Embotelladora Andina Has Solved The UF Problem And Has Value

seekingalpha2023-12-14

Embotelladora Andina should not suffer from excessive UF inflation-adjusted interest, which had negatively impacted its net income.The company has shown significant growth in topline and operating ...

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I wrote recommending the company before, in December 2021 and September 2022. Since then, the stock has provided good returns in appreciation and dividends. I recommend readers revisit those articles to learn more about the business structure to avoid repetition. In this article, I plan to revisit recent developments and provide a back-of-the-envelope model of the company to explain why I consider the stock still has value on it. The UF problem is (hopefully) behind. Since the pandemic, Embotelladora Andina has shown significant growth in the topline and operating profits. This has been fueled by the recovery in Argentinian income and, more generally, GDP growth in Paraguay, Chile, and Brazil. However, for some reason, net income decoupled from that growth trajectory, and has remained stagnant for most of the past three years. Data by YChartsWhen we look under the hood, the reason for that divergence is not interest expenses via higher interest rates (these have actually decreased in net terms), but rather an item called Income by Indexation Units. The expense under this item multiplied by 3x between 2020 and 2021, and then doubled again in 2022. AKO's income statement for FY22, FY21, and FY20 (SEC)Indexation Units, called Unidades de Fomento and abbreviated as UF in Chile, are a form of inflation-adjusted currency that is very common in Chile for long-term lending. The system is pretty simple: each unit grows in value with inflation, and therefore the principal debt is kept fixed in real terms. By adjusting the principal, interest is also transformed into a real rate. The problem for Embotelladora Andina was the explosion of inflation in Chile. From an average that had rarely crossed 4% per year, inflation ballooned to above 12% by the end of 2022. Data by YChartsThis increased the CLP amount of Embotelladora Andina's debts, approximately 70% of which are denominated in UFs. That increase is expensed directly in the income statement. However, inflation in Chile has reverted to more 'normal' levels, currently standing at 5% YoY. This means Embotelladora Andina does not need to carry those losses in such a large amount. Further, the company entered into swaps to fix the rates of those UFs into CLP for 9 million of the approximately 15 million UF that it owes. In general, the company's debts are low-yielding, except for the inflation component of its UF-denominated debt. A simple napkin calculation of the debts below yields an annual interest charge of about CLP 42 billion or close to $48 million. I arrived at this number by applying the interest rate of each type of debt to its outstanding value and adding 4% to the interest rate in 6 million of the unhedged UFs (4% is the average Chilean inflation in the pre-pandemic period). From that figure, one has to remove the approximately CLP 25 billion ($28 million) the company can earn on its close to CLP 288 billion in deposits and amortizable financial assets (9% approximately). AKO's debt balances by type (SEC)Business going forward and napkin valuation I believe that Embotelladora Andina is a relatively stable business. It will probably not provide any meaningful growth above the GDP of the countries where it operates, but it will also not suffer from drastic falls. The same can be said of its margins. Some countries, like Chile and Paraguay, tend to show a more stable upward trend of consumption and higher margins, above 13%, whereas Brazil and specially Argentina tend to move in a more volatile fashion. Argentina tends to add more volatility not only because of its economy's booms and busts but also because sometimes the country's currency revaluates in real terms (depreciation is lower than inflation), whereas in other cases, it is the opposite. AKO has produced about $400 million EBIT for the past year and a half. The company's net interest expense is closer to $20 million going forward, as calculated in the previous section. This net interest expense already includes the expected unhedged income units' Indexation Units Income (expense). This leaves $380 million in pre-tax profits, which we can tax at approximately 35% to be conservative (income tax rates are 27% in Chile, 35% in Argentina and Brazil, and 10% in Paraguay). The result is that I expect $250 million in net income for the company going forward, growing at the GDP level of the region. This compares with a current market cap of $2 billion for the company, yielding what I believe is an attractive P/E of 8x. Chile market multiples One potential explanation for AKO's cheapness is the fact that the whole Chilean market has been under substantial selling pressure since the student protests started in 2018. This was exacerbated by the victory of a leftist president and the attempts to modify the country's constitution. As seen in the chart below by CEIC data, the Chilean stock market has suffered a prolonged bear market and trades at less than 10 times earnings, just like AKO. Chilean market P/E ratio (CEIC data)I do not like playing the market multiples game, but this provides an additional avenue for appreciation if the country recovers the market's confidence. I believe this is possible given that Chile is famous for its conservativeness and moderate politics. Further, most developing economies have suffered in the past decade and a half, but that might change in the future thanks to a tight commodity market. Conclusion Andina is a company with a deep moat (thanks to Coca-Cola's brand power), in a mix of a defensive and cyclical industry (given the higher elasticity in Latin America of these products). The company's operations are stable and growing, albeit slowly, given the company is mature. Its financial expenses should normalize as inflation recedes in Chile. This should provide a boost to net income. Andina trades at an 8x P/E multiple of what I consider to be conservative earnings expectations. This implies an attractive 12% earnings yield, monetized via a current 9% dividend yield.  On top of that, the company offers exposure to a very hit Chilean market. If multiples return to their historic mean in the Andean country, AKO can offer share price appreciation on top of earnings power.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2391594514"}