Análisis y Estrategia Bursátil México

Novemeber 22, 2019 Corporate Note ALSEA www..com Attractive 2020 synergies; reiterates 2022 guidance @analisis_fundam

▪ During investors’ day, Alsea reiterated 2022 guidance, in particular expectations of a 170bp improvement in ’s EBITDA margin in Valentín Mendoza 2020, and a recovery in profitability to pre-acquisition levels by 2021 Auto Parts/ Consumer Discretionary / Real Estate/ Retail ▪ In addition, greater efficiencies stemming from the COA (Alsea’s [email protected]

Operations Center) should drive the margin by 0.2 pp in , while debt should decrease to 2.8x ND/EBITDA by 2020 vs. 3.3x previously. BUY Current Price P$52.96 ▪ Alsea’s corporate strategy is positive and underpins our overall PT 2020 P$60.00 upbeat view of the company. We therefore reiterate our BUY rating Dividend Dividend Yield (%) on the stock with a PT2020E of MXN 60.00 per share. Upside Potential 13.3% Max – Min LTM (P$) 56.74 – 33.50 Higher profitability in Europe. Alsea recently held its 2019 investors’ day event Market Cap (US$m) 2,263.6 Shares Outstanding (m) 838.5 in New York. Management shared the company’s strategy for profitable growth Float 48.52% through the roll-out of portfolio brands and markets with high potential and Daily Turnover (P$ m) 102.5 Valuation metrics LTM attractive margins, operating excellence, and the leverage of new technologies, FV/EBITDA 8.6x such as adders, in order to meet 2022 guidance. However, in our view, the most P/E 67.4x relevant information was: (1) an estimated 170bp increase in the EBITDA margin in Europe in 2020 (140bp above BNTe) on the back of synergies, in particular a Rendimiento relativo al IPC recovery in profitability to levels reached prior to the acquisitions of Grupo Vips 12 meses and in and the Benelux countries by 2021; (2) a projected 0.2% 20% 10% increase in the EBITDA margin in Mexico resulting solely from COA 0% efficiencies (Alsea’s Operations Center); (3) the objective of lowering debt from -10% 3.3x to 2.8x ND/EBITDA by 2020, and to 2.2x by 2021; (4) the prioritization of -20% sub-franchising-led growth; and (5) the intention to make an incursion into the -30% -40% Mexican food niche in Mexico and potentially in the U.S. Nov-18 Mar-19 Jul-19 Nov-19 MEXBOL ALSEA*

Financial Statements Valuation and financial metrics MXN, million 2017 2018 2019E 2020E 2017 2018 2019E 2020E

Revenues 42,529 46,157 58,403 62,791 FV/EBITDA 9.1x 10.9x 7.4x 6.7x

Operating Income 3,715 3,294 4,803 5,634 P/E 40.5x 46.4x 52.6x 36.0x EBITDA 6,466 6,408 12,837 14,014 P/Book 4.7x 3.8x 3.6x 3.2x EBITDA Margin 15.2% 13.9% 22.0% 22.3% Net Income 1,089 953 836 1,222 ROE 10.6% 7.9% 5.9% 7.8%

Net Margin 2.6% 2.1% 1.4% 1.9% ROA 2.7% 1.8% 1.0% 1.4% EBITDA/ Interest expenses 6.9x 6.9x 6.9x 6.9x Total Assets 39,659 53,750 81,276 88,681 Net Debt/EBITDA 2.1x 3.7x 3.7x 3.3x Cash 1,540 1,988 1,772 3,588 Debt/Equity 1.4x 1.9x 3.4x 3.1x

Total Liabilities 29,056 40,101 66,570 72,148 This document is provided for the reader’s convenience Debt 15,063 25,901 49,610 50,534 only. The translation from the original Spanish version Common Equity 10,603 13,649 14,706 16,533 was made by Banorte’s staff. Discrepancies may Source: Banorte with data from MSE possibly arise between the original document in Spanish and its English 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 “Atractivas sinergias en 2020; reitera guía a 2022” was released on November 22, 2019. Document for distribution among public

