Equity Research Special Report rd March 23 , 2020
Andean Equities Report A stock guide on COVID-19 crisis
Any feeling of safety has faded away. A simple virus that started CREDICORP CAPITAL RESEARCH spreading from a distant place in China has changed our reality. Uncertainty comes not only from when we will have the vaccine or the Carolina Ratto extension of the quarantine but also from how this crisis could eventually +(562) 2446 1768 change human habits, re-shaping the story of many industries (tourism, [email protected] retailers, malls, airlines). Regarding the labor force, many answers are unknow. How long will it be possible to maintain current payroll? How will Tomás Sanhueza companies manage salary reductions to avoid layoffs? Home office is +(562) 2446 1751 here to stay as it allows lighter cost structures. What is the effect on [email protected] consumption behavior? The impact on the market and economic activity is tremendous. Sebastián Gallego, CFA +(571) 3394400 ext. 1594 Governments and central banks are doing their part. In Chile, President [email protected] Piñera announced an unprecedent fiscal package for 4.7% of GDP to protect the jobs and income of the most vulnerable population as well as the SMEs, for Daniel Córdova them to be able to ‘survive’ at times of crisis. The Board of the Central Bank of +(511) 416 3333 Ext. 33052 Chile (BCCh) cut its reference rate by 75bps to 1.0%, reaching its lowest level [email protected] since 2010. In Colombia, the government has also announced a fiscal plan amounting to 1.5% of GDP coming entirely from stabilization funds as well as the postponement of disbursements to FONPET (pension fund and other regional entities). Even though the BANREP has not cut rates or made any commitment to buy financial assets yet, it took some measures to provide liquidity to the market. Peru has yet to announce a full fiscal package. There are some measures on poverty relief and facilities for corporate debt restructuring amounting to only 0.3% of GDP. The Central Bank of Peru (BCRP) decided to lower its monetary policy rate by 100bps to 1.25%, in line with the level reached during the 2008/2009 global financial crisis, a record low. Is this enough? It is yet to be seen.
From a market perspective, share prices have lost correlation with their fundamental values. Relief will only come when people feel safe again. Therefore, it is important to pay special attention to whether measures taken to prevent the spread of COVID-19 and to avoid the collapse of the healthcare system are effective. Colombia has reported 231 cases of COVID-19 (2 deaths), Peru 363 cases (5 deaths) and Chile 632 cases (1 death). In Colombia and Peru, the governments have declared states of emergency until April 13th and March 30th, respectively, locking down cities in a mandatory quarantine. In Chile, President Piñera is being pressured to do the same, but the government states that there is no need for a quarantine yet and that the country is better prepared to face COVID-19 than Italy or Spain. It was indicated that the higher number of cases in Chile compared to the other Andean countries is related to the greater capacity for testing for the disease. From a healthcare infrastructure prospective, it seems that Peru is the most IMPORTANT NOTICE (US FINRA RULE 2242) This document is fragile, followed by Colombia with ~1.7 hospital beds per 1,000 people and then intended for INSTITUTIONAL INVESTORS and is not subject to all of the Chile with ~2.1 hospital beds per 1,000 people (vs ~3.4 in Italy and ~3 in independence and disclosure standards applicable to debt research reports prepared for retail investors. Credicorp Capital may do or seek to Spain). do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to (continues in next page) important disclosures on page 21 to 23. Analyst Certification on Page 21. Additional disclosures on page 23.
1 BUYING Considering the current uncertainty and volatility of global markets, we are mapping OPPORTUNITIES. opportunities to provide an investment guide on how to play the Andean markets Parque Arauco, during the crisis. In terms of strategy, we believe investors should stay defensive as no Falabella, Cencosud, one really knows the magnitude of the crisis. However, we do believe investors could take Entel, Sonda, risks in some names. Companies have been selected considering a stress test analysis Santander, BCI, ILC. that assesses the possible impact of the COVID-19 outbreak on their dividend policies, Bancolombia, business operations, cash flows and liquidity. In addition, we are including two Davivienda, Grupo sections: dividend stories and levered companies. The level of uncertainty is still Argos, Nutresa, huge, and thus this should be considered a preliminary analysis. Grupo Sura, Celsia, Regarding possible changes in consumer behavior, our first thought is that the quarantine Ecopetrol. Peru. will definitely accelerate digital transformation within companies and boost ecommerce InRetail, Cementos sales. Banks seems to be more prepared for this journey than retailers. However, we Pacasmayo, believe the need for social and personal interaction will preserve the existence of malls, Ferreycorp, Aceros but real estate operations will have to speed up efforts to provide experiences to cover Arequipa, IFS, these social needs (music festivals, restaurants, medical clinics). This could significantly Alicorp. change the tenant mix. Buying Opportunities. Moderate Risk. Stocks extremely discounted; healthy SAFE HEAVEN. balance sheet. They will survive the crisis. Chile. Parque Arauco, Falabella, Banco de Chile, Cencosud, Entel, Sonda, Santander, BCI, ILC. Colombia. Bancolombia, Davivienda, Colbun, Andina, Grupo Argos, Nutresa, Grupo Sura, Celsia, Ecopetrol. Peru. InRetail, Cementos CCU, IAM/Aguas, Pacasmayo, Ferreycorp, Aceros Arequipa, IFS, Alicorp. Concha y Toro, SMU. GEB, Grupo Safe Haven. Low risk. Chile. Banco de Chile, Colbun, Andina, CCU, IAM/Aguas, Concha Aval, Canacol, y Toro, SMU. Colombia. GEB, Grupo Aval, Canacol, Corficolombiana, BVC. Peru. Engie Corficolombiana, Peru, Luz del Sur, Enel Distribucion Peru, Enel Generacion Peru. BVC. Engie Peru, To be Out. Chile. ItauCorpbanca, Latam Airlines, Hites. Colombia. CLH, Cemargos, Luz del Sur, Enel Avianca. Peru. Mining Distribucion Peru, Enel Generacion Peru.
2 Mapping Andean companies during COVID-19 crisis
Chile
Estimated Cash / Category Characteristics P/BV Stocks Comments Div Yield Equity
Extremely discounted. Market overeaccion. Strong impact on 2Q20 due to the closure of Malls. Tenants 8.1% 0.8x 29.6% Parque Arauco will not be forced to pay due to COVID-19 quarantine, and insurance will not cover losses. However, the company´s strong cash position and solid asset base should guarantee steady cash flows in the future.
Challenges ahead remained, while cash flows will be streched during 2Q20 since only ~7% of the EBITDA is coming from supermarkets. However, the company´s strong market position and assets (loan 0.8% 0.8x 6.0% Falabella porfolio & Mall Plaza), prevent as to justify current market prices. Still, it will continue to be under pressure because flow of news will be negative.
4.8% 0.8x 37.9% Entel Healthy balance after the sell of towers; steady cash flows expected
4.1% 0.8x 29.7% Sonda Attractive valuations but more risky; The delivery will be key to monitor
BUYING Stocks extremely Shares are trading a with a relevant discount when compared to Banco de Chile. The bank should be OPPORTUNITES discounted, resilient during the current cycle amid: i) a solid capital position, ii) a transformation risk process over the last - MODERATE healthy balance years to focus on high income individuals, iii) solid funding base and a low cost of funding, and iv) 5.5% 1.5x - Santander RISK sheet. leadership across the industry. Despite all these attributes, we have a slight preference for Banco de Chile for 2020E as we see it as safe-heaven. We will continue to monitor the evolution of asset quality at the bank when considering also that Santander just acquired Santander Consumer (auto loans). Shares are trading at 0.9x (trailing) P/BV, which seems unusual and highly discounted when considering a strong and diversified asset base. Recall that 25% to 30% of assets are located in the USA which should help to mitigate the current scenario (assuming no collapse of the financial system in the USA). We do not 3.5% 0.9x - BCI see liquidity concerns when considering BCI’s stable funding base and strong capital position. We acknowledge that profitability may decline in 2020 and potentially 2021, but we do see a long term opportunity for an asset that may be able to attain 13-14% ROAE (with an operation in the USA).
Quarantine impact on earnings is limited. Considering all regulatory risks, we believe a bottom price would 11.0% - - ILC be something around CLP 7,000, way above current levels.
Moderate impact on P&L during the COVID-19 crisis. Good cash flow generation, despite the closure of 7.9% 0.4x 2.7% Cencosud Malls.
Resilient in a potential worst case scenario due to: i) strongest asset quality indicators with coverage ratios Banco de 4.1% 1.8x - close to 2.0x, ii) the strongest capital ratios ahead of Basel III standards; CET 1 ratio should be above those Chile of peers in Chile, iii) lowest cost of funding, iv) leadership across the industry.
