Mexichem Seen as Buy as Acquisitions Improve Outlook for Returns

Mexichem SAB has returned investors nothing this year but most analysts who rate the stock recommend buying it. That’s because they’re looking ahead.

The petrochemical company controlled by billionaire Antonio del Valle Ruiz has the most optimistic outlook of any company on Mexico’s IPC index. It’s expected to gain investors about 26 percent in 12 months, after losing them 0.7 percent so far this year, according to analysts’ estimates compiled by Bloomberg. It’s rated a buy by 18 of the analysts and hold by one.

Latin America’s biggest plastic pipe maker is benefiting from its 2014 acquisitions of Dura-Line Corp. in the U.S. and Vestolit GmbH in Germany, Chief Executive Officer Antonio Carrillo said in a phone interview from the company’s headquarters in Tlalnepantla, Mexico. Rising sales volumes from those units helped boost earnings and counter the impact of weaker currencies in other countries where Mexichem operates, such as Brazil, Carrillo said.

“Considering the complicated international global environment in terms of currency devaluations and oil prices, people were expecting us to have a much weaker quarter,” Carrillo said in the Aug. 13 interview. The company’s solid results indicate it doesn’t “have any bubbles that could burst,” he said.

Mexichem’s 95 percent ratio of buy ratings is followed by Cemex SAB, the biggest cement maker in the Americas, with 91 percent, and toll-road operator Promotora y Operadora de Infraestructura SAB, or Pinfra, with 88 percent. Mexichem’s current valuations present an attractive entry point as the company has a “compelling risk-reward profile,” Gilberto Garcia, an equity analyst at Barclays Plc, said in an Aug. 13 research report recommending investors buy the stock.

Bearing Fruit

Mexichem’s growth projects are moving closer to bearing fruit, Garcia wrote. The company formed a joint venture with Petroleos Mexicanos in 2013 to boost vinyl chloride production, and is building an ethylene cracker with Dallas-based Occidental Chemical Corp., slated to begin operation in 2017.

“The shares are being hit by the fall in oil prices, but looking at the next 12 months, it’s expected that margins will improve,” Jorge Lagunas, who manages about $200 million in investments at Interacciones Casa de Bolsa SA, said in a phone interview. “It’s likely the shares will rebound near the end of the year.”

Mexichem has been Mexico’s most acquisitive company over the past decade, and growth this year will allow it to make further purchases, according to Carrillo.

Small Acquisitions

The company, which has negotiated at least 21 deals since 2004, is currently “evaluating some small acquisitions” that could “add immediate value and synergies,” said Carrillo, the company’s CEO since 2012. Stable margins and a 2.1 debt-to-Ebitda ratio give the company the flexibility to consider additional buys, he said.

The company reported a 3.5 percent increase in second-quarter earnings before interest, taxes, depreciation and amortization, or Ebitda, according to data compiled by Bloomberg. The company forecasts that Ebitda, excluding the results of operations in Venezuela and the petrochemical plant joint venture with Pemex, will rise by double digits this year.

Oil, which is used to make Mexichem’s products, such as polyethylene and poly-vinyl chloride, or PVC, has fallen about 60 percent in New York since last year’s peak in June.

“It seems most think the company’s shares have already hit their lowest point and should be headed back up,” Jean-Baptiste Bruny, a BBVA Research analyst, said in a phone interview from Mexico City. “Given their positive margins lately, the company is in position to consider further acquisitions in the mid-term.”

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