A Real Bargain for Risky Investors Sepember 4, 2018 A Real Bargain for Risky Investors

Some times, market reaction goes against fundamental analysis, creating opportunities for investors that have a long-term view and high risk tolerance to support volatilities and market turmoil, while fundamentals return, and market Conconcreto vs. COLCAP (Base 100 LTM) prices search for their fair value. 120 110 This is the case of these three stocks: Conconcreto, Latam Holdings, and 100 . Three stocks that have come under fire during the last months, seeing 90 their market prices falling more than 30% YTD, to historical lows in the case of the 80 first two, but where valuation, despite the risks associated with each asset, lies way 70 60 above current market prices. 50 40 It’s worth bearing in mind that we are not providing a full valuation approach in 30 this report. Our intention is to offer a value assessment under acid scenarios for sep.-17 nov.-17 ene.-18 mar.-18 may.-18 jul.-18 sep.-18 COLCAP Conconcreto each company, challenging the current market prices vs. their fundamental value.

Of course, further price declines are possible, as those three companies are facing CLH vs. COLCAP (Base 100 LTM) corporate governance issues or are in the middle of key management decisions that 110 could affect the performance of their shares in the short term. 100

Conconcreto – Market Prices Assume There’s Zero Value in Construction Division 90

Assigning zero value to the construction division, zero value to the equity 80 contribution to the Via 40 Express concession project, and the potential maximum 70 fines that could be imposed against Conconcreto and Industrial Conconcreto for 60

COP78,124mn per company (total of COP156,248mn on a consolidated basis), the 50 relative valuation of Conconcreto would rise to COP416 per share, in line with sep.-17 nov.-17 ene.-18 mar.-18 may.-18 jul.-18 sep.-18 COLCAP CLH market prices, which means, that market players believe the construction division is gone.

Cemex Latam Holdings – Market Prices Don’t even Reflect Value of Cement Avianca vs. COLCAP (Base 100 LTM) Operation

The liquidation value of the cement operation (ex-Maceo) suggests a valuation of 120

COP9,516 per share, with an upside of 51% vs. market prices, meaning that 110 investors are valuing its ready-mix and aggregates operation at zero value, while 100 giving a huge discount to the cement operation not including the Maceo cement plant. 90 80 Avianca Holdings – Lifemiles Valued More than Avianca Holdings’ Consolidated 70 Operation 60 sep.-17 nov.-17 ene.-18 mar.-18 may.-18 jul.-18 sep.-18 In July 2015, Advent International acquired a 30% stake in Lifemiles for a total of COLCAP Avianca USD343.7mn, valuing Lifemiles at USD1,146mn. Assuming that valuation remains static, which is an acid test as members have increased by 36%, moving from 6,1mn Lifemiles members in 2Q15 to 8,3mn in 2Q18, the current value of Avianca Holdings Analysts in Lifemiles rises to USD802mn, or 18% higher than the current market cap of Name: Jairo Julián Agudelo Rpo Avianca Holdings of USD680mn. Phone: (574) 6047048 E-mail: jjagudel@.com.co In other words, Avianca Holdings is valued below the stake Avianca Holdings has in Lifemiles. Name: Juliana Aguilar Vargas, CFA We reiterate that this is not an overweight recommendation on each of those Phone: (574) 6047045 stocks, given that liquidity issues added to current corporate governance E-mail: [email protected] investigations can keep shares under pressure with high volatility. This report is for high-risk tolerance investors with a long-term horizon. Name: Federico Perez Garcia Phone: (574) 6048172 E-mail: [email protected] Conconcreto – Market Prices Assume There’s Zero Value in Construction Division

Assigning zero value to the construction division, zero value to the equity contribution to the Via 40 Express concession project, and the potential maximum fines that could be imposed against Conconcreto and Industrial Conconcreto for COP78,124mn per company (total of COP156,248mn on a consolidated basis), the relative valuation of Conconcreto would rise to COP416 per share, in line with market prices, which means that market players believe the construction division is gone.

