Equity Research

May 5, 2020 Quarterly Report FEMSA www..com KOF and Proximity posted solid results @analisis_fundam

▪ Femsa reported neutral results, in line with our estimates. Revenues Consumer and Telecoms posted a mid-single digit growth, bolstered by Proximity and Health dynamism, which offset declines in KOF and Fuel division Valentín Mendoza Senior Strategist, Equity ▪ Despite a challenging economic environment by the end of march, [email protected] profitability improved by 50bps due to KOF and OXXO margin Jorge Izquierdo expansions, which offset Oxxo Gas’ contraction Analyst [email protected] Solid dynamics in Proximity. Despite a challenging economic environment, revenue increased 5.5% y/y to $122.284 billion. By division, Proximity posted BUY Current Price $155.77 a solid 10.6% growth, boosted by a 5.5% increase in Same Store Sales and 268 PT 2020 $211.00 new openings. In Health, sales grew 19.9% -explained by the integration of GPF Dividend 2020e 3.1 Dividend Yield (%) drugstores and the opening of 35 new units-. The latter offset a 6.8% drop in Upside Potential SSS and a negative FX impact due to the strength of the . In Fuel, Max – Mín LTM ($) 191.42 – 136.2 Market Cap (US$m) 22,585.5 the opening of 5 new service stations mitigated the negative effect of lower Shares Outstanding (m) 3,578 Float 60% volumes (-0.6%) and prices (-0.9%). Thus, revenue was flat (SSS -1.5%). Daily Turnover US$m 593.3 Finally, KOF reported a 1.9% y/y revenue decline. As for EBITDA, the Valuation metrics TTM FV/EBITDA 9.9x company reported a 9.7% y/y growth to $17.132 billion, supported by operating P/E 21.9x efficiencies at KOF (+160bps), a better sales mix in Oxxo stores (+40bps), stable margins in the Health division and lower energy costs, which offset a Relative performance to Mexbol LTM 60bps margin contraction in the Fuel division. Net income jumped 249% y/y 10% bolstered by significant FX gains ($8.325 billion) -due to a positive effect of the 0% depreciation of the Mexican peso on its USD-denominated cash position-. -10% Solid for facing a challenging scenario. The company has deployed strategies -20% for facing a challenging environment with a better liquidity position. Thus, the -30% -40% main highlight is the careful revision of its CapEx deployment though the May-19 Jul-19 Oct-19 Jan-20 Apr-20 number of openings will be lower than expected at the beginning of 2020. MEXBOL FEMSAUBD

Femsa will be postponing dividend payment towards the end of the year.

Consequently, we will incorporate such perspective into our estimates.

Financial Statements Valuation and Financial metrics 2018 2019 2020E 2021E 2018 2019 2020E 2021E Rev enue 483,513 506,910 548,683 593,800 EV/EBITDA 11.4x 10.0x 9.5x 9.1x Operating Income 42,184 47,165 48,154 49,825 P/E 23.1x 28.0x 26.9x 16.3x EBITDA 61,927 75,483 78,325 82,982 P/BV 2.2x 2.2x 2.2x 2.2x EBITDA Margin 12.8% 14.9% 14.3% 14.0% Net Income 24,084 19,936 20,745 34,091 ROE 7.2% 6.0% 6.4% 10.6% Net Margin 5.0% 3.9% 3.8% 5.7% ROA 4.2% 3.1% 3.2% 5.2%

EBITDA/ Interest 6.3x 5.3x 5.6x 5.8x

Total Assets 576,381 637,541 652,124 651,329 Net Debt/EBITDA 1.1x 1.6x 1.5x 1.6x

Cash 62,047 65,562 68,434 55,982 Debt/Equity 0.4x 0.6x 0.6x 0.6x Total Liabilities 240,839 311,790 332,764 327,725 Debt 131,300 187,257 187,544 187,602 Common Equity 335,542 325,751 319,361 323,604 This document is provided for the reader’s convenience Source: Banorte only. The translation from the original Spanish version was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “Sólidos resultados en KOF y Proximidad” was released on April 30, 2020. Document for distribution among public 1

