CFA Institute Research Challenge

Hosted by CFA Society

Instituto Tecnólogico Autónomo de México

The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report.

Disclosures: Ownership and material conflicts of interest The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or a director The author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the subject company. Market making The author(s) does not act as a market maker in the subject company’s securities. Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Mexico, CFA Institute, or the CFA Institute Research Challenge with regard to this company’s stock. 1 BECLE S.A.B DE C.V. Is a Mexican public company founded in 1758 that produces, bottles, trades and distributes alcoholic and non-alcoholic beverages in Mexico, United States and internationally. Becle is currently the global leader in in terms of volume share.

Investment summary Quick Snapshot We issue a HOLD recommendation with a 2019E Price Target of 30.7, which represents a 4.5% upside to its current price ($29.40 as of October Stock Exchange BMV (Mexico) 15th, 2018). Our valuation is based on two main models: a DCF and a Ticker CUERVO* MM relative valuation with a 70/30 weight respectively. Our recommendation is Industry Beverages (Distillers and Vintners) mainly determined by three key drivers: 1) Becle seems to be fairly priced Recommendation HOLD by the market, which is reinforced by our valuation models. 2) Despite Target Price (MXN) 30.7 (4.5%) high growth and innovation opportunities in the Beverages Industry, Becle Enterprise Value (M) 89,767.35 has not been able to take full advantage of such market conditions. 3) A Beta 0.56 shift towards premiumization promises a higher net margin, however, its Average Daily Volume 371,876 success is yet to be seen taking into consideration potential adverse conditions.

Our valuation yields a HOLD recommendation, in line with current market expectations. Becle has been a publicly traded company since February 2017 when its IPO took place. Since then, the stock has seen some volatile sessions and is currently trading 13.5% below its IPO price, which could be indicative that the market is still uncertain about Becle. This might be a part of a learning process from the market about the company. Furthemore, recent news regarding C-level management departures as well as some quarters in which it has missed estimates has raised uncertainty on Becle’s ability to continue growing and gaining market share in the industry.

Figure 1 - CUERVO vs. MEXBOL Estimates and Historical Data - Summary Attractive industry, but is it an already lost opportunity for Becle? The spirits beverage industry has been growing in both, sales value and sales volume for the last five years. Tequila & have been the fastest growing categories within the industry in the U.S, with a CAGR of 6% and 13.5% respectively (according to IWSR figures). However, it appears as if the company has not taken advantage of such benefits. During FY2017 Becle reported a 4.9% volume decline in the United States and Canada segment; a trend that hasn’t changed since then as it reported a decline of -16.9% and -7.0% in 1Q18 and 2Q18 respectively. On the good side, Becle follows a mixed strategy of organic and inorganic growth, which we consider positive in an industry of rapid changing trends and new products constantly entering the market and which could significantly change the trend if done correctly.

Figure 2- Football Field, Estimates A shift towards ‘premiumization’ promises a higher margin business. Becle’s management has repeatedly announced its intention to shift a strategy of volume over value around, mainly through the premiumization of its portfolio (Figure 3). Recent acquisitions like the Irish Whisky Bushmills and the Canadian Whiskey Pendleton are strong indicators that the company is in fact moving to a higher margin business. However, it appears as if the market has already priced in this shift, which could be bad news in case the strategy fails or takes longer to materialize.

Figure 3- Premiumization Strategy Source: Bloomberg 2 Current Highlights  Becle enters into the premium whisky segment in the US and other key markets. Becle enters into the premium whisky segment in the US and other key markets. On February, 2018 Becle completed the acquisition of Pendleton Whisky -one of the leading premium whisky companies in the United States- assets for a total of US $205 million. This purchase included Pendleton Midnight, Pendleton 1910 and Pendleton Directors' Reserve. In considering this strategy and assessing its possible successfulness, Mexican government transition turns out to be critical. New policies adopted by the president elect, may have an important negative impact on luxury and premium segments.  Proximo Spirits CEO leaves the company, leaving behind many question marks. Proximo Spirits CEO leaves the company, raisging many question marks. On June, 2018 Proximo Spirits’ (Becle’s subsidiary in the United States) former CEO, Mark Teasdale, departed from the firm to join Bigger & Leith, a New York-based spirits. Becle remains in search for a new CEO, position that has been temporarily taken by Michael Cheek (current member of Becle’s Board of Directors). Such event, together with the departure of the former CFO Daniel Elguea (June 2018 as well), raised a lot of questions regarding Becle’s top management.

BUSINESS DESCRIPTION Becle is a Mexico-based company in the beverages industry. The company, formerly known as JB y Compañía S.A. de C.V. , produces, bottles, trades and distributes alcoholic and non-alcoholic beverages in Mexico, United States and USA & Canada internationally. In February 2017, Becle did its IPO in the BMV Mexico Stock 31% Exchange raising $912.6 million USD and terminating a 259-year privately held RoW company period. The company has production & bottler facilities in Mexico and 58% Northern Ireland and operates production & bottler facilities in the United States. 11% Mexico In addition, it has a processing plant and farming land for blue agave in Mexico.

Geographic and Business Segments Figure 4 - Volume by Region Becle has a portfolio with over 30 brands retailed in more than 90 countries, having the greatest exposure in the United States, Canada and Mexico (Figure 5. Revenue USA & by region). Becle’s business structure is composed of: spirits beverages, whereas 22% most of the net sales are generated by tequila (58%), followed by non-tequila spirits Canada drinks (19%), i.e. rum, irish whiskey & american whiskey, vodka, gin & , RoW ready-to-drink beverages (12%), and non-alcoholic beverages (12%) - which include 12% Boost and Mix (Figures 6 and 7). Most of the company’s revenue comes 66% Mexico from the United States & Canada (65%), followed by Mexico (23%) & the rest of the world (12%). Today, the company has over 6,000 employees worldwide.

Products Figure 5- Revenue by Region The company’s brands are diversified by segments: (1) spirits beverages which include brands for tequila, rum, Irish whiskey, American whisky & vodka, (2) ready- to-drink beverages and (3) non-alcoholic beverages. Revenue is mainly generated by 12% tequila brands Jose Cuervo, 1800, Centenario & Maestro Dobel. Each spirit beverage Other tequila is catalogued into standard, premium, super-premium, ultra-premium and prestige 10% 36% segments depending on its production process and price per case (9 lt), the company Other spirits has products over all the segments (Appendix 2). Depending on the region where products are sold, sales exhibit a seasonal behavior. Products sold in the United States 20% show an increase in sales at the beginning of May until July, meanwhile products sold Ready to drink in Mexico exhibit an increase in sales just before Independence Day (September) until 22% December. Non-alcoholic beverages Figure 6 - Product Distribution

3 Distribution Network Becle’s buyers include hypermarkets, large retailers & self-service chains. To reach the whole range of clients, the company needs a strong and developed network, therefore an important success factor for the company’s continuous growth has been its global distribution network. Products are mainly distributed by wholesalers and independent stores around the world; including restaurants, hotels, supermarkets, groceries and tax-free stores. In Mexico, the main distribution center is located in , and concentrates 60% of the volume of total sales (Source: Company data). Becle’s finished products, except bulk tequila, are distributed by third parties to the main distribution centers, (Appendix 3 & 4) as the company doesn’t own delivery trucks. Bulk tequila is distributed from the production plants to the bottler facilities in the United States via railroad companies. In the United States, tied house laws limit relationship between importers, producers and wholesalers of alcoholic beverages in one side, and retailers of alcoholic beverages in the other. Therefore, in 22 states distribution is mainly with wholesalers associated with four distribution companies, in other 11 states distribution is via independent distributors and the remaining 17 states distribution is controlled by state government. In 2016, distribution in the US strengthened with the merger between Proximo and the company. The main distribution center for the US is in Lawrenceburg, Indiana.

