Latam Consumer Monthly:Summer doldrums (July 2017)

Sector performance in June was again mixed.

    In July, 50% of our covered stocks showed positive returns while 43%outperformed their respective indices (in other words, the May trend continuedin June). Protein producers BEEF3 and MRFG3 again led the way (up 11% and6%, respectively), joined by BIMBOA (up 7%), bottler KOF (up 6%) and parentFMX (up 5%). Notable decliners included Brazilian retailers BTOW3, HGTX3and PCAR4 (down 11%, 10%, and 8%), but the steepest sell-offs belonged toBRFS and JBSS3 (down 15% and 13%). Year to date, Latam Food and Retailstocks are trailing their respective country indices by 18% and 1% on average,while Beverages are outperforming by 4% (HPC stocks are roughly in-line).

    2Q17 earnings season unlikely to provide strong surprises/catalysts….

    With the 2Q17 earnings season set to begin later this week, we do not expectstrong surprises from Latin consumer companies in general (although for thosewith first-time consolidation of recent acquisitions, such as Arca’s Texas deal,visibility is usually lower). The timing of economic recovery throughout theregion remains uncertain (especially with presidential elections in Mexico,Brazil, Chile and Colombia looming), and most companies have been facingearnings headwinds that will still likely impact their 2Q17 results. In our view,surprises will more likely come from conference calls.

    …but management comments could help in turning market attention to 2018(we highlight three examples here).

    With the recent sharp declines in world sugar (while Mexico prices remainhigh), we expect slightly underperforming Coca-Cola Andina’s management toremind investors that it stands to benefit when current hedges expire (and thatincipient economic recoveries in its territories should drive volume recovery).

    On the other hand, the two Mexico-based Coke bottlers will face high 2018expectations, which in our view will be harder to fulfill in light of strong stockperformance this year (AC.MX has outperformed the Bolsa index by 19% yearto date, and KOF.N has outperformed by 8%). Another example is Kimberly-Clark de Mexico, which has underperformed the Bolsa index by 7% (despitebeing the most geared to a strong MXN in our coverage universe) on the backof dollar pulp price increases: management’s outlook for this and other dollarinput costs in 2018 should provide important clues for earnings growth(assuming that the MXN remains near its recent range). Finally, GRUMAB’sturnaround (after recent margin declines in its core US unit) should hinge onupdated management margin guidance (for 2017 and 2018).

    Brazil protein export trends continued to improve reversing Carne Fraca impact.

    The negative impact of the Carne Fraca scandal that broke in late March isnow reversing. June SECEX data showed a pork export volume increase of1.3% (on still difficult +31% year-on-year comparisons) after three consecutivemonths of decline, while beef volume also showed a modest increase (2.9%,after four consecutive declines and on a moderately tough comparison (7.6%in June 2016). In addition, pork and beef pricing remained strong, rising (yoy)for the ninth time in 30 months, and at sustained rates (23.7% and 7.3%,respectively). On the other hand, poultry volumes fell 10.9% on much easiercomps (+3.9% in June 2016), and with prices rising at decreasing rates (up4.0% yoy after five months averaging 18%).