10.7% 0.5x 22.6% Colbun Stable cash flow; low leverage
Revenues will not suffer as strongly as other forms of consumption; Strong balance with no major debt 3.7% 1.5x 16.6% Andina Stocks that under payments; Sound cash flow SAFE-HAVEN - a volatile scenario Wide portfolio of products will not suffer due to quarantine measures; Still strong cash flow generation and LOW RISK are considered 3.0% 1.5x 15.5% CCU low debt safe-haven 6.6% 1.0x - IAM Stable cash flow; industry with no major impact due to coronavirus
3.7% 1.3x 12.2% Concha y Toro Favorable wine costs and FX; Despite potential weaker volumes, cash flow will remain strong
3.7% 1.0x 7.0% SMU No impact in P&L due to the COVID-19. Sound cash flow.
Stocks extremely 3.6% 0.3x - ItauCorpbanca Profitability has failed to recover; The current is a major risk particularly in capital position. TO BE OUT impacted by The company is operating at 30% capacity due to the coronavirus outbreak. Consequences on liquidity COVID-19 crisis 1.2% 0.5x 34.3% Latam Airlines could be irreversible.
3 Colombia
Estimated Cash / Category Characteristics P/BV Stocks Comments Div Yield Equity
Shares of Bancolombia are trading at 0.8x P/BV (trailing) and roughly the same multiple when looking at 2020E P/BV.We acknowledge that the bank should face a challenging scenario in both 2020 and potentially 2021. That 5.8% 0.8x - PFBancolombia said, we believe that Bancolombia should eventually return to a ROAE close to its Ke (pre-COVID-19) of around 12% .
Shares of Davivienda are trading also near 0.8x P/BV (trailing) and roughly 0.7x when looking at the 2020E 4.0% 0.9x - Davivienda P/BV multiple. We believe that the bank will be able to navigate through this ongoing crisis given a solid funding base, support from its controlling shareholder (Grupo Bolivar), and a strong track record in risk management.
We do not see significant downside risks for Grupo Argos and we believe it is discounted. However, considering 4.7% 0.4x 14.0% Grupo Argos the effect that the current sanitary situation is having on airport traffic and the fact that Opain does not have a minimum return, we believe investors may remain cautious on the name. BUYING Stocks extremely The company has been taking measures to sustain the logistic chain and should not suffer from a major disruption OPPORTUNITES discounted, in sales due to the weaker activity in the country. For governments, it is key to sustain the supply chain for clients - MODERATE healthy balance 4.4% 0.9x 5.8% Nutresa of basic needs products, which we believe will not generate a significant impact in the operations of the company. RISK sheet. Although we acknowledge volumes will be impacted, we believe it will not be as relevant as other sectors. In addition, shares are extremely discounted, which offers limited downside and a floor for the share price.
We do not see significant downside risks for Grupo Sura and we believe it is discounted. However, considering 3.8% 0.3x 9.2% Grupo Sura the current pension reform in Chile, we believe investors could remain cautious.
Celsia has nowadays more to offer given the bet for their distribution assets. Even though, this sell-off located the 4.0% 0.9x 8.5% Celsia share price below our expected fundamental value, we conceive the discount should be excessive by now given the nature of belonging to utility.
Break even stands near the USD 30 per barrel (vs USD ~60 in 2014), FX plays seriously in their favor in line 16.4% 1.1x 12.5% Ecopetrol with their export nature (51% of 2019’s revenues were foreign sales), and leverage, measured in Gross Debt/EBITDA stands at 1.0x (4Q19).
This asset still offers a strong ~7% yield in dividend and a coveted mix in their utility vehicles. With nearly ~70% 7.3% 1.5x 5.7% GEB of their controlled revenues tied to USD, devaluation concerns should be removed from this context. Current valuations should be a solid entry point from a medium time horizon. Our view is supported by: i) 6.6% 0.9x - PFAval leadership across the banking segment in Colombia with +20% market share, ii) strong solvency levels at banks, iii) long term ROAE should return to levels close and/or above 15% , among others.
Stocks that under Canacol offers low volatility in cash flows and solid leverage position, awaiting to end with a Net Debt/EBITDAX SAFE-HAVEN - a volatile scenario 6.9% 2.0x 18.3% Canacol of 1.1x for this year in our model. The company has 80% of their revenues tied to bilateral take-or-pay contracts, LOW RISK are considered with inflation-linked tariffs, for at least 7 to 8 years. safe-haven We consider Corficolombiana as a save heaven under the current volatile scenario. We estimate that 33% of 2.5% 0.9x 45.6% Corficol Corficolombiana’s value comes from Promigas, which has part of its tariff in USD which should offset the COP devaluation. 4G road concessions should also provide long term stability. The company could take advantage of business diversification given the volatility of the capital markets. Recall 8.1% 1.0x 7.0% BVC that as of 4Q19 results, the capital markets line, which could suffer from lower volumes in upcoming weeks, represents just 10% of the total revenues.
Finished year 2019 with a 3.7x Net Debt/EBITDA ratio, with historically low EBITDA levels across central 0.0% 0.1x 1.5% CLH Stocks extremely America (60.6% of its EBITDA), related to a weak demand an increasing competition. TO BE OUT impacted by 10.3% 0.4x 4.4% Cemargos High leverage and looking to divest roughly USD 400 mn in a challenging scenario. COVID-19 crisis 0.0% 0.5x 165.2% Avianca Highly leverage and more than 90% of the fleet on the ground.
4 Peru
Estimated Cash / Category Characteristics P/BV Stocks Comments Div Yield Equity *
2.1% 2.3x 16.5% InRetail No mayor impact during the COVID-19 Crisis. Strong management and growth story
Cementos 6.9% 1.6x 4.8% Low short term debt maturities coupled with a strong balance sheet Pacasmayo BUYING Stocks extremely 8.6% 0.7x 4.1% Ferreycorp Important contracts unlikely to be terminated, manageable financial risk from high working capital OPPORTUNITES discounted, - MODERATE healthy balance Aceros 8.0% 0.5x 20.8% Hefty cash balance, sound maturity schedule and dividend payout RISK sheet. Arequipa Solid balance sheet and operating expenses under control; however, downside risks from deteriorating 6.6% 1.2x - IFS credit conditions in the retail and small companies segments 3.5% 1.9x 24.5% Alicorp Extremely discounted. Further synergies down the road; exposure to consumption that will not be disrupted.
6.3% 1.1x 8.1% Engie Peru 100% of efficient power contracted for 2020; lengthened long term contracts
4.1% 3.6x 1.2% Luz del Sur We expect the Public Acquisition Offer by CTG to proceed in 2Q20 Stocks that under SAFE-HAVEN - a volatile scenario Enel LOW RISK are considered 4.1% 1.8x 7.2% Distribucion Stable medium term revenue/cash generation; investors' flows after Luz del Sur deal safe-haven Peru Enel 5.4% 2.0x 19.6% Generacion Strong liquidity metrics and solvency ratios; stable medium term revenue generation Peru
Stocks extremely Companies under our coverage affected in the short term by the temporary suspension of operations during TO BE OUT impacted by - - - Mining stocks the national emergency period, amid an environment of low base metal prices at least in 1H20 COVID-19 crisis
5 Chile Some dividend stories under an extremely uncertain scenario
Dividend stories are Some companies have already been adjusting their budgets considering the political becoming more and changes taking place in Chile, which do not have a clear outcome. Others have suffered more attractive due to the strong social unrest that started in October 2019 and could eventually get under current worse once we go deeper into constitutional discussions (now the plebiscite will take place market conditions. on October 25th). To make matters worse, the outbreak of coronavirus adds an extra ingredient of uncertainty as the government is taking actions to control the spread, which could lead to months of limited or no activity in the country, which will take its toll on companies. Therefore, it is becoming more and more important to find in shares a hint of safety in a plummeting market.
Due to current share price levels, dividend stories have become more attractive for investors in the equity market. Although many companies already paid exceptional dividends in the past few months, there is still a significant chunk of dividends expected in April and May.
We have constructed a ranking of the shares under our coverage from high to low dividend yields in 2020 (see next page for full ranking). The ten names with the highest dividend yields remaining to be paid in 2020 can be found in the chart below.
When looking at these names, it is clear the utilities sector is appealing under the dividend yield analysis. Therefore, in our strategy we are favoring names in this sector, specifically Colbun, ECL and Aguas/A or IAM.