However, this assumption seems far from reality since around COP50,000mn of the EBITDA generated by the construction division comes from destinations other than infrastructure, which at this time are not at risk. In this line, if we give zero value to the construction of civil works, usually based on government, government related agencies’ or state companies’ initiatives, the valuation of Conconcreto could reach COP667/share, with an upside of 58% vs. market prices. Again, assuming that the infrastructure division of the construction company is valued at zero, an extreme and acid scenario at this time.

Table 1. Conconcreto’s relative valuation approach - zero value to the construction of civil works

Business Equity valuation Conconcreto’s % Conconcreto’s Valuation method equity Buildings Const. division 283,949 100% 283,949 Multiples PACTIA 2,119,534 42% 893,172 Multiples Industrial Conconcreto 129,624 100% 129,624 Book value Concesión C.C.F.C. 25,253 24% 6,061 Book value Concesión Devimed 95,712 25% 23,928 Book value Via Pacifico 120,364 33% 39,720 Book value Via 40 Express 0 50% 0 Book value Consalfa 35,354 50% 17,677 Book value Soletanche 43,381 41% 17,773 Book value Other investments 195,670 Book value Net debt (ex-construction) and corporate expenses (695,541) Potential fines from legal procedures (156,000) Total 756,033 # of shares outstanding 1,134 Price / share 667

Source: Grupo Bancolombia, Conconcreto.

Table 2. Valuation Buildings Construction division Table 3. Valuation PACTIA

COPmn COPmn Median EV/EBITDA global 9.8x Book value per share 2Q18 2,199,893 EBITDA buildings construction LTM 50,000 P/BV multiple 0.9x

EV buildings construction division 490,726 Unit value – June 2018 11,020 Gross debt construction división 206,777 # of units 201.9 Equity value 283,949 Equity value average P/BV and unit value 2,119,534

Source: Own calculations, Bloomberg. Source: Own calculations, ’ 2Q18 results, Bloomberg. What Triggered the Sharp Fall in the Stock Price?

On August 14 the Superintendence of Industry and Commerce (SIC) filed charges against Conconcreto and some top management executives that were linked to a collusion process in the allocation of the 4G concession program named Via 40 Express.

There is no timeline for the resolution of this investigation, however, the potential impact foreseeable at this time could be a fine of up to COP78,124mn per company, and, since in this awarding process Conconcreto and Industrial Conconcreto were bidding together, there could be a potential double sanction, as mentioned before.

Additional Risks Remain

Although we have no further information of what could happen during the Figure 1. Conconcreto’s backlog investigation phase, there are key questions investors have had in mind which we want to replicate as are risks worth bearing in mind in the near term.

1. Could Conconcreto be blocked from participating in future public initiatives? This is one of the biggest risks since the infrastructure division of Conconcreto would be practically gone. Of Conconcreto’s current backlog of COP2.3bn, infrastructure represents 70%, while the remaining 30% comes from buildings (residential and non-residential purposes).

2. Does Conconcreto and Industrial Conconcreto have the resources to pay the fines? According to 2Q18 financial results, Conconcreto’s consolidated cash and cash equivalents closed at COP294,561mn. However, not all the cash is in the hands of Conconcreto, as a share is allocated in different SPVs that support infrastructure and residential projects. Despite this, we believe Conconcreto Source: Conconcreto’s 2Q18 results presentation. has the financial muscle to face such fines without risking financial solvency.

3. Could Conconreto’s financial results be affected by Hidroituango? At this time we believe it’s unlikely as the dam was almost completed. However, potential risks associated to legal procedures or future lawsuits are hard to estimate.

