Analysis: Elektra share surge spooks Mexico investors
Stock Market Predictions
MEXICO CITY (Global Markets) - Anyone investing in funds linked to Mexico's IPC stock index in 2011 would have lost nearly double their money had it not been for the gains of a little-known company whose shares rarely change hands.
Grupo Elektra's stock almost tripled in a year when Mexico's share index fell, making the company the country's third biggest by market value - thanks largely to a financial trick that had nothing to do with its discount retail or banking businesses.
The gains recorded by the company, owned by billionaire television magnate Ricardo Salinas, were the biggest of any firm in Brazil, Mexico or Argentina in 2011. Without changes to stock index rules, analysts fear it could further distort Mexico's IPC index or the widely used MSCI Latin America and MSCI Mexico indices.
Shares in Elektra, which offers Mexico's poor loans for washing machines and other consumer items, surged 165 percent to 1385.72 pesos from 522.85 pesos a year earlier - despite the fact that sales were up only a quarter of that.
"It does not help Mexico at all to have this sort of behavior in the index," said Stacy Steimel, managing director and head of Latin America equities at PineBridge Investments. "This does not enhance our appetite for Mexico."
Mexico's equity market has lagged its rival Brazil in new public offerings and has struggled to attract investment. The stock market capitalization is about 30 percent of Mexican gross domestic product, next to some 50 percent for Brazil.
Elektra's price rise was powered by two things: methodology changes that increased its importance in Mexico's benchmark IPC index, and a derivative instrument known as an equity swap that allows the company to monetize its share-price gains.
The increased IPC weighting triggered a stock squeeze by forcing funds that track the index - like Mexican pension funds - to buy up scarce Elektra shares, which are to a great extent tied up by the Salinas family, or by UBS, the bank that manages the swap.
Many Mexican funds face the prospect of no bonus for 2011, because they did not - or could not - buy Elektra shares and their fund lagged the index, which they are expected to match.
"Nobody could outperform the index unless of course you held Elektra, but in point of fact it would be almost impossible to hold Elektra because it doesn't really have the free float that it looks like it has," Steimel said.
Elektra executives declined to comment on its shares.
Click here for a graphic on Elektra: link.reuters.com/qyk85s
DISTORTION
Salinas has been climbing the Forbes billionaires' list in tandem with Elektra's rising shares.
He withdrew Elektra and two other companies from their New York listings in 2005, after he became a target in a U.S. Securities and Exchange Commission fraud investigation.
Since 2006, when he paid a $7.5 million fine to settle that probe without admitting or denying any wrongdoing, he and his family have jumped to 112 on the Forbes list with a $8.2 billion fortune, making him Mexico's fourth richest man.
Salinas is not the only beneficiary of Elektra's meteoric rise: excluding Elektra, Mexico's IPC index would have fallen close to 7 percent in 2011 as opposed to 3.8 percent.
Several investors that spoke to Global Markets and who missed out on holding Elektra say the methodology behind Mexican indices which assign Elektra a high weighting needs to better reflect the scarcity of the shares.
"We've reached a stage now where Elektra is damaging the brand of capital markets in Mexico," said a Mexico equities analyst, who declined to be identified.
It was time regulators investigated Elektra, he added.
Both Mexico's Bolsa Mexicana de Valores, which designs the IPC index, and MSCI declined to comment. A spokesman for the country's banking regulator also declined all comment.
Those that have exposure to the company appear less worried.
Heiner Skaliks' Strategic Latin America Fund has a small amount of Elektra shares through its holding of an exchange-traded fund (ETF) that mirrors the MSCI Mexico index.
"When we invest in ETFs it's a way to gain access...to securities we would otherwise not invest in directly because they're not listed or because they're very scarce," he said.
Lawrence White, an economics professor at New York University, said Elektra showed Mexico needed to encourage more companies to go public and make its equity market more robust.
SWAPPING PROFIT
Some 70 percent of Elektra's 242 million shares outstanding are held by Salinas and his family. Just 72.5 million shares, or about 30 percent, are registered as freely floated, according to the Bolsa Mexicana de Valores.
Elektra's equity swap with UBS further reduces the number of its shares that are freely available. The swap is for the equivalent of 55.974 million shares, or about 23 percent of the total outstanding, according to Elektra's 2010 annual report.
"Other Mexican companies also use these swaps. It's a strategy to benefit from what they believe is a low market valuation of their shares. But in Elektra's case the problem is the swap is so big, it is absorbing most of the free float," said a Mexico City-based analyst, who declined to be named.
A spokesman for UBS declined to comment.
Factoring in the shares held by UBS to hedge the swap, the actual float of shares available is just 6 percent, Citigroup analysts calculated in a research report on Wednesday.
Further complicating the matter, in the first half of 2011, Elektra's buyback program accounted for between 19 percent and 41 percent of the monthly trading volume in the shares, the Citigroup report said.
That added liquidity to the shares - helping to boost its weighting according to index methodologies.
The market capitalization of Elektra reached 335.5 billion pesos ($24 billion) at the end of 2011, up from 127 billion pesos at the start of the year. Its market value is now greater than banking rival Banorte (GFNORTEO.MX) and supermarkets Soriana (SORIANAB.MX) and Chedraui (CHDRAUIB.MX) combined.
Elektra's net profit, including gains from the swap, rose to 18.9 billion pesos in the first nine months of 2011 from a loss in the year-earlier period. Core profit rose 13 percent.
Two local analysts, among the few who cover the company, have a 'Sell' and 'Underperform' rating on the stock.
The same two noted in October reports that Elektra received - just in the third quarter - a paper profit from the swap of 18.9 billion pesos. That figure was more than 12 times Elektra's third-quarter operating profit.
(Editing by Dave Graham)