Remainding Div Yield 2020 Possible cut in RANK Stocks Div Yield Payout ratio should not be Div Yield 2020 2020 affected 1 AESGener 17.0% 100% x 4 ILC 11.0% 70% x 3 Colbun 10.7% 100% x 2 SK 9.7% 80% x 5 ECL 9.5% 100% x 6 Ripley 9.1% 30% x 9 Parque Arauco 8.1% 50% x 8 Cencosud 7.9% 35% x 7 IAM 6.6% 100% x 10 SM SAAM 6.4% 60% x
Sources: Credicorp Capital * Calculated with share price in March 20th, 2020
6 Ranking from high to low 2020 dividend yields
Avg. Div. Yield Div. Yield Div. Yield Name Payout Ratio 2015-2018 2020 Remaining in 2020 AESGener 100% 6.8% 17.0% 17.0% ILC 70% 6.3% 11.0% 11.0% Colbun 100% 4.2% 10.7% 10.7% SK 80% 5.4% 9.7% 9.7% ECL 100% 2.7% 9.5% 9.5% Ripley 30% 3.1% 9.1% 9.1% Parque Arauco 50% 2.9% 8.1% 8.1% Cencosud 35% 3.5% 7.9% 7.9% IAM 100% 6.2% 10.1% 6.6% SM SAAM 60% 5.2% 6.4% 6.4% Enel Am 50% 2.9% 7.5% 6.2% Aguas Andinas 100% 6.0% 9.7% 6.0% Enel Gx 60% 5.4% 6.8% 6.0% Masisa > 30% & < 50% 4.2% 6.0% 6.0% Besalco 30% 3.8% 5.9% 5.9% SQM 60% 3.7% 5.9% 5.9% Salfacorp 30% 2.6% 5.6% 5.6% Santander 60% 4.6% 5.5% 5.5% Enel Chile 60% 4.1% 6.2% 5.4% Embonor 74% 3.9% 7.9% 5.4% Entel 31% 0.5% 4.8% 4.8% Copec 40% 2.2% 4.3% 4.3% Sonda 44% 2.3% 4.1% 4.1% Banco de Chile 60% 3.8% 4.1% 4.1% Andina 74% 3.1% 6.5% 3.7% SMU 0% 0.0% 3.7% 3.7% Concha y Toro 37% 2.3% 4.0% 3.7% Itaucorp 30% 1.5% 3.6% 3.6% BCI 35% 2.8% 3.5% 3.5% CCU 58% 2.4% 4.4% 3.0% LATAM 47% 1.0% 1.2% 1.2% CMPC 40% 0.3% 1.1% 1.1% Falabella 25% 1.5% 3.6% 0.8% IPSA 55% 3.0% 6.1%
Sources: Credicorp Capital * Calculated with share price in March 20th, 2020 * Average dividend for index calculated as weighted average by market cap
7 Companies with However, it is important to understand how these potentially attractive dividend good dividend yields yields could change in the future. Many companies are seeing their cash flows being and no major pressured, while facing challenges regarding their balance sheets and debt payments. downside risks to Therefore, we want to break down the list of names into two categories: (i) Companies the yield: AesGener, with good dividend yields and no major downside risks to the yield and (ii) Companies with Colbun, Ripley, risks of lowering their payout ratios. Cencosud, IAM. • Companies with good dividend yields and no major downside risks to the yield AES Gener (HOLD; T.P.: CLP 175). We highlight AES Gener as the winner of the index in terms of dividend yields. At current levels, we estimate a ~17% dividend yield for 2020E, and we are confident that management intends to distribute 100% of the earnings. Regarding the Stabilization Fund pressures, AES Gener receivables reached USD ~33mn in Dec-19, being the least exposed to the new ruling among the Santiago-listed utilities, on the back of its relatively low exposure to the regulated segment. However, we prefer to stay on the sideline due to challenges ahead related to: i) lack of funding to accelerate investments in renewables, ii) short-term market headwinds to execute the announced capital increase of USD 500 mn (extraordinary board meeting will take place on April 16th) and iii) exposure to mining contracts, which may suffer due to the current COVID-19 crisis. Colbun (BUY; T.P.: CLP 160). The diversified asset mix and low dependence on coal units makes us confident that management is not willing to compromise the high payout ratio. In addition, we highlight Colbun’s low leverage level (1.3x Net Debt to EBITDA) and its M&A discipline. Due to the Covid-19 outbreak’s effect on overall economic activity, both regulated and non-regulated demand will probably suffer a drop during the upcoming months. However, the utilities sector should be seen as a refuge, on the back of the limited impact of the outbreak relative to other sectors, as stable cash flows should result in attractive dividend yields. • Companies with the highest risks of lowering their payout ratios
Companies with the Engie Chile (BUY; T.P.: CLP 1,450). On the back of its excellent pricing on the regulated highest risks of segment contracts, the company’s receivables in the Stabilization Fund reached USD lowering their ~75mn in Dec-19. Additionally, Engie Chile is executing a 1GW/USD1bn renewables plan, payout ratios: Engie which, along with the Stabilization Fund pressures, is making us doubt whether the high Chile, SMSAAM, payout ratio is sustainable. On the positive side, we highlight the low Net Debt to EBITDA Copec, Latam, SK, ratio of Engie Chile. ILC, Parque Arauco. SM SAAM (BUY; T.P.: CLP 75) has announced a dividend of USD 34mn (58% of net income of 2019) following the trend of recent years. However, the strong drop expected in international trade (at least during 1H20) should drag down the payout ratio in 2021. The company’s high diversification and the successful implementation of its new operating plan in recent years should allow to the company to face this crisis. Copec (BUY; TP: CLP 8,000). Lower-than-previously-expected pulp prices and the execution of the MAPA project have put pressure on the company’s balance sheet. Therefore, we see downside risk to our 2020E dividend yield estimate. Latam Airlines (HOLD; TP: USD 10 (ADR) / CLP 7,500 (local)). The airline industry is facing a perfect storm, and the company will face liquidity difficulties. Although we were not expecting a high dividend yield for 2020, the current scenario makes us believe the company will not pay dividends at all this year. The mining industry has been operating normally but with lower volumes. In this context, we foresee lower activity for SK (HOLD; T.P: CLP 1,400) across the board during the upcoming quarters. Even though the balance sheet and cash flows seem healthy and the company has a suitable level of cash, we believe management will decrease the payout ratio to provide more liquidity to the company if the global scenario worsens.
8 Balance Sheet – Stress test
It is paramount to analyze companies’ cash flow generation and balance sheets under the current local and global risks. We are presenting several metrics of balance sheet in order to understand how companies are positioned to face the tough outlook going forward (see table below). Further on in this section, we will discuss in depth specific companies that have more challenging scenarios than others by doing a stress test for each of these cases.
Balance Sheet Metrics for our Chilean Sample Cash/Sales Cash/Equity NFD/EBITDA EBITDA/Fin. Exp. P/BV x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 3-Y Avg Last Quarter CHILE X X X X X X X X X X X X X X AESGENER 15% 15% 14% 14% 4.5x 5.0x 5.2x 6.0x 1.1x 0.4x AGUAS ANDINAS 8% 6% 6% 5% 2.9x 3.2x 10.1x 10.1x 3.5x 2.1x ANDINA 10% 9% 21% 17% 1.9x 1.8x 5.6x 7.5x 3.0x 1.5x ANTARCHILE 8% 7% 26% 25% 2.5x 3.3x 5.7x -10.1x 0.9x 0.4x BESALCO 9% 17% 20% 37% 5.1x 4.6x 4.4x 4.7x 1.6x 0.9x CCU 14% 11% 20% 16% 0.0x 0.4x 15.0x 12.1x 2.7x 1.5x CENCOSUD 3% 1% 7% 3% 4.4x 4.0x 2.7x 2.8x 1.2x 0.4x CMPC 16% 11% 10% 8% 2.8x 2.8x 5.8x 6.0x 0.9x 0.5x COLBUN 57% 54% 23% 23% 1.6x 1.3x 7.1x 7.7x 1.0x 0.5x CONCHA Y TORO 7% 11% 8% 12% 2.7x 3.0x 8.5x 8.5x 1.6x 1.3x COPEC 9% 9% 18% 21% 2.3x 3.5x 5.9x 4.6x 1.6x 0.6x ECL 18% 20% 10% 14% 2.0x 1.1x 18.2x 14.0x 1.0x 0.6x EMBONOR 13% 11% 20% 17% 1.5x 1.8x 9.3x 8.6x 2.1x 1.2x ENEL AMERICAS 21% 14% 33% 21% 1.6x 2.0x 3.0x 3.7x 1.7x 0.9x ENEL CHILE 18% 9% 14% 7% 1.1x 2.4x 9.4x 6.4x 1.2x 1.0x ENEL GX CHILE 15% 1% 12% 1% 1.2x 1.4x 8.9x 10.2x 2.1x 1.0x ENTEL 10% 28% 16% 38% 3.6x 1.8x 5.5x 7.9x 1.5x 0.8x FALABELLA 3% 3% 6% 6% 3.4x 3.4x 5.2x 5.4x 3.0x 0.8x HITES 11% 9% 24% 22% 2.4x 5.5x 4.9x 3.7x 1.4x 0.2x LATAM 15% 11% 41% 34% 3.5x 4.2x 5.3x 3.7x 1.7x 0.5x PARQUE ARAUCO 101% 153% 21% 30% 5.4x 5.3x 3.4x 3.8x 1.8x 0.8x RIPLEY 6% 6% 10% 10% 2.5x 1.7x 5.2x 3.8x 1.1x 0.4x SALFACORP 7% 9% 14% 18% 7.1x 10.2x 4.6x 3.3x 1.1x 0.4x SK 11% 12% 21% 22% 2.5x 2.8x 6.0x 5.1x 1.3x 0.8x SM SAAM 33% 43% 21% 29% 1.1x 2.0x 8.3x 8.7x 1.1x 0.7x SMU 3% 2% 15% 7% 6.4x 4.4x 1.8x 4.0x 1.5x 1.0x SONDA 9% 19% 16% 30% 0.6x 1.7x 8.5x 5.2x 2.1x 0.8x SQM 26% 30% 23% 28% 1.2x 1.9x 13.4x 8.4x 5.2x 2.4x IAM nm nm 7% 6% nm nm nm nm nm 1.0x P/BV Cash/Deposits Cash/Loans Tier 1 Regulatory Solvency Regulatory CET 1 2020E Reg.Min. LCR Regulatory x 5-Y Avg Last Quarter X 5-Y Avg Last Quarter X Ratio Minimum X Ratio Minimum X CC Estimates CC Estimate X Minimum BANKS CHILE X X X X X X X X X X X X X X X X X BANCO DE CHILE 1.8x 8.6% 10.8% 72.6% 73.9% 10.9% 4.5% 14.1% 8.0% 11.7% 8.0%-9.0% 102.0% 70.0% SANTANDER CHILE 1.5x 12.4% 15.1% 76.5% 71.8% 10.1% 4.5% 12.9% 8.0% 9.5% 8.0%-9.0% 104.0% 70.0% BCI 0.9x 11.6% 11.4% 83.1% 80.2% 9.8% 4.5% 12.0% 8.0% 9.9% 8.0%-9.0% 124.9% 70.0% ITAUCORP 0.3x 9.0% 6.1% 72.6% 73.7% 8.6% 4.5% 13.1% 8.0% 7.4% 8.0%-9.0% 123.4% 70.0% Sources: Bloomberg, Credicorp Capital * Calculated with share price in March 20th, 2020 * Retail: Calculated with IFRS 16 / Excludes bank debt from metrics
