Equity Research CONSORCIO ARA, S.A.B. DE C.V. Housing February 24, 2015

Solid Report, in line with our estimates EBITDA’s positive growth continues. Reiterate BUY BUY Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other

Last Price: P$ 6.70 Figures in millions of pesos ARA Medium Liquidity Price Target 2015: P$ 8.00 Return 19% 2013 2014 2015e 2016e

■ ARA’s EPS came in slightly above our estimate (3%). Total sales and Sales 5,736 6,206 6,853 7,767 EBITDA increased 32% and 33% YoY, respectively. Solid growth in unit EBITDA 898 909 1,060 1,227 sales, positive price performance and cost control were the main drivers. Margin 15.7% 14.6% 15.5% 15.8% Growth YoY -21.6% 1.2% 16.6% 15.8% ■ Positive MP162 million free cash flow generation and debt reduction Net Profit 444 494 555 620 (12%). ARA continued to improve its leverage closing 2014 with a 1.2x net Margin 7.7% 8.0% 8.1% 8.0% debt to EBITDA ratio (from a 2.0x peak ratio during the 4Q12). Growth YoY -20.4% 11.3% 12.2% 11.8% Total Assets 15,676 16,276 16,941 17,948 ■ We are reiterating our MP 8.00 PT and BUY recommendation. We believe Cash 643 1,076 1,050 1,350 ARA will be able to achieve a 12% CAGR in sales between the 2015/2016 Total Liabilities 5,493 5,537 5,640 6,019 period with EBITDA increasing 16% with the margin at 15.6% on average. Debt 2,431 2,147 2,372 2,642 Equity 10,183 10,739 11,301 11,930 ■ In our view, ARA is the most attractive option to invest in the Mexican Majority 10,147 10,701 11,262 11,888 housing sector. It is still early to jump on the stock with the sector’s Multiples inflexion point in 3Q14. The company has a strong financial profile and EV/Sales 1.9x 1.6x 1.5x 1.3x attractive valuation with a 14.2x P/E in 2016. EV/EBITDA 11.8x 10.9x 9.6x 8.3x P/E 19.8x 17.8x 15.9x 14.2x ROE 4.4% 4.6% 4.9% 5.2% We remain bullish on ARA. In our view ARA’s main differentiator is its prudent ROA 2.8% 3.0% 3.3% 3.5% growth strategy which enabled the company to comfortably survive during the Net Debt/ EBITDA 2.0x 1.2x 1.2x 1.1x industry’s most complicated period. Sales will increase 12% on average during the Dividend Yield 0.0% 0.0% 0.0% 0.0% next two years, with an average 15.6% EBITDA margin and a MP400 million free cash flow generation. Market Data: Mkt. Cap (mn) USD 590 2015 will be a promising year. We expect a 10% sales growth (vs. 8% in 2014, Firm Value (mn) USD 681 but with double-digit growth potential in coming years), boosted by Federal loan 1yr. High—low MP 6.9—MP 4.7 support programs. We estimate a 115bp expansion in the EBITDA margin to 15.8% Float 58% in 2015 vs. 2014. At the bottom line, we expect an 8% margin, similar to 2014.

Total sales increased 32% during the 4Q14, with a 21% rise the number of ARA vs IPC (Feb 2014 = 100) units. During the quarter, ARA sold 2,888 units, which still are well below the 4,300 140 average per quarter during the 2008-11 period. The average selling price increased 130 8% compared to the 4Q13’s MP576k, but well above the MP410k average selling prices in the 2008-11 period, reflecting a better sales mix. We highlight the solid 120 performance in the middle income housing segment (43% of total sales) which 110 increased its revenues 31% during the quarter. 100 EBITDA presented a solid 33% increase. The EBITDA margin expanded 6bps 90

(vs. A drop of 11 bps in the 3Q14) to reach 13.7%. The operating margin expanded

Jul-14

Oct-14

Apr-14

Jun-14 Jan-15 Feb-15

strongly to 10.2% (vs. 4.5% in 4Q13) mainly as a result of lower SG&A costs as a Mar-14