Trading at Discount vs. Peers and Own Track Record

It’s hard to asses a relative valuation given the illiquidity of the stock, however, the recent performance of the share price has led to a deep discount against its peers and its own track record, supporting the mismatch of fundamental vs. market prices. Currently, Conconcreto is trading at 0.35x P/BV and 6.3x EV/LTM EBITDA, both with a discount vs. market peers.

Figure 2. Conconcreto’s EV/EBITDA LTM 5-year average Table 4. Conconcreto’s multiples vs. peers

Company EV/LTM P/BV PE Ratio 14 EBITDA +2 SD 12 Median 8.3 0.7 6.13 +1 SD 10 Average 9.9 1.2 16.9

8 5Yr Average Conconcreto 6.3 0.4 6.1

6 -1 SD OHL Mexico 5.3 0.6 5.7

4 -2 SD Graña y 6.2 0.7 NA Montero 2 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Besalco 13.3 1.8 44.3 El Condor 10.4 0.65 3.3 Source: Bloomberg, Grupo Bancolombia’s own calculations. Source: Bloomberg, Grupo Bancolombia. Cemex Latam Holdings – Market Prices Don’t even Relfect Value of Cement Operation

The liquidation value of the cement operation (ex-Maceo) suggests a valuation of COP9,516 per share, with an upside of 51% vs. market prices, meaning that investors are valuing the ready-mix and aggregates operation at zero value, while giving a big discount to the cement operation without including the Maceo cement plant.

CLH’s free cash flow during the first half of 2018 closed at USD17mn (USD46mn in 2Q18), down 44% vs. 1H17, sign of a hard landing the construction sector is facing in , in addition to ’s construction workers’ strike. However, the still positive FCF for 1H18 leads us to believe that we are not facing a liquidity trap. Table 5. Latam cement transactions

Target country / % Total EV Ton EV/Ton Date Target Buyer region Acquired (USDmn) (mn) (USD)

Gamma Jul – 17 Cemento Polpaico 57.1% 240.3 2.3 104.5 Cementos Dec – 16 Trinidad Cement Caribbean Cemex SAB 30.3% 657.2 2.4 278.5 Cia Industrial de Titan Aug – 16 44% 493.3 2.0 246.7 Cimento Apodi Cement Dec – 15 Yguazu Cementos Paraguay NA 16% 218.8 0.4 546.9

Sep – 14 Cementos Fortaleza Mexico Elementia 47% 478.7 2.0 239.4 UNACEM May – 14 UNACEM Ecuador Ecuador 100% 553 1.5 368.7 Peru Apr – 14 Cimentis Guyanis French Guyana Cemargos 100% 68.5 0.2 342.5 Sep – 13 Lafarge Honduras Honduras Cemargos 53.3% 559 1.3 430 Average 319.6

Source: Bloomberg, corporate web sites. Table 6. Valuation summary Cemex Latam Holding, without considering the Maceo plant, has COPmn an installed cement capacity of 8.8mn tons of cement a year, CLH cement capacity (mn ton) 8.8 which according to recent market transactions could be worth USD2.8bn (USD320mn per ton of cement). If we subtract the net EV/Ton 319.6 debt and assume the legal procedures by the DIAN will be ruled against CLH, the equity value would rise to USD1.79bn, or EV (USDmn) 2,803 COP9,516 per share. Net debt (USDmn) 856.0 In addition, if we add the cement capacity of Maceo of 0.95mn DIAN investigation (USDmn) 160.8 tons of cement a year, the valuation of CLH would rise to COP11,040 per share, a deeper discount that does not support Equity value (USDmn) 1,795.9 current market prices.

FX currency 2,950 It’s worth remembering that this valuation is based on market Equity (COPmn) 5,298,017 transaction and it does not represent our DCF valuation with a TP of COP13,840 per share. Our current recommendation on the # of shares outstanding 556.7 stock is Speculative Overweight.

Price per share 9,516

Source: Own calculations, Bloomberg. What Triggered the Sharp Fall in the Stock Price?