9 Below you can find an analysis of names that we see facing a challenging outlook going forward in terms of balance sheet, liquidity and covenants:
SalfaCorp (HOLD; TP: CLP 545) finished 2019 with the lowest consolidated backlog to Salfacorp will be be executed in the next twelve months (CLP 296bn; USD ~350mn) in the last eight years. able to pay all short This should lead to a decrease in ICSA’s revenues for this year. In addition, we forecast a term obligations. strong slowdown in the residential real estate business, coupled with a lack of suitable However, if the low bids for its land for sale. This should drag down cash flows during the upcoming quarters. activity becomes the Even though we do not expect the company to break covenants, we are concerned about new norm, the high leverage ratio (Net Debt to EBITDA 2019: 10.2x), which could lead to some management should financial complications in the upcoming periods. have to make an extra effort to meet Acid Test for SalfaCorp. Considering the following assumptions, in an extremely negative obligations. scenario, we estimate that SalfaCorp’s current cash could decrease by 50% (CLP -35bn): i) ICSA executes only its current combined backlog (CLP 442bn) during this year, and gross margin remains at low levels between 6%-6.5%, ii) a strong drop of ~80% in revenues for the company’s residential real estate segment (Aconcagua), iii) a 60% decrease in revenues for its home building segment (Noval/Novatec), following the trend in Aconcagua, and iv) a 50% drop in the sales of land in RD&I. This would put strong pressure on SalfaCorp’s cash flow. However, considering its current debt at the end of 2019 (CLP 181bn; CLP 83bn until 90 days; CLP 97bn between 90 days and 12 months), its cash (CLP 69bn) and its land bank (CLP 163bn at book value) that could be given as partial payment, we believe that SalfaCorp will be able to pay all its short-term debt obligations even with strong assumptions of low activity. As we mentioned before, if the low activity becomes the new norm in the mid term, meeting debt obligations will require extra effort from management. We will continue to monitor the situation closely. Despite high leverage ratios and a Empresas Copec (BUY; TP: CLP 8,000). The balance sheet is not very solid at the strong capex moment. Net Debt / EBITDA is at 3.4x, which is the highest level since December of 2012. pipeline, we do not This is due not only to low pulp prices but also to the execution of the MAPA project, see major risk for which is not a cheap project to develop. However, the company is not even close to Copec in terms of breaking covenants. In addition, it currently holds ~USD 2.3bn in cash, which is more than breaking covenants enough to meet all short-term financial obligations. Moreover, the company owns non- or meeting debt essential assets (mostly biological assets) that it could divest if things get more obligations. challenging. We do not foresee risk of a capital increase at Empresas Copec level for now. Management is in continuous contact with rating agencies, and because the company is highly exposed to a commodity business, agencies usually wait a little longer before changing ratings.
10 Latam. We estimate Latam Airlines (HOLD; TP: USD 10 (ADR) / CLP 7,500 (local)) is facing a challenging the company’s moment due to the coronavirus outbreak, which has impacted demand while causing the current cash closure of several borders. As a consequence, the company has reduced its capacity by position would cover 70% (a 90% decrease in international flights and a 40% decrease in domestic flights), and ~5 months before further capacity reductions cannot be ruled out. This is arguably the greatest crisis in the company breaks history for the civil aviation sector, and if the outbreak lasts for a significant period of time, covenants (minimum it could really impact the company’s liquidity. Management continues to talk with lenders cash of USD 750mn), and creditors to postpone upcoming maturity payments, and capex may also be reduced. while it would cover On the positive side, the company already reached an agreement with its unions for a ~8 months before it partial reduction in wages of 50% for most of Latam Airlines’ workers from April through runs out of cash. June of 2020, which will lead to savings of ~USD 100mn per quarter, based on our estimates.
We did an acid test, trying to estimate how long the company could continue to operate before going bankrupt if the large-scale capacity cuts last indefinitely. For Latam Airlines, we are assuming: i) that operations remain at 30% of capacity, ii) lower fuel costs, in line with the recent drop in oil prices, iii) a 50% reduction of wages, iv) the lowest possible capex levels (~USD 500mn for 2020), v) that the company does not pay taxes and vi) that the company neither refinances debt nor issues new debt. We estimate a quarterly cash burn of roughly USD 460mn. Considering the company currently holds ~USD 2.1bn in cash and equivalents and that debt maturity amounts to ~USD 1bn for 2020, we estimate the company’s current cash position would cover ~5 months before the company breaks covenants (minimum cash of USD 750mn), while it would cover ~8 months before it runs out of cash. If we assume that the airline shuts all its capacity down, it would take ~5 months before it runs out of cash. However, as we mentioned before, management continues to negotiate with lenders and creditors to defer payments, and it has ~USD 250- Itau Corpbanca, we 300mn of assets held for sale, which it could use as collateral for loans. Government continue to believe support could also be an option. that CET 1 estimates remain at least 200 Itau Corpbanca (UPERF; T.P.: CPL 4.6) is our least preferred share within banks across bps below those of the Andean region. The current scenario poses a major challenge for the bank as peers. A potential profitability has failed to recover to levels closer to peers in Chile. In fact, we expect ROAE game changer for the bank to stay in low single digits for the upcoming years. In addition, we reiterate and/or risk to our that the consumer-oriented strategy may suffer due to increased competition, considering thesis comes from a the new reality amid the economic slowdown in Colombia and Peru. Finally, we reiterate potential corporate that the biggest challenge for the bank remains its capital position; at this point, we event that may continue to believe that CET 1 estimates remain at least 200 bps below those of peers. A involve Itau potential game changer and/or risk to our thesis comes from a potential corporate event Unibanco. that may involve Itau Unibanco.
11 Parque Arauco. Parque Arauco (BUY; T.P.: CLP 2,415). Due to the coronavirus outbreak in the Andean Clearly short-term countries, Parque Arauco’s share price plummeted in just a few days. This is due to the cash flows will be mandatory closure of malls during the quarantine and to the uncertainty regarding how affected, but despite long governments will maintain these restrictions. In addition, it is highly probable that high leverage ratios, tenants will not have to pay rent under these circumstances, and insurance will likely not the company’s cover profit losses. Clearly short-term cash flows will be affected, but despite high strong cash position leverage ratios, the company’s strong cash position and solid asset base will allow Parque and solid asset base Arauco to overcome the crisis. will allow Parque Arauco to overcome In order to shine some light on the magnitude of the crisis, we did a stress test assuming the crisis. the that malls will be closed for three months. In this stress test, we estimated that Parque company can cover Arauco would collect only 20% of the revenues of a normal quarter (~CLP 11,000 mn). liquidity needs for However, most of its costs are fixed (SG&A of ~CLP 6,200 mn each quarter), leading to ~7 months with its almost no EBITDA. After considering the payment of financial expenses (~CLP 50,000 mn current cash. annually), Capex (~USD 100 mn for 2020) and debt (~CLP 234,000 mn in the next 12 months), we estimated that the company could burn ~CLP 30,000 mn in a quarter. However, the company can cover liquidity needs for ~7 months with its current cash. This is an extreme scenario in terms of the extension of the quarantine and because we assumed that debt payments would not be renegotiated. Regarding covenants, we do not see a major risk.
