Cemex Latam Holdings

ANALYSIS BANCOLOMBIA: EQUITY RESEARCH – Update Cement I January 10, 2017

Reassessing the Start of the Maceo Plant SPECULATIVE BUY Following the events related to the plant in Maceo, Antioquia, we decided to exclude CLH from our Top Picks for 2H16 on September 26th. Subsequently, on October 12th, we put our coverage Return and Trading Data under review, with the purpose of making an in-depth analysis of the situation the Maceo plant, Target Price (COP) 14,300 the company’s main source of organic growth, is currently undergoing. This, seeking to protect Previous (Sep/26/2016) 16,600 the portfolio of investors with a low or moderate risk profile against the high expected volatility in Closing Price (Ene 06, 2017) (COP) 11,600 Upside +23.3% the asset. 52 Week Range (COP) 9,020 – 14,300 This decision was effective since volatility in CLH’s shares has been greater than the market’s, Market Cap (COPmn) 6,453,972 nd Outstanding Shares (mn) 556 with a standard deviation of returns equal to 2.23% since September 22 , 2016, while the Floating (Excluding AFPs)(mn) 142 volatility of the COLCAP has been 0.71%. Also, since September 16 the company has corrected ADV 12 months (COPmn) 4,223 15.6%. Dividend Yield 0.0% Total Return 23.3% However, despite the final impact regarding the Maceo plant is not clear, we wanted to run an Bloomberg: CLH CB exercise excluding the entry into operation of the plant in order to offer a target price of CLH ex- Maceo, and identify whether the stock is under or over rated.

The result leads us to a recommendation of SPECULATIVE BUY, despite the cut of the TP from

COP16,600/share (with Maceo) on September 26 to COP14,300/share (-14%, ex Maceo). The decision to place it under SPECULATIVE BUY is due to the increase in the volatility mentioned above and possible future movements tied to the pending permits, reasons that make it an asset CLH vs. COLCAP 12 months (base 100) for professional investors and with high risk tolerance. 140 The main changes were: i) exclusion of the Maceo plant from entering into operation; ii) new macroeconomic forecasts for the coming years; iii) increase in the risk-free rate, from 2.6% to 130

3.2% in US treasuries; iv) inclusion of financial results as of 3Q16 and the company’s 120 expectations for year-end; v) new tax rates according to changes in the tax reform, and vi) deduction of USD20mn on irregular payments and USD74mn for a possible fine by the DIAN – 110 tax agency. 100

Why not to Include Maceo in our Valuation? 90 The decision responds to our interest to provide investors with a vision of CLH without the 80 ene-16 abr-16 jul-16 oct-16 ene-17 inherent risk of obtaining the pending permits for the entry into operation of the Maceo plant, and CLH CB Equity COLCAP Index without the implicit uncertainty about the final decisions made by the General Prosecutor’s Office for violations of the code of ethics made by several former employees, which at the moment is Source: Bloomberg, Bancolombia difficult to estimate, both in amount and in time. Despite of the above, it’s clear that from a fundamental point of view, CLH’s stock is undervalued, and we could say that the entry into operation of the Maceo plant would perform as a free option, that if incorporated would generate greater fundamental value for the asset, as we will show later. Analysts Name: German Zuñiga Saavedra Multiples (USD000) 2014 2015 2016E 2017E 2018E Phone: (574) 6047045 Net Sales 1.724.710 1.427.058 1.326.295 1.419.991 1.522.663 E-mail: [email protected] Operating Income 481.131 364.818 346.138 363.506 395.402 EBITDA 576.942 449.772 441.515 461.391 495.978 Name: Jairo Julian Agudelo Restrepo Phone: (574) 6047048 Net Income 273.398 95.491 109.419 129.543 139.728 E-mail: [email protected] P / E 16,1 21,7 19,1 16,9 15,4 EV/EBITDA 9,7 7,0 7,3 6,9 6,2 P / BV 3,2 1,6 1,5 1,4 1,3 Dividend Yield 0.0 0.0 0.0 0.0 0.0 Source: Grupo Bancolombia

Cemex Latam Holdings| Cement

January 10, 2017

Maceo Plant will Enter our Model once its Economic Impact is Certain

Recently, Corantioquia, agency in charge of regional environmental licensing, informed CLH of the refusal to modify the environmental license in Maceo, with which the company sought to increase the quarry’s operating capacity to 950,000 tons/year. The main reason for this decision is the partial overlap with a renewable natural resources management district. However, CLH will appeal the decision before a higher court.