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ALSEA – Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Income Statement Year 2017 2018 2019E 2020E TCAC 70,000 22.0% 22.3% 25% Net Revenue 42,529 46,157 58,403 62,791 13.9% 60,000 Cost of goods sold 12,923 14,188 17,372 18,771 13.3% 20% Gross profit 29,606 31,969 41,031 44,019 14.1% 50,000 15.2% 13.7% 13.9% General expenses 26,419 28,708 36,218 38,386 13.3% 40,000 15% Operating Income 3,715 3,294 4,803 5,634 14.9% Operating Margin 8.7% 7.1% 8.2% 9.0% 0.9% 30,000 10% Depreciation 2,752 3,115 8,034 8,381 45.0% 20,000 EBITDA 6,466 6,408 12,837 14,014 29.4% 5% 10,000 EBITDA Margin 15.2% 13.9% 22.0% 22.3% Interest income (expense) net (1,627) (1,456) (3,132) (3,251) 26.0% 0 0% Interest expense 1,307 1,628 2,863 3,561 39.6% 2016 2017 2018 2019e 2020e Interest income 45 57 53 32 -10.2% Revenue EBITDA Margin Other income (expenses) (95) 118 (380) 150 -216.6% Exchange Income (loss) (269) (2) 58 126 -177.7% Unconsolidated subsidiaries (0) (0) 4 -301.2% Net Income before taxes 2,088 1,838 1,671 2,386 4.6% Provision for Income taxes 835 698 650 907 2.8% Discontinued operations Net Income & ROE Consolidated Net Income 1,252 1,139 1,021 1,479 5.7% MXN, million Minorities 163 186 186 257 16.5% Net Income 1,089 953 836 1,222 3.9% Net Margin 2.6% 2.1% 1.4% 1.9% 1,400 14.0% EPS 1.308 1.141 1.006 1.471 4.0% 11.2% 11.5% 1,200 8.1% 12.0% 9.0% Balance Sheet (Million pesos) 1,000 10.0% Total Current Assets 5,658 5,895 7,376 12,926 31.7% 6.9% 800 8.0% Cash & Short Term Investments 1,540 1,988 1,772 3,588 32.6% Long Term Assets 34,001 47,855 73,900 75,755 30.6% 600 6.0% Property, Plant & Equipment (Net) 15,772 18,575 22,072 23,927 14.9% 400 4.0% Intangible Assets (Net) 8,497 25,823 26,099 26,099 45.4% 200 2.0% Total Assets 39,659 53,750 81,276 88,681 30.8% Current Liabilities 12,783 14,438 19,780 24,927 24.9% 0 0.0% Short Term Debt 1,094 2,595 5,240 5,734 73.7% 2016 2017 2018 2019e 2020e Accounts Payable 5,198 6,004 8,377 12,567 34.2% Net Income ROE Long Term Liabilities 16,273 25,663 46,790 47,220 42.6% Long Term Debt 13,969 23,306 44,370 44,801 47.5% Total Liabilities 29,056 40,101 66,570 72,148 35.4% Common Stock 10,603 13,649 14,706 16,533 16.0% Non-controlling interest 1,143 1,879 2,616 2,941 37.0% Total Equity 9,460 11,770 12,090 13,593 12.8% Net Debt & Net Debt to EBITDA ratio Liabilities & Equity 39,659 53,750 81,276 88,681 30.8% MXN, million Net Debt 13,522 23,913 47,838 46,947 51.4%

3.7x 3.7x Cash Flow (Million pesos) 2017 2018 2019E 2020E 60,000 3.3x 4.0x Cash flow from operating activities 4,536 7,495 12,476 10,540 3.5x 50,000 Cash flow from investing activities (3,229) (17,441) (4,349) (4,878) 2.4x 3.0x Cash flow from financing activities (2,353) 10,795 (6,921) (3,846) 40,000 2.1x 2.5x FX effect on cash 39 (401) (1,422) Change in cash balance (1,007) 447 (216) 1,816 30,000 2.0x

1.5x 20,000 1.0x 10,000 0.5x 0 0.0x 2016 2017 2018 2019e 2020e

Net Debt Net Debt/EBITDA

Source: Banorte, BMV

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Value maximization strategy. Management shared a corporate strategy based on three main pillars: (a) structured and profitable growth; (b) customer loyalty, and (c) attracting and retaining the best talent. All three are leveraged on operating excellence, the use of technology –such as digitalization and adders– and innovation. Regarding the first pillar, Alsea said it will develop its global and local brands in markets with growth potential and attractive margins by: (i) growing internationally iconic brands like Starbucks, Domino’s Pizza and ; (ii) rolling out its own brands like Italianni’s, Vip’s, Archie’s, Foster’s Hollywood and Ginos; (iii) extracting greater value from recent acquisitions; (iv) making incursions into new high-growth food segments, such as Mexican food in Mexico and potentially in the U.S. also; (v) selling brands with no further growth potential, such as La Vaca, Cañas y Tapas and ; and (vi) prioritizing growth through Domino’s Pizza, Foster’s Hollywood and Starbucks sub-franchises in France.

Well-defined strategies for addressing regional challenges. Management is aware of the fact that it faces challenges in all markets, the most important ones being: (1) low economic growth and its potential impact on consumers in Mexico; (2) a challenging macroeconomic situation in and recent events in in the case of ; and (3) the implementation of a single operating model in Europe following recent acquisitions. In order to address them, Alsea has outlined specific strategies, including: (a) offering an excellent service by improving the quality of its products; (b) empowering unit managers to drive results; (c) strengthening home delivery through adders and other internal means; (d) the ongoing improvement of the supply chain, in particular the objective of a 20bp increase in Mexico’s EBITDA margin on the back of COA efficiencies; (e) maintaining transaction and traffic volume in Argentina; (f) taking advantage of attractive margins in Chile, where growth potential is also good; (g) selling operations in markets with limited growth; and (h) capturing synergies in Europe.

