Emerging Peruvian Equities
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People seem to be very excited about some Latin American countries. Bolivia has recently sold $500 million in 10 year bonds at at a rate below 5%, and Peru's 10 year debt also trades at very tight spreads. I think rates on those sovereign bonds do not reflect real risk and are way too low.
That said, some fundamentals give support for so much excitement: in a world that is going through a giant economic crisis, the IMF expects the Bolivian economy to grow by 5% and the Peruvian economy to grow by 5.8% in 2013. So bonds seem expensive, but what about equities? Are they also expensive, or are them being overlooked? Here I start a series of reviews on Latin American equities. Let's start by reviewing the three main Peruvian equities for those who want to play the Latin American growth story going forward.
Compania de Minas Buenaventura (NYSE: BVN) is Peru’s largest publicly traded company in the precious metals industry. BVN gives exposure to some of the world’s leading mines across several metals, and unparalleled reach to one of the richest mineral reserves in the world. BVN controls world class mines that dig for various metals: gold through Yanacocha, silver through Uchucchacua, and copper through the Cerro Verde mine. The company has a compelling 20% payout ratio, but at today's market cap of $8.45 billion, it just offers a 1.7 dividend yield.
Even if the yield doesn’t sound too exciting and there are always risks associated to a company that mainly operates in just one emerging market, BVN, with its copper, gold (which is almost 45% of the product mix) and silver resources will always be a target for M&A. So, for those of you short on the US Dollar and long on the Peruvian development as a serious emerging market, BVN is a valid option since, valued at x5.1 EV/EBITDA, it trades at a 23% discount to peers.
Credicorp (NYSE: BAP) is Peru's financial leader and is engaged in commercial banking, insurance, and investment banking, and it is the number one reference in the Peruvian economy so I couldn’t avoid mentioning it. If BVN was a play on Peruvian exports, BAP is a bet on the development of Peru's internal market and the growth of consumption. Even if I am convinced about the future high earnings growth that BAP can achieve, I am also convinced that, at a market cap of $11 billion, trading at x14 P/E and x2.9 Price/Book, this diversified financial group is overvalued since it still operates in a $178 billion economy (Peru's GDP). In my opinion, not even a 33% year over year EPS growth can explain a $11 billion valuation for this complex group of companies. I would like BAP, but it has to be cheaper!
Cementos Pacasmayo (NYSE: CPAC) is the largest cement company in Peru and a true bet on a country that is lacking a huge amount of infrastructure and is growing at an exciting pace. Fundamentals are strong: during the last 9 months (the last three quarters) CPAC has increased cement volumes sales by 17.5% compared to the same period in 2011. However, EBITDA has grown 33.6% in Q3 compared to Q2, and net income has gone up by an even higher 57% rate in just one quarter. CPAC, even when trading at the rich x25 P/E multiple, has an affordable market cap of $1.39 billion, and it could be an attractive M&A target for the likes of Brazilian giant Carmargo Correa, which has been buying cement assets across Latin America (such as the Argentinean local champion Loma Negra). The company is growing fast and it has a lot of room to expand in a country so hungry for infrastructure.
Latin America in general and Peru in particular offer great growth opportunities. As an investor you only have to beware the price you are paying for that growth before making any investment. This is just the start of our country by country search for potential opportunities in Latin America.
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