A highly accretive acquisition PLUS inflationary tailwinds have powered up, by far, a quarterly report worth digesting for even the most cynical of investors.
Taking into account forex (Chedraui generates revenues in Mexican pesos as well as US dollars), consolidated revenues grew almost 79% year over year. The total reported Q2 top line was $3.13 billion US, up from $1.76 billion in Q2, 2021. Absent the Smart & Final purchase, revenues would have increased by 16.9% in the Mexican division, by 12% in the US division and by 31% in the shopping center rental division.
Q2 EBITDA was $262.5 million USD.
The overall EBITDA margin was 8.4%.
Inflationary and efficiency tailwinds powered every division in the grocer’s stable of names. The Mexican operations reported an 8% EBITDA margin. In the United States, El Super posted a 9.1% EBITDA margin, Smart & Final reported an 8.4% margin and La Fiesta came up with an EBITDA margin of 6.4%. Turning to the real estate rental division, EBITDA margins were 67.5%.
Net income per share increased by 78%+ in Q2.
The per share amount was .077 US, up from $.041 US year over year. On a dollar basis, the figure was $74.4 million US.
Debt paydown from the Smart & Final acquisition continues at an impressive clip.
Total debts declined in the quarter by an additional $74 million USD. The Smart and Final purchase cost of $620 million has, thus far in 2022, resulted in EBITDA accretion of $166 million USD.
Top and bottom line metrices continue to pad any analytical margin of error.
My EBITDA forecast for 2022 now looks to be above $1 billion US, a full year ahead of my prior expectation. All new store openings for 2022 have been located in Mexico while management assesses the outlook for Smart & Final. Sooner than anticipated, given the tailwinds and underlying US profitability, surplus capital may be allocated to embark upon expansion of the US operations.
Featuring a market cap below $3 billion, the present valuation of Chedraui speaks to a credibility gap; one that may no longer be deserved, considering the strong EBITDA contribution from Smart and Final. There appears a great disconnect between the present earnings power of the underlying business as compared to the present enterprise value. $1 billion + in annual EBITDA on a relatively unleveraged balance sheet should support a variety of growth initiatives for the benefit of current shareholders.
The markets initially considered the Chedraui purchase of Smart & Final to be a turnaround risk. A takeover of a stagnant retailer in need of an expensive brand refresh typically becomes a money pit; these sorts of deals, more often than not, wind up getting either quietly, or occasionally, ingloriously divested, years later, for a horrific loss. Investors are usually right to be skeptical on purchases.
Preliminary fears about Smart and Final being a millstone have been, thus far, overly pessimistic.
In fact, a few more quarters of results similar to Q2 and investors might wind up declaring the purchase, not to be just a fair deal, but perhaps an outright steal. Should Chedraui announce a decision to open new Smart and Final locations in the year ahead and expand the footprint, the acquisition could very much wind up being a transformative, company maker.
Chedraui, provided it remains a public company, has a more visible path towards reaching smallish large cap status, in the coming years.
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