Individual Research

Investment Analysis
2018

Title:

VALUATION OF ALICORP S.A.

Sección: S-002

Lecturer: Guillermo Dávila Jaramillo

Name: Last name:

Edwin Curahua Huaringa

1. Theoretical Framework: Narrative of the Company
1.1. Description of the Company: Core Business, Key people & Products
La empresa fue fundada en 1910 cuando el matrimonio británico conformado por José R.
Lindley y Martha Stoppanie de Lindley llega al Perú y se establece en el distrito del Rímac,
dedicándose a la fabricación de bebidas carbonatadas, donde resalta la marca Inca Kola. Con el
pasar del tiempo se ha convertido en la empresa líder del mercado1 teniendo como socio
estratégico a Arca Continental, el tercer embotellador más importante del sistema Coca-Cola a
nivel mundial. Lindley se beneficia de un fuerte reconocimiento de marca en el mercado de
bebidas gaseosas, diversificado portafolio, una fuerte y exclusiva red de distribución, y la alta
penetración de mercado que llega a más de 240.000 puntos de venta en todo el país.

1.2. Hechos de importancia

Corporación Lindley S.A. es el único embotellador autorizado y distribuidor de marcas
registradas de The Coca-Cola Company en todo el Perú, incluyendo Coca-Cola e Inca Kola. La
compañía ofrece una amplia gama de bebidas no alcohólicas que consisten en bebidas
carbonatadas (gaseosas) y bebidas no carbonatadas.

En 1999, The Coca-Cola Company adquirió una participación en Corporación Lindley S.A. En
2004, Corporación Lindley S.A. adquirió a su principal competidor, Embotelladora
Latinoamericana S.A., después de lo cual la compañía se convirtió en el embotellador exclusivo
de las marcas de Coca-Cola en el Perú.

En el 2015, Corporación Lindley concreta la alianza estratégica con Arca Continental que
adquirió el 47,52% del total de las acciones de la empresa. La venta del paquete de
308.847.336 acciones comunes emitidas por la corporación y que representa el 53,16% de las
acciones con derecho a voto, se dio por US$ 760 millones (Semana Económica.com 2015) y,
adicionalmente, el pago de US$ 150 millones por un acuerdo de no competencia , lo cual lleva
a un precio de US$ 2,95 por acción.

En enero del 2016, Arca Continental realizó una segunda compra de acciones comunes con
derecho a voto de Corporación Lindley, pagando US$ 1,57 por acción a la familia Arredondo
Lindley. La adquisición fue de 38,4 millones de acciones, que equivalen al 6,62% de las
acciones comunes de la embotelladora peruana. Con esta operación, Arca Continental se
convierte en titular del 60,25% de acciones con derecho a voto de Lindley (Semana
Económica.com 2016).

En marzo de 2016, Arca Continental detenta 15.801.752 acciones de inversión de Corporación

Lindley, que representan el 21,96% del total de los títulos, y busca hacerse con el 25% de las
acciones de inversión de la empresa como parte del plan de inversión en la compañía. Sin
especificar cuándo se llevará a cabo, Arca Continental tendría autorizado por su asamblea de
accionistas adquirir hasta el 100 % de las acciones de inversión al precio de US$ 0,89, pese a
que algunos tenedores de los papeles han manifestado su inconformidad con la oferta (Diario
Gestión 2016)

1.3. Growth Rate:

In the second quarter of 2017, Alicorp posted a net profit of PEN 128.2 million, which
was 71.4% more than the same period of the previous year. According to the CEO, it
was due to growth in its three product lines. In the same quarter, a growth of 12.2% in
sales amount was achieved, but of 9.5% in volume (quantity of products sold), with
respect to the same period of the previous year. This growth is broken down as
follows1:

 Mass Consumption Peru: Sales for 666.8 million PEN in 2Q17, 8.3% more than
in 2Q16. This thanks to greater sales in detergents, oils, sauces and softeners.
 B2B: Sales of 390.2 million PEN in 2Q17, 4.4% more than in 2Q16. This thanks
to the growth of the restaurant sector.
 Aquaculture: Sales of 466.6 million PEN in 2Q17, 43.1% more than in 2Q16.
This thanks to higher sales of fish and shrimp feed for a recovery in this sector.
Finally, Alicorp in 2Q17 reported a total sales of 1,827.4 million PEN.
In the third quarter of 2017, Alicorp achieved sales of 1,823.5 million PEN and a growth
of 4.2% with respect to the same period of the previous year. The growth in volume
(quantity sold) was 5.7% with respect to 3Q16. This growth was due to the
simultaneous growth of its three product lines. The breakdown of the growth obtained
is shown below2:

 Mass Consumption Peru: Sales for 709.9 million PEN, 7.8% more than in 3Q16.
This thanks to greater sales in detergents, sauces, pastas and cookies. In
addition, thanks to the launch of a new category of preserves.
 B2B: Sales for an amount 11.9% higher than 3Q16.
 Aquaculture: Sales for an amount 5.7% higher than 3Q16.
The International Mass Consumption business recorded a decrease in its revenues of
14.8% compared to 3Q16. This is mainly due to lower sales in Argentina given the
continued contraction of the market subject to the decline in purchasing power,
together with still high levels of inflation and the depreciation of the currency. 3
Finally, the consolidated net profit was 116.4 million PEN in 3Q17, 28.7% higher than
that registered in 3Q16.
Among other additional data that may be relevant for the valuation we have the
following:

 Alicorp will invest USD 20 million to increase its production. The company in
question plans to consolidate its investments in Peru and feels optimistic about
the evolution of that economy, given that it is effectively avoiding the
international financial crisis.4
 Fitch rating agency considering Alicorp's solid financial profile in 1Q17 and
analysts' estimates indicated that the company had the potential to grow 5%
this year, where EBITDA would grow between 12% and 13%. On the other

1
Information retrieved from Diario El Comercio: "Alicorp's profits soar in the second quarter"
(07/26/17). https://elcomercio.pe/economia/negocios/ganancias-alicorp-disparan-segundo-trimestre-
noticia-445350
2
Information retrieved from Diario El Comercio: "Alicorp: Sales reached S / .1,823.5 million during
3Q17" (10/30/17). https://elcomercio.pe/economia/negocios/alicorp-ventas-alcanzaron-mlls-3t2017-
noticia-469969
3
Information retrieved from the main page of Alicorp in Alicorp News: Services for Investors.
https://www.alicorp.com.pe/alicorp-ir/public/informacion-financiera/noticias/alicorp-incrementa-sus-
ventas-ebitda-y-utilidad-neta-en-el-3t2017.html
4
Information retrieved from Diario Gestión: "Alicorp will invest US $ 20 million to increase production"
(11/22/17). https://gestion.pe/noticia/287798/empresa-alicorp-invertira-us-20-millones-incrementar-
produccion
 hand, Alicorp estimates that its revenues grow an average 6.5% annually to
2019 while its EBITDA margin reaches a range of among 13.5% to 14.5%.5
 Among other factors to be taken into account, 62% of Alicorp's revenues come
from Peru, according to the source in footnote number 5.
2. Financial Statement Analysis: Assumptions & Projections
It is worth to mention that all the figures shown in all the tables are in millions of USD.
On the other hand, given that according to S & P Capital IQ the projected growth of
Alicorp for 2017 is 9% in sales, this figure will be taken as an assumption, but in
addition it will take 6.5% as the growth for the years 2018 and 2019. , a summary of the
results of Alicorp is shown below in table 1:

Table 1: Summarized Income Statement of Alicorp from 2012 to projected 2017 results

Period 2012 2013 2014 2015 2016 2017

Total Revenue 1,752.3 2,080.9 2,102.7 1,932.0 1,977.6 2,164.6

Cost Of Goods Sold 1,269.5 1,514.4 1,529.5 1,382.8 1,376.9 1,481.7

Gross Profit
482.9 566.5 573.2 549.2 600.7 683.0
Selling General & Admin Exp.
278.9 356.7 383.7 369.5 393.3 435.4
Other Operating Expense (Income) (9.3)
16.8 73.9 12.5 13.4 19.7
Other Operating Exp., Total
295.8 347.4 457.6 382.0 406.8 455.1
Operating Income
187.1 219.1 115.6 167.2 193.9 227.8
Net Interest Exp. (10.5) (42.3) (53.9) (56.3) (34.7) (22.7)