Solid results in Europe. The highlight of the event was perhaps Alsea’s objective to grow Europe’s EBITDA margin by 170bp in 2020 and a recovery in profitability to levels reached prior to the acquisitions of Grupo Vips and Starbucks in France and the Benelux countries by 2021. This forecast was a positive surprise for us, as it more than surpassed our expectation of a 30bp recovery this year on the back of synergies. Thus, in 2020 alone, Alsea expects to achieve the following improvements: +70bp from expense efficiencies; +20bp from improvements in operating costs; +20bp from supply chain achievements and +60bp from savings related to the cost of sales.

Reiterates 2022 guidance. Alsea reiterated its 2022 guidance (excluding the effect of IFRS16), which includes mid-digit SSS growth and a TS CAGR of ~15%. Meanwhile, based on its commitment to grow EBITDA at a rate above revenues, EBITDA is projected to grow at a CAGR of 16.5% which should take the EBITDA margin to around 15%, and EPS is forecasted to growth at a CAGR of >25% with accumulated dividends of MXN 3.90 per share. Finally, debt should decrease to 2.2x ND/EBITDA from 3.3x previously, with annual capital

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expenditure (Capex) amounting to ~MXN 5 bn. Thus ROIC should reach 13.5% and ROE 16%.

We believe that a corporate strategy focused on achieving more profitable growth and lowering debt is positive and underscores our upbeat view of Alsea. We therefore reiterate a BUY rating on the stock with a PT2020E of MXN 60.00 per share.

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Certification of Analysts. We, Gabriel Casillas Olvera, Delia Maria Paredes Mier, Alejandro Padilla Santana, Manuel Jiménez Zaldívar, Tania Abdul Massih Jacobo, Katia Celina Goya Ostos, Juan Carlos Alderete Macal, Víctor Hugo Cortes Castro, Marissa Garza Ostos, Miguel Alejandro Calvo Domínguez, Hugo Armando Gómez Solís, Gerardo Daniel Valle Trujillo, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Santiago Leal Singer, Francisco José Flores Serrano, and Leslie Thalía Orozco Vélez, 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.

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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.

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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 Rating PT ALSEA 23/10/2019 Buy P$60.00 ALSEA 25/07/2019 Buy P$47.00 ALSEA 25/01/2019 Hold P$60.00

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

Research and Strategy

Gabriel Casillas Olvera Chief Economist and Head of Research [email protected] (55) 4433 - 4695 Raquel Vázquez Godinez Assistant [email protected] (55) 1670 - 2967

Economic Analysis

Delia María Paredes Mier Executive Director of Economic Analysis [email protected] (55) 5268 - 1694 Katia Celina Goya Ostos Senior, Global Economist [email protected] (55) 1670 - 1821 Juan Carlos Alderete Macal, CFA Senior Economist, Mexico [email protected] (55) 1103 - 4046 Miguel Alejandro Calvo Domínguez Economist, Regional [email protected] (55) 1670 - 2220 Francisco José Flores Serrano Economist, Mexico [email protected] (55) 1670 - 2957 Luis Leopoldo López Salinas Analyst, Global Economist [email protected] (55) 1103 - 4000 x 2707 Lourdes Calvo Fernández Analyst (Edition) [email protected] (55) 1103 - 4000 x 2611

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Alejandro Padilla Santana Head Strategist – Fixed income and FX [email protected] (55) 1103 - 4043 Santiago Leal Singer FX Senior Strategist [email protected] (55) 1670 - 2144 Leslie Thalía Orozco Vélez Fixed Income and FX Strategist [email protected] (55) 5268 - 1698

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Director Equity Research — Manuel Jiménez Zaldivar [email protected] (55) 5268 - 1671 Telecommunications / Media Víctor Hugo Cortes Castro Technical Analysis [email protected] (55) 1670 - 1800 Equity Research – Conglomerates / Financials/ Marissa Garza Ostos [email protected] (55) 1670 - 1719 Mining / Petrochemicals Equity Research – Airlines / Airports / Cement / José Itzamna Espitia Hernández [email protected] (55) 1670 - 2249 Infrastructure / REITs Equity Research – Auto Parts/ Consumer Valentín III Mendoza Balderas [email protected] (55) 1670 - 2250 Discretionary / Real Estate / Retail Jorge Antonio Izquierdo Lobato Analyst [email protected] (55) 1670 - 1746 Eridani Ruibal Ortega Analyst [email protected] (55) 1103 – 4000 x 2755 Itzel Martínez Rojas Analyst [email protected] (55) 1670 - 2251

Corporate Debt

Tania Abdul Massih Jacobo Director Corporate Debt [email protected] (55) 5268 - 1672 Hugo Armando Gómez Solís Senior, Corporate Debt [email protected] (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Manager, Corporate Debt [email protected] (55) 1670 - 2248

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