Cencosud can Cencosud (BUY; T.P.: CLP 1,400). Even though we acknowledge that Cencosud is survive ~12 months highly indebted, its sales mix that is focused on supermarkets will allow the company to without facing any maintain healthy cash flows in the upcoming months. Concerns are mostly tied to the liquidity constraints. exposure to Cencoshopp as the real estate business represents ~30% of its total EBITDA. As with Parque Arauco, we assessed the company’s liquidity position under the possible closure of Malls, D. Stores and Home Improvement stores for thee months. In this case we assume: i) sales will reach only 58% of a normal quarter, ii) a gross margin of 25%, iii) a 15% decline in SG&A expenses (related to the headcount reduction in 3Q19), iv) capex equal to depreciation (~CLP 74,000 mn in one quarter) and v) financial expenses of ~CLP 55,000 mn in one quarter. Taking into consideration that the company should face debt payments of ~USD 150 mn, Cencosud can survive ~12 months without facing any liquidity constraints. However, rating agencies said that to maintain investment grade status, the company should have a gross debt / EBITDA below 4x, which will probably not occur this year. However, we believe they will take into consideration that the effect of the COVID-19 outbreak should be temporary.
Hites This is Hites (UNDER REVIEW). This is certainly a tough case; however, we believe the certainly a tough company will somehow overcome the crisis. The main question is how much cash the case; however, we company could burn in one quarter, assuming that Department stores will be closed for believe the company three months. As opposed to banks, most people use the store to pay their loans or credit will somehow card debt, and thus the impact on collection is highly uncertain. In addition, the economic overcome the crisis. impact of the COVID-19 crisis will probably be higher for the lowest socio-economic It has enough cash segment as many people in this segment are employed by SMEs or in the informal sector. to continue with the In this analysis, we assume that income for the financial business will decrease by 50% operations for ~4 and that no money will be received in the retail business. After receiving CLP 5,000 mn months. from the insurance company (due to losses during the social unrest), paying financial expenses, capex and a debt payment of CLP 6,000 mn that is due in September, the company could burn ~CLP 13,000 mn in a quarter. Therefore, it has enough cash to continue with the operations for ~4 months. It is important to note that the company could eventually stop lending money and increase its cash flow as it can collect ~CLP 78,000 mn in one quarter. However, it will probably break the bank covenant, and it should negotiate with banks, but this is not necessarily a default event. The company’s loan portfolio is ~CLP 182,000 mn. Our bet is that it will struggle but survive.
12 Colombia Dividends
No major changes to dividend policies this year; uncertainty could come next year.
Companies have Business plans in Colombia should change dramatically amid the outbreak of COVID-19. already announced Under this scenario, we expect potential adjustments to dividend policies for upcoming their dividend years. That said, we highlight that companies have already announced their dividend policies for this year policies for this year (based on 2019 results) and that no major changes have been made (based on 2019 up to now. Recall that the the outlook in Colombia before the outbreak of the virus was results) and that no neutral to positive for most companies. At this point, we highlight some minor changes, major changes have primarily in payment dates: i) Ecopetrol maintained its dividend policy of COP 180/share, been made up to but 86% of the payment to the controlling shareholder (government) will occur in 2H20, ii) now. We highlight Cementos Argos approved its dividend policy but also changed some dates; the new some minor dates are in August and October of 2020, while the last payment is due in February 2021 changes, primarily in and iii) considering the actions taken by Cemargos, we do not rule out similar changes for payment dates Grupo Argos.
Ranking from high to low 2020 dividend yields
Avg. Div. Yield Name Payout Ratio Div. Yield 2020 2015-2018 Éxito nm 3.4% 19.8% Ecopetrol 56% 5.2% 16.4% Cemargos 281% 2.3% 10.3% BVC 88% 4.6% 8.1% GEB 70% 5.1% 7.3% Canacol 86% 0.0% 6.9% Aval 44% 5.0% 6.6% Bogota 48% 4.8% 5.9% Bancolombia 51% 3.4% 5.8% Grupos Argos 67% 1.7% 4.7% Nutresa 58% 2.0% 4.4% Celsia 66% 3.5% 4.0% Davivienda 28% 3.1% 4.0% Grupos Sura 37% 1.0% 3.8% Corficolombiana 50% 1.9% 2.5% CLH 0% 0.0% 0.0% Avianca 0% 6.4% 0.0% COLCAP 61% 4.3% 13.0%
Sources: Credicorp Capital * Calculated with share price in March 20th, 2020 * Average dividend for index calculated as weighted average by market cap
13 GEB, Aval, BVC and Regarding dividend policies, we highlight on the positive side names such as GEB, Aval, Canacol should BVC and Canacol. These companies should be more resilient to the current cycle, and sustain current dividend policies could be sustainable in the long run. On the other hand, we believe that dividend policies in a +100% payout ratio in the case of Cemargos could impact the balance sheet health of the long run. the company given its highly leveraged balance sheet. Lastly, we welcome the decision of Avianca to suspend dividends as the company faces major challenges to overcome the ongoing crisis.
Finally, the Boards of Directors of Grupo Sura (HOLD; T.P.: COP 35,300), Grupo Argos (UPERF; T.P.: COP 16,900) and Nutresa (BUY; T.P.: COP 30,500) gave their Grupo Sura, Grupo authorizations to submit for the approval of the General Assemblies of Shareholders Argos and Nutresa buyback programs of COP 300 bn, COP 400 bn and COP 300 bn, respectively. These annpunced buyback sums correspond roughly to 3.6%, 6.9% and 3.8% of these companies’ market caps, programs of COP respectively. In all of these cases, buybacks must be done during the following three 300 bn, COP 400 bn years. The BoD at each company will define the terms and conditions under which these and COP 300 bn, buyback programs will be carried out. Please note that the General Assemblies of respectively. These Shareholders of these companies will meet on March 23rd, March 24th and March 26th, announcements respectively. These announcements of buyback programs were announced before the could now be at risk outbreak of COVID-19 and could now be at risk given the priority for liquidity needs. The given the priority for initial message could be a positive signal regarding current valuations, but we reiterate liquidity needs that these repurchase programs are proposed for a three-year period, so they may be somewhat diluted over time. Finally, we do not expect additional companies to announce buyback programs; although valuations may be appealing for some names, we believe that liquidity needs are the priority under current conditions. We will be monitoring any potential announcements on a case-by-case basis.
Balance Sheet
It is paramount to analyze companies' cash flow generation and balance sheets under the Banks should be current local and global risks. We are presenting several metrics of balance sheet in order well positioned to to understand how companies are positioned to face the tough outlook going forward (see face the ongoing table below). crisis; current capital ratios, Starting with banks, we expect a deterioration of financials during 2020 and potentially measured in terms 2021. However, we believe that banks should be well positioned to face the ongoing crisis; of Tier 1, look way current capital ratios, measured in terms of Tier 1, look way above minimum regulatory above minimum requirements (some banks double the indicator). In addition, cash positions over deposits regulatory look healthy, and we reiterate that the top banks in Colombia have double-digit market requirements. shares of retail deposits.
Ecopetrol should face a more challenging scenario amid the recent collapse of oil prices. We do anticipate That said, we highlight that Ecopetrol’s cash cost stands near USD 30/barrel, compared to some deterioration figures above USD 50/barrel in prior years. We do anticipate some deterioration of of balance sheet balance sheet indicators; however, Ecopetrol should not face liquidity issues due to its indicators; however, strong cash position and available credit lines. Ecopetrol should not face liquidity issues We remain cautious on Avianca and cement companies. These entities have high due to its strong leverages and face a potential slowdown (significant one) in revenues with additional cash position and deterioration of profitability. We highlight that Cementos Argos has debt maturities for available credit ~USD 300 mn in the short term, while Avianca has more than 90% of its fleet on the lines. ground.