Market strategy Becle specifies four main pillars that drive its market strategy for the 2018 fiscal year: 1 Expansion & diversification of business through inorganic and organic growth initiatives and route-to-market expansion. The acquisition of Pendleton Whisky for USD $205m contributes to the expansion and intention to increase the penetration in Becle’s most significant market, US. According to the company’s M&A Associate Director, inorganic growth is fundamental for a successful market penetration, therefore getting involved in an M&A transaction requires the acquired/merged company to have recognized brands, premium products (above its average segment market price), growth potential and a ROIC above 14% in the last 5 years of operations. As to the route-to-market expansion, taking the control of 92% of own distribution reinforced to control route-to-market and the brand building strategy. As well, the company’s intention is to continue to lead the development of the tequila segment by 2 increasing exposure in the US & Canada market, adapt to new growing markets and trends with the creation of new brands that focus on complex but easy to assimilate products for the Figure 7- Product Breakdown 3 millennial generation and maintain innovation, product development & the 4 premiumization of products. In the end of FY2017, Becle reported an expense of MXN $5,644m in promotion, advertising and marketing, which accounts for 21% of total sales and the highest expense with respect to total general expenses.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING Industry Overview The spirits beverage industry has been growing in both sales value & sales volume for the last five years. From 2012 to 2017, the market sales value increased at a CAGR rate of 4.8% (excluding China) or USD $8.2 billion (according to the IWSR). Tequila, the company’s most important alcohol category, represents 2.5% of the global sales value. Becle states that tequila and irish whiskey alcohol categories continue to be under represented in the spirits beverages industry. Both categories with increasing annual growth rates of 6.0% for tequila and 13.5% for irish whiskey in the US spirits market from 2013-2017. It is expected that the global alcoholic beverages market grows at a CAGR of 3.1% from 2018 to 2023, according to Mordor Intelligence report. As of today, the underlying drivers that continue to boost growth in the alcoholic beverages industry are (1) demand for premium products, (2) innovation of alcoholic drinks and (3) the extension of purchase channels that could lead to underpenetrated outside core markets.

► Demand for premium brands, a sector that is increasing exponentially. In the US spirits market, from 2015 to 2016, premium brands grew twice as much as non-premium brands in almost any category (Source: Parkstreet report). Overall growth for premium products was 9%, with tequila itself having a remarkable increase in annual volume sales of 18.6% on premium brands. For 2021, projections reflect an estimated market share growth for premium products to reach 23.6% compared to 2.9% (CAGR) for non-premium. The company has Jose Cuervo Especial, Centenario and Tradicional products as established tequila premium brands and is currently concentrating efforts and investment on the premiumization of 1800 Tequila, Maestro Dobel, Reserva de la Familia products and non-tequila brands such as Kraken rum & Pendleton whiskey. ► Innovation of alcoholic drinks. The growing demand of young-adult generations (millennials) are pushing companies to create complex but easy to assimilate alcoholic beverages with the will to pay for a higher price for this distinctiveness. Consumers increase in health concerns and ethical brands, has led to develop low-calorie alcoholic drinks and brands that create products that are gender-neutral. Following the innovation path, Becle developed the tequila Cristalino category and Kraken spiced rum, which today have a top sale position in their category. 4 ► The extension of purchase channels, the rise of alcohol ecommerce market. According to IWSR Ecommerce study, China has the largest e-commerce market for alcoholic beverages reaching USD$6.1 billion in sales, followed by and the UK. Although the company’s main geographic market, North America, still has a young e-commerce market, IWSR expects online alcohol growth rates in less developed e-commerce markets to range from 20%-40% from 2017 to 2021, which constitutes a great opportunity to extend purchase channels and reach new generations. According to Nielsen, consumer purchasing trends indicate that consumers are looking for convenience and it is expected that in 5-7 years 70% of US consumers will regularly purchase consumer packaged goods online.

Competitive Positioning Rivalry The spirits beverages industry is characterized for having a highly competitive within industry market. Entry barriers are high due to significant spending on production, 5 distribution channels & promotion, as well as for strict regulations in the most 4 profitable markets (Appendix 4). Becle is the global market leader for the 3 Threat of tequila category in the spirits beverages industry, taking 29.7% of the global Buyer 2 new power tequila market share. The global market share by spirit category in the industry 1 entrants (excluding Baiju) is led by vodka (13.8%), whiskey (8.6%), brandy (6%), rum 0 (4.4%) and tequila (1%) but with tequila & irish whiskey being the fastest growing categories in the U.S.

Supplier Threat of ► Becle US competitors: markets share & margins. As of 2017, power substitutes Becle had a 3.6% volume share in the US spirits beverages market. The Figure 8- Porter's Five Forces company’s main competitors are Diageo (16.7%), Beam Suntory (9.5%), Pernod Ricard (6.9%), Bacardi (6.6%), Brown-Forman (4.7%), William Grants & Sons (1.1%) and David Campari-Milano (2.2%) according to Euromonitor. Within the last 12 months, important acquisitions have highlighted growth tendencies in the spirits beverage market. ► The competitive M&A arena and premiumization of tequila: From 2017 to 2022, forecasts expect a 21% total growth (CAGR 4%) of sales volume in the tequila category (Source: Euromonitor). Within the tequila category, the ultra-premium segment has been growing at a CAGR of 16% according to DISCUS (Distilled Spirits Council of the United States), while representing 18% of total tequila volume and 42% of total sales value (which means high profitability). The acquisition of Casamigos for USD$700m (up to USD$1bn) by Diageo highlighted the competitive M&A arena in the ultra-premium tequila segment and market tendencies. In this segment, Tequila Patrón has 83% volume share followed & Casamigos (Diageo). Becle’s intention has been to gain market share with Maestro Dobel (<100k cases) tequila but it has been difficult to overcome Patrón actual dominance of the most profitable segment. On the other hand, the company is expecting to increase profitability not by gaining market share but via cost reductions that result from a complete vertical integration (Appendix 5). ► Attractive vertical integration that could improve the company’s position: Becle is looking forward to increase its own agave production from 70% to 90% (FY2021) according to company data. This margin enhancement strategy would be reflected on a COGS decrease that would boost profit and let the company get an advantage vs its competitors. According to the company annual report, the plantation of Agave Azul is already considered under its inventory. The Investor Relations team confirmed that they see existing opportunities as a result of vertical integration.

Corporate Governance The Corporate Governance of Listed Companies, 3rd Edition CFA, A Manual for Investors, was used for this analysis.

