Equity Research Me xico GMXT Initiation of Coverage September 28, 2018 www.banorte.com Railway system leader with attractive valuation @analisis_fundam . We are initiating coverage on Grupo México Transportes (GMXT), with a PT 2019 of MXN$37.00, which represents a FV/EBITDA 2019e Marissa Garza of 8.8x (vs 8.6x current) with a BUY recommendation Mining/Chemicals/Industrials/Financials/Railways [email protected] . GMXT is GMexico’s transportation subsidiary and the leading operator of rail services in Mexico, as well as the largest railway BUY regional owner of the US in the east coast of Florida (FEC) Current Price MXN$31.00 PT2019 MXN$37.00 . It holds a strategic position, first class assets, a diversified portfolio, Dividend 2019 MXN$1.20 solid customer base, favorable growth and profitability perspectives Dividend (%) 3.8% along with an attractive valuation Upside Potential 23.2% Max – Mín LTM 36.01-25.63 Market Cap (USD$m) 6,714.2 It stands as the only investment vehicle of its kind in Mexico, with solid Shares outstanding (m) 4,100.6 outlooks and an attractive valuation. GMXT shares stand as the only Float 30.0% Daily Turnover (MXN$m) 25.3 vehicle in Mexico to invest in the rail system and also post attractive growth Valuation Metrics LTM * opportunities and profitability improvements that, in our view, its current FV/EBITDA Adj 8.6x P/E 19.0x valuation still does not reflect. Its strategic position, coupled with an experienced management team and important investments in world-class assets, have allowed it to be the leader in the industry, with a market share Relative performance to MEXBOL (LTM) close to 65%. The company intends to make important investments, which 10% should be reflected mainly in a better operating profitability. Our estimates 5% assume a revenue growth and Adjusted EBITDA of 13.6% and 14.4% in 2018 0% and for 2019 of 8.1% and 9.8%, respectively. Currently, the company's shares -5% trade at a 2018e FV/EBITDA multiple of 8.4x, which represents a discount of -10% around 25% vs. global peers. The main risks associated with the company, -15% -20% such as NAFTA and the COFECE ruling regarding the conditions of effective nov-17 feb-18 may-18 ago-18 competition in the industry have been left behind, and any change in terms of MEXBOL GMXT* concessions seems difficult. Financial statements Valuation and financial metrics MXN, million 2016 2017 2018E 2019E 2016 2017 2018E 2019E Rev enues 32,905 38,577 43,827 47,361 EV/EBITDA 9.2x 9.7x 8.4x 7.7x Operating Income 9,819 10,506 13,902 15,595 P/E 19.0x 21.3x 11.8x 12.3x Adjusted EBITDA 14,441 16,526 18,905 20,750 P/BV 3.9x 2.7x 2.3x 2.0x EBITDA Margin 43.9% 42.8% 43.1% 43.8% Net Income 6,677 5,967 10,740 10,341 ROE 20.4% 12.5% 19.0% 15.9% Net margin 20.3% 15.5% 24.5% 21.8% ROA 12.8% 5.8% 9.9% 8.9% EBITDA/ Interest ex penses 68.7x 13.4x 7.2x 8.7x Total Assets 51,969 102,115 108,356 116,331 Net Debt/EBITDA -0.2x 1.5x 1.2x 1.1x Cash 7,887 6,642 5,172 5,186 Debt/Equity 0.1x 0.6x 0.4x 0.4x Total Liabilities 11,476 46,398 43,645 42,687 This document is provided for the reader’s convenience Debt 5,528 31,476 28,439 28,439 only. The translation from the original Spanish version was made by Banorte’s staff. Discrepancies may Common Equity 40,492 55,717 64,711 73,644 possibly arise between the original document in Spanish Source: Banorte 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 “GMXT: Líder en sistema ferroviario con atractiva valuación” was released on September 28, 2018. 