Cultiba – Analysis of FY 2023 and Q1 2024 Results

A look at Cultiba's and Grupo Gepp's FY 2023 and Q1 2024 results.

May 15, 2024

Context

In November 2023 I published my analysis and valuation of Cultiba. A holding company with significant amounts of cash, no debt, and a 40% stake in Grupo Gepp, Mexico’s exclusive PepsiCo bottler and the owner of Epura.

At the time, the market was valuing Cultiba’s stake in Grupo Gepp at 2.5 times TTM EBITDA. I believed that this valuation was incorrect, as competitors sell at multiples between 7-10 times TTM EBITDA and the company sold 11% of its stake in the company in 2016 in a private transaction at a multiple of 7.8x EBITDA.

Since my writeup, the market has not corrected the valuation of Cultiba. At the time, Cultiba was selling at $12 MXN per share. Today the company sells at $11 MXN per share.

In this post, I will analyze the recent results from the company and understand if Cultiba continues to be an attractive investment opportunity.

Analysis of FY 2023 Results of Grupo Gepp

2023 year-end results reflect a continued margin expansion from higher volumes, price increases, and maintenance of more bottled beverages sold as a percentage of volume.

FY 2023 vs FY 2022 Results

Volume of Cases Sold: 1,757 million vs 1,676 million, a growth of 4.8%.

Volume of Bottled Beverages: 1,018.7 million cases vs 972 million cases, a growth of 4.7%.

Volume of Jug Water: 738.5 million cases vs 704 million cases, a growth of 4.9%.

Revenue: $61,348 million vs $54,605 million, an increase of 12.35%.

Bottled Beverages as a % of Revenue: 88.03% vs 88.34%.

Jug Water as a % of Revenue: 11.97% vs 11.66%.

Price per Case: $34.9 vs $32.6, an increase of 7%.

Price per Case of Bottled Beverages: $52.23 vs $49.63, an increase of 5.25%.

Price per Case of Jug Water: $9.8 vs $9.04, an increase of 8.3%.

Gross Margin: 44.09% vs 43.45%.

Operating Margin: 9.3% vs 8.82%.

Operating Income: $5,712 million vs $4,817 million, an increase of 18.58%.

Net Income: $2,958 vs $2,715, an increase of 8.95%.

Capex: $3,105 million vs $2,455 million, an increase of 26%.

Estimate of Non-Cash Change in Working Capital: $129 million.

Analysis of Q1 2024 Results of Grupo Gepp

The company continues to benefit from price increases and an increase in sales volume.

Net income was negatively affected by financial expenses. Interest expenses increased 26% during the quarter from an increase in short-term debt.

The company faces liquidity pressure from short-term debt. At the end of FY 2023, the current ratio was 0.5. Since then I believe this has been reduced by the increase in short-term debt from $5,000 million to $6,000 million.

I believe that the company will either need to refinance the maturity of its short-term debt or issue long-term debt to pay its short-term debt, to improve its liquidity position.

Volume of Cases Sold: 411.7 million vs 399.9 million, a YoY increase of 3%.

Revenue: 14,782 million vs 13,550 million, a YoY increase of 9.1%.

Price per Case: 35.9 vs 33.8, a YoY increase of 6.2%.

Operating Margin: 6.9% vs 6.1%.

Operating Income: 1,015 million vs 822.5 million, a YoY increase of 23.1%.

Net Income: 440 million vs 422 million, a YoY increase of 4.2%.

Short Term Debt: $6,000 million

Long Term Debt: $1,418 million

Total Debt: $7,418 million

Net Debt: $6,007 million

Dividends Paid by Grupo Gepp to Cultiba in 2023

In 2023, Grupo Gepp paid Cultiba 956.2 million in dividends.

This represents a payout ratio of 80% ($2,390/$2957). A figure that I think is unsustainable in the near term, given the Grupo Gepp’s liquidity position.

Analysis of Financial Position of Grupo Gepp

I believe the combination of high dividend payouts, increases in short-term debt, and the requirement to sustain capital expenditures places a considerable demand on the company’s financial resources.

Grupo Gepp current assets relative to current liabilities have continually decreased since 2016. At the end of 2023, the company had a current ratio of around 0.5. Today, I expect this ratio to be lower because the company increased its short-term debt by 26% in Q1 2024.

The decrease in current ratio from 2016 to 2023 has been attributed to improvements in working capital and increases in short-term debt.

Negative Cash Conversion

Grupo Gepp operates with a negative conversion cycle. This means that it sells inventory before it has to pay suppliers. Effectively, suppliers finance the company’s inventory. As a result, the company has to tie up little capital.

Furthermore, only 35% of the company’s sales are paid in credit, the rest are paid upfront. This reduces the capital that is tied up in accounts receivables.

The combination of these two aspects of the business causes the company to have a negative working capital. This is not a bad thing, operationally it means that the business has significant bargaining power and good company management.

The following graph shows changes in non-cash cash working capital, effectively displaying the movements that have helped produce a negative level of working capital.

Short Term Debt

Although the company benefits from negative cash conversion, the ratio of current assets to current liabilities is worrying.

I believe increases in short-term debt have driven short-term liabilities to a point where they now present a financial risk to the company.

The following graph illustrates the increases in short-term debt from 2016 to Q1 2024.

