Latam Consumer Monthly:Back to choppy waters (May 2017)

Sector performance mixed, with little support from earningsIn April 46% of our covered stocks showed positive returns (50% outperformedtheir respective indices). Brazilian retailers HGTX3, PCAR4 and BTOW3 led theway this time, but select Food and Beverage names (e.g., AC) also rallied.

    Notable decliners included Chilean retailers CEN and FAL as well as bakinggiants BIMBOA and GRUMAB. Year to date, Latam Food stocks are trailingtheir respective country indices by 16% on average, while the Beverage, Retailand HPC sectors are now outperforming (by 2%, 5% and 11% respectively).

    1Q17 earnings almost done, and generally disappointingMost of our covered companies have now reported 1Q17 earnings which havegenerally fallen short of market expectations. For the group as a whole (on anequal-weighted basis), results were in line with Bloomberg consensus only atthe Net Income line, while revenue/EBITDA missed by 3% and 9% respectively.

    On a weighted-average basis, revenues fell short by 6% and EBITDA/EPS camein 15% and 4% (respectively) below Street expectations as of 1Q17’s close.

    The percentage of companies that beat consensus EBITDA was 24% (with only20% surprising by over 5%), the same as the percentage that beat EPS (24%,with 14% beating by over 5%).

    Brazil proteins operationally back to normalOn the back of the Carne Fraca scandal that broke in late March, April SECEXdata showed a pork export volume decline of 15.8% on still-difficult (+47%)year-on-year comparisons, while beef volumes fell 19% (and with much easiercomparisons: +4% in April 2016). But pork and beef pricing remained strong,rising (yoy) for the seventh time in 28 months, and at sustained rates (43.6%and 6.4%, respectively). Poultry volumes fell 22.9% on tougher (+26%) comps,but again with rising prices (up 17.8% yoy, the eighth consecutive increase in28 months). Despite the negative impact on volumes, all producers appear tobe back to normal operation in May, with no lasting damage to their exportbusiness from the Federal Police probe.

    Latam Coke system consolidation still in low gear, but Coke FEMSA’s decisionto pass on US refranchising could signal more M&A in Latam or AsiaIn this issue, we have updated our Coca-Cola bottling system maps for LatinAmerica with 2016 volume information: based on Coca-Cola Company filingsfor the overall country totals and on the annual reports of publicly-tradedcompanies for individual franchise territories (or DB estimates for privately-heldbottlers). There was only one M&A deal in 2016 (KOF’s acquisition of Vonpar inBrazil), and after KOF’s decision not to acquire territories in the US we believethe company may turn its strategic attention to potentially expanding in Asia inthe medium-to-long term and pursue bolt-on deals in Latin America in theshort-to-medium term.