141 9 27 (64) 166 (6) Net income 1,44 488 1,96 76 (2.1%) 1,11 18 162 1 43 326 38 1 (88.%) asset 4,222 42,49 44,43 4,132 1.6% 4,222 41,47 42,733 44,43 42,49 42,146 43,924 4,132 Current assets 28,336 3,4 34,489 32,793 (4.9%) 28,336 28,733 33,43 34,489 3,4 29,736 31,291 32,793 Cash 2,194 1,4 1,786 1,822 2.% 2,194 1,178 1,69 1,786 1,4 1,7 1,86 1,822 Credit portfolio (net) 2,89 22,773 22,418,339 13.% 2,89 21,79 21,461 22,418 22,773 23,319 24,41,339 Recoverable taxes 94 62 639 63 2.1% 94 916 641 639 62 3 94 63 Inventories 2,43 2,4 2,733 2,476 (9.4%) 2,43 2,727 2,82 2,733 2,4 2,381 2,492 2,476 Rights to collect from related parties 8 4,812 261 (94.6%) 4,812 8 1,888 181 261 Non-current assets 11,887 12,486 9,941 12,339 24.1% 11,887 12,736 9,299 9,941 12,486 12,41 12,633 12,339 Credit portfolio (net) 1,716 3,12 3,382 3,271 (3.3%) 1,716 1,87 2,83 3,382 3,12 3,261 3,339 3,271 Rights to collect from related parties 4,33 4,1 4,1 4,33 4,626 4,719 4,1 3,1 4,1 4,1 Goodwill, intangibles 277 243 337 32.% 277 266 243 243 33 337 Deferred income tax 2,196 1,69 2,943 1,678 (43.%) 2,196 2,711 2,81 2,943 1,69 1,64 1,716 1,678 liabilities 32,81 34,17 3,641 36,279 1.8% 32,81 33,17 34,14 3,641 34,17 33,62 3,17 36,279 Current liabilities 21,712 24,172 24,11 23,4 (2.3%) 21,712 21,14 22,272 24,11 24,172 24,663 26,1 23,4 Demand deposits 14,479 17,274 17,3 17,9.2% 14,479 14,13 1,38 17,3 17,274 18,29 2,318 17,9 Short-term debt 4,19 4,26 4, 3,12 (28.4%) 4,19 3,379 4,124 4, 4,26 3,62 3,72 3,12 Suppliers 1,628 1,373 1,261 1,13 (12.%) 1,628 1,667 1,28 1,261 1,373 1,238 1,396 1,13 Non-current liabilities 1,369 1,3 11,4 12,734 1.3% 1,369 12,66 11,882 11,4 1,3 9,19 8,66 12,734 Demand deposits 3,88 3,789 4,13 6,66 9.% 3,88 4,98 4,37 4,13 3,789 3,146 2,977 6,66 Long-term debt 4,911,97,47,89 7.9% 4,911,99,7,47,97,613,32,89 Shareholders equity 8,141 8,31 8,74 8,83 1.1% 8,141 8,299 8,79 8,74 8,31 8,493 8,818 8,83 Adj. EBITDA 1,67 1,72 1,81 1,632 3.2% 34 419 419 389 47 416 37 366 (.9%) Provisions (%) 1.4% 12.% 8.6% 1.4% 17 bps 1.4% 9.6% 9.% 8.6% 12.% 11.1% 11.% 1.4% Credit Update DW-LA 2 November 217 Page 4
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