It’s important to keep in mind that the current exploitation capacity of the quarry has not been disclosed by the company, so it’s difficult to estimate the potential impact of this decision, which, if confirmed, would oblige CLH to replace the remaining with another quarry, which in our opinion could make the clinker operation not feasible, taking into account the high transport costs. In addition, the environmental license to operate said mining title will return to C.I. Calizas y Minerales, which means neither CLH nor its subsidiary Central de Mezclas S.A. shall be the owners of said license. In spite of this, it’s important to keep in mind that CLH has a lease through which it can operate, exploit and manage the complete operation of the plant, from the quarry to the production of cement. Two additional issues are pending permits and procedures for the proper operation of the plant. The first is the expansion of the free tax zone, since the clinker line does not have this tax benefit and, second, the pending permits to finish the access route to the production plant. Such procedures may take time or may eventually receive an adverse response.

Based on the above, we consider it appropriate not to include Maceo’s production until it is effective, since delays, legal impacts, fines, penalties, the partial or complete operation of the plant are uncertain and difficult to measure.

Valuation - Discounted Cash Flow Our model was developed using the discounted cash flow methodology. With the aforementioned considerations, we reached a TP of COP14,300/share (+23.3% vs. market price) that leads to a

SPECULATIVE BUY rating. The perpetuity growth rate used was 3.17% and the discount rate 10.6%, both in nominal terms. The weighted average cost of capital (WACC) was calculated with a risk free rate of 3.2% in USD (+600bps vs. previous report), a country risk for Colombia, Panamá, Costa Rica, Nicaragua and Guatemala of 3.2%, 2.03%, 4.8%, 4.8% and 2.6%, respectively, and a leveraged beta of 1.12x. On the other hand, the perpetuity growth rate was calculated as a weighted average between the long-term inflation of markets where CLH operates and its share in the generation of EBITDA expected by us. We incorporated into our model the new tax rates according to changes in the tax reform by the government, these corporate taxes will changes as follows: 40% for 2017, 37% for 2018 and 33% for 2019 and henceforth, direct changes are reflected in the WACC and cash flows.

The main adjustment made in the discount rate comes from: i) higher risk-free rate that goes from 2.6% to 3.2%, ii) higher beta as a result of the increase in the volatility of the asset and the asset’s risk perception, and iii) new country risk metrics measured by the EMBI+ in the last 12 months.

Cemex Latam Holdings| Cement

January 10, 2017

Table 1. Summary DCF valuation model Table 2. WACC Calculation

USD 000 2017E 2017E PV of cash flows 2.127.708 Liabilities 1.147 PV of perpetuity 2.322.213 Kd 9,0% Enterprise value 4.449.921 Net debt 997.550 E/E+D 70,1% DIAN legal demand 74.000 D/E+D 29,9% Irregular Payments Maceo Plant 20.000 Tax rate 30,2% Other non current liabilities 664.936 Equity value 2.693.434 Shares outstanding 556.054 Leverage Beta 1,12 FX 2.950 Risk Premium 5,5% Target price 14.300 Risk Free Rate 3,2% market value 11.600 Country risk (Colombia) 2,9% Upside (downside) potential 23,3% Country risk (Panama) 2,0% Source: Bancolombia Country risk (Costa Rica) 4,8% Country risk (Nicaragua) 4,8% Table 3. Sensitivity analysis - WACC vs. g nominal Country risk (Guatemala) 2,6% Ke (USD) 12,5% Perpetuity growth rate (g nominal) 14.300 2,2% 2,7% 3,2% 3,7% 4,2% WACC 10,6% 9,6% 14.709 15.663 16.766 18.054 19.578 Source: Bancolombia 10,1% 13.679 14.502 15.444 16.532 17.802 WACC 10,6% 12.772 13.488 14.300 15.229 16.302 11,1% 11.966 12.594 13.300 14.101 15.017 11,6% 11.246 11.799 12.418 13.115 13.906 Source: Bancolombia

