IDBHF - Industrias Bachoco Is Holding Strong But Slight Pressure Coming

2023-03-21 07:30:00 ET

Summary

• Minimum wage changes and other worker rights legislation doesn't hit Bachoco much, but the situation around grain prices and dislocation in Ukraine remains a problem.
• Gross profits are falling as revenues hit slight bumps.
• The business should be pretty recession resistant, and substitution effects have probably helped the volumes stay strong and should continue to do so.
• Moreover, there is the looming issue that the rest of the shares will be bought on tender offer by the controlling family, which is a good thing for non-controlling holders.
• But even considering the possible quick payday, the substantial run-up since our last coverage means we're not biting at the current valuation.

Published on the Value Lab 03/18/23

Industrias Bachoco ( IBA ) is substantially a poultry play. They've been hit by higher grain prices due to the Ukraine invasion that effects the cost of meal, which is huge in their cost structure. Strength of the MXP was helpful, and ultimately they were anyway able to pass through costs, but as a commodity they weren't able to go further than to maintain unit margins and unit profits in the Q4. Slight volume declines hit the gross profits, which demonstrates resilience but also raises concerns around the next leg of the recession.

Ultimately, the company is solid, and the low multiple seems to fairly reflect the company's commodity status but not the state of its markets, which are necessities. Moreover, the controlling family is still working at tendering enough shares to go private. It's speculation as to whether they will do that at a higher price than today's, but they likely will since the savings from not being a public company will probably add substantially to a compressed operating income net income margin, likely by between 1-2% which is very meaningful considering operating margins are at around 2%.

Quick Note on Q4 Results

The volumes were flattish to slightly declining, and their COGS ran up a little more intensely than their prices leading to slight GM crimp and very minimal gross profit declines.

SG&A costs were up 10%, and the operating income was compressed quite meaningfully by that, bringing down operating margins substantially to 1.3% from 2.4% in Q4 2021.

For the FY results, all metrics are up, including gross profits, as the company got ahead of raw material issues earlier in the year, where catch-up eventually happened as prices to the consumers rationalised.

These effects shouldn't be particularly surprising. The company has been under pressure all year from the fact that a grain-rich Ukraine has become a dislocated part of the supply, and meal prices have come up. Grain meal for poultry inflated to explain the majority of the troubles in growing the gross profits in the latest quarter, which is probably a good barometer to assess the outlook for the company, but there are seasonality effects so don't go annualising Q4 data.

SG&A also inflated by 10%, consistent with an average inflation between Mexico and the US, and this caused the most substantial declines in profitability, where gross profits managed to remain flat.

Things could have been worse though . Bachoco pays well above minimum wage, which was upped substantially in Mexico with newly passed legislation, and therefore was unaffected.

Outlook

The company is probably going to still be the target of tender offers by the controlling family, which owns almost 90% of the stock. The reason is the costs of being public likely compress incomes quite substantially. A 1-2% rise operating income margin is feasible, where current operating income margins are below 2%. This could double profits. Moreover, it's not a bad investment by the controlling family, and neither is it for the average non-controlling investor. Inflation has likely meant substitution into cheaper proteins, and food in general is a resilient category. Volumes have held up for the Q4, and the company should continue to demonstrate a strong performance. A tender offer will require some sort of premium, so shareholders could turn a quick buck.

The PE seems to be around 10x on a run-rate basis, where net income should come down to 2021 levels as some of the catch-up takes hold of inflation. 10x is a decent price, but it's normal for commodified exposures. At least poultry is recession resistant, volumes shouldn't take too big of a hit. Also, there continues to be major benefits to a take private, and shareholders could turn a quick buck. However, there are still cheaper ideas out there, and while acquisition by the controlling interest is a reasonable possibility, there are less speculative things out there with similar recession resistance, higher dividends and lower prices. IBA is among the more interesting plays right now, because earnings yield is likely to not have to compete with as high rates and can maintain yields thanks to resilience, but we still pass as we take a hyper-selective stance in a difficult market with a lot of unknown unknowns. Bachoco economics are solid in volumes, but razor thin margins means the economics aren't that great, and earnings are pretty volatile due to the sensitivity to the fixed cost structure.

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