FEMSA – Results 1Q20 Revenue & EBITDA Margin MXN, million MXN, million Diff% vs Concept 1Q19 1Q20 Var % 1Q20e Estim. Revenue 115,938 122,284 5.5% 124,524 -1.8% Operating Income 8,979 9,518 6.0% 9,402 1.2% 135,000 18% Ebitda 15,611 17,132 9.7% 16,507 3.8% 130,000 Net Income 2,233 7,787 248.7% 4,891 59.2% 16.0% 15.2% Margins 125,000 16% 14.8% Operating Margin 7.7% 7.8% 0.0pp 7.6% 0.2pp 120,000 14.0% Ebitda Margin 13.5% 14.0% 0.5pp 13.3% 0.8pp 13.5% Net Margin 1.9% 6.4% 4.4pp 3.9% 2.4pp 115,000 14% EPS $0.62 $2.18 248.7% $1.37 59.0% 110,000

105,000 12%

1Q19 2Q19 3Q19 4Q19 1Q20 Income Statement (Million pesos) Year 2018 2019 2019 Variación Variación Revenue EBITDA Margin Quarter 1 4 1 % A/A % T/T

Net Revenue 115,938 132,289 122,284 5.5% -7.6% Costs of goods sold 73,144 80,300 76,441 4.5% -4.8% Gross profit 42,794 51,989 45,843 7.1% -11.8% General expenses 33,417 37,290 36,047 7.9% -3.3% Net Income & ROE Operating Income 8,979 13,618 9,518 6.0% -30.1% MXN, million Operating Margin 7.7% 10.3% 7.8% 0.0pp (2.5pp) Depreciation 6,632 7,497 7,613 14.8% 1.6% EBITDA 15,611 21,114 17,132 9.7% -18.9% 9,000 10.7% 12.0% EBITDA Margin 13.5% 16.0% 14.0% 0.5pp (2.0pp) 9.9% 8,000 9.2% 9.3% Interest Income (Expense) net (3,889) (5,156) 3,781 N.A. N.A. 10.0% 7,000 7.9% Interest expense 3,470 3,665 5,338 53.9% 45.7% 6,000 8.0% Interest income 744 702 690 -7.3% -1.7% 5,000 Other income (expense) 23 8 104 347.7% >500% 6.0% Foreign exchange gain (loss) (1,187) (2,201) 8,325 N.A. N.A. 4,000 Unconsolidated subsidiaries 922 1,408 260 -71.8% -81.5% 3,000 4.0% 2,000 Income before taxes 4,835 8,450 13,559 180.4% 60.5% 2.0% Income taxes 1,930 2,985 4,723 144.7% 58.2% 1,000 Discontinued operations N.A. N.A. 0 0.0% Consolidated Net Income 3,849 6,076 9,112 136.7% 50.0% 1Q19 2Q19 3Q19 4Q19 1Q20 Non-controlling interest 1,616 1,283 1,325 -18.0% 3.3% Net Income ROE Net Income 2,233 4,793 7,787 248.7% 62.5% Net Margin 1.9% 3.6% 6.4% 4.4pp 2.7pp EPS 0.624 1.340 2.176 248.7% 62.5%

