Equity Research México

Quarterly Report July 29, 2020 ALFA www..com Focused strategy on retaking its growth-path @analisis_fundam

▪ Alfa's results were strongly impacted by the effects of COVID-19, with some extraordinary items, which exacerbated the falls particularly in Marissa Garza Director of Equity Strategy and [email protected]

▪ Although challenges prevail in the environment, all plants are now functionally operating, thus it seems that the worst has been left behind, Under Review while Alfa remains focused on re-starting its growth Current Price $11.40 Theoretical NAV value $16.19 Weakness beyond estimates given non-recurring items. Results were clearly Discount/Premium vs NAV -29.6% PT2020 impacted by the effects of the pandemic. On a consolidated basis, fell Upside Potential 13.2% y/y, and EBITDA declined 53.4% y/y, below estimates. The latter is Max – Min LTM ($) 19.50- 6.12 Market Cap (US$m) 2,494.9 mainly explained by a greater weakness in Alpek's figures -due to a greater than Shares outstanding (m) 5,058.3 anticipated inventory and raw material carry-forward effect, although the solid Float 54.5% Daily Turnover ($m) 112.5 volumes and resilience of margins stood out- and Nemak's -affected by the Valuation Metrics LTM * temporary shutdown of its plants and some non-recurrent labor indemnities, FV/EBITDA Adj 6.0x related to its cost reduction strategy. The latter was offset by positive numbers P/E 14.3x in Axtel, supported by good results in Infrastructure (now Axtel Networks) and an extraordinary gain from the assignment of spectrum to Amx. In Sigma, we observed profitability pressures and a lower demand in Food Service. The Relative performance to MEXBOL (LTM) operating weakness impacted the results at the net level, where a loss of $2.1 20% billion was posted. With these results, ND/EBITDA ratio rose from 3.4x to 3.9x. 10% Alfa's shares trade at a 29.6% discount to its net value (NAV). 0% -10% -20% Implementing strategies to help restart its growth. Although the -30% environment is still very challenging, it seems that the worst is over, as all Alfa's -40% -50% plants are finally functioning. Thus, focus remains on making operations more -60% -70% efficient with strict measures in order to reduce costs and expenses, optimizing Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 working capital and adapting new strategies in each business for the 'new MEXBOL ALFAA normal'. However, we believe that restarting growth will take some time.

Financial statements Valuation and financial metrics MXN, million 2018 2019 2020E 2021E 2018 2019 2020E 2021E Revenues 366,432 337,750 322,138 319,942 FV/EBITDA 3. 9x 4.5x 6.9x 6.2x

Operating Income 35,705 23,593 19,034 21,044 P/E 4. 5x 10.1x 6.4x 6.5x Adjusted EBITDA 55,178 44,280 36,938 38,915 P/BV 0. 8x 0.8x 0.7x 0.7x EBITDA Margin 15.06% 13.11% 11.47% 12.16%

Net Income 13,143 5,807 9,115 9,033 ROE 17.9% 8.1% 11.0% 10.3%

Net margin 3.59% 1.72% 2.83% 2.82% ROA 3. 6% 1.7% 2.3% 2.2% EBITDA/ Interest expenses 5. 9x 5.6x 4.0x 4.4x Total 369,828 339,709 401,249 405,781 Net Debt/EBITDA 2. 4x 2.7x 4.7x 4.1x

Cash 26,411 25,195 18,442 22,950 Debt/Equity 1. 6x 1.5x 1.8x 1.6x Total Liabilities 271,604 244,783 293,677 293,144 Debt 157,049 144,088 190,829 182,155 This document is provided for the reader’s convenience only. The translation from the original Spanish version was Common Equity 98,224 94,926 107,572 112,637 made by Banorte’s staff. Discrepancies may possibly arise Source: Banorte 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 “Enfocando su estrategia en retomar el 1 crecimiento” was released on July 16, 2020. Document for distribution among public

ALFA –2Q20 Results & EBITDA Margin MXN, Millions MXN, million

Diff % vs Concept 2Q19 2Q20 Var % 2Q20e Estim. 14.9% 88,000 16.0% Revenue 85,538 74,275 -13.2% 76,890 -3.4% 13.3% 13.4% 86,000 12.7% Operating Income 6,431 -657 N.A. 2,681 N.A. 14.0% 84,000 Ebitda 11,368 5,300 -53.4% 7,066 -25.0% 12.0% 82,000 1,817 -2,090 N.A. 746 N.A. 80,000 7.1% 10.0% margins 78,000 8.0% Operating Margin 7.5% -0.9% -8.4pp 3.5% -4.4pp 76,000 6.0% Ebitda Margin 13.3% 7.1% -6.2pp 9.2% -2.1pp 74,000 4.0% Net Margin 2.1% 4.2% 2.1pp 1.0% 3.2pp 72,000 EPS $0.36 -$0.41 N.A. $0.15 -380.2% 70,000 2.0% 68,000 0.0% 2Q19 3Q19 4Q19 1Q20 2Q20

