Equity Research M exico

Quarterly Report March 2, 2021 FEMSA www..com Recovery attests positive outlook @analisis_fundam

▪ Femsa’s report positively surprised, on the back of a sound sequential Consumer and Telecom recovery across all of its business units, except for Fuels; thus beating our operating estimates. Yet the company reported a net loss Valentín Mendoza Senior Strategist, Equity [email protected] ▪ Results point towards an imminent recovery this year, a view also shared by the company’s management on its earnings call. However, Juan Barbier, CFA Femco’s valuation still does not incorporate such outlook Analyst [email protected]

Oxxo not as weak as expected and a strong performance in Health and Kof. Regardless new confinement measures put in place back in December (~45% BUY of company’s units faced restrictions), consolidated revenues declined only Current Price $143.75 1.5% y/y to MXN 130.329 billion. The main highlight of the quarter was the PT $190.00 Dividend $3.3 vigorous sequential recovery posted in Proximity (TS: -2.4%; SSS: -4.3%), on Dividend Yield (%) 2.3% the back of economy’s reopening (traffic +510bps q/q to -16.9%). Furthermore, Upside Potential 34.5% ADR Price US$69.53 a sound momentum on its pharmacies in and Chile drove Health sales PT ADR US$96.00 (TS: +15.4%; SSS: +15.3%), while recent acquisitions bolstered those of Shares per ADR 10 Max – Mín LTM ($) 171.0 – 112.5 Strategic Businesses 60.9%, offsetting weakness in Fuels (TS: -30.7%; LfL Market Cap (US$m) 22,955.5 sales: -31.1%) and Kof (TS: -5.1%). Meanwhile, EBITDA remained fairly Shares Outstanding (m) 3,578.2 Float 60% unchanged (-0.8% y/y to MXN 20.938 billion), managing to improve respective Daily Turnover US$m 500.9 margin by 10bps to stand at 16.1%, as profitability gains in Kof (+220bps), Valuation metrics TTM FV/EBITDA 10.1x Health (+20bps) and Fuels (+80bps) compensated for pressures in Proximity P/E N.A. (-170bps) owing to Oxxo’s operating deleverage. Finally, a 90% y/y increase in A

CFC (on the back of larger interest expenses and FX losses), a loss on its stake in Heineken, and an unusually high effective tax rate (94.4%) hurt the Relative performance to Mexbol company’s bottom line, and translating into a MXN 1.245 billion net loss. LTM 20% Valuation still is quite attractive. Implicitly, Femco trades at 11.1x 10% FV/EBITDA (-18% vs the three-year average), which in our view, does not 0% -10% incorporate company’s imminent recovery outlook (on which management -20% optimistically agreed). All in all, Femsa remains one of our top picks. -30% -40% mar.-20 jun.-20 ago.-20 nov.-20 mar.-21

MEXBOL FEMSAUBD 2019 2020 2021E 2022E 2019 2020 2021E 2022E

Revenue 506,910 493,627 531,982 579,064 FV/EBITDA 9.4x 10.1x 9.1x 8.2x Operating Income 47,165 41,473 47,779 53,094 P/E 25.7x -265.7x 37.5x 23.6x EBITDA 75,483 72,017 81,168 89,488 P/BV 2.0x 2.2x 2.1x 2.1x EBITDA Margin 14.9% 14.6% 15.3% 15.5%

Net Income 19,936 -1,927 13,662 21,671 ROE 6.0% -0.6% 4.3% 6.6% Net Margin 3.9% -0.4% 2.6% 3.7% ROA 3.1% -0.3% 2.0% 2.9% EBITDA/ interest 5.3x 4.1x 4.6x 4.9x Total Assets 637,541 684,638 700,492 734,898 Net Debt/EBITDA 1.6x 2.0x 1.8x 1.4x

Cash 65,562 107,233 106,150 133,365 Debt/Equity 0.6x 0.8x 0.8x 0.8x Total Liabilities 311,790 377,451 379,394 396,465 This document is provided for the reader’s convenience Debt 187,257 253,124 252,248 260,677 only. The translation from the original Spanish version was Common Equity 325,751 307,187 321,099 338,433 made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its English Source: Banorte 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 “Recuperación confirma perspectiva positiva” was released on March 1, 2021. Document for distribution among public