Becle’s Corporate Governance is Corporate Governance Scorecard Points made up by the Board of Directors, the Audit and Corporate Board of Directors 9 (out of 12) Governance Committee and the Management team. The company’s Management Team 5 (out of 5) organizational structure is divided in Shareowner Rights 7 (out of 8) 4 levels; (1) Board of Directors, (2) CEO, (3) Executive CEO and (4) a Total 21 (out of 25) group of executives responsible of the Figure 10 - Scorecard Summary centralized corporate areas and decentralized business units. A Corporate Governance Scorecard was made to evaluate Becle´s Corporate Governance. (Appendix 6). The results shown in Figure 9 are positive as having more points involves better corporate governance practices.

Figure 9 - Corporate Governance Overview 5 Board of Directors The board is composed by 10 members who are elected or ratified at the annual shareholders’ meeting. This annual election gives the company the possibility to meet changes in the industry with modifications of the board members, if needed. Even though 60 % of the board are independent members, most of them are elected by Juan Francisco Beckmann Vidal, the Chairman of the Board since 1972, and principal shareholder (Owner with his close family members of 85% of outstanding shares). This compromises the level of independence together with the lack of an independent nomination committee. Mr. Beckmann has proven to be qualified for his position due to his studies and previous experience in the company, nevertheless investors should be cautious as his effective participation on the board might be uncertain as he serves as a member in numerous boards.

The Audit and Corporate Governance Committee is composed by 3 independent board members; Ricardo Cervera, Chairman of the Committee (considered a financial expert due to his studies and professional career), Rogelio Rebolledo and John Randolph. This committee ensures internal controls, audit external consultants and related parties, and works on improving Corporate Governance in the company. Last June, Mr. Mark Teasdale resigned his position as President and General Executive Director of the US Unit due to personal circumstances. Michael Cheek, current independent member is going to fulfill this vacant position to assist the company in this transition to ensure the ongoing business. KPMG Cárdenas Dosal are the External Consultants hired by the board to audit the combined financial statements, give tax advice and other services such as due diligence, studies of transfer prices and tax compliance.

Management Team Recently, Becle announced the hiring of the new CFO Fernando Suarez Gerard, 15 85% effective on October 8, 2018. “He brings a wealth of financial discipline, cost control and capital allocation experience to the Company’s CFO function…” said Juan Domingo Beckmann, Becle´s CEO. Together with Mr. Suarez, all management team members seem qualified for their positions due to their experience in the industry. All information presented by management team to the board and investors is disclosed in a clear and timely manner.

Company Ownership Juan Francisco Beckmann and his close family members hold 85% of the outstanding shares, while the other 15% is held by public investors. All shares representing the Company's capital stock have full voting rights. Each share grants its holder one vote at Juan Francisco Beckmann and any shareholders' meeting. Proxy voting is allowed, but even though the company has family minority rights for protecting minority shareholders, in practice, due to the lack of legal enforcement of loyalty and diligence duties in Mexico, it is difficult for minority Public Investors shareholders to exercise rights against the Company, the directors or majority shareholders. Source: Becle’s Annual Report 2017

Becle’s corporate governance is a strength for the company due to the qualification of all its Figure 11 - Company Ownership members and many good practices. Nevertheless the company's majority of shares are owned by a single family (Beckmann) which gives the power to appoint most of board directors and have a big impact vote when deciding over company´s conflicts that might not meet the interests of other investors or shareholders. This might not be good for investors as their vote in company decisions might be limited but it could be good for the company in terms of decision taking, control and implementation. The company discloses this information publicly, which is a sign of transparency for investors. Investors are able to evaluate the level and quality of reporting around corporate governance and use it as a proxy to evaluate the board’s ability to manage the long-term sustainability of the company.

COMPANY’S VALUATION We derive our price target using a DCF model (with an assigned weight of 70%) and a relative valuation (with an assigned weight of 30%).

Discounted Cash Flow Becle’s corporate strategy might be letting opportunities get away in a highly fragmented market like the United States. Our estimates for Becle’s future revenue are based on growth estimates for both, price and volume in the regions of United States & Canada and Mexico, which represented 88% of total revenue for the company (as of FY2017). Each region’s volume was forecasted based on Euromonitor’s growth estimates in the Spirits category, taking into consideration Becle’s market share in each of its main categories and assuming its market share remained fairly constant. Our insight on Becle’s performance in relation to market share is directed towards a slow to neutral level of expansion, this is mainly derived from market conditions in its two main markets; Mexico as a mature industry for Becle’s main revenue driver, tequila and in the United States due to a highly fragmented market with many global competitors which drives competition to differentiate mainly because of price. 6

The market in the rest of the world is considered to be at an early stage and therefore, grows at an accelerated rate. This last observation is not consistent with Becle’s ‘premiumization’ strategy where price is not necessarily consistent with trends and consumer demand.

Improvements and past investments will begin to take effect in the upcoming years: As mentioned by the Investor Relations team, in-house agave production for Becle will rise from 70% to 90% (by 2021), resulting in smaller direct costs and a higher gross margin. Our estimates include this decrease in costs associated with Blue Agave production.

► Depreciation: according to the Investor Relations team, will remain stable in the upcoming years around 40 million USD, which was included in our projections for the account. Amortization for intangible assets and goodwill (brands and recent acquisition effects) are only affected by FX and hence forecasted using Chicago Mercantile Exchange information on futures for USD/MXN and accounting for the possible effects (with an inverse relation on balance sheet). ► Dividend policy: historical data is short but consistent throughout the last couple of years, resulting in an average payout ratio of around 40%. In order to keep consistency with recent dividend behavior, such payout ratio was used to forecast dividends for our valuation purposes.

Functional currency effects and market conditions were taken into consideration to compute the Weighted Average Cost of Capital: Many considerations were carefully accounted for in the valuation of Becle. Recalling that Becle’s IPO occurred on February 2017, data available to compute required elements for the WACC wasn’t enough, such as the Beta needed for the cost of capital. ► Cost of Capital: Stock price observations were not enough to compute a beta for Becle that could be used for our valuation purposes, so we proceeded to analyze comparable companies in the same industry (Appendix 10) resulting in a beta of 0.56. Market risk premium was taken from Aswath Damodaran assessment on Equity Risk Premiums latest publication. The estimated cost of capital turned out to be 11.39% ► Cost of Debt: Becle’s balance sheet includes one main tranche of debt which is USD denominated with an interest rate of 3.75%. The fact that we are calculating cost of debt for a Mexican company that trades in a Mexican stock exchange, required to use a MXN denominated interest rate, which was achieved using an interest rate swap that estimated (500M USD, 10 year debt) 8.12% as the corresponding MXN denominated interest rate. Such considerations combined with Mexico’s corporate tax rate of 30% resulted in an estimate for cost of debt of 5.68%. Becle’s capital structure thus is composed by 82.3% equity and 17.7% debt. This results in an estimated Weighted Average cost of capital of 10.4%, which is fairly in line with Becle’s historical WACC but most importantly with market conditions that need to be taken into consideration.

Country / Becle % of GDP Growth ► Perpetual Growth Rate: Estimated taking into Region Revenue estimates consideration the nominal (our valuation considers nominal cash flows) GDP growth rate for each of the Mexico 23% 6.3% Becle’s revenue sources (U.S., Mexico and Rest of the United States 63% 4.7% World). Since we consider the market in other countries rather than U.S. and Mexico to be on an early stage, we Rest of the world 14% 5.9% conducted a sensitivity analysis to assess the effect that a Weighted Average 5.2% potential rise on RoW’s growth rate could cause on the final price target.