Table 4. Sensitivity analysis – WACC vs. COP

COP Currency 14.300 2.450 2.700 2.950 3.200 3.450 9,6% 13.926 15.346 16.766 18.186 19.606 10,1% 12.828 14.136 15.444 16.752 18.060 WACC 10,6% 11.878 13.089 14.300 15.511 16.722 11,1% 11.048 12.174 13.300 14.426 15.552 11,6% 10.315 11.367 12.418 13.470 14.521 Source: Bancolombia

Reactivation of Construction Sector in Bogotá and Participation in 4G Projects: Catalysts

2017 will be a year in which the Colombian economy will be driven by the construction sector, mainly during the second half. The portfolio of projects, particularly in Bogota, is significant, but the delay in infrastructure at the national level urges an immediate beginning.

We expect 2017 to be the year of 4G projects and PPPs of private initiative. Of 32 projects awarded, 20 have financial closure and some have already started construction, which leads us to estimate a peak in cement demand between 2018 and 2019, in which CLH will play a key role in providing the construction materials for complementary works in roads, bridges, tunnels, viaducts, water channels, among others.

We believe CLH is in an environment of positive fundamentals due to the significant investments being made by the government in terms of infrastructure and housing.

According to the above, we highlight some fundamentals that will boost the demand for cement and ready-mix in the country and therefore the performance of the company.

Cemex Latam Holdings| Cement

January 10, 2017

1. Bogotá: Boost in Infrastructure will be Positive for CLH Table 5. Projects in Bogota Bogotá has a significant lag in terms of rehabilitation and maintenance of roads, as well as new alternative routes, because for several years no complementary works have been made in the Project Intervention road network. Currently there’s a very ambitious project portfolio for the construction of new Metro Elevado* Construction roads, such as the ALO (Avenida Longitudinal de Occidente). It’s important to emphasize the Autopista Norte Extension positivism of CLH regarding the construction of the city’s metro, whose initial design was Carrera Septima Truck road modified, being now elevated, and therefore will demand a greater amount of ready-mix Transmilenio 8 New lines compared to the underground model, and will have fewer complications and costs. Avenida Caracas Extension Avenida Boyaca Extension 2. 4G: Better Late than Never Linear Parks 1.500 hectares The dynamics of 4G projects are increasingly strong, all first-wave projects, part of the second, Avenida ALO 21 km construction and some of the private initiative projects, have already been secured financially. The company New houses 8.000 units - government support will have a significant stake in the supply of building materials; several contracts in functional * It is under study units have already been signed. However, we do not rule out that the reputational risk arising Table 6. 4G concessions with financial closure from the news related to the Maceo plant may lead to a lower participation than that projected by the company. 4G Concessions with We emphasize that 4G projects are a reality. Local and international banks, as well as the contractual financial closing (COPmn) Financiera de Desarrollo Nacional, have given support to the projects, and it’s only a matter of First Wave 6.084.604 time before we can see the results of this plan which has been slow to start, but which stands on Honda, Puerto Salgar, Girardot 454.609 firm ground. Autopista Conexión Pacifico 1 1.142.465 Autopista Conexión Pacifico 2 577.769 Alternative Scenario: Incorporation of the Plant in 2018 Autopista Conexión Pacifico 3 857.573 Perimetrial Oriente de Cundinam. 614.900 We ran a scenario where we assume that the Maceo plant goes into operation by 2018 without Cartagena - Barranquilla 434.927 problems, fines or penalties. Under this scenario the target price would be COP17,400/share, for Autopista Rio Magdalena 2 878.564 an upside of 50%, which would ratify our SPECULATIVE BUY rating. Mulaló - Loboguerrero 488.209 Conexión Norte 635.588 In addition to the aforementioned assumptions, under this scenario we add the following: i) addition in productive capacity of 1 million tons per year, reaching 5.5mn tons/year on a Second Wave 5.808.401 Tranversal del Sisga 291.020 consolidated basis, ii) the total tax benefit is assumed since it’s located in a free tax zone, i.e., for Villavicencio - Yopal 1.025.400 the additional million tons the tax rate would be 20% according to the tax reform, iii) we maintain Santana - Mocoa - Neiva 883.614 a real capacity of cement production at 90% of its nominal capacity and an average increase in Popayán - Santander de Quilichao 765.349 ready-mix production of 4.7%, and v) new tax rates according to the tax reform as we mention Pasto - Rumichaca 1.055.061 before. Autopista al Mar 1 965.253 It’s important to mention that the Maceo plant will play a fundamental role in the supply of cement Bucaram. - Barrancab. - Yondo 822.704 and concrete for 4G projects that will be developed in the central area of Colombia, mainly in PPP 1.680.223 Antioquia, where the main cement plants have little idle capacity. Ibague - Cajamarca 551.068 Bogota - Villavicencio Sector 3 559.297 Risks in our Valuation Conexión Vial Cesar - Guajira 135.664 Neiva - Girardot 434.194 The main risks in our base scenario are: i) changes in prices and volume as a consequence of Source: Bancolombia growing dynamics of import of clinker, tied to a lower cost in maritime transport, ii) reduction in market share due to the entry of new competitors and operational expansion amongst peers, iii) Figure 1. Market share in Colombia (Bancolombia Proxy) adverse responses regarding the Maceo plant, or materialization of an unexpected event (fine, penalty, delay in entry into operation) regarding the aforementioned investigation, iv) lawsuit against the DIAN for the payment of taxes related to 2009, and v) deceleration in the demand of cement in Colombia.