Income Statement (Millions) Revenue EBITDA Margin Year 2019 2020 2020 Var% Var% Quarter 2 1 2 y/y q/q

Net Revenue 85,537.5 82,691.0 74,274.7 -13.2% -10.2% Cost of goods sold 69,445.2 67,184.5 62,277.8 -10.3% -7.3% Gross profit 16,092.3 15,506.5 11,996.8 -25.5% -22.6% Net Income & ROE General expenses 9,661.8 9,315.7 12,653.5 31.0% 35.8% MXN, million Operating Income 6,430.6 6,190.8 (656.7) N.A. N.A. Operating Margin 7.5% 7.5% -0.9% (8.4pp) (8.4pp) Depreciation 4,885.3 4,772.5 5,166.3 5.8% 8.3% 4,000 12.8% 12.7% 14.0% EBITDA 11,368.0 11,100.0 5,300.0 -53.4% -52.3% 10.4% EBITDA Margin 13.3% 13.4% 7.1% (6.2pp) (6.3pp) 3,000 12.0% Interest income (expense) net (2,323.9) (6,051.5) (1,361.2) -41.4% -77.5% 2,000 8.1% 10.0% Interest expense 2,194.5 2,304.3 2,675.2 21.9% 16.1% 1,000 8.0% Interest income 111.9 97.0 141.6 26.6% 46.0% 5.5% Exchange Income (loss) 197.1 (42.9) (81.9) N.A. 90.9% 0 6.0% Unconsolidated subsidiaries (438.4) (3,801.3) 1,254.2 N.A. N.A. (1,000) 4.0% Unconsolidated subsidiaries (7.9) 37.4 (118.7) >500% N.A. (2,000) 2.0% Net Income before taxes 4,098.8 176.7 (2,136.6) N.A. N.A. Provision for Income taxes 1,525.8 (3,249.4) 461.0 -69.8% N.A. (3,000) 0.0% Discontinued Operations N.A. N.A. 2Q19 3Q19 4Q19 1Q20 2Q20 Consolidated Net Income 2,573.0 3,426.1 (2,597.6) N.A. N.A. Net Income ROE Minorities 755.9 (50.1) (507.2) N.A. >500% Net Income 1,817.1 3,476.2 (2,090.4) N.A. N.A. Net Margin 2.1% 4.2% -2.8% (4.9pp) (7.0pp) EPS 0.359 0.688 (0.414) N.A. N.A.

Balance Sheet (MXN, million) Net Debt & Net Debt to EBITDA Total Current Assets 117,563.2 156,270.9 152,229.4 29.5% -2.6% MXN, million Cash & Short Term Investments 23,330.3 52,945.3 54,209.5 132.4% 2.4% Long Term Assets 242,782.1 270,541.0 263,827.8 8.7% -2.5% Property, Plant & Equipment (Net) 149,512.5 156,807.3 153,495.8 2.7% -2.1% 180,000 3.9x 4.5x Intangible Assets (Net) 27,913.6 32,505.9 30,939.3 10.8% -4.8% 160,000 4.0x Total Assets 360,345.3 426,811.8 416,057.3 15.5% -2.5% 3.4x 140,000 3.5x Current Liabilities 106,869.5 127,628.7 116,414.7 8.9% -8.8% 2.7x 2.8x 2.7x 120,000 3.0x Short Term Debt 27,086.2 31,265.6 30,334.9 12.0% -3.0% 100,000 2.5x Accounts Payable 76,616.3 92,485.9 82,042.3 7.1% -11.3% Long Term Liabilities 158,449.3 197,099.2 201,041.2 26.9% 2.0% 80,000 2.0x Long Term Debt 137,175.3 174,069.0 178,208.4 29.9% 2.4% 60,000 1.5x Total Liabilities 265,318.8 324,728.0 317,455.9 19.7% -2.2% 40,000 1.0x Common 95,026.5 102,083.9 98,601.4 3.8% -3.4% 20,000 0.5x Minorities 24,014.9 25,015.7 24,394.5 1.6% -2.5% 0 0.0x 2Q19 3Q19 4Q19 1Q20 2Q20 Total Equity 71,011.6 77,068.2 74,206.9 4.5% -3.7% Liabilities & Equity 360,345.3 426,811.8 416,057.3 15.5% -2.5% Net Debt Net Debt to EBITDA Net Debt 140,931.3 152,389.3 154,333.8 9.5% 1.3%

Cash Flow Cash Flow from Operating Activities 16,437.5 9,150.6 9,517.3 Cash Flow from Investing Activities (11,739.4) (3,225.5) (6,069.0) Cash Flow from Financing Activities (1,328.9) 22,302.3 28,220.9 Increase (decrease) in cash (2,544.0) 23,930.3 25,866.0