DCF main Results: Our base case Discounted Cash Flow scenario yielded a price target of MXN$31. The methodology used to perform de DCF was to obtain our estimated Free Cash Flow to the Firm, that was discounted using the Weighted Average Cost of Capital. Details on values obtained and present value of the cash flows are presented on Appendix 7. In addition, a sensitivity table was produced and we consider the center area to be the most likely to come to reality mainly due to our previous analysis of market conditions and Becle’s operational risks. An additional sum of the parts valuation was performed to get a more accurate estimate of each of Becle’s operations value.

Figure 12 - Relative Valuation Matrix 7 Dividend Discount Model We performed a dividend discount model valuation, however, we found out that this technique is not appropriate because of the short period of time that Becle has been a public company and that it doesn’t have a properly established dividend policy. Furthermore, according to their notes and annual reports, dividends are not nor will be fixed.

Relative valuation The Spirits industry is highly diversified and fragmented, thus we conducted a thorough analysis to find Becle’s best peers. All of the companies selected for the relative valuation are part of the Beverages industry (divided in spirits and non-alcoholic beverages), thus many of them share and are exposed to similar trends, risks and potential growth strategies. However, not all companies have the same portfolio and are present in the same countries. Furthermore, many of them are in different growth stages, with a different debt profile, growth potential and EBITDA margins as well as trading at very different multiples. As a result, we decided to evaluate each comparable company to see the level of similarity with Becle across two main categories: 1) growth potential & company fundamentals and 2) portfolio & market exposure. Growth potential is measured with the sustainable growth rate of each company (RR times 2017 ROE). Company fundamentals encompass 3 key metrics for each company: EBITDA margins, leverage level and current P/E valuation. On the other hand, the portfolio exposure was measured as the number of categories in which these companies are present, adjusting the value of each with the weight they represent in Becle’s total volume. Lastly, market exposure has to do with the markets in which these companies have sales, having a greater weight if they have operations in the United States (as is Becle’s case). Becle appears to be undervalued when compared to the Spirits Net income 2019E (mxn) 5,860 companies, but seems fairly in line when compared to the beverage industry as a whole. Regarding the relative valuation, we found that Becle P/E 2019E industry median 18.7x is currently trading at a significant discount to its international peers in the # shares (m) 3,654 Spirits industry. However, as a result from our previously explained Price target 2019E 30.0 methodology we dediced to compare it with the Beverages industry as a whole. Using Bloomberg estimates for EBITDA and earnings for 2019E for each of the comparable companies, we reached a peers average multiple of 11.2x EV/EBITDA and 18.7x P/E 2019e. Taking the forward 2019 P/E peer average, we reach a 2019 stock price for Becle of MXN $ 30.0 per share.

Geometric Brownian Motion-Monte Carlo Simulation: After analyzing Becle's fundamentals and performing valuation techniques as explained before, a stock price simulation was made through a Geometric Brownian Motion Process. The reason for choosing this technique over other available methods is that given the short period of time that the company has been listed, there is not enough information to make assumptions for underlying distributions for Monte Carlo simulation, for example, in order to simulate elements of the Free Cash Flow and come up with scenarios based on such simulations. Returns were tested for normality using Jarque Bera, not rejecting the null hypothesis (returns are normally distributed). Then we proceeded to perform 10,000 simulation for the stock price path until YE2019. This result is explained with the negative estimator of the mean calculated using all the available information and the volatility estimator that turned out to be high partly because data is limited. It’s important to note that we didn’t consider this valuation technique for our price target because even though the mean of our simulation scenarios turned out to be 27.20, close to current price, the estimator for the variance is indeed very high, producing scenarios that either took the price very high or very low. We expect this volatility to stabilize over time as Becle is better known and the market gains better insights on its stock. Its incorporation to the MEXBOL index might drive investor interest towards Cuervo fostering a better understanding of the company.

Limitations to our analysis: Disruptive significant acquisitions: M&A strategies could be considered as one of the main drivers for Becle’s performance; so far, the company has been able to thrive through this. Becle’s projections supplied by Investor Relations for capital expenditures were included in our assumptions, however proceeds from the IPO are still available and as mentioned in our competitive positioning analysis, we consider that the company presents integration opportunities and could be considering future plans for expansion that could represent important effects on future cash flows. It's important to note that due to the complexity of the operations that Becle has acquired, negative effects derived from social complexity and management could hit the company after an important acquisition. These possible effects are taken into consideration for strategic analysis purposes, but to provide a realistic valuation, we didn’t include possible disruptions of uncertain future events.

Tighter regulation in a market selling potentially harmful products: Alcoholic drinks by nature could represent health threats to consumers, including addictions. A tightening in the regulation could affect Becle directly and addiction prevention campaigns indirectly, reducing volume and sales in certain products and segments.

Uncertainty derived from market learning process: As mentioned before, an important component of the BECLE*MM high volatility could be explained through the uncertainty of a recently listed company. This limitation is centered mainly on the fact that the outcome might as well be positive or negative and impact the stock price in either direction. 8 Political uncertainty derived from government transition in Mexico: As mentioned before, political uncertainty and future policies adopted by the new Mexican administration, will play an important role in the overall performance of the Mexican companies. In particular, Becle is specially exposed due to its premiumization strategy that might seem contradictory with the president elect intentions that could affect luxury or premium products.

FINANCIAL ANALYSIS (Appendix 10)

Ratios 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Profitability Gross Mg 59.3% 60.9% 59.3% 62.1% 62.2% 60.7% 60.7% 60.7% 60.7% 60.7% EBITDA Mg 23.0% 26.3% 24.8% 27.6% 25.7% 30.1% 26.9% 26.7% 26.6% 26.6% Net Income Mg 22.5% 23.8% 12.9% 20.0% 18.3% 16.7% 18.2% 18.2% 18.2% 18.2% ROA 13.9% 11.4% 6.9% 8.0% 7.2% 6.4% 6.9% 6.7% 6.5% 6.3% ROE 19.1% 18.6% 11.2% 11.1% 9.9% 8.8% 9.3% 8.9% 8.5% 8.1% Liquidity Current Ratio 2.7x 3.7x 4.4x 7.2x 7.1x 7.4x 8.1x 9.0x 10.0x 11.0x Quick Ratio 2.0x 2.6x 3.1x 5.7x 5.7x 6.0x 6.6x 7.5x 8.4x 9.3x Op. Cash Flow 0.9x 2.4x 1.3x 1.3x 1.4x 1.5x 1.4x 1.4x 1.5x 1.5x Activity Inv. Turnover 1.6x 1.5x 1.7x 1.3x 1.5x 1.5x 1.5x 1.5x 1.5x 1.5x Rec. Turnover 4.0x 3.9x 4.2x 3.8x 4.0x 4.0x 4.0x 4.0x 4.0x 4.0x Asset Turnover 0.6x 0.5x 0.5x 0.4x 0.4x 0.4x 0.4x 0.4x 0.4x 0.3x Debt Debt to Assets 48.9% 49.3% 48.4% 35.6% 34.5% 33.7% 32.2% 30.7% 29.3% 27.9% Debt to Equity 67.3% 80.5% 78.9% 49.2% 47.5% 45.9% 43.3% 40.7% 38.2% 36.0% Eq. Multiplier 1.4x 1.6x 1.6x 1.4x 1.4x 1.4x 1.3x 1.3x 1.3x 1.3x

Revenue Growth Becle experienced high levels of revenue growth from 2014 to 2016, averaging 26% per year. Last year, it only achieved a growth of 6.4% resulting in a CAGR for the last 4 years of 9.58%. It is important to consider that this meaningful drop in growth was driven primarily by the poor results of the company in the United States and Canada; net sales in that region only grew 2.59% last year. Furthermore, in the Rest of World region, sales only grew by a third of the previously years average. Sales in Mexico, its home market, continued to rise and increased up to 15.28%. We have forecasted growth for the next years by region and by spirit (see Appendix 10).