Since 2016, CLH has come under fire for different issues, the most important are: i) inadequate practices in the acquisition of the land and mineral rights of the quarry for the construction of the cement plant in Maceo, Antioquia, that has led to an open investigation by the US Department of Justice against Cemex SAB (owner of CLH), at the same time that corporate governance issues arise at the company level, ii) legal procedures against the DIAN (tax agency), and iii) collusion practices in Colombia.

Although such issues do not risk the financial stability of CLH, they do jeopardize the expansion boundaries in Colombia, as Maceo is the only project that could increase CLH capacity in the near term.

Additional Risks Remain Table 7. CLH’s free cash flow calculation Additional risks can keep the price of the stock and CLH’s financial results under pressured, such as: USDmn 2Q18 2Q17 % var Operating 1. A delay in the recovery of the Colombian cement industry. Despite 62 76 -19% imports of cement are at lows vs. the average of the last two years, EBITDA the dynamism of the cement industry is yet to start, and could be Net financial 14 15 delayed until 2019 when the 4G concession program starts demanding expenses high volumes of cement per year. Maintenance & 9 25 2. Maceo cement plant. Currently, the cement plant is ready for Strategic Capex operation, however, two main aspects must be solved before turning it on: i) the modification of the environmental license by Corantioquia, Change in WK -23 -36 with which CLH sought to increase the quarry’s operating capacity to 950,000 tons/year, and ii) the expansion of the free tax zone, since the Taxes paid 13 43 clinker line does not have this tax benefit. Other cash items 2 -2 3. The pending investigation of the US DoJ against Cemex SAB that could (net) affect the performance of CLH’s price if the resolution is negative. FCF discounted 0 3 operations 4. Cement prices collusion in Colombia. A negative answer by the Administrative Court of Cundinamarca can affect the reputation of the Free cash flow 46 29 60% cement industry in Colombia, including CLH, bringing additional noise to the corporate standard reputation. Source: CLH’s 2Q18 results presentation.

Figure 3. CLH’s EV/EBITDA LTM 5-year average Table 8. CLH’s multiples vs. peers

15 Company EV/LTM P/BV PE Ratio 14 EBITDA +2 SD 13 Median 10.9 1.7 22.8 12 +1 SD 11 Average 10.9 2.4 45.7 10 CLH* 6.6 0.8 9.6 9 5Yr Average 8 -1 SD Cemargos* 10.1 1.7 32.6 7 -2 SD Unacem 7.2 1.0 22.5 6 5 Cemex SAB 10.5 1.1 18.5 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Cementos 11.3 2.2 33.0 Pacasmayo Source: Bloomberg, Grupo Bancolombia’s own calculations. Source: Bloomberg *Grupo Bancolombia’s own calculations. Avianca Holdings – Lifemiles Valued More than Avianca Holdings’ Consolidated Operation

In July 2015, Advent International acquired a 30% stake in Lifemiles for a total of USD343.7mn, valuing Lifemiles at USD1,146mn. Assuming that valuation remains static, which is an acid test as members have increased by 36%, moving from 6,1mn Lifemiles members in 2Q15 to 8,3mn in 2Q18, the current value of Avianca Holdings in Lifemiles rises to USD802mn, or 18% higher than the current market cap of Avianca Holdings of USD680mn.

This contrasts with the full valuation of Avianca Holdings which current market cap is USD680mn, or in other words, Avianca Holdings is valued below than the stake Avianca Holdings has in Lifemiles, meaning that the passenger and cargo division value is zero, and that Lifemiles value is lower today than in 2Q15, with 36% more members.

It’s true that Avianca has been facing different challenges that have had a negative impact on financial results. First, the loss of USD320mn from Venezuela’s operation, then the sharp devaluation of the Colombian FX currency, the deceleration of the Colombian economy, and finally the pilots’ strike in 2017 that is still affecting 2018 financial results. All these news, added to the expected commercial alliance with United and Copa, at the same time that the potential merger with Avianca Brazil is on the table, has led speculative investors to take positions in the stock, increasing the volatility in recent years.

