Gralado - LATAM Stocks Investment Analysis #14
Gralado is a Uruguayan company that owns the operating rights to the Tres Cruces bus terminal and shopping mall, both of which are the largest in the country.
Dear LATAM Stocks Readers,
Thanks for reading another edition!
I am writing you from Montevideo, Uruguay. This is my fourth time visiting Uruguay and every time I am more and more impressed by the country. The quality of life here is very high when compared to the rest of LATAM. Uruguay has the highest GDP per capita is South America. It’s safe, beautiful and the people are friendly. If you get the chance, it’s a wonderful country to visit!
Years ago when I worked in M&A I looked at a good number of projects in Uruguay, but all private market opportunities. I had never dug into the public markets here. So for this edition of the newsletter I decided to dive into the Uruguayan stock market and cover a company from Uruguay.
This presented me with a few problems. First, there just are not very many public equities listed on the Montevideo stock exchange. The full list has 21 companies, but it appears to be somewhat out of date, as some companies are no longer listed or have been acquired. Second, not all of the companies listed have good financial disclosures or if they do, I couldn’t find them. And finally, I didn’t want to cover another food company (I have covered a lot of LATAM food companies) or a large multinational bank like Scotiabank. This left me with few options.
Luckily I found an interesting real estate and infrastructure company that I think will serve as a good case study to learn more about the Uruguayan economy and investing in Uruguay.
Enter Gralado.
Gralado has government concessions to operate the Tres Cruces bus terminal and the connected shopping mall. Tres Cruces is the largest bus terminal in Uruguay. Located in the heart of Montevideo, it serves the entire country. Through a separate concession Gralado also operates the connected shopping mall. Both the terminal and the mall have been recently renovated, with a 12,000 square meter addition to the mall opening in December 2022.
Just last week I passed through Tres Cruces and can attest that the bus terminal feels brand new. It’s a huge improvement from the old and run down bus terminal I remember using the last time I visited Uruguay in 2018.
I realize it’s unlikely any of you will invest in Gralados’ stock. Even if you do manage to open an account on the local stock exchange, there are very few share outstanding, which are tightly held. Some days the stock doesn’t trade. But I think it’s a unique company and can be a useful case study for those interested in Uruguay.
I hope you agree and learn something from the following analysis. Let me know what you think in the comments!
Before going into the company specific information I want to highlight a few facts about Uruguay and its economy. What I want to convey with these facts is that Uruguay is slow, steady and stable. Although it might not offer many opportunities to get rich quick, chances are Uruguay will be a safe place to invest for those with a long term horizon.
For a more complete overview of the Uruguayan economy I recommend reading the following document from Price Waterhouse Cooper. “Doing Business in Uruguay”
The Uruguayan Economy - Quick Facts
GDP (PPP): $85.9 billion; $24,233 per capita
Unemployment: 10.5%
Inflation (CPI): 7.7%
Public Debt to GDP: 65.1%
“Uruguay’s economy is strongly rooted in raw material production (meat, grains, wool, wood, cellulose pulp), other strategic sectors have developed because of high human capital standards. These sectors, including services related to tourism, information technology, finance, logistics and transportation, construction, call centres, and shared service centres, have shown significant growth.” - PwC
Doing business in Uruguay
The Heritage Foundation ranks Uruguay as the 27th freest economy in the world, just above The United Kingdom. The only Latin American country with a higher ranking is Chile at 22.
Uruguay’s ranking is bolstered by its strong property rights and effective judicial system, as well as by relatively low trade tariffs and equal treatment for foreign investments. However operating a business in Uruguay is not without government intervention. Strict labor laws and associated taxes can be burdensome.
Uruguay Demographics
Uruguay has a population of around 3.5 million people. Based on current projections Uruguay is currently at or near its peak population, which is projected to remain relatively constant for the next 20 years.
The median age of Uruguayans is 36. Around half of the country’s population, 1.8 million people, live in the capital city of Montevideo. The second largest city, Salto, has less than 100,000 residents.
Uruguay has one of the lowest population densities in the world, with 20 residents per square kilometer, making it the 200th most densely populated country in the world!
Common Stock: Gralado S.A.
Industry: Infrastructure and Real Estate
Current Market Price: 239 Pesos; 6.14 USD
Market Capitalization: 3.1 Billion Pesos; 78.5 million USD
*All values in this article are expressed in Uruguayan Pesos unless otherwise noted.
*This analysis is based on the company’s audited annual report for the year ending April 2022, as well as a detailed report by Moody’s. You can find the source documents by following the links.
*A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.
Summary of the Company
Gralado S.A. is a publicly traded Uruguayan company that has government concessions to operate the largest bus terminal in Uruguay, Tres Cruces, as well as the connected shopping center.
These are two separate concessions. The bus terminal concession is valid until 2024. The shopping center concession is valid until 2041.
In 2022 the shopping center accounted for 75% of the company’s revenue and the bus terminal accounted for the remaining 25%.