FEMSA – Results 4Q20 Revenue & EBITDA Margin MXN, million MXN, million Diff% vs Concept 4Q19 4Q20 Var % 4Q20e Estim. Revenue 132,289 130,329 -1.5% 124,090 5.0% 135,000 16.0% 18% Operating Income 13,618 13,145 -3.5% 11,947 10.0% 14.9% 16.1% 14.0% 13.2% 16% Ebitda 21,114 20,938 -0.8% 19,582 6.9% 130,000 Net Income 4,793 -1,245 N.A. 2,710 N.A. 14% Margins 125,000 12% 10% Operating Margin 10.3% 10.1% -0.2pp 9.6% 0.5pp 120,000 Ebitda Margin 16.0% 16.1% 0.1pp 15.8% 0.3pp 8% Net Margin 3.6% -1.0% -4.6pp 2.2% -3.1pp 115,000 6% 4% EPS $1.34 -$0.35 N.A. $0.76 N.A. 110,000 2%

105,000 0%

4Q19 1Q20 2Q20 3Q20 4Q20 Income Statement (Million pesos) Year 2019 2020 2020 Change Change Revenue EBITDA Margin Quarter 4 3 4 % y/y % q/q

Net Revenue 132,289 126,501 130,329 -1.5% 3.0% Costs of goods sold 80,300 77,965 78,312 -2.5% 0.4% Gross profit 51,989 48,536 52,017 0.1% 7.2% General expenses 37,290 36,977 38,247 2.6% 3.4% Net Income & ROE Operating Income 13,618 11,354 13,145 -3.5% 15.8% MXN, million Operating Margin 10.3% 9.0% 10.1% (0.2pp) 1.1pp Depreciation 7,497 7,457 7,793 4.0% 4.5% EBITDA 21,114 18,811 20,938 -0.8% 11.3% 9.3% 10,000 10.0% EBITDA Margin 16.0% 14.9% 16.1% 0.1pp 1.2pp 7.9% Interest Income (Expense) net (5,156) (5,206) (9,791) 89.9% 88.1% 5,000 8.0% Interest expense 3,665 3,035 5,005 36.6% 64.9% 6.0% Interest income 702 528 261 -62.9% -50.6% 0 3.3% Other income (expense) 8 91 (113) N.A. N.A. 4.0% Foreign exchange gain (loss) (2,201) (2,790) (4,934) 124.1% 76.8% (5,000) 1.7% Unconsolidated subsidiaries 1,408 2,263 (1,572) N.A. N.A. 2.0% -0.8% Income before taxes 8,450 6,546 3,342 -60.4% -48.9% (10,000) 0.0% Income taxes 2,985 1,195 3,154 5.7% 163.9% Discontinued operations N.A. N.A. (15,000) -2.0% Consolidated Net Income 6,076 4,691 730 -88.0% -84.4% 4Q19 1Q20 2Q20 3Q20 4Q20 Non-controlling interest 1,283 1,468 1,975 53.9% 34.5% Net Income ROE Net Income 4,793 3,223 (1,245) N.A. N.A. Net Margin 3.6% 2.5% -1.0% (4.6pp) (3.5pp) EPS 1.340 0.901 (0.348) N.A. N.A.