Costs Over the last 4 years, COGS have represented ~40% of net sales. Becle has several blue agave plantations that represent 70% of its current needs and has a plan to fulfill 90% of its needs in the next 3 years. However, gross margin has been affected negatively because the company has utilized less internally sourced agave. Advertising, marketing, and promotion costs have risen due to the complexity and fragmentation of the industry in North America. Distribution costs have risen as well and, due to raising forecasts of diesel by the US Energy Department, we expect them to continue rising. Here the Designation of Origin plays against Becle because in order to sell premium tequila, it must be bottled in the DO region and then transported to North America.

9 ROE Du Pont Method Becle’s ROE for 2017 was 11.1% and we expect it to decline over the next years. By decomposing ROE with the DuPont method, it’s possible to see that this fall in the next year is due to a lower net margin; for the oncoming years it is due to a decrease in asset turnover, signaling operating inefficiencies, and a decrease, as well, of the equity multiplier as a result of debt absence.

ROE Decomposition 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Net Income mg 22.5% 23.8% 12.9% 20.0% 19.4% 20.3% 20.3% 20.3% 20.3% 20.3% Asset turnover 0.6x 0.5x 0.5x 0.4x 0.4x 0.4x 0.4x 0.4x 0.3x 0.3x Equity multiplier 1.4x 1.6x 1.6x 1.4x 1.4x 1.4x 1.3x 1.3x 1.3x 1.3x ROE 19.2% 18.6% 11.3% 11.1% 10.4% 10.5% 10.0% 9.6% 9.1% 8.6% Figure 13- ROE Decomposition Cash conversion cycle Becle's cash conversion cycle was analyzed and found to behave as figure 14. It´s important to note that it seems to be high, but it is in line when compared to peers in the industry. A large cash conversion cycle might be explained through the nature of Becle’s products, considered to be long lasting (nearly non-perishable). Amounts of long-term inventory, composed of aging spirits and other reserves, contribute importantly to this long cash conversion cycle. Despite the previous consideration, it stands out that days payable outstanding are much shorter than days receivables outstanding causing a risk that is offset by the large among of cash that the company holds; in addition to, Becle’s reports indicate that Figure 14 - Cash Conversion Cycle they don’t have considerable concentration of income in a single customer.

Credit Profile Based on our forecasts, Becle displays a robust liquidity profile, with a current ratio above 7x, and a quick ratio close to 6x. It is important to consider the effect of the excess cash Becle still has from its IPO, so when we calculate Operating Cash Flow Ratio, the liabilities coverage falls to 1.6x. It is not clear which will be the next strategic acquisition for the company, but we believe it has favorable conditions for financing future acquisitions. We performed an Altman Model with the Z-Score to assess the probability of bankruptcy. Mainly because of its debt to equity ratio, Becle is not likely to fall into bankruptcy. Ratios and data used for computing Z-Score can be found in appendix 7. The resulting 3-year average Z-Score is 8.36.

M-Score Test Figure 15 - Altman Z-Score Scale Finally, to evaluate the reliability and quality of the information that was analyzed and spot any possibility of altered earnings, we performed the M-Score test. The result indicates that Becle’s financial information is not likely to be manipulated. This was applied to 2017 because it was the most recent full year information and the only year during which the company has been publicly traded. Indexes used for computing M-Score can be found in appendix 8. The resulting M Score for 2017 is -2.18. Figure 16 - Baneish M-Score Scale

10 INVESTMENT RISKS Likelihood and severity are presented in figure 17.

Mergers and Acquisitions. More mergers ahead in the industry due to heightened consumer demand and fragmentation of liquor brands (mainly whiskey, tequila, and gin). Becle might lag market trends and fail to timely acquire a complementary brand.

► Financial Risks Foreign Exchange Rates. An appreciation of the Mexican peso against the US or Canadian dollar would diminish the currency exchange gains from the North American operations.

Increasing Tax Rates. Some US states have already increased Figure 17 - Risk Matrix substantially special taxes on spirits, and many other states are discussing this increase.

► Market Risks Goodwill Impairment. Intangible assets representing 9.7% of Threat of beverages with Cannabidiol & Rise of Craft the company total assets may be impaired. Failure to position Beer. Some major players, such as Constellation Brands, have brands as market leaders could easily trigger the impairment. already make strategic investments in the cannabidiol beverages and craft beer industries. Many producers have seen ► Operational Risks margins decline as consumer tastes changes towards craft Labor Relations. A recently created labor union in Jalisco beer, especially millennials. could create tensions between jimadores (agave harvesters) and Becle. This union is a scion of a heavily established union Unfavorable market conditions: saturation & emerging in Baja California. markets. The spirits industry could be seen as a lifestyle investment, not the next big thing for a value investor. ► Regulatory and Legal Risks Economic challenges in emerging markets have caused global Protectionism. Protectionism policies by the current US consumption levels to decline. administration could be materialized as tequila tariffs; however, due to the recent USMCA deal, the tequila industry Agave Prices is protected. Other agave products, such as agave syrup or inulin, use the equivalent of 20% agave plants needed in the tequila industry Mexico’s New Government. Mexico’s upcoming government in 2018. Currently, the tequila industry is facing agave could impose additional taxes to high end products, such as, shortages, and according with the Tequila Regulatory Council, premium spirits; this action would setback the premiumization this will continue until 2021. strategy. There’s a lot of uncertainty surrounding the actions and strategies the new government might take, some of them ► Strategic Risks might affect in a meaningful manner the activities, financial Dependency on Blue Agave, Wood, and Fuels. Farming situation, and operating results of the company. practices have affected the genetic diversity of the Blue Agave putting it at risk. Industry relies on the asexual reproduction; ► Natural Risks the resulting monoculture is highly vulnerable to disease or Blue agave & lumber scarce. Agave and wood could be infestation. In addition, 7-12 kg of wood are needed per liter affected by natural disasters, diseases, or plagues. A severe of tequila to roast the agave pineapples, and an increase in fuel drought or a delay in rainfalls could diminish the agave prices would escalate transportation costs. production. Although the company is insured against natural disasters, there’s no guarantee that the damage won’t surpass Increasing Competition. Other tequila brands seem more the insured amount; additional complications may arise. appealing to millennials (social media engagement); other Mexican agave spirits, such as mezcal, cannibalize tequila ► Other Unforeseeable Risks market; other countries are starting to distill agave spirits (US, Organized Crime. Due to agave appreciation, theft has grown South Africa, and Australia).Currently in the US, the strongest as well (3x last year). There have been several cases in consumer segment of spirits are millennials; they are looking México of organized crime taking control over plantations of for better products; they want to know the story behind the products that have increased in demand and prices. brand.