EBT Excl. Unusual Items

175.9 132.6 17.1 67.9 145.7 189.6
Other Gain (Loss) (7.6) (5.5)
4.3 3.7 2.9 0.5
EBT Incl. Unusual Items
180.2 136.3 20.1 68.4 138.1 184.1
Income Tax Expense
58.7 45.0 15.9 22.2 48.0 59.1
Other Gain (Loss) (0.6) (1.1) (0.1)
16.5 22.4 0.1
Net Income
138.0 113.7 3.5 45.1 90.2 124.9
Source: S&P Capital IQ
This can be complemented with the vertical analysis shown in table 2, where it can be
seen what each item represents as a percentage of sales. Thanks to this, we can make
the following assumptions that will be relevant for the valuation:

 Historically the cost of goods sold is around 70% of sales, therefore, it will be
considered with that percentage.

5
Information recovered from Semana Económica: "Fitch: Alicorp is in a position to grow inorganically".
http://semanaeconomica.com/article/sectores-y-empresas/consumo-masivo/225426-fitch-alicorp-esta-
en-posicion-para-crecer-inorganicamente/
  It will be assumed that accounts grow at the same rate of growth as sales do,
since their estimate is based on a percentage of this account.
 Sales will be projected for 7 years and after that, an organizational growth
equivalent to the growth of the economy will be assumed. It assumes a growth
of 9% for 2017, 6.5% for 2018 and 2019 and 4.7% (average growth in sales for
the period between 2013 and the projected result of 2017) from 2020 to 2023.
From 2024 it will be considered growth according to the economy.
Table 2: Vertical Analysis of Alicorp from 2012 to projected 2017 results

Period 2012 2013 2014 2015 2016 2017

Total Revenue 100% 100% 100% 100% 100% 100%
Cost Of Goods Sold 72% 73% 73% 72% 70% 68%
Gross Profit 28% 27% 27% 28% 30% 32%
Selling General & Admin Exp. 16% 17% 18% 19% 20% 20%
Other Operating Expense (Income) 1% 0% 4% 1% 1% 1%
Other Operating Exp., Total 17% 17% 22% 20% 21% 21%
Operating Income 11% 11% 5% 9% 10% 11%
Net Interest Exp. -1% -2% -3% -3% -2% -1%
EBT Excl. Unusual Items 10% 6% 1% 4% 7% 9%
Other Gain (Loss) 0% 0% 0% 0% 0% 0%
EBT Incl. Unusual Items 10% 7% 1% 4% 7% 9%
Income Tax Expense 3% 2% 1% 1% 2% 3%
Other Gain (Loss) 1% 1% 0% 0% 0% 0%
Net Income 8% 5% 0% 2% 5% 6%
Source: S&P Capital IQ
The estimation of the effective tax rate and Opex in tables 3 and 4 is shown below:
Table 3: Effective Tax Rate Estimation without considering 2014 (one-time effect)

2012 2013 2014 2015 2016 2017 Average

Tax 33% 33% 79% 32% 35% 32% 33%
Source: S&P Capital IQ
Table 4: Operating Expenditure Estimation

2012 2013 2014 2015 2016 2017 Average

Opex 17% 17% 22% 20% 21% 21% 19%
Source: S&P Capital IQ
Due to Opex's upward trend, a percentage point will be added to the average estimate
of this, taking it from 19% to 20%. Now that all the necessary factors are present, the
EBIT estimate after Taxes is presented in table 5:
Table 5: EBIT after Taxes Estimation from 2018 to 2023

2018 2019 2020 2021 2022 2023

Growth 6.50% 6.50% 4.70% 4.70% 4.70% 4.70%
Sales 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3
Cogs 1,613.7 1,718.6 1,799.4 1,884.0 1,972.5 2,065.2
 Opex 438.0 466.5 488.4 511.4 535.4 560.6
EBIT 253.6 270.1 282.8 296.1 310.0 324.5
Tax 83.7 89.1 93.3 97.7 102.3 107.1
EBIT(1-t) 169.9 180.9 189.5 198.4 207.7 217.4
Source: S&P Capital IQ
Since you have the estimate of EBIT after taxes. Work Capital and CAPEX will be
projected. Table 6 shows the DPO, DSI and DSO ratios that will be useful for the
following assumptions considering their simple arithmetic average as the estimated
future of their growth.
Table 6: Computing of DPO, DSI and DSO including projected 2017 results