Balance Sheet (Million pesos) Total Current Assets 172,967 172,579 250,389 44.8% 45.1% Net Debt & Net Debt to EBITDA ratio Cash & Short Term Investments 74,854 65,562 133,470 78.3% 103.6% MXN, million Long Term Assets 444,152 464,962 510,843 15.0% 9.9% Property, Plant & Equipment (Net) 107,385 114,513 117,936 9.8% 3.0% Intangible Assets (Net) 106,348 104,483 105,632 -0.7% 1.1% Total Assets 617,119 637,541 761,233 23.4% 19.4% 140,000 2.0x Current Liabilities 124,390 136,534 156,042 25.4% 14.3% 120,000 1.7x Short Term Debt 24,770 35,737 41,013 65.6% 14.8% 1.6x 100,000 1.5x 1.6x Accounts Payable 63,290 76,676 75,947 20.0% -1.0% 80,000 Long Term Liabilities 171,090 175,256 257,360 50.4% 46.8% 1.5x Long Term Debt 149,970 151,520 224,956 50.0% 48.5% 60,000 Total Liabilities 295,480 311,790 413,402 39.9% 32.6% 40,000 1.1x Stockholders’ Equity 321,639 325,751 347,831 8.1% 6.8% 20,000 Non-controlling interest 75,074 73,762 72,705 -3.2% -1.4% 0 1.0x Total Equity 246,565 251,988 275,126 11.6% 9.2% 1Q19 2Q19 3Q19 4Q19 1Q20 Liabilities & Equity 617,119 637,541 761,233 23.4% 19.4% Net Debt 99,886 121,695 132,499 32.7% 8.9% Net Debt Net Debt to EBITDA

Cash Flow CF from Operating Activities 15,161 12,627 12,179 CF from Investing Activities 8,778 (26,175) (3,140) CF from Financing Activities (9,267) (15,746) 42,441 FX effect on cash (1,864) (2,994) 16,428 Change in Cash Balance 12,807 (32,289) 67,908

Source: Banorte, MSE.

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Performance by Division

Proximity Division 1Q19 Margin 1Q20 MargIn % y/y Ticket $33.9 $37.0 9.1% Traffic 20.9 20.2 (3.3%) SSS* $706.7 $745.9 5.5%

Revenues $41,250 $45,620 10.6% EBITDA $7,708 17.8% $8,655 18.1% 12.3%

Health Division 1Q19 Margin 1Q20 MargIn % y/y SSS* $1,388.9 $1,293.8 (6.8%)

Revenues $12,758 $15,296 19.9% EBITDA $995 7.8% $1,191 7.8% 19.7%

Fuel Division 1Q19 Margin 1Q20 MargIn % y/y Price per lt $17.6 $17.4 (0.9%) Volume 380.8 378.4 (0.6%) SSS* $6,697.4 $6,599.0 (1.5%)

Revenues $10,853 $10,858 0% EBITDA $535 4.9% $464 4.3% 11.9%

Coca – Cola Femsa 1Q19 Margin 1Q20 MargIn % y/y Volume 796.1 793.5 (0.3%)

Revenues $46,248 $45,348 (1.9%) EBITDA $8,541 18.5% $9,086 20.0% 6.4%

Consolidated 1Q19 Margin 1Q20 MargIn % y/y

Revenues $115,938 $122,284 5.5% EBITDA $15,612 13.5% $17,133 14.0% 9.7%

*SSS = Same-store sales considering units that have been operating for more than 12 months

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Certification of Analysts. We, Gabriel Casillas Olvera, Alejandro Padilla Santana, Delia María Paredes Mier, Juan Carlos Alderete Macal, Manuel Jiménez Zaldívar, Marissa Garza Ostos, Tania Abdul Massih Jacobo, Francisco José Flores Serrano, Katia Celina Goya Ostos, Santiago Leal Singer, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Víctor Hugo Cortes Castro, Hugo Armando Gómez Solís, Miguel Alejandro Calvo Domínguez, Luis Leopoldo López Salinas, Leslie Thalía Orozco Vélez, Gerardo Daniel Valle Trujillo, Jorge Antonio Izquierdo Lobato and Eridani Ruibal Ortega, certify that the points of view expressed in this document are a faithful reflection of our personal opinion on the company (s) or firm (s) within this report, along with its affiliates and/or securities issued. Moreover, we also state that we have not received, nor receive, or will receive compensation other than that of Grupo Financiero Banorte S.A.B. of C.V for the provision of our services.

