All Mexican stocks part 2: first potential diamond

Continuing on the hunt for stocks in Mexico I come accross the first interesting candidate.

This blog is part of a series. I will discuss the next stocks listed on the Bolsa Mexicana. If you wonder why I’m interested in the Mexican stock market please read my first article on Mexican stocks.

1. Grupo Ollamani: Recently spun off from Grupo Televisa. Market cap 5.5B pesos, net profit last year of 424M pesos, and shareholders equity of 8.6B pesos.
   
   Ollamani SAB is involved in soccer, gambling, and publication. Most important are: Aguilas Club - a professional soccer team, Aztec stadium, and PlayCity - gambling and raffle brands in Mexico.
   
   Stock is not expensive, but have little knowledge about the Mexican gambling scene. Sports clubs are usually not a great business outside the US, given that there is no salary cap.

1. Aleatica SAB: Market cap 60.6B pesos, net income 716M pesos.
   Active in the management of transportation and airport infrastructure. The Company’s concessions portfolio comprises a number of toll roads, which interconnect the urban zones of the Federal District and the states of Mexico and Puebla. Furthermore, it is also involved in the integral management of Toluca International Airport.
   
   While infrastructure might be interesting I don’t like the significant and growing debt load of 46B pesos. In addition to this the results during Covid-19 show losses. This combined with the current high valuation do not make me interested.

2. Alfa SAB: Market cap 61.3B pesos, loss of 10.9B pesos. 2022 was a great year with 11.7B profit.
   Portfolio includes:

   1. Sigma, a producer, marketer and distributor of foods under a number of brands. Alpek, a producer of polyester, namely purified terephthalic acid (PTA), polyethylene terephthalate (PET) and fibers.

   2. Nemak, is a provider of lightweighting solutions for automotive industry and specialized in the development and manufacturing of aluminum components for powertrain and body structure.

   3. Axtel, a provider of information technology and communication services for enterprises, government and residential markets through its Alestra and Axtel brands.

   4. Newpek is an oil and gas exploration and production company with operations in Mexico and the United States.

   This combination of assets does not look synergistic to me. In combination with debt and losses in the current year leads to next.
   

3. Alpek SAB: market cap 26.6B pesos, Loss of 10.9B pesos, and 25.2B net tangible equity. The Company's activities are divided into two business segments: Polyester and Plastics & Chemicals.
   
   Not interested in a cyclical company that produces these kinds of losses in a downturn. The company has significant leverage. Chemical are globally struggling, but hard to get sufficient confidence in this Mexican company.
   

4. Alsea: Market cap 57.8B pesos and 2.1B pesos net profit.
   Main activity is the operation of franchises. Main ones are Starbucks, Domino’s Pizza, and Burger King. 23% is franchised and 77% corporate. 53% of the revenue comes from Mexico, 31% out of Europe, and 16% South America. Company is showing consistent growth.
   
   I would rather own Starbucks or Domino’s than the franchise from them (not a great fan of the China exposure of Starbucks though). I understand that the current situation is beneficial for both. Plus there is a nice growth runway and this stock fits well within the thesis to benefit from wealthier Mexican consumers. If you have sufficient confidence in this thesis and that Alsea will continue to grow this might be a stock you can hold for the long term. The Restaurant business is very competitive and I do not have enough local knowledge to judge. Ian Bezek has written extensively on Alsea before the stock run-up. The current valuation is too expensive for my taste.

5. Consorcio Ara: Market cap 4.1B pesos and 669M pesos net profit in 2023. Ara also bought back 1.1% of the shares outstanding in 2023.
   The company is active in construction and focuses primarily on the development of housing and shopping centres. The company has been profitable during Covid-19 and has afterwards shown clear positive earnings growth.
   
   Three years ago Aaron already clearly showed the potential of Consorcio Ara. While Ian took the other side of the trade warning on potential overvaluation of the assets and poor historic share price performance.
   
   Since then the performance of Consorcio Ara has been disappointing.

   

   
   The market has not been willing to reward Consorcio Ara with a higher multiple. Higher profits have not translated into a higher share price. Underlying there still is value in Consorcio Ara.

   1. The balance sheet is very strong for a construction company with an A+ rating. Net debt is only 358M pesos

   2. Tangible book value is 15.0B pesos. Which means you can get the assets cheaply at a market cap of 4.1B.

   3. Operating profit in 2023 was 729M pesos and 303M of this operating profit was more stable rent from shopping malls
      
      In my view there is just one reason holding the share price back.

      Management: Management recently cut the dividend to 0. The company only wants to pay dividends from free cash flow. This makes some sense, but in this case not too much. The company was hit by hurricane Otis, but operating results are still good. The main reason free cash flow took a hit was major investments in the land bank. Cutting the dividend to 0 is not a good sign for investors who bought shares in a company with an A+ credit rating.
      
      Ian was right in his assessment that a significant part of the land bank might not be developed anytime soon. As an investor I don’t want to see this company make new significant investments in a land bank, given that they historically have not made great decisions in buying it.

      
      I see hidden value in the shopping malls (more than other investors blogging about it). I believe the enormous landbank has some value. Investors are getting it at a significant discount. My main worry though is that it is difficult to get the value out.
      
      I also own stock in a similar case in Canada (Alberta). Melcor Developments is also a very cheap company with significant land and real estate holdings. In that case, I have more trust in management and the long-term track record is better. At Melcor there is more focus on unlocking value of the land holdings. I might write on Melcor another time. You can read this great blog of Olivier, which lays out the thesis for Melcor Development nicely.

Conclusion

Consorcio Ara and Alsea might be interesting companies to add to one’s portfolio. Given that I run a relatively concentrated book I’m not buying them myself. Both benefit from a wealthier Mexican consumer and might fit a portfolio focused on this theme.