Tactical Spin-Offs And Sigma's Expansion Into Plant-Based Products Boost Growth And Profitability

Key Takeaways

• The spin-off and simplified corporate structure could enhance valuation, net margins, and operational efficiencies, notably benefiting Sigma's market leadership.
  
• Sigma's revenue growth is driven by strategic acquisitions and diversified income streams, alongside expected EBITDA improvements from operational efficiencies and stable demand.
  
• Complex restructuring and spin-offs may disrupt operations and financials, impacting revenue stability, profitability, and investment-grade ratings amidst economic uncertainties.

Catalysts

Engages in the petrochemical and synthetic fiber and refrigerated food businesses in Mexico.

• The spin-off of Alpek will allow each business unit within ALFA to achieve a fair valuation based on individual merits and potential, which can improve the overall revenue visibility and investor appeal for each entity.
  
• The transition to a simplified corporate structure with focus on individual performance may lead to improved net margins and operational efficiencies, particularly for Sigma as it enhances its market leadership in branded food.
  
• Expected capital increase, driven by oversubscription and strong investor demand, will be utilized to reduce debt, improving net margins and bolstering financial health.
  
• Sigma's expansion through accretive acquisitions and developing new sources of revenue, such as plant-based products, could lead to diversified income streams and revenue growth.
  
• Anticipated improvements in EBITDA guidance for Alpek and Sigma, due to factors such as operational efficiencies and stable demand, are likely to positively impact overall earnings.

Alfa. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alfa. de's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.3% today to 11.3% in 3 years time.
• Analysts expect earnings to reach MX$40.9 billion (and earnings per share of MX$8.47) by about December 2027, up from MX$-9.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.8x on those 2027 earnings, up from -8.6x today. This future PE is lower than the current PE for the MX Industrials industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 4.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.21%, as per the Simply Wall St company report.

Alfa. de Future Earnings Per Share Growth

Risks

• The complex restructuring process and spin-offs could create temporary operational and financial disruptions, impacting revenue stability and operational efficiency during the transition.
  
• ALFA's capital strategy, including the $400 million capital raise to reduce debt and the uncertainty surrounding its ownership stake allocations, could lead to financial strain if market conditions change, potentially affecting earnings and net margins.
  
• The reliance on the successful execution of the Alpek spin-off and obtaining the necessary regulatory approvals for Controladora Alpek could lead to delays and additional costs, impacting revenue and profitability forecasts.
  
• Potential currency fluctuations and FX volatility, especially related to Sigma's operations in diverse markets, could adversely impact profit margins in regions like Mexico and the U.S.
  
• Uncertainties around potential large-scale acquisitions, such as the reported interest in Oscar Mayer's meat business, could affect ALFA’s ability to maintain investment-grade ratings, thereby influencing future borrowing costs and financial stability.

Valuation

• The analysts have a consensus price target of MX$20.38 for Alfa. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$23.0, and the most bearish reporting a price target of just MX$15.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MX$361.8 billion, earnings will come to MX$40.9 billion, and it would be trading on a PE ratio of 3.8x, assuming you use a discount rate of 16.2%.
  
• Given the current share price of MX$15.25, the analyst's price target of MX$20.38 is 25.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.