14 Balance Sheet Metrics for our Colombian Sample Cash/Sales Cash/Equity NFD/EBITDA EBITDA/Fin. Exp. P/BV x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 3-Y Avg Last Quarter COLOMBIA X X X X X X X X X X X X X X AVIANCA 10% 7% 35% 165% 5.7x 8.3x 3.1x 1.7x 0.7x 0.5x BVC 16% 12% 10% 7% -0.4x -0.2x nm nm 2.1x 1.0x CANACOL 37% 16% 23% 18% 1.7x 1.9x -4.8x -6.3x 2.6x 2.0x CELSIA 12% 10% 13% 8% 3.5x 3.3x -3.2x 3.0x 1.0x 0.9x CEMARGOS 7% 4% 7% 4% 4.3x 3.6x 4.1x 3.6x 1.7x 0.4x CEMEX LATAM HOLDINGS 3% 2% 3% 1% 2.4x 3.7x 7.2x 3.8x 1.1x 0.1x CORFICOLOMBIANA 33% 44% 60% 46% nm nm 0.0x 0.0x 1.8x 0.9x ECOPETROL 13% 10% 15% 13% 1.8x 1.1x 9.3x 22.0x 1.7x 1.1x ETB 32% 14% 21% 12% 0.2x 1.2x -49.4x 11.6x 0.8x 0.4x GEB 40% 16% 12% 6% 2.3x 2.7x -6.3x 6.4x 1.4x 1.5x GRUPO ARGOS 15% 15% 13% 14% 3.8x 4.1x 3.9x 3.8x 1.0x 0.4x GRUPO ÉXITO 15% 11% 78% 85% 0.1x 1.4x 2.1x 2.5x 0.8x 0.7x GRUPO SURA 10% 11% 7% 9% nm nm 0.0x 0.0x 0.9x 0.3x NUTRESA 4% 5% 4% 6% 2.5x 2.0x 4.0x 4.5x 1.4x 0.9x
P/BV Cash/Deposits Deposits/Loans Tier 1 Regulatory Solvency Regulatory CET 1 2020E Reg.Min. x 5-Y Avg Last Quarter X 5-Y Avg Last Quarter X Ratio Minimum X Ratio Minimum X CC Estimates CC Estimate BANKS COLOMBIA X X X X X X X X X X X X X X BANCOLOMBIA 0.8x 11.9% 11.6% 86.4% 86.2% 9.6% 4.5% 12.8% 9.0% 10.5% 7.0% DAVIVIENDA 0.9x 13.2% 13.8% 83.3% 77.6% 8.0% 4.5% 11.6% 9.0% 10.2% 7.0% AVAL 0.9x 15.7% 17.2% 96.9% 97.8% nm nm nm nm nm nm BOGOTA 1.1x 18.6% 19.3% 97.8% 99.8% 9.1% 4.5% 12.8% 9.0% 11.0% 7.0%
Sources: Bloomberg, Credicorp Capital * Calculated with share price in March 20th, 2020 * Retail: Calculated with IFRS 16 / Excludes bank debt from metrics
Ecopetrol (BUY; T.P.: COP 3,600) faces another negative pricing scenario but with Ecopetrol. Opex serious advantages compared to the 2015 context. Breakeven stands near USD 30 per cuts are expected to barrel (vs USD ~60 in 2014), FX plays in the company’s favor due to its export nature be about COP 2.0 tn (51% of 2019 revenues were foreign sales) and leverage, measured in Gross (USD ~500 mn) and Debt/EBITDA, stands at 1.0x (4Q19), but with the possibility of being stressed in the mid capex is estimated term (to even 2.0x). Some balancing factors are: i) opex cuts are expected to be about at USD 1.2 bn for the COP 2.0 tn (USD ~500 mn) and ii) reducing capex of USD 1.2 bn for the year. Finally, year. recall that there are two business lines ready to support Ecopetrol’s profits: midstream and gas. That said, we acknowledge that, if the current scenario continues, further projects like the JV with Oxy and crude production might suffer adjustments. Avianca Holdings (HOLD; TP: USD 5.4 (ADR) / CLP 2,100 (local)) is facing a Avianca. challenging moment due to the coronavirus outbreak, which has impacted demand while Management causing the closure of several borders. Due to restrictions on passenger travel imposed by continues to talk the Colombian government, the company will cease to operate international passenger with lenders and capacity for at least 30 days starting on March 23rd. Flights to and within Peru, El creditors to Salvador and Ecuador have already been canceled until the end of April 2020. On the postpone upcoming other hand, domestic passenger transportation within Colombia remains unrestricted; maturity payments, however, due to weak demand, the company will decrease its domestic capacity within and the company Colombia by 84% as of April 1st. This is arguably the greatest crisis in history for the civil will defer non- aviation sector, and it will have a huge impact on the company’s liquidity. Management essential costs and continues to talk with lenders and creditors to postpone upcoming maturity payments, and capital expenditures the company will defer non-essential costs and capital expenditures. Additionally, new hires have been suspended, and the company has offered personnel the option of taking unpaid leave until the crisis ends in order to preserve more than 20,000 jobs. Government support could also be an option.
15 Avianca. 5 We did an acid test, trying to estimate how long the company could continue to operate Scenarios. Bear before going bankrupt if the large-scale capacity cuts last indefinitely. For Avianca case. the company’s Holdings, we are presenting five scenarios. current cash position would cover Scenario 1: It is based on the following assumptions: i) operations at 10% of capacity ~2 months before it indefinitely, ii) lower fuel costs, in line with the recent drop in oil prices, iii) that 50% of runs out of cash. workers accept the unpaid leave deal, iv) the lowest possible capex levels (~USD 100mn for 2020), v) that the company does not pay taxes, vi) that the company is not able to issue new debt and vii) that the company pays the whole debt maturity of 2020 in December of this year. In this scenario, we estimate a quarterly cash burn of roughly ~USD 85mn. Considering the company currently holds ~USD 340mn in cash and equivalents and that debt maturity amounts to ~USD 920mn for 2020, we estimate that the company’s current cash position would cover ~8 months before it runs out of cash.
Scenario 2: Same assumptions as scenario 1 but with the difference that the company shuts all its capacity down. In this scenario, we estimate a quarterly cash burn of roughly ~USD 130mn, which implies that the company’s current cash position would cover ~6 months before it runs out of cash.
Scenario 3: Same assumptions as scenario 1 but with the difference that the company is able to postpone all debt maturity payments of 2020. In this scenario, we estimate a quarterly cash burn of roughly ~USD 85mn, which implies that the company’s current cash position would cover ~12 months before it runs out of cash.
Scenario 4: Same assumptions as scenario 1 but with the difference that the company shuts all its capacity down and is able to postpone all debt maturity payments of 2020. In this scenario, we estimate a quarterly cash burn of roughly ~USD 130mn, which implies that the company’s current cash position would cover ~8 months before it runs out of cash.
Scenario 5: Same assumptions as scenario 1 but with the difference that debt maturity payments of 2020 are evenly distributed throughout the year and that the company pays. This scenario is highly unlikely. In this scenario, we estimate a quarterly cash burn of roughly ~USD 85mn, which implies that the company’s current cash position would cover ~2 months before it runs out of cash.
Stay out of cement CLH (UPERF; T.P.: COP 3,800) finished 2019 with a 3.7x Net Debt/EBITDA ratio, with companies. historically low EBITDA levels across Central America (60.6% of its EBITDA) due to weak demand and increased competition. Given a scenario of economic deceleration, we believe a recovery in the markets in Central America will be more challenging as any pick- up was expected to come mainly from infrastructure activity. Thus, we continue to recommend staying on the sidelines in the case of CLH.
Cemargos (UPERF; T.P.: COP 5,500) finished 2019 with a 4.1x Net Debt/EBITDA ratio, while its dividend policy calls for a +100% dividend payout ratio. The company stated in its 4Q19 conference call that it expects to execute a divestment plan of USD 400 mn for 2020. This should help the company to face the challenging scenario due to the current crisis. The company is also facing a challenging pricing and demand environment in Central America (31.7% of the company’s EBITDA in 2019), and we saw deceleration in the markets in Colombia and the US before the coronavirus outbreak. Under a scenario of economic distress, we see the environment for Cemargos becoming even more challenging as the main drivers for volume increases were expected be infrastructure projects, which will be less of a priority for governments now. Thus, we continue to recommend staying on the sidelines in the case of Cementos Argos.
16 Peru Dividends
For most non-mining The Peruvian government declared a state of national emergency for 15 days (ends on companies, dividend March 30th) to fight against the spread of COVID-19 in Peru. During this time, citizens will payouts should not have to comply with mandatory social isolation. In addition, only a handful of commercial be significantly activities are permitted to operate, such as food retailers, pharmacies, hospitals, energy affected. dividend suppliers, communication services and financial, insurance and pension fund activities. distributions from We believe these restrictions will heavily impact service-oriented sectors such as mining companies entertainment, travel, restaurants and retailers of discretionary items, among others. For are more vulnerable most non-mining companies, dividend payouts should not be significantly affected due to the temporary provided that the state of emergency lasts for only two weeks. However, dividend operational distributions from mining companies are more vulnerable due to the temporary operational slowdown and base slowdown and base metal prices that may take longer to recover. Cement and metal prices that construction companies expect a rebound in activity once the state of emergency ends, may take longer to which would partly compensate for the temporary halt in operations. recover. Cement and construction The recent market correction has opened up attractive entry points for investing in companies expect a companies with strong balance sheets and sound records of dividend distributions. Most rebound in activity companies approve dividend distributions during their annual shareholders once the state of meetings, which usually take place in March. Almost all of these meetings have emergency ends, been postponed until the state of emergency ends. As the ranking below shows which would partly (highest to lowest dividend yields expected for 2020), we project that cement and compensate for the construction companies (Ferreycorp, Aceros Arequipa and Pacasmayo) will lead in terms temporary halt in of dividend returns for shareholders this year, with the local utilities under our coverage operations. (Engie, Luz del Sur, Enel Gx and Enel Dx) joining the group with attractive dividend yields expected.