Nov-14 Dec-14 Aug-14 Sep-14 May-14 percentage of total sales (-300 bps to 18.6%). Although EBITDA margins are still ARA* IPC below the 17% level that the company achieved in previous years, we anticipate an Source: Bloomberg average 155bp improvement during the next two years. Ramón Ortiz Reyes Cement, Construction & Transport (Figures in Millions of Pesos) [email protected] INCOME STATEMENT 4Q14 4Q13 Chg. 2014 2013 Chg. Sales 1,702 1,288 32% 6,206 5,736 8% +52 (55) 1103 6600 x 1835 EBITDA 233 175 33% 909 898 1% EBITDA Margin 13.7% 13.6% 14.6% 15.7% Mauricio Arellano Sampson Net Profit 144 95 52% 494 464 7% [email protected] EPS $ 0.11 $ 0.07 52% $ 0.38 $ 0.35 7% Source: Company, Actinver +52 (55) 1103 6600 x 4132 Actinver’s Equity Research 1 Net income advanced 52% to MP 144 million, as a result of the solid operating performance, a stable effective tax rate (30%) and a MP7.7 million financial gain vs. an MP8.4 million loss in the 4Q13. The net margin was a very respectable 8.5%, up from 7.4% in 4Q13.

ARA generated positive a MP 162 million free cash flow during the 4Q14. This figure compares favorably with the MP69 million 4Q13 level. For all of 2014 FCF reached MP864 million vs. negative MP51 million in 2013.

Further reduction in debt levels. Total debt fell 12% on a YoY basis with the net debt to EBITDA ratio at 1.2x in 4Q14 (from a 2.0x peak ratio in the 4Q12). ARA’s MP414 million short-term debt represents 19% of total debt. Similarly, we believe ARA could well refinance its MP1.7 billion secured syndicated loan with better terms in 2015, further improving its financial position.

Actinver’s Equity Research 2 Equity, Economic, Quantitative and Fixed Income Research Departments

Equity Research

Gustavo Terán Durazo, Head of EquityResearch (52) 55 1103-6600 x1193 [email protected] CFA Senior Analysts Telecommunications, Media and Martín Lara (52) 55 1103-6600x1840 [email protected] Financials

Carlos Hermosillo Bernal Consumption (52) 55 1103-6600 x4134 [email protected]

Pablo Duarte de León FIBRAs (REITs) (52) 55 1103-6600 x4334 [email protected]

Mining, Metals, Paper and Pablo Abraham Peregrina (52) 55 1103-6600x1395 [email protected] Conglomerates

Ramón Ortiz Reyes Cement, Construction and Concessions (52) 55 1103-6600 x1835 [email protected]

Federico Robinson Bours Energy, Chemicals and Industrial (52) 55 1103-6600 x4127 [email protected] Carrillo Junior Analysts Telecommunications, Media and Juan Ponce (52) 55 1103-6600x1693 jponce@actinver,com.mx Financials Enrique Octavio Camargo Energy, Chemicals and Industrial (52) 55 1103-6600x1836 [email protected] Delgado José Antonio Cebeira Consumption (52) 55 1103-6600x1394 [email protected] González

Mining, Metals, Paper Conglomerates , Mauricio Arellano Sampson (52) 55 1103-6600 x1835 [email protected] Cement, Construction and Concessions Economic and Quantitative Research

Head of Economic and Quantitative Ismael Capistrán Bolio [email protected] Research (52) 55 1103-6600 x6636

Jaime Ascencio Aguirre Economy and Markets [email protected] (52) 55 1103-6600 x1100

Santiago Hernández Morales Quantitative Research [email protected] (52) 55 1103-6600 x4133

Roberto Ramírez Ramírez Quantitative Research (52) 55 1103-6600x1672 [email protected]

Roberto Galván González Technical Research [email protected] (52) 55 1103 -66000 x5039

Fixed Income Research

Araceli Espinosa Elguea Head of Fixed Income Research (52) 55 1103 -66000 x6641 [email protected]

Jesús Viveros Hernández Fixed Income Research (52) 55 1103 -66000 x6649 [email protected]

