Share analysis: Grupo Melo – agribusiness

The Company

Grupo Melo is an industry leader in a variety of agro-industrial activities across Panama, with a historical focus on poultry products. The company is publicly traded, listed on the Panama Stock Exchange (Bolsa de Valores de Panamá, BVP) under the ticker symbol MELO.

Grupo Melo has expanded to have a national presence through its 196 points of sale, operating through an internal structure made up of eight separate divisions. The company’s portfolio includes restaurants, pet services, gardening, industrial equipment sales and construction material outlets.

Together, these eight divisions generated roughly $424.8m in group sales for FY 2014, for a 6.3% increase over the previous year. From an international perspective, the company recently had its first foray into international markets through a commercial operation in Costa Rica.

Poultry Priority

Grupo Melo’s main line of business continues to be its poultry division, which is in charge of reproducing, incubating, growing, processing and packaging poultry and poultry-related products for sale in the country’s supermarkets.

With modern processing plants and distribution centres located throughout the country, the division generated some $165.9m in sales in 2014, representing 39% of the group total. In addition, the company is working on expanding and improving its main poultry processing plant, which will contribute to more efficient processing and distribution of fresh chicken through its different sales channels.

Meanwhile, Grupo Melo’s store division, which has more than 100 points of sale across Panama and Costa Rica, generated nearly $120.6m in sales in 2014, for an increase of $11.6m over the previous year. This represented approximately 28.4% of the group’s total sales. This division is comprised of Melo & Cia, an agribusiness subsidiary; Melo Pet & Garden; and COMASA, the construction materials stores. Melo & Cia is a leading chain for agriculture technology in Panama, offering a wide variety of pest control and maintenance products. For its part, the machinery division generated $85.3m in sales in 2014, accounting for 20.1% of Grupo Melo’s total sales. The group represents a variety of brands, including John Deere, Isuzu, Fiat and MG, and is a market leader in the sale of lightweight trucks, with a 27% market share.

The agriculture line maintained its leadership in the sector, with a 45% market share in grain harvest and a 100% market share amongst sugar cane harvesters. In its restaurant division, Grupo Melo owns a leading chain of Panamanian fast-food fried chicken restaurants called Pio Pio. The division generated a total of $47.8m in sales for the year, equivalent to 11.2% of group sales. The chain is well known for its quality products and prices.

Besides its main agro-industry divisions, Grupo Melo has some other minor activities in the Panamanian real estate sector, which generate around 1.7% of the group’s total income.

Group Performance

As of December 2014, Grupo Melo posted net income of $21.7m, a 10.4% increase over the previous year, which saw income of $19.6m. Furthermore, the company’s operating margin of 6.47% demonstrates an improvement in terms of cost reduction – a strategy that Grupo Melo has been pursuing in order to gain a competitive advantage over its local competitors.

The group’s fixed assets totalled $144m as of December 2014, up 11% over the previous year. This increase was primarily due to changes in net property, equipment and improvements, which increased by $14m year-on-year, from $95.4m to $109.4m.

In terms of market performance, Grupo Melo had a market capitalisation of $169.8m as of end-2014 and a share price of $71.70, for a price-to-earnings ratio of 7.9x on controlling common equity.

The stock was trading close to its 12-month low and was outperformed by the BVP index by some 1.8%. The company distributed $7.7m in dividends.