Despite this performance, we believe Avianca Holdings’ management has made the right decisions to protect the balance sheet, to improve profitability through operating efficiencies, and to create an for the long term, navigating the aforementioned negative winds but readying to take off in the short term.

We are expecting Avianca Holdings to give two important and material news to the market during the second half of 2018: i) the final decision regarding the comercial Alliance with and Copa Holdings, and ii) the results of the negotiation with Airbus to postpone or cancel the entrance of aircrafts that will reduce capex requirements by approximately USD2bn for the next three years.

In our view, these two stories will help to eliminate a big share of the noise the stock price is facing today, something that could support the price of the stock if news are well received by market players.

Trading at Discount vs. Peers and Own Track Record

Avinca Holdings is trading at a discount vs. peers in all measurements, which supports our view that market prices is failing to reflect the correct value of the asset, creating an opportunity for high-risk investors to take long-term positions in the stock.

Figure 4. Avianca’s EV/EBITDA LTM 5 years average Table 8. Avianca’s multiples vs its peers

9 Company EV/LTM P/BV PE Ratio +2 SD EBITDA 8 Median 5.9 1.3 10.6 +1 SD 7 Average 7.0 1.7 47.6 5Yr Average Avianca* 5.2 0.6 7.5 6 -1 SD Delta 5.9 3.1 11.6 5 -2 SD United 6.1 2.8 11.7 4 Continental Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Copa 6.1 1.5 8.7

Latam 8.0 1.6 27.3 Source: Bloomberg, Grupo Bancolombia’s own calculations. Source: Bloomberg, *Grupo Bancolombia’s own calculations. Fixed Income Equity Research

Manuel Rey Ayala Jairo Agudelo Restrepo MD - International Institutional Head of equity research Investors [email protected] [email protected] +574 6047048 +571 353 5205 Diego Buitrago Aguilar Economic Research Energy Analyst [email protected] +571 7463984 Juan Pablo Espinosa Arango Head of Economic Research Federico Perez Garcia [email protected] Consumption & Industry Analyst +571 7463991 ext. 37313 [email protected] +574 6048172 Arturo González Peña Quantitative Analyst Andrea Atuesta Meza [email protected] Financial Sector Analyst +571 7463980 ext 37385 [email protected] +571 7464329 Julián Felipe Huertas Espitia Regional Analyst María Antonia Yarce, CFA [email protected] Oil & Gas Analyst +571 7463980 ext. 37303 [email protected] +574 6049821 Juan Manuel Pacheco Perez International and Markets Analyst Juliana Aguilar Vargas, CFA [email protected] Cement & Infrastructure Analyst +571 7464322 ext. 37380 [email protected] +574 6047045 Juan Camilo Meneses Cortes Central Banking and Financial System Andrés Felipe Escobar Cataño Analyst Intern [email protected] +574 6046496 +571 7463994 ext. 37316 [email protected] Juanita Blanco Zea Nicole Vanessa Galeano Torres Intern Intern [email protected] +571 7464318 +571 7463988 ext. 37310 [email protected] Research Assistant

Alejandro Quiceno Rendón Research Editor [email protected] +574 6048904 TERMS OF USE

