The Long and Short

KUOBMM post weak results

| July 21, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

KUOBMM’s most recent round of results showed general weakness across its portfolio of businesses, with particular strain in its chemicals segment. The company’s top line revenues declined a significant 17%, a marked acceleration from a first quarter drop of 3.5%. The chemical business bore the brunt of the downturn, posting a nearly 50% decline in its top line, while the consumer and automotive segments showed relatively stable results, with the former up 3.3% and the latter down 3.3%. The company’s paper for the next few quarters may have limited potential to outperform the market.

Within the chemicals segment, both volumes and end prices took a hit, and the impact of the Mexican peso’s appreciation exacerbated the negative year-on-year comparison. As a result, EBITDA in the chemicals segment plummeted by 65%, driven by lower sales and inventory devaluation in both subsegments due to the downward trend in main raw material prices, such as butadiene and styrene. Consequently, the EBITDA margin in this segment fell by 500 bp to 13.3%.

The consumer segment saw a modest revenue gain, attributed to improved demand and pricing in the pork meat and Herdez Del Fuerte businesses. However, EBITDA declined by 39% due to higher raw material prices, a less favorable sales mix, and adverse foreign exchange effects. The Herdez Del Fuerte business did manage to lower costs primarily due to reduced avocado pricing. The EBITDA margin in the consumer segment also saw a decline, reaching 4.3%, representing a 290 basis points reduction year-on-year.

In the automotive segment, the slight dip in the top line resulted mainly from lower sales in the Transmissions business, partially offset by solid demand in brakes, engine, and power train parts in the Aftermarket business. EBITDA in this segment declined by 12% year-on-year, with the margin dropping by 90 basis points to 9.4%.

The company anticipates this trend to be pervasive across comparable sectors during the second quarter reporting cycle this year, with particular pressure on the petrochemical industry.

On the balance sheet, operating weakness and the appreciation of the peso led to a decline in cash to approximately $148 million at the end of the quarter, down from around $166 million in Q123. As a result, the net debt/EBITDA ratio increased from 2.49x in the previous quarter to 2.95x. Although cash levels remain adequate to meet operating needs and debt obligations, the 2027 bonds have seen increased trading in recent months. Despite previously anticipated calls of the bonds, the rising yields to nearly 9% for the 4-year paper have put the call potential on the back burner.

Looking ahead, KUOBMM faces challenging comparisons for the next quarter or two, which may limit return potential unless there is a broader market movement.

Declan Hanlon
declan.hanlon@santander.us
1 (212) 973-7658

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