Relevant statements. In accordance with current laws and internal procedures manuals, analysts are allowed to hold long or short positions in shares or securities issued by companies that are listed on the and may be the subject of this report; nonetheless, equity analysts have to adhere to certain rules that regulate their participation in the market in order to prevent, among other things, the use of private information for their benefit and to avoid conflicts of interest. Analysts shall refrain from investing and holding transactions with securities or derivative instruments directly or through an intermediary person, with Securities subject to research reports, from 30 calendar days prior to the issuance date of the report in question, and up to 10 calendar days after its distribution date.

Compensation of Analysts. Analysts’ compensation is based on activities and services that are aimed at benefiting the investment clients of Casa de Bolsa Banorte Ixe and its subsidiaries. Such compensation is determined based on the general profitability of the Brokerage House and the Financial Group and on the individual performance of each analyst. However, investors should note that analysts do not receive direct payment or compensation for any specific transaction in investment banking or in other business areas.

Last-twelve-month activities of the business areas. Grupo Financiero Banorte S.A.B. de C.V., through its business areas, provides services that include, among others, those corresponding to investment banking and corporate banking, to a large number of companies in Mexico and abroad. It may have provided, is providing or, in the future, will provide a service such as those mentioned to the companies or firms that are the subject of this report. Casa de Bolsa Banorte or its affiliates receive compensation from such corporations in consideration of the aforementioned services. Over the course of the last twelve months, Grupo Financiero Banorte S.A.B. C.V., has not obtained compensation for services rendered by the investment bank or by any of its other business areas of the following companies or their subsidiaries, some of which could be analyzed within this report.

Activities of the business areas during the next three months.

Casa de Bolsa Banorte, Grupo Financiero Banorte or its subsidiaries expect to receive or intend to obtain revenue from the services provided by investment banking or any other of its business areas, by issuers or their subsidiaries, some of which could be analyzed in this report. Securities holdings and other disclosures. As of the end of last quarter, Grupo Financiero Banorte S.A.B. of C.V. has not held investments, directly or indirectly, in securities or derivative financial instruments, whose underlying securities are the subject of recommendations, representing 1% or more of its investment portfolio of outstanding securities or 1 % of the issuance or underlying of the securities issued. None of the members of the Board of Grupo Financiero Banorte and Casa de Bolsa Banorte, along general managers and executives of an immediately below level, have any charges in the issuers that may be analyzed in this document.

The Analysts of Grupo Financiero Banorte S.A.B. of C.V. do not maintain direct investments or through an intermediary person, in the securities or derivative instruments object of this analysis report.

Guide for investment recommendations.

Reference

BUY When the share expected performance is greater than the MEXBOL estimated performance. HOLD When the share expected performance is similar to the MEXBOL estimated performance. SELL When the share expected performance is lower than the MEXBOL estimated performance. Even though this document offers a general criterion of investment, we urge readers to seek advice from their own Consultants or Financial Advisors, in order to consider whether any of the values mentioned in this report are in line with their investment goals, risk and financial position.

Determination of Target Prices

For the calculation of estimated target prices for securities, analysts use a combination of methodologies generally accepted among financial analysts, including, but not limited to, multiples analysis, discounted cash flows, sum-of-the-parts or any other method that could be applicable in each specific case according to the current regulation. No guarantee can be given that the target prices calculated for the securities will be achieved by the analysts of Grupo Financiero Banorte S.A.B. C.V, since this depends on a large number of various endogenous and exogenous factors that affect the performance of the issuing company, the environment in which it performs, along with the influence of trends of the stock market, in which it is listed. Moreover, the investor must consider that the price of the securities or instruments can fluctuate against their interest and cause the partial and even total loss of the invested capital. The information contained hereby has been obtained from sources that we consider to be reliable, but we make no representation as to its accuracy or completeness. The information, estimations and recommendations included in this document are valid as of the issue date, but are subject to modifications and changes without prior notice; Grupo Financiero Banorte S.A.B. of C.V. does not commit to communicate the changes and also to keep the content of this document updated. Grupo Financiero Banorte S.A.B. of C.V. takes no responsibility for any loss arising from the use of this report or its content. This document may not be photocopied, quoted, disclosed, used, or reproduced in whole or in part without prior written authorization from Grupo Financiero Banorte S.A.B. of C.V. History of PT and ratings Stock Date Recommendation PT FEMSA UBD 29/11/2019 Buy $211.00 FEMSA UBD 04/4/2019 Hold $192.00

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GRUPO FINANCIERO BANORTE S.A.B. de C.V.