Balance Sheet (Million pesos) Total Current Assets 172,579 227,444 201,033 16.5% -11.6% Net Debt & Net Debt to EBITDA ratio Cash & Short Term Investments 65,562 134,460 107,233 63.6% -20.2% MXN, million Long Term Assets 464,962 501,665 483,605 4.0% -3.6% Property, Plant & Equipment (Net) 114,513 114,200 113,106 -1.2% -1.0% Intangible Assets (Net) 104,483 104,067 107,456 2.8% 3.3% Total Assets 637,541 729,109 684,638 7.4% -6.1% 150,000 2.5x Current Liabilities 136,534 135,108 118,308 -13.3% -12.4% 145,000 2.0x Short Term Debt 35,737 27,080 16,703 -53.3% -38.3% 140,000 1.9x 2.0x 135,000 2.0x Accounts Payable 76,676 74,371 75,217 -1.9% 1.1% 1.7x Long Term Liabilities 175,256 274,656 259,143 47.9% -5.6% 130,000 1.6x Long Term Debt 151,520 250,184 236,421 56.0% -5.5% 125,000 Total Liabilities 311,790 409,764 377,451 21.1% -7.9% 120,000 1.5x 115,000 Stockholders’ Equity 325,751 319,345 307,187 -5.7% -3.8% 110,000 Non-controlling interest 73,762 72,732 69,546 -5.7% -4.4% 105,000 1.0x Total Equity 251,988 246,613 237,641 -5.7% -3.6% 4Q19 1Q20 2Q20 3Q20 4Q20 Liabilities & Equity 637,541 729,109 684,638 7.4% -6.1% Net Debt 121,695 142,804 145,891 19.9% 2.2% Net Debt Net Debt to EBITDA

Cash Flow CF from Operating Activities 12,627 14,695 19,527 CF from Investing Activities (26,175) (5,309) (15,783) CF from Financing Activities (15,746) (13,614) (20,666) FX effect on cash (2,994) (1,552) (10,305) Change in Cash Balance (32,289) (5,780) (27,227)

Source: Banorte, MSE.

Performance by business unit Proximity Division 4Q19 3Q20 4Q20 % y/y % q/q Ticket $ 37.1 $ 42.30 $ 42.7 15.1% 0.9% Traffic 21.0 17.3 17.4 -17.1% 0.6% SSS $ 778 $ 732 $ 744 -4.4% 1.7% Revenue $ 47,941 $ 45,478 $ 46,769 -2.4% 2.8% EBITDA $ 8,655 $ 5,269 $ 7,688 -11.2% 45.9% EBITDA Margin 18.1% 11.6% 16.4% -1.6% 4.9%

Health Division 4Q19 3Q20 4Q20 % y/y % q/q SSS $ 1,295.9 $ 1,418.8 $ 1,493.6 15.3% 5.3% Revenue $ 15,009 $ 16,932 $ 17,319 15.4% 2.3% EBITDA $ 1,509 $ 1,849 $ 1,773 17.5% -4.1% EBITDA Margin 10.1% 10.9% 10.2% 0.1% -0.7%

Fuel Division 4Q19 3Q20 4Q20 % y/y % q/q Price per lt $ 17.8 $ 16.80 $ 16.40 -7.9% -2.4% Volume 421.6 309.5 313.6 -25.6% 1.3% SSS $ 7,486 $ 5,189 $ 5,156 -31.1% -0.6% Revenue $ 12,235 $ 8,568 $ 8,485 -30.6% -1.0% EBITDA $ 511 $ 540 $ 428 -16.2% -20.7% EBITDA Margin 4.2% 6.3% 5.0% 0.9% -1.3%

Coca-Cola FEMSA 4Q19 3Q20 4Q20 % y/y % q/q Volume $ 889.6 $ 807.9 $ 902.2 1.4% 11.7% Revenue $ 51,735 $ 46,734 $ 49,116 -5.1% 5.1% EBITDA $ 9,391 $ 10,075 $ 9,998 6.5% -0.8% EBITDA Margin 18.2% 21.6% 20.4% 0.1% -1.2%

Strategic Businesses Division 4Q19 3Q20 4Q20 % y/y % q/q Revenue $ 5,368 $ 8,789 $ 8,640 60.9% -1.7% EBITDA $ 950 $ 1,083 $ 2,048 115.6% 89.1% EBITDA Margin 17.7% 12.3% 23.7% 6.0% 11.4%

Consolidated 4Q19 3Q20 4Q20 % y/y % q/q Revenue $ 132,289 $ 126,501 $ 130,329 -1.5% 3.0% EBITDA $ 21,114 $ 18,812 $ 20,938 -0.8% 11.3% EBITDA Margin 16.0% 14.9% 16.1% 0.1% 1.2%

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 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 18/01/2021 Compra $190.00 FEMSA UBD 27/07/2020 Buy $164.00 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 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, CFA 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

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