2023-11-03 11:30:00 ET
Summary
- Alfa is a conglomerate simplifying into a single-line business, with its main focus on the branded food business Sigma.
- The decline in Alfa's cyclical Alpek business has caused a decline in its stock price.
- Alfa's stock is trading at a lower value than the estimated value of just the Sigma business, making it an attractive investment opportunity.
The following segment was excerpted from this fund letter.
Alfa S.A.B. de C.V. ( OTCPK:ALFFF )
We increased Alfa ( OTCPK:ALFFF ) from a Small to a Medium position size.
Alfa is a conglomerate that is in the process of simplifying into a simple single-line business via divestitures of its other holdings. The remaining business is intended to be Sigma, which is a branded food business focusing on meats and yogurt with strong competitive positions in Mexico, U.S. and the EU. The sole other non-core business that is still part of the portfolio is Alpek, which is a commodity chemical company.
Alfa’s stock declined, driven in large part by the decline in its cyclical Alpek business. That business is deeply cyclical, and its stock, which trades independently under the ticker ALPEKA MM, is now priced at a greater than 20% Free Cash Flow yield based on historical full-cycle results. There are no material secular issues that I am aware of.
Alfa’s share price reached a level where the stock was trading at less than my estimate of the value of just the Sigma business. On the value of the whole enterprise the stock was trading at less than 50% of my base case value estimate with modest downside to my worst case.
While management is progressing towards simplifying the business slower than I, and I suspect other shareholders, would like I judge them to be competent and honest. The remaining business is of above-average quality with a small competitive advantage due to brands and distribution. This combination of facts merited the increase from a small to a medium position size.
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Silver Ring Value Partners - Alfa S.A.B. De C.V: Trading At Less Than 50% Of My Base Case Value