On Wednesday, JPMorgan initiated coverage on BBB Foods Inc (NYSE:TBBB), a leading hard discount food retailer in Mexico, with an Overweight rating and a price target of $30.00 per share.
The firm highlighted the company's significant growth potential in the Mexican market, where its format currently has limited penetration compared to more developed markets.
BBB Foods, known as 3B, operates a business model that the analyst believes has substantial room for expansion. With only about 2,300 stores at present, JPMorgan sees the potential for over 11,000 stores, indicating a significant opportunity for growth. The analyst noted that 3B's format tends to complement traditional food retail formats rather than compete directly with them.
The firm's analysis suggests that 3B could achieve a 5-year compound annual growth rate (CAGR) of 15% for store count, with revenues increasing at a 25% pace and EBITDA (earnings before interest, taxes, depreciation, and amortization) growing by 54% pre-IFRS16, which is a set of accounting standards. These growth rates are substantially higher than the local peers' average of around 5%.
Despite what appears to be high valuation multiples on the surface, with 19x/14x projected 2024/2025 enterprise value to EBITDA ratios, JPMorgan suggests that a long-term discounted cash flow (DCF) model is the most appropriate way to value 3B. The firm believes that the risk-reward profile for the company is favorable, as indicated by sensitivity analysis.
The analyst commended 3B's business model for its high return on invested capital (ROIC) of over 30% in mature stores and its negative working capital needs, which provide a financial advantage. The coverage launch reflects confidence in 3B's potential to outperform within its sector and the broader market.
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