1 Document for distribution among public GMXT Financial Statements Revenue & EBITDA Margin MXN, million MXN, million Income Statement Year 2016 2017 2018E 2019E CAGR 43.9% 50,000 43.8% 44.0% 43.8% Net Revenue 32,905.0 38,577.0 43,827.0 47,361.2 12.9% 40,000 43.6% Cost of goods sold 30,119.2 35,311.0 40,116.5 43,351.5 12.9% 43.1% 43.4% Gross profit 2,785.8 3,266.0 3,710.5 4,009.7 12.9% 30,000 43.2% General expenses (7,033.2) (7,240.0) (10,191.1) (11,585.5) 18.1% 42.8% 43.0% Operating Income 9,819.0 10,506.0 13,901.6 15,595.1 16.7% 20,000 42.8% Operating Margin 29.8% 27.2% 31.7% 32.9% 3.3% Depreciation 2,865.0 3,917.0 5,003.6 5,155.2 21.6% 10,000 42.6% EBITDA 14,441.0 16,526.0 18,905.1 20,750.4 12.8% 42.4% 0 42.2% EBITDA Margin 43.9% 42.8% 43.1% 43.8% -0.1% 2016 2017 2018e 2019e Interest income (expense) net (399.0) (793.0) (3,788.0) (2,668.8) 88.4% Interest expense 404.0 1,430.0 2,819.9 2,843.9 91.7% Revenues EBITDA Margin Interest income 194.0 195.0 206.8 465.5 33.9% Exchange Income (loss) (189.0) 442.0 (1,174.8) (290.3) 15.4% Unconsolidated subsidiaries 73.0 83.0 37.1 Net Income before taxes 9,798.0 8,829.0 12,463.2 13,507.0 11.3% Provision for Income taxes 1,464.0 1,216.0 637.8 2,835.0 24.6% Consolidated Net Income 4,947.0 4,238.0 9,618.4 10,009.0 26.5% Net Income & ROE Minorities 1,730.0 1,729.0 1,122.1 331.5 -42.3% MXN, million Net Income 6,677.0 5,967.0 10,740.4 10,340.6 15.7% Net Margin 20.3% 15.5% 24.5% 21.8% 2.5% EPS 1.628 1.455 2.619 2.522 15.7% 12,000 25.0% 20.4% 19.0% Balance Sheet (MXN, million) 10,000 20.0% Total Current Assets 13,063.5 13,970.0 13,469.0 12,900.1 -0.4% 15.9% 8,000 Cash & Short Term Investments 7,887.0 6,642.0 5,172.3 5,185.5 -13.0% 12.5% 15.0% Long Term Assets 38,905.0 88,145.0 94,887.3 103,431.0 38.5% 6,000 Property, Plant & Equipment (Net) 37,078.0 71,469.0 86,148.9 87,993.7 33.4% 10.0% Intangible Assets (Net) 1,827.0 16,676.0 8,738.4 15,437.4 103.7% 4,000 Total Assets 51,968.5 102,115.0 108,356.3 116,331.1 30.8% 2,000 5.0% Current Liabilities 4,064.9 17,059.0 6,370.9 6,758.6 18.5% Short Term Debt 180.0 11,288.0 109.7 109.7 -15.2% 0 0.0% 2016 2017 2018e 2019e Accounts Payable 3,884.9 5,771.0 6,261.3 6,649.0 19.6% Long Term Liabilities 7,412.0 29,339.0 37,274.0 35,928.1 69.2% Net Income ROE Long Term Debt 5,349.0 20,188.0 28,329.3 28,439.0 74.5% Total Liabilities 11,476.9 46,398.0 43,645.0 42,686.8 54.9% Common Stock 40,492.0 55,717.0 64,711.3 73,644.3 22.1% Preferred Stock 7,840.0 8,069.0 8,215.0 8,546.5 2.9% Total Equity 32,652.0 47,648.0 56,496.3 65,097.8 25.9% Liabilities & Equity 51,968.9 102,115.0 108,356.3 116,331.1 30.8% Net Debt & Net Debt to EBITDA Net Debt (2,358.0) 24,834.0 23,266.7 23,363.1 MXN, million Source: Banorte 30,000 2.0x 1.5x 25,000 1.2x 1.1x 1.5x 20,000 15,000 1.0x 10,000 0.5x 5,000 -0.2x 0.0x 0 2016 2017 2018e 2019e (5,000) -0.5x Net Debt Net Debt to EBITDA 2 Valuation: BUY, PT2019 MXN$37.00 Discounted Cash Flow Valuation (DCF) In order to obtain GMXT shares price, we used discounted cash flow valuation model, with the objective of reflecting the upside value of the company's shares. It is noteworthy that within our model, when calculating the target price we use an EBITDA that does not include the tax benefit derived from deducting the Special Tax on Production and Services (IEPS by its Spanish acronym) in terms of the company’s consumption of diesel, and that in our opinion should simply be reflected in a lower effective tax rate. Even though GMXT does not deduct this benefit from its costs, it does it with the adjusted EBITDA reported and this represents around 10% of the consolidated. Therefore, EBITDA (2019e MXN $ 18,619m and 2020e MXN $ 20,215m) differs from Adjusted EBITDA (2019e MXN $ 20,750m and 2020e MXN $ 22,214m) mentioned in our estimates, in which we did include the benefit with the aim of having comparable figures with those of the company.