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

 

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sigma (Unlisted, 100% Owned by Alfa) - Sigma is the crown jewel of the Alfa complex. It is a multinational producer of branded food products (mostly meats and cheeses) and one of Mexico's largest CPGs. Mexico represents 38%, Europe/US represent 37%/18% respectively. FY20 sales were 136bn which equates to ~U$7bn. This is a very large business and a category leader in multiple countries. For context, sales in 20212 were 45.5bn (14% Rev CAGR, but not all organic). Even during a weak period for EBITDA margins, TTM EBITDA stands at 14.4bn. We think a 10x EBITDA multiple for a leading global producer of branded food products is undemanding, especially when compared with companies like Hormel trading at ~20x. At 10x EBITDA and stripping out the net debt, Sigma is worth ~110bn to Alfa equity holders or 157% of Alfa's current market cap.

 

 

Sigma Brands:

 

Real Estate - Alfa has an attractive, large campus in a prime location in downtown Monterrey. This is estimated to be worth more than 10bn.

 

 

All in, this gets you to:

 

+110   -  Sigma:

+47.7  -  Alpek Stake Mkt Value

+5.3    -  Axtel Stake Mkt Value

+10     -  Real Estate

-22      -   Alfa Net Debt:

 

Sum of the Parts   =   151 (+115% vs Alfa's current mkt cap)

 

To reiterate, this SotP assumes no rerating by Alpek or Axtel once the share overhang clears. We think both businesses also have material upside as this process unfolds.

 

 

 

Hopefully this establishes the premise that the discount is substantial. That's a necessary but probably not sufficient condition for this to be interesting. What makes this compelling is that management and the Garza family are actively working to break apart the conglomerate and unlock this discount.  This goes beyond a rhetorical commitment to 'shareholder value'  - they consistently communicate a specific set of intentions and plan. The family has already opted to list Axtel and Alpek to assist in this process. And, as mentioned, the Nemak spin has been completed and Newpek has been unwound. The Alpek spin has been predicated on generating enough cash where both Sigma and Alpek will stand at prudent leverage levels. We think that, by the end of the year, both entities will have reached that threshold barring a complete collapse in the petrochemical environment (as Alfa's deleveraging will be aided by dividends from Alpek). Axtel is harder to time but, as mentioned, it is a much, much smaller piece of total value. We don't detect any hurry for real estate disposal as we think that Covid makes the local market less than ideal.

 

In the meantime, you can create the Sigma stub today if you are inclined to short out the Alpek/Axtel exposure.

 

 

 

Nafinsa Trust - Foreigners own Alfa shares through a neutral investment trust called a NAFINSA trust. That trust had a 50% foreign ownership limit. In February 2021, Alfa's shares experienced significant forced selling as the foreign ownership limit was reached and, due to daily inflows and outflows, it became impossible to confirm that the trust was still compliant with that threshold. This caused many indices (including MSCI, the gorilla in this context) to sell their Alfa positions. The company has received approval to increase the foreign ownership threshold to 75%.  Once formalized, Alfa will be eligible for index inclusion once again.

 

US Listing for Alfa/Sigma - Mexico's capital markets are inappropriately harsh to local businesses, especially those that are ultimately international in nature (Like Sigma and Alpek). Once Alfa is cleaned up, we think a US relisting would be a logical step to attracting a more appropriate value.

 

 

 

 

 

We think there's a much greater risk of this being dead money (or subject to volatile selling in a risk-off environment) rather than seeing significant impairment of fundamental value. But that impairment could come if Alpek's business suffers in a way it's not seen historically, perhaps due to harsh regulations around plastic usage. Failing that, it's strategic value combined with historically strong economics over time makes it difficult to see it being worth a lot less than book value. Sigma is at the whims of protein pricing at the extremes. If protein prices spike too much, Sigma will likely not be able to pass on 100% of prices. We would flag that this is hedgeable both through shorting similarly exposed peers as well as directly in the commodity markets. Sigma appears to be addressing its margin challenges n Europe, but maybe they fail. If you think the market already has a bead on Alfa's SotP but continues to demand a 50% discount in a bear scenario where Sigma isn't working,  we can see 25% downside based on Alpek being valued at book and Sigma valued at 6x like a lower-end meat processing businesses.

 

 

 

 

 

 

There is scope to dream a bit here. Sigma is arguably cheap at 10x today, especially if it solves some of its margin challenges in Europe. Is 12x dreaming - especially in the event of a US listing? Alpek may enjoy a new normal of higher profitability as a combination of lessened Asian imports and ESG strictures keeping new supply offline in the Americas boost full cycle pricing. Those same ESG strictures may come to embrace plastics for their extreme recyclability if collection networks are properly assembled. Axtel is plausibly worth 14.4bn to Alfa shareholders in a well-orchestrated sale process. We don't think it's crazy to think that there's a triple or better here if good 'old economy' businesses catch a bid. Also, while this is impossible to quantify, we have been impressed by the professionalism, skill and drive within the group. With the share overhang removed, Sigma and Alpek will become attractive companies to own (Axtel could be as well, but we are less convinced). And we believe that mgmt will be likely to use cash from any supernormal profits or disposals in a shareholder friendly way too.