Walmex Way Ahead


US-based mass grocery retailer Walmart 's Mexican unit Walmex is by some distance the country's largest retailer , with annual sales close to US $ 30bn. In Mexican peso terms, Walmex's annual sales of 381bn for the year to December 2011 represented about 43% of the market for organised food retailing , according to our data, which is head and shoulders above companies such as Commercial Mexicana - the next biggest retailer with an estimated market share of about 10%. While investigations into alleged bribery regarding store openings in the country are ongoing, the company's shares are up by about 12% so far in 2012 and are currently trading at a trailing 12 months price -to- earnings ratio of about 33, which is a significant premium to its more mature parent Walmart , at about 14 .

What we want to assess here is Walmex's growth prospects in Mexico over the next few years based on our fundamental take on the retail market.

Walmex Stands Out With Double Digit ROA, Shares Trading Close To All Time Highs
Walmex Daily Share Price (MXN) and Return On Assets –- 2009-2011

In our view , the premium valuation Walmex's shares trade at can largely be attributed to three main factors: its comprehensive dominance of the market, a positive growth outlook and being owned by the world's leading retailer by annual sales . Indeed, parent company Walmart ' s scale and logistical/distributional knowledge and connections strongly affect its subsidiaries . To 2017, we see headline total mass grocery retail sales growing at a compound annual rate (CAR) of 5.4%, which provides Walmex with a good amount to work with. Between 2006 and 2011 the company has grown its annual sales at an average rate of 13.4% - compared with headline mass grocery retail sales growing at a CAR of 8.3% over the same period . Having grown quicker than the wider market, Walmex arguably ha s the tools to do so once more. In US dollar terms, a 43% share of the market in 2017 will be worth about US$45bn , based on our data.

In addition to this, one area where Walmex has stood out from some of the other large retailers in Latin America, including the Chilean pair of Cencosud and Falabella , is its return on assets (net income to total assets). At 10.6% in 2011, its ability to generate income from its invested capital was nearly 5% higher than either of the Chilean companies and about 2% higher than Wal m art's. Given that Walmex also carried next to no debt on a total debt - to - earnings before interest, taxes, depreciation and amortisation basis, one can see why it is valued at a such a premium, particularly given Mexico's own status as one of the world's most exciting consumer stories.

Walmex Dominance Gives It Great Platform To Capitalise
Mexico - Total Mass Grocery Retail Sales, MXNbn (LHS) & % chg y-o-y

O ur fundamental view on Mexican retail could have an impact on Walmex's share price from a near - term perspective. Given the above - 30 trailing price -to- earnings its shares currently t rade at, which suggests that a lot of the factors working in the company's favour are currently priced in, it is difficult to see where the momentum would come from for a sustained push above all-time highs at around MXN45. That said , we believe that over the long term, Walmex remains by far the best placed retailer to take advantage of the ongoing growth and formalisation in Mexican retail.

This article is tagged to:
Sector: Food & Drink
Geography: Mexico

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