The Bus Terminal
The terminal was inaugurated in 1995 and has undergone several renovations and expansions. It is open 24/7/365.
The terminal has 75 bus platforms with a total area of around 50,000 square meters.
Tres Cruces received over 10 million passengers in 2019, (over 30,000 per day on average), making it one of the busiest bus terminals in South America.
In addition to being the largest bus terminal in Uruguay, Tres Cruces also has international routes with connections to Argentina, Brazil, Chile, and Paraguay.
The Shopping Center
Connected to the largest bus terminal in the country, which is strategically located in the center of Montevideo, Uruguay’s largest city.
Over 200 stores and service businesses. Shopping center tenants include a variety of retail businesses, a super market, travel agency, car rentals, restaurants, and a cinema, among others.
100% occupancy as of January 2023.
12,000 square meters of new space inaugurated in December 2022, mostly new shops and parking.
Tres Cruces Shopping Center
The Financials
Revenue and Cost Analysis
Gralado had revenue of 561.6 million pesos (~14 million USD) in the fiscal year ending April 2022. This is a significant increase from revenue of 356.4 million pesos the previous year. This growth can be attributed to a return to more normal travel after the covid lockdowns were lifted.
Gross profit of 323.6 million pesos in 2022, representing a gross margin of 58%.
EBITDA was 369 million pesos in 2022.
EBIT was 273 million pesos in 2022.
Gralado had net income of 251.6 million pesos in 2022, representing a profit margin of 45%. Even with the lockdowns and uncertainties in 2021, Gralado still managed to be profitable, with net income of 60 million pesos, representing a profit margin of 17%.
Balance Sheet Analysis
Gralado has a healthy balance sheet. Their liquidity position is fine, with a current ratio of 1.2 and they are not leveraged, with debt to equity ratio of 0.9.
To finance the recent bus terminal renovation, Gralado obtained financing from the Inter-American Investment Corporation which is an IDB representative.
What is the IDB?
“IDB Invest aims to be the partner of choice for the private sector in Latin America and the Caribbean. We finance projects to advance clean energy, modernize agriculture, strengthen transportation systems and expand access to financing.
IDB Invest is owned by its 48 member countries, 26 of which are in the Latin American and Caribbean region. Each country’s voting power is proportional to the number of IDB Invest shares it holds.”
You can read more about IDB and see examples of the projects they finance on their site.
Debt Analysis
The company has 741.1 million pesos in total debt outstanding as of the fiscal year end April 2022, 141.8 million of this debt is classified as current.
Over 57% of the company’s debt is denominated in foreign currency. This is a significant risk as 100% of the company’s revenue is in Uruguayan pesos.
Valuation Metrics
Price to Book – 3.3x
Price to Sales – 5.4x
Price to EBITDA – 8.3x
Price to EBIT - 11.2x
Price to Net Income - 12.1x
Share Dynamics and Capital Structure
The company’s capital stock is made up of 12,816,000 ordinary shares, each with the right to one vote.
Dividends
In the fiscal year 2022 Gralado paid out dividends totaling 96 million pesos. This equates to a dividend per share of 7.5 pesos.
At the current market price this implies a trailing dividend yield of 3.1%.
Technical Analysis Notes
Gralado stock is thinly traded with very few shares outstanding. Some days the stock does not trade.
The technicals provide almost no useful information for long term investors and Gralado stock is not a suitable instrument for short term traders.
Summary and Conclusions
Positives
The shopping center has 100% occupancy as of January 2023.
Strong margins. Very impressive that the company maintained profitability in 2021, one of the most challenging years in history for retail and travel related businesses.
Consistently pays a healthy dividend.
Bus Terminal is key infrastructure for the wealthiest per capita country in South America.
Negatives
Bus terminal concession expires in 2024. If it doesn’t get renewed ~25% of revenue disappears.
Significant carry trade risk, 57% of debt denominated in foreign currency. Carry trades have historically been very bad for LATAM companies.
Valuation is not cheap.
Conclusion
Assuming the bus terminal concession get renewed, Gralado is likely to be a slow and steady performer for the foreseeable future. Uruguay’s demographics and economy are stable and the country is already quite wealthy relative to the region.
The company’s financial position is OK, with strong margins and a decent dividend. But investors need to monitor the company’s foreign currency debt closely.
I realize Gralado might not be the most exciting company in the world, and it certainly isn’t going to make anyone rich anytime soon. But it is a high quality company and a suitable investment for investors with a long term time horizon, for example a family office. The same can be said for Uruguay as a whole. The country offer patient investors many attractive opportunities for slow and steady wealth accumulation in a secure jurisdiction.
I hope you learned something from this analysis! As always, feel free to comment below. And if you want to receive future write ups, subscribe here.
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*A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.
Great note! Are there many Uruguayan companies listed on exchanges out of Uruguay? Such as on US exchanges via ADRs?