Source: Banorte, MSE

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Operating Results by Division

Alpek MXN, Million 2Q19 Margin 1Q20 Margin 2Q20 Margin % y/y % q/q Revenue 31,425 100.0% 28,522 100.0% 27,448 100.0% -12.7% -3.8% EBITDA 3,077 9.8% 2,205 7.7% 1,700 6.2% -44.8% -22.9% EBITDA* 3,619 11.5% 2,541 8.9% 2,567 9.4% -29.1% 1.0% *Inventory and non – operating (non – recurring) gains/losses are excluded Source: Alfa Nemak MXN, Million 2Q19 Margin 1Q20 Margin 2Q20 Margin % y/y % q/q Revenue 19,325 100.0% 17,841 100.0% 9,171 100.0% -52.5% -48.6% EBITDA 3,325 17.2% 2,814 15.8% - 920 -10.0% NA NA

Source: Alfa Axtel MXN, Million 2Q19 Margin 1Q20 Margin 2Q20 Margin % y/y % q/q Revenue 3,092 100.0% 3,106 100.0% 3,078 100.0% -0.5% -0.9% EBITDA 1,094 35.4% 2,974 95.8% 1,222 39.7% 11.7% -58.9%

Source: Alfa Sigma MXN, Million 2Q19 Margin 1Q20 Margin 2Q20 Margin % y/y % q/q Revenue 30,776 100.0% 32,569 100.0% 34,287 100.0% 11.4% 5.3% EBITDA 3,425 11.1% 3,375 10.4% 3,695 10.8% 7.9% 9.5%

Source: Alfa Newpek MXN, Million 2Q19 Margin 1Q20 Margin 2Q20 Margin % y/y % q/q Revenue 379 100.0% 317 100.0% 172 100.0% -54.6% -45.7% EBITDA - 111 -29.3% - 112 -35.3% - 184 -107.0% NA NA

Source: Alfa

Net Assets Value

ALFA’S NET ASSET VALUE MXN, thousands Current Shares Price Mkt Cap Participation Total Equity Debt Cash Net Debt Alpek 2,118,163 $ 17.61 37,300,844 82.0% 30,586,692 48,244,500 13,829,000 34,415,500 Axtel 2,874,800 $ 4.38 12,591,624 53.5% 6,736,519 17,244,000 3,314,000 13,930,000 Nemak 3,078,076 $ 4.76 14,651,642 75.2% 11,018,035 52,092,000 14,618,000 37,474,000 Sigma 4,750,000 $ 12.50 59,375,000 100.0% 59,375,000 57,626,000 14,982,000 42,644,000 Total 107,716,246 175,206,500 46,743,000 128,463,500 ALFA 5,055,110 $ 11.40 57,628,254 208,543,800 54,210,000 154,333,800 Holding 33,337,300 7,467,000 25,870,300

Theoretical Price ALFA 81,845,946 Per share $ 16.19 Discount/Premium -29.6%

Source: Banorte, Alfa

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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, Eridani Ruibal Ortega and Juan Barbier Arizmendi, 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 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. Historical PT and Rating Stock Date Rating PT ALFA January 20, 2020 Under Review Under Review ALFA July 18, 2019 BUY $21.80 ALFA April 24, 2019 BUY $26.80 ALFA January 18, 2019 BUY $29.50

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

Research and Strategy Gabriel Casillas Olvera IRO and Chief Economist [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 Financial Alejandro Padilla Santana [email protected] (55) 1103 - 4043 Markets 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 Eridani Ruibal Ortega Analyst [email protected] (55) 1103 - 4000 x 2755 Juan Barbier Arizmendi Analyst [email protected] (55) 1670 - 1746

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 Analyst, Economic Studies [email protected] (55) 1670 - 2220

Wholesale Banking Armando Rodal Espinosa Head of Wholesale Banking [email protected] (81) 8319 - 6895 Alejandro Aguilar Ceballos Head of Asset Management [email protected] (55) 5268 - 9996 Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales [email protected] (55) 5268 - 1640 Alejandro Frigolet Vázquez Vela Head of Sólida Banorte [email protected] (55) 5268 - 1656 Arturo Monroy Ballesteros Head of Investment Banking and Structured Finance [email protected] (55) 5004 - 1002 Carlos Alberto Arciniega Navarro Head of Treasury Services [email protected] (81) 1103 - 4091 Gerardo Zamora Nanez Head of Transactional Banking, Leasing and Factoring [email protected] (81) 8318 - 5071 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 Lizza Velarde Torres Executive Director of Wholesale Banking [email protected] (55) 4433 - 4676 Osvaldo Brondo Menchaca Head of Specialized Banking Services [email protected] (55) 5004 - 1423 Raúl Alejandro Arauzo Romero Head of Transactional Banking [email protected] (55) 5261 - 4910 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