Latam Consumer Monthly:We still see limited pockets of value(June 2016)

　　Across-the-board setback on dollar strength, but sector remained defensive

　　Latam consumer stocks took a mid-to-high-single-digit step back in May on theback of renewed dollar strength. Only 10% of our covered stocks showedpositive returns in USD (vs. 65% the prior month), while 68% outperformedtheir respective indices (vs. 39%). Notable outperformers were MGLU3, JBSS3(on proposed listing of non-Brazilian units abroad) and LREN3. Notableunderperformers included BTOW3 (on proposed capital increase) and PCAR4.

　　YTD, 45% of our coverage has outperformed. Overall we continue to think thatmost defensive names remain fairly valued (with the exception of Brazilianprotein producers), while risk-reward of discretionary names is not compelling.

　　Coke system consolidation in Latam remains in low gear, but is starting to shiftup (see Monthly Feature for an update of progress during the past year)

　　There was only one major change in the Latin Coke bottling landscape in 2015(Arca’s acquisition of Lindley, as discussed in our Monthly Feature herein), butwe believe it may shift into higher gear. Coca-Cola FEMSA recently announcedjointly with The Coca-Cola Company that it has acquired from Unilever the soybasedbeverage brand AdeS for $575 million (50% ownership by KOF and 50%by KO, customary in the non-carbonated beverage business in LatAm). AdeS ispresent in Brazil, Mexico, Argentina, Uruguay, Paraguay, Bolivia, Chile andColombia and had sales of $284 million in 2015 (volumes of 56.2 million unitcases). This implies multiples of 2x Revenues and $10.23/unit case (above theaverage for bottler deals of $4-5), but we believe that the higher profitability ofthe brand would bring the deal’s EV/EBITDA multiple closer to 10x (near theaverage historical valuation discussed in a previous report). Considering Arca’srecent deal with Coke to take over franchises in Texas and other Southweststates and Coke FEMSA’s potential takeover (in our view, discussed herein) ofthe Southern California franchise, we see consolidation for the LatAm Cokebottler system as moving back into higher gear over the next 12 months.

　　Walmex comp sales continue to exceed expectations, but CentAm struggling

　　Walmex reported May SSS growth of 8.0% in Mexico; again defying gravityand tougher comparisons (we expected +5.5% and consensus was 6.0%). Thenegative calendar effect showed as expected (the 4-week comparable growthrate was 11.9%), but the underlying rate remains well above what is explainedby macro factors alone (there is still a chance in our view that the inexplicablesales trend may be partially driven by aggressive pricing and this could showin 2Q16 results/margins when they are released in late July). Central America,on the other hand, reported 1.3% SSS growth (currency-neutral), significantlybelow the 7.0% reported in April and the 5.0% reported in 1Q16. We expected7% growth on easier comparisons, despite the negative calendar.

　　SICOBE: Brazil beverage production continues to point to a tough economy

　　According to SICOBE, May beer production rose 0.6% on very easy comps(10.5% drop in May 2015) and soft drinks fell 1.4% after rising only once in thepast 15 months. For beer, comparisons are set to get gradually more difficult incoming months (also true for soft drinks, although to a lesser extent). Given theexpectation of a 4% GDP decline in 2016 (and only a slight recovery in 2017),we do not expect a significant improvement in beverage trends any time soon.