Equity Research M exico

Quarterly Report May 4, 2021 FEMSA www..com Recovery goes on; the best is yet to come @analisis_fundam

▪ Femsa results proved that sequential recovery is following its way. Consumer and Telecom Meanwhile, sales finally resumed growth, regardless the tighter mobility restrictions faced during the quarter Valentín Mendoza Senior Strategist, Equity [email protected] ▪ Future earnings shall reflect strong growth, which in our view should drive a higher valuation. Consequently, we reiterate FEMSA among Juan Barbier, CFA our top picks 2021 Analyst [email protected]

A start of the year of sequential recovery in all businesses. Femsa's report was in line with our estimates at the operating level, confirming that recovery BUY continues in all businesses. We see this as remarkable considering the more Current Price $160.67 astringent mobility restrictions put in place during the quarter. That said, sales PT $190.00 Dividend $2.3 resumed growth after three consecutive quarters in contraction. The increase Dividend Yield (%) 1.4% was of 1.8% y/y MXN 124,474 billion, driven by a solid performance in Health Upside Potential 19.7% ADR Price US$69.53 (+ 16.0%) and acquisitions in the US, which offset the weakness in Kof, PT ADR US$96.00 Proximity (-4.8%) and Fuels ( -21.4%) businesses, that regardless of the year- Shares per ADR 10 Max – Mín LTM ($) 164.3 – 112.5 on-year drops continued to recover. Meanwhile, lower profitability at the Market Cap (US$m) 25,799.1 bottling company (-30bps) and Oxxo's operating deleveraging (-60bps) offset Shares Outstanding (m) 3,578.2 Float 60% the 140bps expansion in Pharmacies and the 80bps at Oxxo Gas. As such, Daily Turnover US$m 409.1 EBITDA remained virtually flat, standing at MXN 16.974 million (-0.9% y/y) Valuation metrics TTM FV/EBITDA 10.9x and the corresponding margin fell 40bps to 13.6%. Finally, net income slumped P/E N.A. 41.4% year-on-year, impacted by 81.7% lower foreign exchange gains vs 1Q20. A

We still see room and catalysts for FEMCO to continue re-rating. Femco Relative performance to Mexbol implicitly trades at 11.1x FV/EBITDA LTM, with a discount close to 14% when LTM compared to historical averages, while the business’ outlook is positive. 40% 30% Economic recovery coupled with easy comps, should reflect into a strong 20% earnings growth, as soon as 2Q21, and support further re-rating on the stock, in 10% 0% our view. -10% -20% -30% -40% Apr-20 Jul-20 Oct-20 Jan-21 Apr-21

MEXBOL FEMSAUBD 2019 2020 2021E 2022E 2019 2020 2021E 2022E

Revenue 506,910 493,627 534,473 581,486 FV/EBITDA 10.2x 11.0x 9.7x 8.8x Operating Income 47,165 41,473 50,613 56,289 P/E 28.8x -298.3x 31.6x 23.8x EBITDA 75,483 72,017 83,274 91,062 P/BV 2.3x 2.4x 2.4x 2.3x EBITDA Margin 14.9% 14.6% 15.6% 15.7%

Net Income 19,936 -1,927 18,196 24,123 ROE 6.0% -0.6% 5.9% 7.5% Net Margin 3.9% -0.4% 3.4% 4.1% ROA 3.1% -0.3% 2.6% 3.3% EBITDA/ interest 5.3x 4.1x 4.9x 5.0x Total Assets 637,541 684,638 691,533 733,377 Net Debt/EBITDA 1.6x 2.0x 1.9x 1.6x

Cash 65,562 107,233 93,540 124,042 Debt/Equity 0.6x 0.8x 0.8x 0.8x Total Liabilities 311,790 377,451 380,138 401,547 This document is provided for the reader’s convenience Debt 187,257 253,124 253,164 265,943 only. The translation from the original Spanish version was Common Equity 325,751 307,187 311,396 331,830 made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its English Source: Banorte translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “La recuperación sigue su curso; y viene lo mejor” was released on April 29, 2021. Document for distribution among public