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APPENDIX 1: STOCK PERFORMANCE

CUERVO’S STOCK PERFORMANCE 1: Fitch Upgrades Becle Ratings to BBB+ (stable perpective)

2: Proximo Australia acquired L.I.P.S. PTY Ltd.

3: Acquisition of Pendleton Whiskey assets

4: Becle’s CFO, Daniel Elguea Solis’s, resignation Results beat by $0.36 7 5: Becle’s CEO of USA unit, Mark

Results missed Teasdale, resignation. Scotiabank Results beat by $0.19 worries over management departure. by $0.01 6: Becle announces new CFO, Results missed Fernando Suárez by $0.10

APPENDIX 2: TEQUILA PER SEGMENT

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APPENDIX 3: BECLE AND INDUSTRY TIMELINE

The following timeline illustrates the way in which Becle has executed it’s M&A strategy partly in response to industry trends and shows some important events of its history.

APPENDIX 4: LOCATION OF TEQUILA DESTILLERIES

Jalisco, Mexico

Guadalajara (capital city) Main roads Main cities

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APPENDIX 5: VERTICAL INTEGRATION

APPENDIX 6: PORTER’S 5 FORCES

4A Main Assessment categories

The spirits beverage industry is considered a competitive marketplace in both the United States and Mexico, according to the US Department of Justice considerations with HHI of 787 in the US & 996 in Mexico (source: Rivalry within Euromonitor). Becle + 7 competitors’ control >60% total volume sales of spirits in Mexico & US. The spirits the industry industry is expected to grow at a rate of 4.8% in Mexico and 4.7% in USA FY18-19. As a main player in the tequila segment for both markets, Becle can profit from re-branding and launching products that could help Jose Becle Especial gain the lost market share.

There is a high threat of substitutes in the spirits industry, especially in the tequila segment. In the premium price (<30 usd): Jose Cuervo brand has not increased market share for the last 8 years, with other small gaining Threat of importance and biggest competing brands such as not moving from their 15% market share. (Source: substitutes Euromonitor). In the ultra-premium price (40-60 usd): Patrón & Casamigos have most of the market share (>83%) of the most profitable segment, with Don Julio & Maestro Dobel trying to gain market share in a difficult and expensive environment.

There are high barriers to entry in the spirits industry for both the US and Mexico. The development of distribution channels is expensive, and the industry is highly competitive. Regulatory barriers are high due to tied-house Threat of entry laws in the US and strict laws to produce tequila in Mexico. Capital requirements for spirit beverage producers are high due to high production and bottling costs. Switching costs for customers are low in terms of quality and the current introduction of new spirits brands due to the highly competitive industry.

Supplier power is low. Product differentiation is low for raw materials, and forward integration is difficult due to high capital requirements. Becle’s intention for the following years is to increase own agave lands so >90% Supplier (Source: Becle annual report FY17) of tequila production comes from own raw material. COGS volatility will be power reduced.

Main buyers include wholesalers, retail stores and independent stores such as restaurants, hotels, convenience stores, and tax-free stores. Given that Becle has well-known brands by customers in Mexico & USA, large Buyer power percentage of buyer’s sales are attributed to the company’s’ brands. Backward integration is not impossible but difficult due to economies of scale, expensive M&A atmosphere and high capital requirements.

APPENDIX 7: ALTMAN Z-SCORE

Altman Z-Score 2015 2016 2017 Average X1= Working Capital/Total Assets 0.20 0.22 0.19 X2= Retained Earnings/Total Assets 0.23 0.27 0.20 X3= EBIT/Total Assets 0.25 0.12 0.10 X4= Market Value of Equity/Total Liabilities 7.17 6.09 5.97 X5= Sales/Total Assets 1.23 1.38 1.44 Altman Z Score 9.10 8.07 7.91 8.36

APPENDIX 8: BANEISH M-SCORE

Baneish M - Score 2017 Weight Days Sales in Receivables 1.07 0.92 Gross Margin 0.95 0.53 Asset Quality 0.76 0.40 Sales Growth 1.06 0.89 Depreciation Index 1.19 0.12 SG&A 0.99 -0.17 Leverage 0.76 4.68 Total Accrual to Total Assets 0.04 -0.33 Baneish M - Score -2.18 5A

APPENDIX 9: CORPORATE GOVERNANCE SCORECARD

0: If the company has no practices or policies referred to in any given line 1: If the company has practices or policies referred to in any given line

Corporate Governance Scorecard Points Comments The Board Qualified Board Members 1 All board members are qualified for their position.

Independent Board Members (Majority) 1 60% of board members are independent. Budgetary Authority to hire independant 3rd party 1 Company directors hired KPMG as external consultants. consultants Board Members elected annually 1 Audit Committee 1 Composed by 3 independent board members.

Corporate Governance committee 1 The Audit committee looks also at Corporate Governance matters. Remuneration and Compensation committee 0 No independent Compensation Committee to prevent excessive comp. Independent Nominations Committee 0 Beckmann family appoints most of the board members. Other Management Committees 0 Comunication of the board with shareholders 1 Company uses the internet site ircuervo.com to disclose all relevant info. Diversity of background and experience 1 Directors have an average experience of 10 years in industry. Responsabilities of the board 1 All the main responsabilities of the board are fullfilled.

Management Qualified Management Team 1

Adoption of Code of Ethics 1 Cuervo's has a code of conduct and a code of suppliers ethics.

Commitment to Ethical Framework 1 Internal Ethics Committee to ensure fullfillment of the code of ethics Communications with Shareowners 1 All information about mgt team performance is disclosed for shareowners Consistency and Transparency in Disclosures 1 Shareowner Rights Majority voting Standards 1 A majority vote is required in meetings.

Different classes of shares 0 A "Unique" type of shares; common, ordinary, nominative, with no par value.

Voting Rights 1 All Cuervo shares have voting rights.

Proxy Voting 1 SH can to appoint someone to vote if they are not able to attend meetings.

Minority Rights 1 Company's statutes state a list of minority rights.

Protection of Minority Rights 0 Rights to minority SH are not fully protected by Mexico´s legal system.

