IBA - Bachoco Looks Cheap And Another Tender Offer Might Be On The Way

Summary

• The company has over $1 billion in cash and is trading at below 7.5x forward price to earnings.
• In 2022, the founding family launched a tender offer for the 26.75% they didn’t own, with the idea of delisting Bachoco from both the Mexican and New York stock exchanges.
• However, the founders increased their stake to just 87.77%, which is nowhere near enough to delist the company.
• In my view, there’s another tender offer on the way, and this one is likely to include a higher price.
• However, any negative events are likely to lead to high share price volatility due to the low liquidity, and I think that it could be best for risk-averse investors to avoid this stock.

Introduction

I've mentioned in several articles on SA that I work as an M&A analyst covering Latin America, and I've written about some companies from the region, e.g. Betterware de Mexico ( BWMX ) here . One thing that stands out about the Mexican stock market is that local companies prefer to list in the USA, as the valuations they get on home soil are often low and there is limited liquidity. This also applies to many other Latin American countries, but it seems more pronounced in Mexico, where several companies have been talking about delisting over the past year. There hasn’t been a single IPO on the Mexican stock exchange since 2017. In my view, this opens up some interesting opportunities, and today I want to talk about poultry producer Industrias Bachoco (IBA).

Overview of the business and financials

Industrias Bachoco is involved in breeding, processing, and marketing chicken, eggs, swine, and balanced animal feed and has over 1,000 facilities and more than 32,000 employees. It’s a vertically integrated company focused on Mexico and the USA, and its subsidiaries include SASA, RYC Alimentos, and OK Foods among others. While around 85% of revenues come from poultry and eggs, Bachoco has been shifting its business to become a multi-protein producer and on December 2, it revealed that it’s buying Mexican pork company Norson which exports its products to the USA, Japan, China, and Korea among others. Bachoco is also involved in the production of animal feed through CAMPI and vaccines and pharmaceuticals for veterinary use through Pecuarius.

Turning our attention to the financial performance of the business, I think that Q3 2022 results were solid as net sales came in at $1.22 billion while net income rose to $47.8 million. Yeah, it's not a high-margin business (net margin of just 4% as the products are pretty much commodities) but the consumer staples sector tends to perform well during recessions. There is some seasonality in Bachoco’s business, with margins typically being higher during the first half of the year compared to the third quarter due to lower demand in the Mexican poultry market. In addition, the Q3 2022 margins were negatively affected by high corn and soybean meal prices, which were about 20% above the levels from a year earlier. Yet, this was compensated for by higher selling prices thanks to an improvement in the product mix.

Bachoco has a conservative management team and aims to grow at a regular rate of about 6% per year through market expansion as well as small acquisitions. In my view, what makes the company stand out is its strong balance sheet, and more specifically, its cash pile. As of September 2022, Bachoco had just over $1 billion in cash, as net cash flow from operating activities for the first nine months of the year stood at $221.3 million. As fellow SA contributor Tomas Andrade Campanini said in January 2022 , Bachoco has had a large cash position since 2014 and the company could be waiting for a downturn cycle in the industry to carry out larger acquisitions.

Bachoco has a total of 600 million shares outstanding, with each ADR listed on the NYSE being equal to 12 shares. This gives the company a market capitalization of $2.52 billion as of the time of writing, while the enterprise value stands at just $1.71 billion. And if you think this valuation is low, you are not alone as the founders, the Robinson Bours family, decided in March 2022 to launch a tender offer for the 26.75% they didn’t own with the idea of delisting Bachoco from both the Mexican and New York stock exchanges. There were protests from minority shareholders that the offered price was too low. The tender offer ended in November, and the Robinson Bours family bought a total of 86,589,532 shares at $4.06 per share and now the offeror, including affiliates and related parties, owns around 87.77% of Bachoco's share capital. However, companies need the holders of at least 95% of shares to approve a delisting from the Mexican stock exchange, which is why Bachoco remains listed today. In my view, the launch of another tender offer is likely to take place in 2023, and I expect a share price premium of at least 10%. Even if a new tender offer doesn’t materialize, I think that Bachoco seems like a good investment for these turbulent times and the dividend rate is decent. At the moment, the dividend yield stands at 1.9% .

Besides the lack of a new tender offer, I think that another risk here is the low liquidity, as the daily trading volume on the NYSE rarely surpasses 10,000 ADR. This means that any major negative news, e.g. bird flu, in Mexico is likely to lead to a significant decline in the share price.

Investor takeaway

Bachoco has become a major player in the Americas poultry market, and I think it looks cheap considering it’s trading at below 7.5x forward price to earnings and has over $1 billion in cash. The founding family launched a tender offer in 2022 with the aim of delisting the company but failed to acquire enough shares, and it’s unlikely they’ve given up on this plan. I think there’s another tender offer on the way, and this one is likely to include a higher price.

Unfortunately, liquidity is quite low and there are no options available for Bachoco. While the share prices of consumer staples companies tend to perform well during recessions, any negative events are likely to lead to high share price volatility due to the low liquidity and I think that it could be best for risk-averse investors to avoid this stock.

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