FEMSA – Results 1Q21 Revenue & EBITDA Margin MXN, million MXN, million Diff% vs Concept 1Q20 1Q21 Var % 1Q21e Estim. Revenue 122,284 124,474 1.8% 124,247 0.2% Operating Income 9,518 9,525 0.1% 10,010 -4.8% 135,000 14.9% 16.1% 18.0% 14.0% 16.0% Ebitda 17,132 16,974 -0.9% 17,518 -3.1% 130,000 13.2% 13.6% Net Income 7,787 4,566 -41.4% 3,030 50.7% 14.0% Margins 125,000 12.0% 10.0% Operating Margin 7.8% 7.7% -0.1pp 8.1% -0.4pp 120,000 Ebitda Margin 14.0% 13.6% -0.4pp 14.1% -0.5pp 8.0% Net Margin 6.4% 3.7% -2.7pp 2.4% 1.2pp 115,000 6.0% 4.0% EPS $2.18 $1.28 -41.4% $0.85 50.7% 110,000 2.0%

105,000 0.0%

1Q20 2Q20 3Q20 4Q20 1Q21 Income Statement (Million pesos) Year 2020 2020 2021 Change Change Revenue EBITDA Margin Quarter 1 4 1 % y/y % q/q

Net Revenue 122,284 130,329 124,474 1.8% -4.5% Costs of goods sold 76,441 78,312 77,940 2.0% -0.5% Gross profit 45,843 52,017 46,534 1.5% -10.5% General expenses 36,047 38,247 36,717 1.9% -4.0% Net Income & ROE Operating Income 9,518 13,145 9,525 0.1% -27.5% MXN, million Operating Margin 7.8% 10.1% 7.7% (0.1pp) (2.4pp) Depreciation 7,613 7,793 7,450 -2.2% -4.4% EBITDA 17,132 20,938 16,974 -0.9% -18.9% 9.3% 10,000 10.0% EBITDA Margin 14.0% 16.1% 13.6% (0.4pp) (2.4pp) 8.0% Interest Income (Expense) net 3,781 (9,791) (1,898) N.A. -80.6% 5,000 Interest expense 5,338 5,005 3,835 -28.2% -23.4% 6.0% Interest income 690 261 260 -62.3% -0.3% 3.3% 0 4.0% Other income (expense) 104 (113) 152 46.9% N.A. 1.7% Foreign exchange gain (loss) 8,325 (4,934) 1,524 -81.7% N.A. (5,000) 2.0% -0.8% Unconsolidated subsidiaries 260 (1,572) 836 221.5% N.A. -2.2% 0.0% Income before taxes 13,559 3,342 8,462 -37.6% 153.2% (10,000) -2.0% Income taxes 4,723 3,154 2,659 -43.7% -15.7% Discontinued operations N.A. N.A. (15,000) -4.0% Consolidated Net Income 9,112 730 6,260 -31.3% >500% 1Q20 2Q20 3Q20 4Q20 1Q21 Non-controlling interest 1,325 1,975 1,694 27.8% -14.2% Net Income ROE Net Income 7,787 (1,245) 4,566 -41.4% N.A. Net Margin 6.4% -1.0% 3.7% (2.7pp) 4.6pp EPS 2.176 (0.348) 1.276 -41.4% N.A.

Balance Sheet (Million pesos) Total Current Assets 250,389 201,033 204,868 -18.2% 1.9% Net Debt & Net Debt to EBITDA ratio Cash & Short Term Investments 133,470 107,233 113,327 -15.1% 5.7% MXN, million Long Term Assets 510,843 483,605 484,172 -5.2% 0.1% Property, Plant & Equipment (Net) 117,936 113,106 111,253 -5.7% -1.6% Intangible Assets (Net) 105,632 107,456 107,671 1.9% 0.2% Total Assets 761,233 684,638 689,040 -9.5% 0.6% 150,000 2.5x Current Liabilities 156,042 118,308 127,399 -18.4% 7.7% 145,000 2.0x 2.0x Short Term Debt 41,013 16,703 15,199 -62.9% -9.0% 1.9x 2.0x 2.0x Accounts Payable 75,947 75,217 74,399 -2.0% -1.1% 140,000 1.7x Long Term Liabilities 257,360 259,143 261,815 1.7% 1.0% Long Term Debt 224,956 236,421 239,713 6.6% 1.4% 135,000 Total Liabilities 413,402 377,451 389,214 -5.9% 3.1% 1.5x Stockholders’ Equity 347,831 307,187 299,826 -13.8% -2.4% 130,000 Non-controlling interest 72,705 69,546 64,745 -10.9% -6.9% 125,000 1.0x Total Equity 275,126 237,641 235,081 -14.6% -1.1% 1Q20 2Q20 3Q20 4Q20 1Q21 Liabilities & Equity 761,233 684,638 689,040 -9.5% 0.6% Net Debt 132,499 145,891 141,584 6.9% -3.0% Net Debt Net Debt to EBITDA