Div Yield 2020 Possible cut in RANK Stocks Div Yield 2020 Payout ratio should not be Div Yield 2020 affected At least 2% of 1 Nexa 9.1% x market cap 2 Ferreycorp 8.6% 60% x 3 Aceros Arequipa 8.0% 40% x 4 Cementos Pacasmayo 6.9% 50% x 5 IFS 6.6% 60% x 6 Engie Peru 6.3% 70% x 7 Enel Gx Peru 5.4% 85% x 8 Cerro Verde 4.4% 3% x 9 Enel Dx Peru 4.1% 65% x 10 Luz del Sur 4.1% Up to 100% x
Sources: Credicorp Capital * Calculated with share price in March 20th, 2020
17 Ranking from high to low 2020 dividend yields
Avg. Div. Yield 2015- Name Payout Ratio Div. Yield 2020 2018 Nexa 0% 1.3% 9.1% Ferreycorp 60% 5.0% 8.6% Aceros Arequipa 40% 7.1% 8.0% Cementos Pacasmayo 50% 5.0% 6.9% IFS 60% 4.3% 6.6% Engie Peru 70% 3.5% 6.3% Enel Gx Peru 4.2% 5.4% Cerro Verde 3% 2.1% 4.4% Enel Dx Peru 2.7% 4.1% Luz del Sur 4.1% 4.1% Alicorp 15% 0.9% 3.5% UNACEM 0% 2.3% 3.2% InRetail 0% 0.2% 2.1% Volcan 1% 1.4% 1.1% Buenaventura 1% 0.6% 0.2% Graña y Montero 0% 5.1% 0.0% Minsur 0% 3.9% 0.0% IGBLV 22% 3.0% 3.6% Sources: Credicorp Capital * Calculated with share price in March 20th, 2020 * Average dividend for index calculated as weighted average by market cap Balance Sheet
Given the uncertainty regarding the duration of the negative effects from the Covid- 19 crisis on the local economy and Peruvian equities, we focus on the names with the most solid balance sheets to weather the storm. Although some other companies also show healthy financial metrics at the moment, we highlight below those that additionally rank high in terms of our 2020 dividend yield forecasts, as well as Engie Peru within the group of local utilities.
Cementos Pacasmayo (HOLD; T.P.: PEN 7.20 (loc) / USD 10.7 (ADR)) has a sound Cementos debt distribution, with only 9% of its total debt due in the short term. Most of its financial Pacasmayo. Most of debt is composed of corporate bonds maturing in 2023 (which represents 39% of the total its financial debt is debt outstanding), 2029 (24%) and 2034 (28%). Pacasmayo has already paid its annual composed of dividend, which is usually paid by year-end. However, current stock prices make the corporate bonds company’s expected 2020 dividend yield very attractive; it is also one of the highest maturing in 2023 among our Peruvian coverage universe. The Ministry of Economics and Finance has been (which represents actively monitoring budget execution at the local, regional, and national levels with weekly 39% of the total debt and monthly targets that could potentially give an additional boost to reconstruction- outstanding), 2029 related expenditures. Additionally, 2020 is not expected to be particularly intensive in (24%) and 2034 capital expenditures (2020E: USD 35mn); apart from the construction of a silo in the Piura (28%). plant, most of the expenditures should be focused on maintenance.
18 Balance Sheet Metrics for our Peruvian Sample Cash/Sales Cash/Equity NFD/EBITDA EBITDA/Fin. Exp. P/BV x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 5-Y Avg Last Quarter x 3-Y Avg Last Quarter PERU X X X X X X X X X X X X X X ACEROS AREQUIPA 11% 14% 14% 21% 2.0x 2.0x 7.9x 9.5x 0.5x 0.5x ALICORP 7% 9% 20% 25% 2.3x 2.7x 3.4x 3.5x 2.7x 1.9x BUENAVENTURA 15% 24% 5% 8% 1.8x 2.1x 9.6x 4.8x 1.3x 1.3x CEMENTOS PACASMAYO 15% 5% 10% 5% 2.3x 2.7x 5.8x 5.0x 2.0x 1.6x CERRO VERDE 12% 17% 6% 9% 1.2x 0.3x 6.0x 11.7x 1.6x 0.9x ENEL DISTRIBUCION PERU 7% 5% 10% 7% 1.7x 1.6x 7.7x 9.3x 2.0x 1.8x ENEL Gx 29% 37% 17% 20% -0.2x -0.6x 42.1x 30.6x 2.2x 2.0x ENGIE ENERGIA PERU 7% 17% 5% 8% 2.8x 2.2x 7.3x 6.7x 1.3x 1.1x FERREYCORP 2% 2% 6% 4% 2.8x 3.0x 6.2x 7.1x 1.1x 0.7x GRAÑA Y MONTERO 12% 23% 28% 64% 3.0x 1.2x 3.8x 3.3x 0.8x 0.8x INRETAIL 5% 6% 13% 17% 3.3x 3.4x 2.7x 3.8x 2.1x 2.3x LUZ DEL SUR 1% 1% 2% 1% 2.1x 2.1x 10.3x 9.3x 2.1x 3.6x MINSUR 69% 65% 42% 36% 0.3x 2.6x 4.9x 5.0x 1.1x 0.9x NEXA 41% 30% 36% 33% 0.7x 3.9x 5.9x 1.6x 0.8x 0.2x UNACEM 5% 3% 4% 3% 4.1x 3.3x 3.8x 4.6x 1.1x 0.7x VOLCAN 16% 5% 14% 6% 2.4x 4.2x 6.8x 4.0x 3.2x 3.1x P/BV Cash/Deposits Cash/Loans Tier 1 Regulatory Solvency Regulatory x 5-Y Avg Last Quarter X 5-Y Avg Last Quarter X Ratio Minimum X Ratio Minimum BANKS PERU X X X X X X X X X X X IFS 1.2x 34.8% 29.4% 105.2% 98.9% 11.3% 4.5% 15.2% 8.0%
Sources: Bloomberg, Credicorp Capital * Calculated with share price in March 20th, 2020 * Retail: Calculated with IFRS 16 / Excludes bank debt from metrics
Aceros Arequipa (BUY; T.P.: PEN 0.90) has a solid cash balance of PEN 446mn and a Aceros Arequipa sound debt maturity schedule. The company’s financial debt maturities for 2020 amount to Most of its financial PEN 460mn, and these maturities are almost entirely covered by the company’s debt is composed of outstanding cash balance. The new melt-shop was financed with a seven-year leasing corporate bonds agreement. In our view, debt payments should not pressure dividend payments as most of maturing in 2023 the long-term financial debt payments are evenly distributed at approximately PEN 125mn (which represents per year. Aceros Arequipa pays three dividends per year; one of them was going to be 39% of the total debt announced in the recently cancelled shareholders meeting due to the state of emergency outstanding), 2029 in Peru. The company will reschedule the meeting after the lifting of the mandatory (24%) and 2034 quarantine. In terms of indebtedness, Aceros Arequipa has been gradually reducing its (28%). short-term financial debt in recent quarters; in fact, it currently represents only 37.7% of the total debt, down from 59.8% in 2018. Additionally, the company has reduced its Net Debt/EBITDA ratio to 2.0x, down from 2.3x in 2018, mainly through the expansion of its EBITDA after the acquisition of Comasa and better sales volumes in 2019. Ferreycorp. Ferreycorp (BUY; T.P.: PEN 2.85) announced in its proxy statement that the Board of indebtedness has Directors will propose a dividend distribution of PEN 146.9mn, which amounts to recently increased in approximately PEN 0.152 per share. The calculated dividend per share considers the order to acquire the number of shares outstanding on the date of the announcement (March 3rd). The final machinery that will DPS amount will be announced at the shareholders meeting, meaning that it could be delivered to the increase if the company continues to repurchase additional shares. The shareholders Quellaveco mining general meeting has been postponed until April 6th provided that the state of emergency project. Most of the ends on March 30th. Otherwise, it will be held by the end of April. Ferreycorp’s company’s indebtedness has recently increased in order to acquire the machinery that will be maturities are due in delivered to the Quellaveco mining project. Most of the company’s maturities are due in 2020. 2020, and the company will use the cash flows from delivering said machinery to repay the loans. Anglo American, owner of the Quellaveco project, has recently announced that
19 the operations will be significantly slowed down to comply with the state of emergency. Once this period is over, we expect construction to resume promptly. Even considering the current interruption of operations, the project is within the company guidance in terms of delivery as it is ahead of schedule and within its budget.