2012 2013 2014 2015 2016 2017 Average

DPO 16% 16% 22% 28% 27% 31% 23%
DSI 23% 19% 22% 21% 17% 19% 20%
DSO 17% 16% 16% 15% 15% 13% 15%
Source: S&P Capital IQ
Now in table 7 the calculation of Working Capital is shown:
Table 7: Working Capital Estimation from 2018 to 2023

2018 2019 2020 2021 2022 2023

Sales 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3
Cogs 1,613.7 1,718.6 1,799.4 1,884.0 1,972.5 2,065.2
A/P 377.3 401.8 420.7 440.5 461.2 482.8
Inventory 325.4 346.5 362.8 379.9 397.7 416.4
A/R 351.8 374.7 392.3 410.8 430.1 450.3
WC 299.9 319.4 334.4 350.1 366.6 383.8
 WC 185.7 19.5 15.0 15.7 16.5 17.2
Source: S&P Capital IQ
Now we go to estimate the CAPEX. It is known that the growth of the company can be
estimated as the product of the impact of its assets on the generation of sales (or the
effective use of the company's assets) and the ratio of reinvestment of profits in the
following way:

𝒈 = 𝑹𝑶𝑨 𝒙 (𝑹𝒆𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑹𝒂𝒕𝒆) = 𝑹𝑶𝑨 𝒙 (𝟏 − 𝑷𝒂𝒚𝒐𝒖𝒕)

In this way, considering that we already have the historical ROA of the company in the
historical information and the organizational growth rate, we will consider the amount of
the CAPEX as the Reinvestment Rate of each year. Historically, the Net Income
average between sales is 4.4%. This figure will be used to estimate the Net Income for
the following years and will be assumed as constant. Likewise, a reinvestment ratio of
69% of the Net Income was found, which will also be assumed permanent. According
to table 8, we can see the calculation of this as an estimated percentage of other
accounts:
Table 8: Capital Expenditure Estimation as a percentage of

2018 2019 2020 2021 2022 2023

 Sales 2,305.3 2,455.2 2,570.6 2,691.4 2,817.9 2,950.3
Net Income 100.6 107.1 112.1 117.4 122.9 128.7
CAPEX 69.4 73.9 77.4 81.0 84.8 88.8
Source: S&P Capital IQ
Now we will proceed to the estimation of depreciation. The duration of the assets will
be considered 20 years from the projected results of 2017. Table 9 shows the
calculation:
Table 9: Depreciation computing for around 20 year fos Net Assets of 2017

Accounts Amount
Gross Property, Plant & Equipment 1,042.7
Accumulated Depreciation 468.6
Net Property, Plant & Equipment 574.1
Average Depreciation 57.4
Source: S&P Capital IQ
Since all the necessary components are already available to form the Cash Flow, the
discount rate will be calculated. The WACC calculation will be done in the next tables:

Table 10: Breakdown of the debt according to the bank

Amount Share Rate Wheighing

BBVA Continental 96,429 34.13% 4.95% 1.69%
Bank of America 80,252 28.40% 3.70% 1.05%
The Bank of Tokyo 76,970 27.24% 3.25% 0.89%
Scotiabank Perú 15,552 5.50% 5% 0.28%
Citibank 8,434 1.63% 3.50% 0.06%
BDMG 4,593 2.98% 3.93% 0.12%
Banco do Brasil 318 0.11% 4.50% 0.00%
282,548 4.08%
Source: Superintendencia de Mercado de Valores (Peruvian Regulatory Agency of
Capital Markets)
Table 11: Beta computing