Cash Flow CF from Operating Activities 12,179 19,527 12,991 CF from Investing Activities (3,140) (15,783) (2,268) CF from Financing Activities 42,441 (20,666) (5,658) FX effect on cash 16,428 (10,305) 638 Change in Cash Balance 67,908 (27,227) 5,703

Source: Banorte, MSE.

Performance by business unit

Proximity 1Q20 4Q20 1Q21 % y/y % q/q Ticket $ 36.9 $ 42.7 $ 42.2 14.4% -1.2% Traffic 19.9 17.4 16.3 -18.1% -6.3% SSS $ 735 $ 744 $ 687 -6.5% -7.7% Revenue $ 45,620 $ 46,769 $ 43,418 -4.8% -7.2% EBITDA $ 5,748 $ 7,688 $ 5,196 -9.6% -32.4% EBITDA Margin 12.6% 16.4% 12.0% -0.6% -4.5%

Health 1Q20 4Q20 1Q21 % y/y % q/q SSS $ 1,222.0 $ 1,493.6 $ 1,411.7 15.5% -5.5% Revenue $ 15,296 $ 17,319 $ 17,750 16.0% 2.5% EBITDA $ 1,191 $ 1,773 $ 1,634 37.2% -7.8% EBITDA Margin 7.8% 10.2% 9.2% 0.1% -1.0%

Fuel 1Q20 4Q20 1Q21 % y/y % q/q Price per lt $ 17.4 $ 16.40 $ 18.00 3.4% 9.8% Volume 377.1 313.6 283.7 -24.8% -9.5% SSS $ 6,576 $ 5,156 $ 5,105 -22.4% -1.0% Revenue $ 10,858 $ 8,485 $ 8,535 -21.4% 0.6% EBITDA $ 673 $ 428 $ 434 -35.5% 1.4% EBITDA Margin 6.2% 5.0% 5.1% -1.1% 0.0%

Coca-Cola FEMSA 1Q20 4Q20 1Q21 % y/y % q/q Volume $ 793.5 $ 902.2 $ 800.7 0.9% -11.3% Revenue $ 45,348 $ 49,116 $ 44,690 -1.5% -9.0% EBITDA $ 9,086 $ 9,998 $ 8,807 -3.1% -11.9% EBITDA Margin 20.0% 20.4% 19.7% 0.1% -0.6%

Strategic Businesses 1Q20 4Q20 1Q21 % y/y % q/q Revenue $ 5,162 $ 8,640 $ 10,081 95.3% 16.7% EBITDA $ 643 $ 2,048 $ 1,991 209.6% -2.8% EBITDA Margin 12.5% 23.7% 19.7% 7.3% -3.9%

Consolidated 1Q20 4Q20 1Q21 % y/y % q/q Revenue $ 122,284 $ 130,329 $ 124,474 1.8% -4.5% EBITDA $ 17,133 $ 20,938 $ 16,975 -0.9% -18.9% EBITDA Margin 14.0% 16.1% 13.6% -0.4% -2.4%

Certification of Analysts. We, Gabriel Casillas Olvera, Alejandro Padilla Santana, Delia María Paredes Mier, Juan Carlos Alderete Macal, Manuel Jiménez Zaldívar, Marissa Garza Ostos, Francisco José Flores Serrano, Katia Celina Goya Ostos, Santiago Leal Singer, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Víctor Hugo Cortes Castro, Hugo Armando Gómez Solís, Miguel Alejandro Calvo Domínguez, Luis Leopoldo López Salinas, Leslie Thalía Orozco Vélez, Gerardo Daniel Valle Trujillo, Eridani Ruibal Ortega and Juan Barbier Arizmendi, certify that the points of view expressed in this document are a faithful reflection of our personal opinion on the company (s) or firm (s) within this report, along with its affiliates and/or securities issued. Moreover, we also state that we have not received, nor receive, or will receive compensation other than that of Grupo Financiero Banorte S.A.B. of C.V for the provision of our services.