Utilities. Stability of Utilities stocks in Peru have proven to be relatively resilient in the current context, with operations and very mild retreats so far in March at Enel Distribucion (-1.8%) and Enel Generacion (- recurrent cash flows 2.7%) and larger corrections at Luz Del Sur (-12.6%) and Engie Peru (-6.6%). Stability of were the norm for operations and recurrent cash flows were the norm for the industry in 2019, and we expect the industry in 2019, this to remain the case in 2020, amid low expansion Capex needs and no expected and we expect this significant changes in energy demand from regulated and non-regulated clients. In the to remain the case in sector, we favor Engie Peru (HOLD; T.P.: PEN 8.10) due to its comfortable cash position 2020, amid low relative to its local peers (17% of total revenues and 8% of its equity to shareholders) and expansion Capex adequate solvency (2.2x Net Debt/EBITDA) and interest coverage (6.7x EBITDA/Financial needs and no expenses) ratios. The company currently has contracted almost 100% of its efficient expected significant power capacity for 2020 and has managed to keep the length of its average long-term changes in energy contract above ~8 years; moreover, as there are no important capital projects in the short demand from term and debt maturity is under control, we believe that the company can sustain a 6.3% regulated and non- dividend yield in 2020, which is the highest we forecast for Peruvian utilities stocks this regulated clients. year.
Regarding the mining sector, short-term production concerns and uncertainty on the path of base metal prices in 2020 make us remain cautious on mining stocks, for the time being. Although on average companies under our coverage present an adequate cash position (28% cash/annual sales and 18% cash/equity ratios as of Dec- 19), the temporary suspension of extracting and processing activities (until March 30th, due to the state of national emergency decreed to contain the spread of coronavirus) will impact 1Q20 revenues and cash flows as companies are keeping only the minimum required staff at mines and production plants to guarantee their safety, maintenance and operational capabilities. On top of this, the industry will continue to be hit by low base metal prices in the remainder of 1H20, with companies’ executives expressing uncertainty on the duration of the slump in prices if a global recession is triggered. However, the impact from the temporary suspension of operations may be uneven among mining companies as some processes have to be progressively wound down. For instance, gold miners such as Buenaventura (in La Zanja and Coimolache units) still have mineral ore in their lixiviation pads that has to be processed to avoid technical difficulties. Since this process may take some weeks, gold production will not suffer as much as the production of base metal concentrates. Moreover, mining companies can still transport already produced concentrates and refined metal to local clients and ports for exportation. Regarding brownfield and greenfield projects under execution, the industry has halted or drastically decelerated them to protect personnel (including Anglo American’s Quellaveco copper project and Minsur’s Mina Justa copper project), which will provide extra cash for short-term working capital needs. Overall, based on our initial assessment, mining companies may revise downwards their 2020 production guidance if the government’s restrictions remain in place until mid-April (which is a plausible scenario at this time), with some firms partially resorting to short-term working capital financing from the financial system. However, if the government extends the national quarantine beyond 30 days, we believe it is likely it will devise measures to secure and resume the inputs supply and delivery chain for mining production (at least partially) as macro fundamentals could be hurt otherwise (fiscal revenues from metal exports and further PEN depreciation). Therefore, if the national emergency is lengthened beyond mid-April, mining production could still be impacted but to a lesser extent than it is today. Based on these factors, we prefer to remain cautious on mining stocks as we wait for additional information on how the industry will deal with a possible extension of the national emergency period.
20 Important Disclosures
This research report was prepared by Credicorp Capital Peru S.A and/or Credicorp Capital Colombia Sociedad Comisionista de Bolsa and/or Credicorp Capital S.A. Corredores de Bolsa, companies authorized to engage in securities activities in Peru, Colombia and Chile, respectively and indirect subsidiaries of Credicorp Capital Ltd. (jointly referred to as “Credicorp Capital”). None of the companies jointly referred to as Credicorp Capital are registered as broker-dealers in the United States and, therefore, they are not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution only to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report can do so only through Credicorp Capital Securities Inc., a registered broker-dealer in the United States. Under no circumstances may a U.S. recipient of this research report effect any transaction to buy or sell securities or related financial instruments directly through Credicorp Capital. CCSI or any of its representatives are not involved in any way in the preparation, development, or supervision of the research report and does not have any influence whatsoever over the research content. Any analyst whose name appears on this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and is not a registered representative of Credicorp Capital Securities Inc. and, therefore, is not subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.
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21 E. Market Making Cedicorp Capital Securities Inc. or its affiliates act as market maker in the following company(ies): Besalco, Enjoy, Security, Masisa, Quiñenco, Ripley, Alicorp, Cementos Pacasmayo, Engiec1, Ferreycorp. F. Rating System Stock ratings are based on the analyst’s expectation of the stock’s total return during the twelve to eighteen months following assignment of the rating. This view is based on the target price, set as described below, and on the analyst’s opinion, general market conditions and economic developments. Buy: Expected returns of 5 percentage points or more in excess over the expected return of the local index, over the next 12-18 months. Hold: Expected returns of +/- 5% in excess/below the expected return of the local index over the next 12-18 months. Underperform: Expected to underperform the local index by 5 percentage points or more over the next 12-18 months. Under Review: Company coverage is under review. The IPSA, COLCAP and IGBVL indexes are the selective equity indexes calculated by the Bolsa de Comercio de Santiago, the Bolsa de Valores de Colombia, and the Bolsa de Valores de Lima, respectively. In making a recommendation, the analyst compares the target price with the actual share price, and compares the resulting expected return for the IPSA, the COLCAP, and/or the SPBVL indexes, as estimated by Credicorp Capital S.A. Corredores de Bolsa, Credicorp Capital Colombia Sociedad Comisionista de Bolsa, and/or CredicorpCapital Peru S.A, and then makes a recommendation derived from the difference in upside potential between the shares and the respective index. G. Distribution of Ratings
Buy Hold Underperform Restricted / UR
Companies covered with this rating 44% 44% 9% 3%
Compensation for investment banking 43% 33% 17% 0% services in the past 12 months*
*Percentage of investment banking clients in each rating category.
H. Price Target Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.
22 II.ADDITIONAL DISCLOSURES
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24 CONTACT LIST
ANDEAN RESEARCH TEAM SALES & TRADING
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CHILE PERU COLOMBIA Andrés Nariño Alfredo Bejar Director Sales Offshore Head of International FI Josefina Valdivia Cynthia Huaccha Camilo A. Durán [email protected] [email protected] Head of Fixed Income Fixed Income Associate Macro Analyst # (571) 339-4400 Ext. 1459 # (511) 205 9190 Ext 36148 [email protected] [email protected] [email protected] # (562) 2651 9308 # (511) 416 3333 Ext 37946 # (5511) 339 4400 Ext. 1383 CHILE PERU COLOMBIA
Alejandro Toth Guido Riquelme Evangeline Arapoglou Carlos Sanchez Analyst Fixed Income Head of Capital Markets Chile Head of international FI Sales Head of Fixed Income [email protected] [email protected] [email protected] [email protected] # (562) 2651 9368 # (562) 2446 1712 # (511) 416 3333 Ext 36099 # (571) 323 9154
Juan Francisco Mas Andrés Valderrama Gustavo Trujillo Fixed Income Sales Fixed Income Sales Head of Sales [email protected] [email protected] [email protected] # (562) 2446 1720 # (511) 416 3333 Ext 40352 # (571) 323 9252
Rafael Gaete Natalia Jurado Andrés Agudelo Local Fixed Income Sales Fixed Income Sales Fixed Income Sales [email protected] [email protected] [email protected] # (562) 2651 9336 # (511) 416 3333 Ext 36027 # (571) 339 4400 Ext 1180
Diego Hidalgo Pamela Horna Emilio Luna Local Fixed Income Sales Fixed Income Sales Fixed Income Sales [email protected] [email protected] [email protected] # (562) 2450 1693 # (511) 313 2902 Ext. 42942 # (571) 339 4400
Lizeth Espiritu Carla Tejada Credicorp Capital Securities INC Fixed Income Sales Fixed Income Analyst [email protected] [email protected] # (562) 2450 1619 # (511) 416 3333 Ext. 36143 Jhonathan Rico Fixed Income Trader Ana Lucía Rondón Medina [email protected] Sales Renta Fija # 1 (786) 9991614 [email protected] # (511) 416 3333 Ext. 40339 Michael Tafur Fixed Income [email protected] # 1 (786) 9991607
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