Actinver’s Equity Research 3 Disclaimer

Guide for recommendations on investment in the companies under coverage included or not, in the main Price Index (IPC)  StrongBuywith an extraordinary perspective. According to the analyst, in the next twelve months, the valuations of stock and/or prospects for the sector are EXTREMELY FAVORABLE  Buy. According to the analyst, in the next twelve months, the stock’s valuation and / or prospects for the sector are VERY FAVORABLE  Neutral. According to the analyst, in the next twelve months, the valuation of stock and / or sector ARE NEUTRAL OR FAVORABLE but with a similar perspective to the IPC  Belowmarket. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NOT POSITIVE  Sell. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NEGATIVE, or likely to worsen  In reviewwith positive outlook  In review with negative or unfavorable perspective

ImportantStatements. a) Of theAnalysts:

“The analysts in charge of producing the Analysis Reports: Jaime Ascencio Aguirre; Mauricio Arellano Sampson; Enrique Octavio Camargo Delgado; Ismael Capistrán Bolio; José Antonio Cebeira González, Pablo Enrique Duarte de León; Araceli Espinosa Elguea; Roberto Galván González; Ana Cecilia González Rodríguez; Carlos Hermosillo Bernal; Santiago Hernández Morales; Martín Roberto Lara Poo; Ramón Ortiz Reyes; Pablo Abraham Peregrina; Juan Enrique Ponce Luiña; Federico Robinson Bours Carrillo; Gustavo Adolfo Terán Durazo; Jesús Viveros Hernández, declare”:

1. "All points of view about the issuers under coverage correspond exclusively to the responsible analyst and authentically reflect his vision. All recommendations made by analysts are prepared independently of any institution, including the institution where the services are provided or companies belonging to the same financial or business group. The compensation scheme is not based or related, directly or indirectly, with any specific recommendation and the remunerationis only received from the entity which the analysts provide their services. 2. "None of the analysts with coverage of the issuers mentioned in this report holds any office, position or commission at issuers underhis coverage, or any of the people who are part of the Business Group or consortium to which they belong. They have neither held any position during the twelve months prior to the preparation of this report. " 3. "Recommendations on issuers, made by the analyst who covers them, are based on public information and there is no guarantee of their assertiveness regarding the performance that is actually observed in the values object of the recommendation" 4. "Analysts maintain investments subject to their analysis reports on the following issuers: AC, ALFA, , , AMX,AZTECA, , CHDRAUI, FEMSA, FIBRAMQ, FINDEP, FUNO, GENTERA, GFREGIO, , ICA, IENOVA, KOF, LAB, LIVEPOL, MEXCHEM, OHLMEX,POCHTEC, TLEVISA,SORIANA, SPORTS, VESTA, WALMEX.

b) On Actinver Casa de Bolsa, S.A. de C.V. Grupo Financiero Actinver

1. Actinver Casa de Bolsa, S.A. de C.V. GrupoFinanciero Actinver, under any circumstance shall ensure the sense of the recommendations contained in the reports of analysis to ensure future business relationship.

2. All Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver business units can explore and do business with any company mentioned in documents of analysis. All compensation for services given in the past or in the future, received by Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver by any company mentioned in this report has not had and will not have any effect on the compensation paid to the analysts. However, just like any other employee of Actinver Group and its subsidiaries, the compensation being enjoyed by our analysts will be affected by the profitability gained by Actinver Group and its subsidiaries. 3. At the end of each of the previous three months, Actinver Casa de Bolsa, SA de C.V. Actinver Financial Group, has not held any investments directly or indirectly in securities or financial derivatives, whose underlying are Securities subject of the analysis reports, representing one percent or more of its portfolio of securities, investment portfolio, outstanding of the Securities or the underlying value of the question, except for the following: * AEROMEX, BOLSA A, FINN 13, FSHOP 13, SMARTRC14. 4. Certain directors and officers of Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver occupy a similar position at the following issuers: AEROMEX, MASECA, AZTECA, ALSEA, FINN, MAXCOM, SPORTS, FSHOP and FUNO. This report will be distributed to all persons who meet the profile to acquire the type of values that is recommended in its content.

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Actinver’s Equity Research 4