Relevant statements. In accordance with current laws and internal procedures manuals, analysts are allowed to hold long or short positions in shares or securities issued by companies that are listed on the and may be the subject of this report; nonetheless, equity analysts have to adhere to certain rules that regulate their participation in the market in order to prevent, among other things, the use of private information for their benefit and to avoid conflicts of interest. Analysts shall refrain from investing and holding transactions with securities or derivative instruments directly or through an intermediary person, with Securities subject to research reports, from 30 calendar days prior to the issuance date of the report in question, and up to 10 calendar days after its distribution date.

Compensation of Analysts.

Analysts’ compensation is based on activities and services that are aimed at benefiting the investment clients of Casa de Bolsa Banorte and its subsidiaries. Such compensation is determined based on the general profitability of the Brokerage House and the Financial Group and on the individual performance of each analyst. However, investors should note that analysts do not receive direct payment or compensation for any specific transaction in investment banking or in other business areas. Last-twelve-month activities of the business areas. Grupo Financiero Banorte S.A.B. de C.V., through its business areas, provides services that include, among others, those corresponding to investment banking and corporate banking, to a large number of companies in and abroad. It may have provided, is providing or, in the future, will provide a service such as those mentioned to the companies or firms that are the subject of this report. Casa de Bolsa Banorte or its affiliates receive compensation from such corporations in consideration of the aforementioned services.

Over the course of the last twelve months, Grupo Financiero Banorte S.A.B. C.V., has not obtained compensation for services rendered by the investment bank or by any of its other business areas of the following companies or their subsidiaries, some of which could be analyzed within this report.

Activities of the business areas during the next three months.

Casa de Bolsa Banorte, Grupo Financiero Banorte or its subsidiaries expect to receive or intend to obtain revenue from the services provided by investment banking or any other of its business areas, by issuers or their subsidiaries, some of which could be analyzed in this report.

Securities holdings and other disclosures.

As of the end of last quarter, Grupo Financiero Banorte S.A.B. of C.V. has not held investments, directly or indirectly, in securities or derivative financial instruments, whose underlying securities are the subject of recommendations, representing 1% or more of its investment portfolio of outstanding securities or 1 % of the issuance or underlying of the securities issued.

None of the members of the Board of Grupo Financiero Banorte and Casa de Bolsa Banorte, along general managers and executives of an immediately below level, have any charges in the issuers that may be analyzed in this document.

The Analysts of Grupo Financiero Banorte S.A.B. of C.V. do not maintain direct investments or through an intermediary person, in the securities or derivative instruments object of this analysis report. Guide for investment recommendations.

Reference

BUY When the share expected performance is greater than the MEXBOL estimated performance. HOLD When the share expected performance is similar to the MEXBOL estimated performance. SELL When the share expected performance is lower than the MEXBOL estimated performance. Even though this document offers a general criterion of investment, we urge readers to seek advice from their own Consultants or Financial Advisors, in order to consider whether any of the values mentioned in this report are in line with their investment goals, risk and financial position.

Determination of Target Prices

For the calculation of estimated target prices for securities, analysts use a combination of methodologies generally accepted among financial analysts, including, but not limited to, multiples analysis, discounted cash flows, sum-of-the-parts or any other method that could be applicable in each specific case according to the current regulation. No guarantee can be given that the target prices calculated for the securities will be achieved by the analysts of Grupo Financiero Banorte S.A.B. C.V, since this depends on a large number of various endogenous and exogenous factors that affect the performance of the issuing company, the environment in which it performs, along with the influence of trends of the stock market, in which it is listed. Moreover, the investor must consider that the price of the securities or instruments can fluctuate against their interest and cause the partial and even total loss of the invested capital. The information contained hereby has been obtained from sources that we consider to be reliable, but we make no representation as to its accuracy or completeness. The information, estimations and recommendations included in this document are valid as of the issue date, but are subject to modifications and changes without prior notice; Grupo Financiero Banorte S.A.B. of C.V. does not commit to communicate the changes and also to keep the content of this document updated. Grupo Financiero Banorte S.A.B. of C.V. takes no responsibility for any loss arising from the use of this report or its content. This document may not be photocopied, quoted, disclosed, used, or reproduced in whole or in part without prior written authorization from Grupo Financiero Banorte S.A.B. of C.V. History of PT and ratings Stock Date Recommendation PT FEMSA UBD 18/01/2021 Compra $190.00 FEMSA UBD 27/07/2020 Buy $164.00 FEMSA UBD 29/11/2019 Buy $211.00 FEMSA UBD 04/4/2019 Hold $192.00

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GRUPO FINANCIERO BANORTE S.A.B. de C.V.

