Alfa S.A.B. de C.V. ALFAA
February 04, 2022 - 4:00pm EST by
2022 2023
Price: 14.35 EPS 0 0
Shares Out. (in M): 4,906 P/E 0 0
Market Cap (in $M): 3,398 P/FCF 0 0
Net Debt (in $M): 3,000 EBIT 0 0
TEV ($): 6,400 TEV/EBIT 0 0

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(All FX is MXN unless noted otherwise)
Alfa is a simple thesis inside of a modestly complicated Sum of the Parts story: the company is a (1) collection of solid-to- rather good businesses (2) trading at a significant discount to the current market value of its components. Crucially, this is also a situation where (3) the owners and management team are actively working to dissolve the conglomerate altogether and have demonstrated their bonafides having already distributed one major business unit to shareholders.
Once the two publicly traded subsidiaries are distributed to shareholders, sold or otherwise fully spun, the Sigma business unit and the HoldCo's premier real estate portfolio will stand alone. While the current market values of Alfa's stakes in the two public subsidiaries represent 75% of the current market cap already, once Sigma is listed we believe that Alfa shares will double assuming nothing other than the recognition for the fair value of Sigma. However, the curing of the overhang on the public subs and some amount of business accretion before a full separation could make Alfa a triple in a more optimistic scenario.
Alfa is one of the most storied conglomerates in Mexico and among the biggest business concerns in Monterrey, although more than 60% of group revenues come from abroad. Founded in 1936 by the Garza family, Alfa had as many as 143(!) different businesses in-house at the height of its status as a conglomerate. However, debt pressures in the 1980s led the company to sell off many of its businesses and the banks ultimately took 45% of Alfa. Crucially, this made the company much less tightly controlled - today, the entire extended Garza family owns 40% of Alfa across the various branches of the family. In the 90s through the 2010s, Alfa succeeded in building multiple category-leading international businesses from its remaining units , however, a disastrous expansion into oil & gas through Pacific Rubiales resulted in the stock declining more than 50% from all-time highs. This combined with a diffuse family ownership led the company to finally accept calls for the conglomerate to be fully taken apart. That process has begun in earnest over the past year and a half with the full spin off of Nemak (an auto parts supplier) and the divestiture of their Newpek unit's Texas oil & gas assets
Overview/Sum of the Parts
Alpek (58.2bn Mkt Cap, 82% Owned by Alfa) - Alpek is the largest producer in the Western hemisphere of a range of petrochemical products (e.g. PET, EPS, PTA). 71% of the business is outside of Mexico. 75% of revenues come from polyester products (e.g. plastic bottles, fibers), with the remaining 25% coming from Plastics & Chemicals which encompasses polypropylene, specialty chems & fertilizers plus other business lines. While not sexy, Alpek is a solid business serving vital, growing end markets: since 2010, ROEs have been in the teens or better every year except 4. Of those 4 years, only once was ROE actually negative. EBITDA increased 3.5x during that period from 2010. Despite this, Alpek only trades at 1.14x P/B and is now entering an exceptionally strong period for its core business starting in 2Q/3Q '21. Ultimately, we think Alpek is a strikingly cheap cyclical at this price, but the crucial point is that Alpek represents the bulk of the publicly traded value of Alfa and it is observably not expensive. If the stock appreciates further, that's simply more upside for Alfa. The fact that Alpek is entering what amounts to an ideal pricing environment for its end products that will result in a lot of cash generation should also benefit Alfa holders.  To that end, Alpek also just announced an acquisition of Octal for U$620mn which we think is likely to be strongly accretive but are assigning no value to.




Axtel (10.1bn Mkt Cap, 53% Owned by Alfa) - Axtel is an important provider of information communication technology services (its 'Alestra' business) and infrastructure (its 'Axtel Networks' business) in Mexico. It is a business of consequence in its sector and provides services to 80% of Mexican corporates according to the company. It is also the problem child of the Alfa complex. The Networks business is likely quite valuable to private equity or a strategic buyer. Alestra has been a consistent struggle and, instead of selling the business together, Alfa now seems to be exploring a piecemeal sale of each. It is unclear to us what the sticking point is beyond price as Axtel Networks alone is likely worth significantly more than the current market price. Either way, Axtel is a very small piece of the overall valuation and fact pattern. If you decide to dig in, we think incremental research efforts are clearly better focused on Alpek and Sigma.