Research and Strategy Gabriel Casillas Olvera Chief Economist, Head of Research and IRO [email protected] (55) 4433 - 4695

Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967

Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

Economic Research and Financial Market Strategy Executive Director of Economic Research and Alejandro Padilla Santana [email protected] (55) 1103 - 4043 Financial Market Strategy Itzel Martínez Rojas Analyst [email protected] (55) 1670 - 2251

Economic Research Juan Carlos Alderete Macal, CFA Director of Economic Research [email protected] (55) 1103 - 4046 Francisco José Flores Serrano Senior Economist, Mexico [email protected] (55) 1670 - 2957 Katia Celina Goya Ostos Senior Economist, Global [email protected] (55) 1670 - 1821 Luis Leopoldo López Salinas Economist, Global [email protected] (55) 1103 - 4000 x 2707

Market Strategy Manuel Jiménez Zaldívar Director of Market Strategy [email protected] (55) 5268 - 1671

Fixed income and FX Strategy Santiago Leal Singer Senior Strategist, Fixed Income and FX [email protected] (55) 1670 - 2144 Leslie Thalía Orozco Vélez Strategist, Fixed Income and FX [email protected] (55) 5268 - 1698

Equity Strategy Marissa Garza Ostos Director of Equity Strategy [email protected] (55) 1670 - 1719 José Itzamna Espitia Hernández Senior Strategist, Equity [email protected] (55) 1670 - 2249 Valentín III Mendoza Balderas Senior Strategist, Equity [email protected] (55) 1670 - 2250 Víctor Hugo Cortes Castro Senior Strategist, Technical [email protected] (55) 1670 - 1800 Jorge Antonio Izquierdo Lobato Analyst [email protected] (55) 1670 - 1746 Eridani Ruibal Ortega Analyst [email protected] (55) 1103 - 4000 x 2755

Corporate Debt Tania Abdul Massih Jacobo Director of Corporate Debt [email protected] (55) 5268 - 1672 Hugo Armando Gómez Solís Senior Analyst, Corporate Debt [email protected] (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Analyst, Corporate Debt [email protected] (55) 1670 - 2248

Economic Studies Delia María Paredes Mier Executive Director of Economic Studies [email protected] (55) 5268 - 1694 Miguel Alejandro Calvo Domínguez Senior Economic, Studies [email protected] (55) 1670 - 2220

Wholesale Banking Armando Rodal Espinosa Head of Wholesale Banking [email protected] (81) 8319 - 6895

Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales [email protected] (55) 5268 - 1640

Alejandro Aguilar Ceballos Head of Asset Management [email protected] (55) 5268 - 9996

Arturo Monroy Ballesteros Head of Investment Banking and Structured Finance [email protected] (55) 5004 - 1002 Head of Transactional Banking, Leasing and Gerardo Zamora Nanez [email protected] (81) 8318 - 5071 Factoring Jorge de la Vega Grajales Head of Government Banking [email protected] (55) 5004 - 5121

Luis Pietrini Sheridan Head of Private Banking [email protected] (55) 5004 - 1453

René Gerardo Pimentel Ibarrola Head of Corporate Banking [email protected] (55) 5268 - 9004 Ricardo Velázquez Rodríguez Head of International Banking [email protected] (55) 5004 - 5279 Víctor Antonio Roldan Ferrer Head of Commercial Banking [email protected] (55) 5004 - 1454