This report has been prepared by Analysis Bancolombia a research and analysis department at Grupo Bancolombia. It shall not to be distributed, copied, sold, or altered in any way without the express permission of Grupo Bancolombia, nor be used for any purpose other than to serve as background material which does not constitute an offer, advice, recommendation, or suggestion by Grupo Bancolombia for making investment decisions or conducting any transactions or business. The use of the information provided is solely the responsibility of the recipient. Before making an investment decision, you should assess multiple factors such as the risks of each instrument, your risk profile, your liquidity needs, among others. This report is only one of many elements that you should consider in making your investment decisions. In order to extend the content of this information, we ask you to contact your business manager. We recommend you not to make any investment decision until fully understanding all factors involved in such decisions. Fixed income and equity securities, interest rates, and other information found here are purely informational and are not an offer or firm demand to perform transactions. Also, according to the applicable regulations, our opinions or recommendations do not constitute a commitment or guarantee of return for the investor. The information and opinions in this research report constitute a judgment as of the date indicated and are subject to change without notice. The information may therefore not be accurate or current. Future projections, estimates, and forecasts are subject to several risks and uncertainties that prevent us from ensuring that they will prove correct or accurate, or that the information, interpretations, and knowledge on which they are based will be valid. In that sense, actual results may substantially differ from the forward-looking statements contained here. You should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance. The entities that are part of Grupo Bancolombia may have acquired and maintain at the time of preparation, delivery or publication of this report, for their own position or that of their clients, the securities or financial assets to which the reports refers. Grupo Bancolombia has risk policies to avoid a concentration in their own positions and those of their clients, which contributes to avoid conflicts of interest. As regards to conflicts of interest, we declare that (i) Valores Bancolombia S.A. Comisionista de Bolsa and/or Banca de Inversión Bancolombia S.A. Corporación Financiera have participated in structuring or underwriting/placing equity securities for Bancolombia S.A., (ii) Grupo Bancolombia is the beneficial owner of 10% or more of the shares issued by Valores Simesa S.A., and Proteccion S.A., (iii) Bancolombia is one of the biggest shareholders of Fondo Inmobiliario Colombia – FIC, and (iv) Valores Bancolombia S.A. Comisionista de Bolsa is a wholly owned subsidiary of Bancolombia S.A. Nevertheless, it has been prepared by our Analysis Bancolombia department team based on strict internal policies that require from us objectivity and neutrality, as well as independence from our areas of brokerage and investment banking. The information contained in this report is not based, does not include nor has been structured based on privileged or confidential information. Any opinions or projections contained herein are solely attributable to the author and have been prepared independently and autonomously in the light of the information available at the time. The content of this message does not constitute a professional recommendation to make investments according to the terms of article 2.39.1.1.2 of the Decree 2555 of 2010 or the regulations that modify, replace or complement it.

RATING SYSTEM:

The investment recommendation on the issuers under coverage by Analysis Bancolombia is governed by the rating system presented below, subject to the following criteria:

The upside potential is the percentage difference between the target price of securities issued by a particular issuer and their market price. The target price is not a forecast of the price of a stock, but a fundamental independent valuation made by Analysis Bancolombia, which seeks to reflect the fair price the market should pay for the shares on a given date.

Based on an analysis of the relative upside potential amongst the securities of companies under coverage and the COLCAP index, the ratings of the assets are determined as follows:

Overweight: when the upside potential of a stock exceeds by 5% or more the return potential of the COLCAP index. Market Weight: when the upside potential of a stock does not differ by more than 5% from the return potential of the COLCAP index. Underweight: when the upside potential of a stock is 5% or more below the return potential of the COLCAP index. Under Review: the company’s coverage is under review and therefore there’s no rating or target price.

Additionally, at the discretion of the analyst, the speculative qualification that complements the recommendation will continue to be used, taking into account the risks seen in the performance of the asset, its future development and the volatility the movement of the stock may show.

The fundamental potential of the index is determined based on the methodology established by the BVC for the calculation of the COLCAP index, considering the target prices published by Analysis Bancolombia. This will be made with the Colcap basket on the dates of calculation May and November of every year. For the companies part of the index but not covered, the consensus of market analysts will be used.

Currently, Analysis Bancolombia has 17 companies under coverage, distributed as follows:

Overweight Market Weight Underweight Under Review

Number of issuers with ratings of: 9 3 2 3 Percentage of issuers with ratings of: 52.9% 17.6% 11.8% 17.6%