Share owners have rights to approve changes 1 Ordinary and extraordinary meetings are held Right of Preferred Subscription 1 SH protection right for keeping shareholding % when add. shares are issued. Any transfer of >10% of shares, consummated in >1 transactions by any Prevention of certain acquisitions 1 person or group of persons acting jointly, requires prior approval of the BoD. Total Points 21 (out of 25)

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APPENDIX 10: DCF METHODOLOGY

Revenue Forecasts (m) 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Total 18,475 24,397 25,958 26,950 28,803 30,490 31,986 33,341 34,676 YoY% 20.60% 32.10% 6.40% 3.80% 6.90% 5.90% 4.90% 4.20% 4.00% US & Canada 11,858 16,545 16,974 17,003 17,935 18,747 19,383 19,934 20,501 YoY% 26.90% 39.50% 2.60% 0.20% 5.50% 4.50% 3.40% 2.80% 2.80% Mexico 4,415 5,018 5,785 6,171 6,570 6,967 7,372 7,784 8,220 YoY% -4.40% 13.70% 15.30% 6.70% 6.50% 6.00% 5.80% 5.60% 5.60% Rest of the World 2,202 2,832 3,199 3,777 4,297 4,775 5,231 5,622 5,955 YoY% 62.80% 28.60% 12.90% 18.10% 13.80% 11.10% 9.60% 7.50% 5.90% Volume (000 9L cases) Total 18,248 20,424 20,491 20,291 20,888 21,496 22,054 22,559 23,061 YoY% 11.92% 0.33% -0.98% 2.94% 2.91% 2.60% 2.29% 2.23% US & Canada 10,803 12,451 11,844 11,338 11,653 11,984 12,251 12,499 12,751 YoY% 6.40% 15.30% -4.90% -4.30% 2.80% 2.80% 2.20% 2.00% 2.00% Mexico 5,640 5,981 6,355 6,430 6,537 6,665 6,814 6,952 7,092 YoY% 0.10% 6.00% 6.30% 1.20% 1.70% 2.00% 2.20% 2.00% 2.00% Rest of the World 1,805 1,993 2,292 2,522 2,698 2,847 2,989 3,108 3,217 YoY% 21.50% 10.40% 15.00% 10.00% 7.00% 5.50% 5.00% 4.00% 3.50% Price (in MXN) US & Canada 1,098 1,329 1,433 1,500 1,539 1,564 1,582 1,595 1,608 YoY% 19% 21% 8% 4.60% 2.60% 1.60% 1.10% 0.80% 0.80% Mexico 783 839 910 960 1,005 1,045 1,082 1,120 1,159 YoY% -4% 7% 8% 5.40% 4.70% 4.00% 3.50% 3.50% 3.50% Rest of the World 1,220 1,421 1,395 1,498 1,593 1,678 1,750 1,809 1,851 YoY% 34% 16% -2% 7.30% 6.30% 5.30% 4.30% 3.30% 2.30%

Perpetual Growth Rate 4.80% 5.00% 5.20% 5.40% 5.60% 5.80% 9.5% 34.1 35.2 36.4 37.7 39.1 40.7 9.7% 32.9 33.9 35.0 36.2 37.5 38.9 9.9% 31.8 32.7 33.7 34.8 36.0 37.2 10.4% 29.4 30.2 31.0 31.8 32.7 33.8

WACC WACC 10.6% 28.6 29.3 30.0 30.8 31.6 32.6 10.8% 27.8 28.5 29.1 29.9 30.6 31.5 11.0% 27.1 27.7 28.3 29.0 29.7 30.5

Net Market 7A Unlevered Company Country Beta Debt Value of Beta (USD) Equity Rémy Cointreau SA FR 0.47 326 6,417 0.45 Anhui Gujing Distillery Co. CN 0.11 0 5,417 0.11 United Spirits Limited IN 0.11 430 4,360 0.10 Brown-Forman Corporation US 0.59 2,275 23,939 0.56 Constellation Brands, Inc US 0.49 9,715 42,295 0.43 Davide Campari-Milano SPA IT 0.35 1,102 9,330 0.33 Diageo PLC UK 1.16 12,080 85,695 1.04 Pernod Ricard SA FR 1.01 8,016 41,894 0.90 Becle's 5 year Beta 0.56 Average 0.53

Discounted Cash Flow (mxn m) 2019E 2020E 2021E 2022E 2023E Perpetuity Operating Income 8,895 9,415 9,878 10,296 10,673 Depreciation and Amortization 780 790 799 809 819 EBIT Tax -2,668 -2,825 -2,963 -3,089 -3,202 EBITDA After TX 7,006 7,380 7,714 8,016 8,290 -Change in NWC -1,223 -1,533 -1,485 -1,461 -1,495 -CAPEX -4,295 -2,085 -1,169 -809 -819 Free Cash Flow 1,488 3,763 5,059 5,746 5,976 6,287

Present Value of FCFF (Discounted using WACC) 1,348 3,088 3,762 3,871 3,648 74,051

Enterprise Value 89,767 Net Debt (including non-operating assets/liabilities) -23,371 Market Value of Equity 113,138

# of Shares (m) 3,654 Price Target - DCF Model 31.0

Sensitivity Analysis - WACC

Row Total 9.98% 10.18% 10.38% 10.58% 11.08% 11.58%

5.2% 5.1% 32.7 31.6 30.6 29.7 27.6 25.9 5.8% 5.2% 33.1 32.0 30.9 30.0 27.9 26.1 6.4% 5.3% 33.5 32.3 31.3 30.3 28.1 26.3 7.0% 5.4% 33.9 32.7 31.6 30.6 28.4 26.6 7.6% 5.4% 34.4 33.1 32.0 31.0 28.7 26.8 8.2% 5.5% 34.8 33.6 32.4 31.3 29.0 27.0 Perpetual Growth Rate Growth Perpetual 8.8% 5.6% 35.3 34.0 32.8 31.7 29.3 27.3

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APPENDIX 11: SOTP VALUATION

EV/EBITDA Sum of the Parts Total EV 2019e A Sum of the Parts analysis points out to the fact that Mexico 19,052 11.4x Becle’s operations are trading at a discount. ~85% of Becle’s EBITDA comes from the United States and Mexico US 57,960 12.2x (according to our estimates) and each division has Rest of the World 7,395 7.4x different growth estimates as well as industry dynamics. Thus, we decided to conduct a Sum of the Parts analysis Total EV 84,407 to understand the value of each of the company’s Cash 13,438 divisions. We are valuing the US operations at 12.2x Debt 9,849 EV/EBITDA 2019e; Mexico at 11.4x and Rest of the World Non-operating assets 21,274 at 7.4x. Non-operating liabilities 1,492 Key WACC Tax rate g assumptions in mxn Equity value 107,778 Mexico 30.0% 10.4% 6.3% United States 27.0% 9.8% 4.4% # shares (m) 3,654 Rest of the World 26.1% 9.4% 5.9% Price target (mxn) 29.5

APPENDIX 12: COMPARABLE COMPANIES

Close Market P/E EV/EBITDA ROE Company Country Ticker price Cap (mxn) 2019E 2019E 2017 Becle, S.A.B de C.V. MX CUERVO* 29 104,890 21.1x 8.4x 11%

Diageo PLC UK DGE 630 1,547,300 18.7x 15.2x 29% Constellation Brands Inc. US STZ 4,257 807,852 22.0x 15.8x 19% Pernod Ricard SA FR RI.FP 2,849 759,571 19.4x 14.3x 12% Brown-Forman Corp US BF.B 879 425,227 25.1x 19.5x 34% Davide Campari-Milano SPA IT CPR 140 163,286 26.8x 17.6x 12% Remy Cointreau FR RCO 2,187 111,892 27.1x 17.5x 12% Spirits industry median 23.5x 16.6x 0.154