Research and Strategy Gabriel Casillas Olvera IRO and Chief Economist [email protected] (55) 4433 - 4695 Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967 Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

Economic Research and Financial Market Strategy Executive Director of Economic Research and Financial Alejandro Padilla Santana [email protected] (55) 1103 - 4043 Markets Strategy Itzel Martínez Rojas Analyst [email protected] (55) 1670 - 2251

Economic Research Juan Carlos Alderete Macal, CFA Director of Economic Research [email protected] (55) 1103 - 4046 Francisco José Flores Serrano Senior Economist, Mexico [email protected] (55) 1670 - 2957 Katia Celina Goya Ostos Senior Economist, Global [email protected] (55) 1670 - 1821 Luis Leopoldo López Salinas Economist, Global [email protected] (55) 1103 - 4000 x 2707

Market Strategy Manuel Jiménez Zaldívar Director of Market Strategy [email protected] (55) 5268 - 1671

Fixed income and FX Strategy Santiago Leal Singer Senior Strategist, Fixed Income and FX [email protected] (55) 1670 - 2144 Leslie Thalía Orozco Vélez Strategist, Fixed Income and FX [email protected] (55) 5268 - 1698

Equity Strategy Marissa Garza Ostos Director of Equity Strategy [email protected] (55) 1670 - 1719 José Itzamna Espitia Hernández Senior Strategist, Equity [email protected] (55) 1670 - 2249 Valentín III Mendoza Balderas Senior Strategist, Equity [email protected] (55) 1670 - 2250 Víctor Hugo Cortes Castro Senior Strategist, Technical [email protected] (55) 1670 - 1800 Eridani Ruibal Ortega Analyst [email protected] (55) 1103 - 4000 x 2755 Juan Barbier Arizmendi, CFA Analyst [email protected] (55) 1670 - 1746

Corporate Debt Hugo Armando Gómez Solís Senior Analyst, Corporate Debt [email protected] (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Analyst, Corporate Debt [email protected] (55) 1670 - 2248

Economic Studies Delia María Paredes Mier Executive Director of Economic Studies [email protected] (55) 5268 - 1694 Miguel Alejandro Calvo Domínguez Senior Analyst, Economic Studies [email protected] (55) 1670 - 2220

Wholesale Banking Armando Rodal Espinosa Head of Wholesale Banking [email protected] (81) 8319 - 6895 Alejandro Aguilar Ceballos Head of Asset Management [email protected] (55) 5268 - 9996 Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales [email protected] (55) 5268 - 1640 Alejandro Frigolet Vázquez Vela Head of Sólida Banorte [email protected] (55) 5268 - 1656 Arturo Monroy Ballesteros Head of Investment Banking and Structured Finance [email protected] (55) 5004 - 1002 Carlos Alberto Arciniega Navarro Head of Treasury Services [email protected] (81) 1103 - 4091 Gerardo Zamora Nanez Head of Transactional Banking, Leasing and Factoring [email protected] (81) 8318 - 5071 Jorge de la Vega Grajales Head of Government Banking [email protected] (55) 5004 - 5121 Luis Pietrini Sheridan Head of Private Banking [email protected] (55) 5004 - 1453 Lizza Velarde Torres Executive Director of Wholesale Banking [email protected] (55) 4433 - 4676 Osvaldo Brondo Menchaca Head of Specialized Banking Services [email protected] (55) 5004 - 1423 Raúl Alejandro Arauzo Romero Head of Transactional Banking [email protected] (55) 5261 - 4910 René Gerardo Pimentel Ibarrola Head of Corporate Banking [email protected] (55) 5268 - 9004 Ricardo Velázquez Rodríguez Head of International Banking [email protected] (55) 5004 - 5279 Víctor Antonio Roldan Ferrer Head of Commercial Banking [email protected] (55) 5004 - 1454

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