It is important to highlight that in 2021 Grupo Gepp paid $1,500 in dividends and $1,900 in cash reimbursements to Cultiba. I believe they financed this payout with debt.

Between 2021 and 2022, net debt increased from 1,808 million to $4,303 million. This increase came from short-term debt, which increased from $2,400 million to $5,000 million.

Long Term Debt

Most of the company’s debt is short-term, which represents 80% of the total debt. The company has maintained constant levels of long-term debt since 2016.

Net Debt Relative to Cash Flow Generation

So, is the company at risk of financial distress from its short-term debt?

The company’s ratio of current Net Debt to 2023 EBITDA - Maintenance Capex is 1.07 = $6,007 million /($8,002 million - $2,400 million).

Based on the above, the company’s overall financial position is not worrying. Net debt relative to the cash flow that the company can generate is a sustainable figure. Effectively, the problem lies with the company’s short-term debt position.

In 2023 Grupo Gepp generated a NOPAT of $3,998 million. Cash flow generation from the business plus the company’s cash position equals $5,404 ($3,998 + $1,411). Based on this, I do not think the company is in a position of financial distress. Together with its cash position, the business is able to pay most of its short-term debt. It could easily raise funds from long-term debt, reduce capital expenditures, and cancel its dividend to pay its total short-term debt.

Moreover, the company can also refinance its short-term debt to long-term debt to release liquidity pressures.

Finally, if they need to, Grupo Gepp can receive an investment from its shareholders (PepsiCo, Empresas Polares, and Cultiba) to improve its financial position.

Based on the above, I think that although Grupo Gepp is in a position where it faces liquidity pressures, viable solutions exist for the company to be able to avoid financial distress.

Analysis of Cultiba’s Capital Allocation Decisions in FY 2023 and Q1 2024

Investment in BAF and Mapesca

In November 2023, Cultiba partnered with Continental Grain, Equity Group Investments, and Castle Harlan, to acquire a stake in Baja Aqua Farms. Through this deal, Cultiba acquired 25.47% of BAF.

Baja Aqua Farms grows and sells premium bluefin tuna in the US, Mexico, and Japan.

At the same time, through its investment in BAF, Cultiba acquired a majority stake ownership of 50.04% in Mapesca, a company that fishes and sells bluefin tuna and sardines. Mapesca is a partially owned subsidiary of BAF, where the owners are BAF and Cultiba.

Cultiba invested a total of US$40 million, equivalent to MX$662.7 million, to complete both operations.

It is not clear whether this was a good investment decision. The company has provided very limited information on the quality of the acquired business and financials. I believe a risk exists that the company will continue to venture outside the scope of beverages and bottled water and destroy value.

Sale to Related Party

On 29 December 2023, Cultiba made a deal to sell 3.3% of its stake in BAF for US$4,444,238 to a related party (physical person). According to the agreement, the buyer will have 7 years to complete the payment to Cultiba.

Although Cultiba mentions that this payment will have additional charges based on a percentage of the determined market value at the time. I think this is a bad deal for minority shareholders, the payment terms are too beneficial for the buyer.

No information is provided if interest payments will be charged or if there will be several payments or a single one.

Stock Repurchases

During 2023 and Q1 of 2024, Cultiba repurchased -2.6% of its outstanding shares, spending a total of 209 million on shares repurchases.

Shares outstanding (Start of 2023): 712,460,518

Shares outstanding (End of Q1 2024): 693,900,274

Amount spent on share repurchases in 2023: 56 million pesos

Amount spent on share repurchases in Q1 2024: 153 million

Based on the attractive price that the company sells at, I believe this was a good management decision.

Resolutions from Cultiba’s Shareholders Meeting on April 30 2024

The company held its annual shareholder’s meeting on April 30, with the following resolutions:

Cancellation of 15,640,362 shares that were held in treasury. This does not have an impact on shareholders, as these shares had been repurchased by the company and they did not have shareholder rights because they were held in treasury.
A dividend payment of USD$20M, equivalent to MXN$340M or around 0.5 per share, payable by July 31 2024.
Agreement to repurchase up to MXN$300M worth of stock in 2024.

Conclusion

Grupo Gepp

Grupo Gepp continues to show improvements in profitability. 2023 and Q1 2024 results reflect a continued margin expansion from higher volumes, price increases, and maintenance of more bottled beverages sold as a percentage of volume.

The short-term financial position of Grupo Gepp is worrying but manageable. Although the company has significant amounts of short-term debt, which places high liquidity pressures. Viable solutions exist to improve the company’s short-term financial position given the ratio of net debt relative to cash-flow generation of 1.07x, and its shareholder group.

I believe the company will likely refinance its short-term debt into long-term debt to improve its liquidity position. In the worst case, the option exists to receive an investment from PepsiCo, Cultiba, and Empresas Polares to pay down debt.

Cultiba

Cultiba’s investment in BAF and Mapesca is worrying because it is outside the scope of beverages. A risk exists that the company will continue to make these kinds of investments, which can destroy value for shareholders.

As for share repurchases, in the past year, the company took advantage of its depressed share price through share repurchases. During 2023 and Q1 2024 the total volume of shares traded was around 45.9 million. Of the shares traded, the company repurchased 18.5 million. This means that Cultiba repurchased 40% of total shares traded in 2023 and Q1 2024.