Source: Bancolombia, DANE

Cemex Latam Holdings| Cement

January 10, 2017

Income Statement 2013 2014 2015 2016E 2017E 2018E Revenues 1.750.116 1.724.710 1.427.058 1.326.295 1.419.991 1.522.663 Operating income 535.296 481.131 364.818 346.138 363.506 395.402 Ebitda 632.681 576.942 449.772 441.515 461.391 495.978 Interest expense (113.763) (90.449) (73.748) (108.134) (80.257) (58.254) Dividends received 0 0 0 0 0 0 Profit before tax 402.563 419.077 188.521 211.613 254.994 306.850 Net income 264.102 273.398 95.491 111.327 131.978 158.462 Gross cash flow 616.940 574.182 366.412 424.041 442.683 475.917 Dividends paid 0 0 0 0 0 0 Operating margin (%) 30,6 27,9 25,6 26,1 25,6 26,0 Net margin (%) 15,09 15,85 6,69 8,4 9,3 10,4 Ebitda margin (%) 36,2 33,5 31,5 33,3 32,5 32,6 Operating income per share 1,0 0,9 0,7 0,6 0,7 0,7 Earnings per share 0,5 0,5 0,2 0,2 0,2 0,3 Ebitda per share 1,1 1,0 0,8 0,8 0,8 0,9 Cash flow per share 1,1 1,0 0,7 0,8 0,8 0,9 Dividend per share 0,0 0,0 0,0 0,0 0,0 0,0

