- FEMSA looks well placed to open more stores in Mexico where the convenience store market is highly fragmented
- It has recently sold non-core assets and simplified its structure
- Its unlisted assets have a low implied valuation
Joe Bauernfreund, chief executive officer of Asset Value Investors which runs AVI Global Trust (AGT), explains why the trust invests in Mexican family controlled holding company FEMSA (MX:FEMSAUB).
"Over the past year, FEMSA has been one of our strongest performers and incapsulates what we look for in an investment. While the family initially built their wealth in brewing, establishing Mexico’s first brewery in the 1890s and eventually selling their business to Heineken in 2010, our interest always lay in FEMSA Comercio – an unlisted business which operates OXXO-branded convenience stores and other small-format retail stores across Mexico and Latin America.
"A typical OXXO store is approximately 100m² in size and sells various high frequency, low-cost items to customers who are motivated by convenience. About 14mn Mexicans visit an OXXO store every day. The average cost of a new store is less than $200,000 (£163,711), which at maturity earns an about 30 per cent return on capital and has a payback period of around three years. OXXO’s management is an expert operator of this model, with more than 20,000 stores in Mexico, and it opens a new store every nine hours, on average. Scale engenders considerable purchasing power and high margin commercial income payments from suppliers, with OXXO being the way to reach Mexican consumers.
"Despite OXXO’s scale advantage, it remains small, only accounting for around 2 to 3 per cent of the close to 1mn 'mom 'n' pop' convenience stores in Mexico. We believe it can grow to more than 30,000 units by the end of the decade, with the potential for almost limitless growth in Brazil where performance has reached a high level of consistency. With a long-growth runway, high returns on capital and operational resilience, this is a business that can compound in value for many years.
"The group structure, which included listed stakes in Heineken (NL:HEIO) and Coca-Cola FEMSA (MX:KOFA), as well as an array of smaller unlisted assets, was overly complex and highly inefficient. As such, FEMSA traded at a meaningful conglomerate discount which expanded as group complexity increased, and investors grew frustrated at the non-sensical structure.
"However, in 2022, FEMSA initiated a “comprehensive strategic review” which led us to increase our position. FEMSA concluded this in February 2023, and announced plans to simplify the group structure, monetise non-core assets and refocus on its core business. Following two accelerated book builds in February and May, FEMSA has now fully exited Heineken and announced the sale of Jetro Restaurant Depot for $1.4bn.
"The simplified structure is likely to attract a lower conglomerate discount. FEMSA has excess capital approaching 20 per cent of its market cap, which we are encouraging its management to return to shareholders in the form of buybacks.
"Despite strong performance, its shares remain cheap at a 28 per cent discount to our estimated net asset value (NAV). The value of FEMSA’s unlisted assets trade at an inordinately wide discount to closest peer Walmex (MX:WALMEX*) and, as at 30 September, were on a forward earnings before interest, taxes, depreciation and amortisation (EBITDA) of 8.7 times versus 11.9 times for the latter, with FEMSA's underlying intrinsic value and NAV having compounded at a high rate. This highlights the attraction of finding investments that exhibit both special situations-type catalysts and high-quality growth."
As at 30 September, AVI Global Trust had generated a return on investment of 69 per cent and internal rate of return of more than 27 per cent on its investment in FEMSA. And at the end of October, FEMSA was the trust's fourth-largest holding, accounting for 6.1 per cent of its assets.