Companies Levered Beta Unlevered Beta

1 Procter & Gamble Co 0.619 0.788
2 Unilever NV 0.946 0.516
3 Nestle SA 0.811 0.601
4 Danone SA 0.811 0.601
5 Mondelez International Inc 1.081 0.451
6 Kellogg Co 0.604 0.808
7 J&J Snack Foods Corp 0.92 0.530
8 Treehouse Foods Inc 1.08 0.452
 9 B&G Foods Inc 0.661 0.738
10Tootsie Roll Industries Inc 1.043 0.468
11Cal-Maine Foods Inc 0.798 0.611
12PepsiCo Inc 0.676 0.722
Average 0.607
Alicorp's Beta 1.014
Source: Bloomberg
The annualized risk free rate is 2.34%6. The annualized rate of return of the market is
13.16%, considering the daily variation of the IGBVL7. In this way we can estimate the
CAPM:

𝑪𝑨𝑷𝑴 = 𝟐. 𝟑𝟒% + 𝟏. 𝟎𝟏𝟒(𝟏𝟑. 𝟏𝟔% − 𝟐. 𝟑𝟒%) = 𝟏𝟑. 𝟑𝟏%

The following table presents the calculation of the WACC, where the debt rate is
already deducted from taxes.

Table 12: WACC computing

Amount Share Rate WACC

Debt 889.7 51% 2.94% 1.50%
Equity 865.8 49% 13.31% 6.52%
1,755.50 8.02%
Source: S&P Capital IQ
It will be considered a growth of the economy of 3% because this figure is the most
representative of the last decade according to BCRP statistics (Peruvian Central Bank).
This will be used to calculate the terminal value in the next table:
Table 13: Enterprise Value computing

Terminal
2018 2019 2020 2021 2022 2023
Value
EBIT(1-t) 169.90 180.95 189.45 198.36 207.68 217.44
WC 185.67 19.49 15.01 15.72 16.46 17.23
CAPEX 69.38 73.89 77.36 81.00 84.81 88.79 3,622.72
Depreciation 57.41 57.41 57.41 57.41 57.41 57.41
Cash-Flow -27.74 144.97 154.48 159.05 163.82 168.83
NPV -25.68 124.24 122.57 116.82 111.39 106.27 2,111.09

Enterprise Value 2,666.69

Millions of Shares 847.19
Price per Share 3.15
Sources: S&P Capital IQ, MarketWatch and Reuters

6
Information retrieved from MEF Daily Bulletin to November 23, 2017.
https://www.mef.gob.pe/dnep/reporte/2017/boletin_diario_23_11_17.pdf
7
A daily index data was considered from November 24, 2015 to November 25, 2017.
https://es.investing.com/indices/lima-stock-exchange-general-historical-data
Considering a PEN / USD exchange rate of 3.25, the price of the Alicorp share would
be around 10.23 PEN. Currently, the share price is from 10.35 to November 25, 2017.
As a conclusion of the valuation, there is sufficient financial evidence to affirm that
Alicorp's stock is above its intrinsic value, for which it would be recommended to sell it,
waiting for the market to correct said error and buy it at a lower price in the market, so
that the investor achieves a profit from said operation.

3. Financial Indicators: Multiples & Comparison

In the following table 14, Alicorp will be compared with other companies with available
data in Bloomberg and more actualized as possible:
Table 14: Multiples comparison among Alicorp and comparable companies

Companies PER EPS EV/EBITDA EV/SALES

1 Procter & Gamble Co 23.23 3.92 15.00 3.84
2 Unilever NV 23.70 2.04 14.16 2.78
3 Nestle SA 28.18 3.01 17.19 3.13
4 Danone SA 23.88 2.94 15.83 2.60
5 Mondelez International Inc 20.10 2.11 19.76 3.06
6 Kellogg Co 15.30 4.23 15.50 2.30
7 B&G Foods Inc 20.02 1.81 13.48 2.46
8 PepsiCo Inc 22.52 5.11 14.60 2.92
Average 22.12 3.15 15.69 2.89
Alicorp 19.45 0.17 9.36 1.25
Sources: S&P Capital IQ and Bloomberg
As a result, Alicorp’s multiples are all under the average, what just means that its
shares would be overvalued, the exact same result obtained in the tables above. It
corroborates the past conclusion and leads to the recommendation for investors to star
selling before the price drops.