Ambev SA BR ABEV3 85 1,337,107 18.5x 10.7x 16% C. Cervecerías Unidas SA CL CCU 245 90,843 18.7x 8.7x 26% Viña Concha y Toro SA CL CONCHA 38 28,185 16.5x 11.2x 9% Emboteralldora Andina CL ANDINAA 62 62,186 15.4x 8.0x 15% Arca Continental MX AC* 116 204,957 17.3x 8.6x 10% Coca-Cola Femsa MX KOFL 115 241,869 16.7x 8.1x 4% Fomento Economico Mexica MX FEMSAUBD 180 593,391 22.3x 10.9x 20% Beverage industry median 17.0x 8.6x 12.60%

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APPENDIX 13: FINANCIAL STATEMENTS Balance Sheet 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Current Assets (m) CashZ and Cash Equivalents 4,139 5,128.14 19,995.89 21,516 22,986 26,906 32,093 37,952 44,059 Accounts Receivable, Net 5,293 6,396 7,260 7,441 7,953 8,418 8,832 9,206 9,574 Inventories 4,352 5,943 7,419 6,243 6,394 6,768 7,100 7,401 7,697 Advance Payments 440 684 679 679 679 679 679 679 679 Other Current Assets 841 1,574 1,244 1,244 1,244 1,244 1,244 1,244 1,244 Total Current Assets 15,066 19,725 36,598 37,123 39,255 44,015 49,949 56,482 63,253

Non Current Assets (m) Property, Plant and Equipment, Net 3,997 4,641 5,280 6,020 10,315 12,400 13,569 14,378 15,197 Goodwill 5,506 5,992 6,274 6,163 5,830 5,759 5,688 5,619 5,550 Intangible Asset-trademark, Net 10,405 11,771 11,365 14,550 14,550 14,372 14,197 14,023 13,852 Other Assets 450.22 380 1,537 1,175 1,078 1,072 1,066 1,061 1,055 Inventory 3,213 3,178 3,878 4,075 4,355 4,610 4,836 5,041 5,243 Total Non Current Assets 23,571 25,963 28,335 31,983 36,128 38,213 39,357 40,122 40,898 Total Assets 38,636 45,688 64,933 69,106 75,383 82,228 89,305 96,604 104,151 Current Liabilities (m) Accounts Payable 1,775 2,407 2,106 1,978 2,148 2,224 2,290 2,351 2,410 Related Parties 176 15 44 44 44 44 44 44 44 Provisions 1,270 1,708 2,087 2,087 2,087 2,087 2,087 2,087 2,087 Other Liabilities 823.985 326 866 867 867 867 867 867 867 Total Current Liabilities 4,046 4,457 5,103 4,975 5,146 5,221 5,288 5,348 5,407 Non Current Liabilities (m) Long-term Debt 8,490 10,207 9,781 11,272 12,046 12,752 13,378 13,944 14,503 Deferred Income Taxes 2,357 2,759 2,820 2,252 2,252 2,252 2,252 2,252 2,252 Other Long-term Liabilities 97.02 243 297 292 243 243 243 243 243 Total Long Term Liabilities 10,944 13,209 12,898 13,816 14,542 15,247 15,873 16,440 16,998 Total Liabilities 14,990 17,665 18,001 18,791 19,688 20,468 21,161 21,788 22,406

Shareholders' Equity (000) Common Stock - Par Value 11,047 10,052 28,049 28,049 28,049 28,049 28,049 28,049 28,049 Retained Earnings 9,046 12,118 12,745 16,099 21,480 27,544 33,929 40,601 47,530 Accumulated Retained Earnings 4,653 8,967 7,555 12,745 17,964 23,823 30,025 36,531 43,313 -Dividends (Projections) 0 0 0 1,865 2,344 2,481 2,603 2,713 2,811 Net Income 4,393 3,152 5,191 5,219 5,859 6,202 6,506 6,782 7,027 Other Comprehensive Income (Loss) 3,554 5,853 6,137 6,167 6,167 6,167 6,167 6,167 6,167 Total Shareholders Equity 23,647 28,022 46,931 50,315 55,695 61,760 68,145 74,816 81,745 Total Liabilities & SH Equity 38,636 45,688 64,933 69,106 75,383 82,228 89,305 96,604 104,151 Cash Flow 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Operating Activities Net Income 4,393 3,152 5,191 5,219 5,859 6,202 6,506 6,782 7,027 Current Assets and Liabilities -1,741 -3,260 -1,358 867 -492 -765 -679 -614 -605 Depreciation and Amortization 244 451 425 740 780 790 799 809 819 Adjustment -5,396 1,934 -6,727 -1,007 1,186 1,376 1,531 1,664 1,766 Operating Cash Flow -2,501 2,278 -2,470 5,819 7,334 7,602 8,158 8,640 9,007

Investing Activities CAPEX -1,654 -644 -640 -740 -4,295 -2,085 -1,169 -809 -819 Intangible investments -4,459 -1,366 406 -3,185 0 178 175 173 171 Investing Cash Flow -6,113 -2,010 -234 -3,925 -4,295 -1,907 -994 -636 -648 10A Financing Activities Long Term Debt Proceeds 8,488 1,717 -426 1,491 775 705 626 566 558 Common Stock Issuance 108 -995 17,997 0 0 0 0 0 0 Dividends Paid 0 0 0 -1,865 -2,344 -2,481 -2,603 -2,713 -2,811 Investing Cash Flow 8,596 721 17,571 -374 -1,569 -1,775 -1,977 -2,146 -2,253 0 0 0 0 0 0 0 0 0 Net change in Cash and Equivalents -18 989 14,868 1,520 1,470 3,920 5,188 5,858 6,107 10A

Income Statement (m) 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Total Income 18,475 24,396 25,958 26,950 28,803 30,490 31,986 33,341 34,676 Mexico 4,415 5,018 5,785 6,171 6,570 6,967 7,372 7,784 8,220 US 11,858 16,545 16,974 17,003 17,935 18,747 19,383 19,934 20,501 RoW 2,202 2,832 3,199 3,777 4,297 4,775 5,231 5,622 5,955 Cost of Sales 6,514 9,936 9,837 9,270 9,493 10,049 10,543 10,989 11,429 Gross Profit 11,961 14,460 16,121 17,681 19,309 20,440 21,443 22,351 23,246 Total SG&A 2,259 8,871 9,386 9,714 10,415 11,025 11,566 12,056 12,573 Advertising, Marketing and Promotion 1,889 6,039 5,644 5,778 6,676 7,067 7,414 7,728 8,060 Distribution 370 749 918 1,010 949 1,005 1,054 1,099 1,146 Selling and administrative 0 2,235 2,623 2,721 2,767 2,929 3,073 3,203 3,341 Other (income) expenses, net 0 -153 201 205 22 23 24 25 26 Operating profit 9,701 5,590 6,735 7,967 8,895 9,415 9,878 10,296 10,673

Depreciation & Amortization 244 451 425 740 780 790 799 809 819 EBITDA 7,085 6,041 7,160 8,707 9,675 10,205 10,677 11,105 11,492 Financial Results 2,999 925 784 914 977 1,034 1,085 1,131 1,176 Profit before tax 6,703 4,665 5,949 7,052 7,917 8,381 8,792 9,165 9,497 Income tax 2,310 1,513 758 1,834 2,059 2,179 2,286 2,383 2,469 Net Income 4,393 3,152 5,191 5,219 5,859 6,202 6,506 6,782 7,027 YoY Growth 1% 12% 6% 5% 4% 4%

SOURCES

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