Balance Sheet 2013 2014 2015 2016E 2017E 2018E Cash & equivalents 76.691 51.772 53.635 86.742 409.431 78.378 Current assets 449.819 328.695 287.369 303.123 641.319 327.245 Net fixed assets 3.360.226 3.120.395 2.880.254 3.231.301 3.195.895 3.162.316 Total assets 3.836.312 3.483.940 3.196.930 3.567.303 3.869.733 3.521.738 Short term debt 342.889 170.505 276.579 143.671 687.348 5.055 Current liabilities 641.873 406.913 524.245 371.407 931.807 267.803 Long term debt (financial and bonds) 1.124.996 1.048.433 830.434 1.087.434 845.086 940.032 Total debt 1.467.885 1.218.938 1.107.013 1.231.105 1.532.434 945.086 Total liabilities 2.478.333 2.083.007 1.880.115 2.146.887 2.311.600 1.802.615 Minority Interest 14.989 5.762 5.329 5.946 6.451 5.870 Shareholder's equity 1.342.990 1.395.171 1.311.486 1.414.470 1.551.682 1.713.253 Total liabilities & SHE 3.821.323 3.478.178 3.191.601 3.561.356 3.863.282 3.515.868 Net debt 1.391.194 1.167.166 1.053.378 1.144.363 1.123.002 866.709 Current ratio 0,7 0,8 0,5 0,8 0,7 1,2 Total debt / equity (%) 109,3 87,4 84,4 87,0 98,8 55,2 BV/share 2,4 2,5 2,4 2,5 2,8 3,1

Valuation metrics 2013 2014 2015 2016E 2017E 2018E Capital stock (000) 556.054 556.054 556.054 556.054 556.054 556.054 Share price 14.800 15.980 10.200 11.340 11.600 11.600 FX rate 1.869 2.019 2.743 3.010 2.950 3.003 Market Cap US$mn 4.403.458 4.401.064 2.067.719 2.094.902 2.186.519 2.147.929 Net liabilities 1.391.194 1.167.166 1.053.378 1.144.363 1.123.002 866.709 Minority interest 14.989 5.762 5.329 5.946 6.451 5.870 EV 5.843.799 5.586.406 3.129.499 3.248.072 3.318.611 3.021.997 BV/share 2,4 2,5 2,4 2,5 2,8 3,1 Price to earnings (x) 16,7 16,1 21,7 18,8 16,6 13,6 EV to Ebitda (x) 9,2 9,7 7,0 7,4 7,2 6,1 Price to gross cash flow (x) 7,1 7,7 5,6 4,9 4,9 4,5 Price to book (x) 3,3 3,2 1,6 1,5 1,4 1,3 Dividend yield (%) 0,0 0,0 0,0 0,0 0,0 0,0 Price to sales (x) 2,5 2,6 1,4 1,6 1,5 1,4 ROE (%) 19,7 19,6 7,3 7,9 8,5 9,2 ROA (%) 10,0 9,9 8,2 7,0 6,8 8,1

Cemex Latam Holdings| Cement

January 10, 2017

Equity Sales Equity Research

Rupert Stebbings Jairo Agudelo Restrepo Equity Markets Vice President Head of equity research [email protected] [email protected] +574 6045138 +574 6047048

Juan Camilo Dauder Sánchez Fixed Income Head Energy Analyst

Pablo Caicedo [email protected] VP International Business +574 6049821 [email protected] Diego Buitrago Aguilar +571 488 6000 Energy Analyst

[email protected] Economic Research +571 7463984 ext 37307

Juan Pablo Espinosa Germán Zúñiga Saavedra Head of Economic Research Infrastructure and Industry Analyst [email protected] [email protected] +571 7463991 ext. 37313 +574 6047045

Arturo González Peña Federico Perez Garcia Central Bank and Financial System Analyst Oil & Gas Analyst [email protected] [email protected] +571 7463980 ext 37385 +574 6048172 Henry Alexander Otero Giraldo International and Markets Analyst Laura Castaño Herron [email protected] Intern +571 7463980 ext 37310 +574 6046496 [email protected] Julián Felipe Huertas Espitia

Analyst Erika Ivanna Baquero Jimenez [email protected] Intern +571 7463988 ext. 37303 +571 7463980 ext 37376 Jorge Alexander Gomez Guarin [email protected] Intern

+571 7463980 ext 37310 Research Assistant [email protected]

Claudia Restrepo Juan Sebastián Gallego León Research Editor Intern [email protected] +571 7463980 ext 37316 +574 404 3809 [email protected]

Cemex Latam Holdings| Cement

January 10, 2017

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