ALFA S.A.B. DE C. V. May 18, 2015 Better Oil Price Perspectives Justify BUY BUY Last Price: MP 31.76 Figures in millions of MP ALFA High Liquidity Price Target 2015: MP 36.2, Upside 14.0% 2013 2014 2015e 2016e ■ We have a new MP 36.2/sh. price target for Alfa, which implies a 14% upside, Revenues 203,456 228,886 239,518 243,446 8 percentage points above our estimate for the Mexbol Index. We are EBITDA 22,009 26,493 29,560 32,227 upgrading Alfa to BUY from HOLD. Margin 10.8% 11.6% 12.3% 13.2% Growth YoY -9.1% 20.4% 11.6% 9.0% ■ We are including in our valuation model, Alpek´s new PT, in addition to new Net Profit 5,926 (2,259) 2,125 5,717 oil price estimates and PRE’s market price Margin 2.9% -1.0% 0.9% 2.3% EPS 1.15 (0.44) 0.41 1.11 Total Assets 165,390 232,540 224,352 222,523 New Brent´s price estimate of USD 68.0/bb. Given the recovery in the European Cash and ST Inv. 11,902 22,141 17,917 15,150 reference’s price (Jan 19th - May 18th 2015: +21%) we are increasing our year-end Total Liabilities 100,221 163,619 159,273 156,503 Brent estimate to USD 68/bbl. Net Debt 45,552 75,251 74,742 72,170 Equity 65,169 68,921 65,079 66,020 In addition to a new PT for Alpek, we are adjusting Newpek´s estimates … Majority 56,441 55,156 51,510 52,254 Federico Robinson, Actinver’s petrochemicals analyst, increased Alpek’s PT by 6.7% Multiples to MP 23.8/sh. on May 15th mainly due to a better oil price scenario. Additionally, we EV/Sales 1.2x 1.1x 1.0x 1.0x are adjusting Newpek’s operating model, raising the subsidiary’s 2016e EBITDA 16%. EV/EBITDA 11.0x 9.7x 8.5x 7.7x P/E 31.8x NA 76.8x 28.5x … and updating PRE’s market value. Finally, we are updating Alfa’s stake in PRE (19%) to USD 6.05/sh. The Canadian oil company’s value increased 29.6% after Alfa ROE 10.4% NA 5.5% 10.9% and Harbour Energy’s offer (May 5th to date). ROA 4.1% NA 1.6% 3.2% Net Debt/ EBITDA 2.1x 2.8x 2.5x 2.2x We have a new USD 36.2/sh. price target, which implies a 14% upside and is Dividend Yield 2.7% 0.1% 1.7% 0.8% derived using a sum of the parts valuation model (SOTP). Considering the above Mkt. Cap USD 10.7bn Float 45% mentioned, we upgraded Alfa to BUY. What´s next? Nemak´s IPO and the acquisition of PRE would change Alfa´s 3mo. Avg. USD 21.4m 1yr. high-low MP 47.5-27.1 structure. Assuming a mixed (60% primary / 40% secondary) USD 1,000 million IPO for Nemak, we expect an incremental EBITDA of approx. USD 70 million per year ALFA vs. IPC (May 2014 = 100) (M&A @ 9.2x) from 2016. 130 Although, a mixed IPO could dilute Alfa´s participation in Nemak even more (up to 6 120 percentage points), we believe the conglomerate could finance the acquisition of 110 PRE´s remaining shares (USD 407 million), which will positively affect Alfa´s leverage. 100 90 Assuming a scenario in which Nemak goes public and Alfa acquires Pacific Rubiales in 80 2015 (Alfa consolidating 50% of PRE), we estimate a 45% increase in Alfa’s 70 consolidated 2016 EBITDA (vs. our current forecast) and a ND/EBITDA of 3.3x May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 (4Q15). ALFAA IPC Pablo Abraham Peregrina [email protected] +52 (55) 1103 6600 x 1395 Mauricio Arellano Sampson [email protected] +52 (55) 1103 6600 x 4132 Actinver Corporate Headquarters Guillermo Gonzalez Camarena 1200, 11th Floor, Centro de Ciudad Santa Fe D.F., Mexico 01210 1 New PT (MP 36.2/sh.) and New Recommendation (BUY) ■ After the oil price recovery in the last few months (Brent Jan 19th to May18th: +21%), we include a new USD 68/bbl. year-end estimate. ■ We adjusted Newpek’s operational estimates, included PRE’s market value and incorporated Alpek’s new price target to reach a MP 36.2/sh. PT for Alfa (14% upside). We used a sum of the parts valuation model to estimate our new price target. We used DCF valuation models for Alpek (82% participation), Nemak, and Sigma; while using target EV/EBITDA ratios for Alestra and Newpek. We also added Alfa’s share of PRE’s market value (19% participation) and applied a 15% holding discount. Alfa, S.A.B. DE C.V Sum of the Parts Valuation (MP million) Valuation Implicit Alfa´s Alpek DCF 7.9 41,336 Nemak DCF 10.9 92,319 Sigma DCF 9.7 76,975 Alestra EV/EBITDA mult. 5.0 8,493 Newpek EV/EBITDA mult. 9.0 8,788 Stake in PRE Market Value - 4,521 Enterprise Value 232,432 - Net debt (Holding) 13,993 Market Cap 218,438 Holding discount 15% PT (MP) 36.2 Source: Actinver Price Target Composition by Subsidiary MP/sh 45 0.7 40 1.4 1.5 35 30 12.7 12.7 25 20 15 15.3 15.3 10 5 6.8 (2.3)6.8 0 -5 Alpek Nemak Sigma Alestra Newpek PRE Net debt Source: Actinver 2 ALFA - Financial Statements (MP´000) Income Statement 2013 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E CAGR Sales 203,456 228,886 239,518 243,446 245,555 12% 5% 2% 1% 5% Cost of Sales (166,829) (187,704) (145,999) (199,029) (200,826) 13% (22%) 36% 1% 5% Gross Profit 36,627 41,181 93,519 44,417 44,728 12% 127% (53%) 1% 5% Gross Margin 18.0% 18.0% 39.0% 18.2% 18.2% (0%) 117% (53%) (0%) 0% SG&A (20,331) (24,422) (29,643) (30,266) (30,539) 20% 21% 2% 1% 11% Operating Profit 14,078 16,886 63,657 14,151 14,190 20% 277% (78%) 0% 0% Operating Margin 6.9% 7.4% 26.6% 5.8% 5.8% 7% 260% (78%) (1%) (4%) Depreciation and Amortization (7,932) (9,607) (15,229) (18,076) (18,537) 21% 59% 19% 3% 24% EBITDA 22,009 26,493 29,560 32,227 32,726 20% 12% 9% 2% 10% EBITDA Margin 10.8% 11.6% 12.3% 13.2% 13.3% 7% 7% 7% 1% 5% Interest expense (1,775) (1,644) (3,392) (2,641) (2,523) (7%) 106% (22%) (4%) 9% Other income (expense) (2,489) (17,214) (5,094) 0 0 592% (70%) (100%) NA (100%) Interest income 207 127 182 110 110 (39%) 44% (40%) 0% (15%) Pre-Tax Profit 10,021 (1,845) 55,354 11,621 11,777 (118%) (3,100%) (79%) 1% 4% Taxes 3,192 (660) 2,485 4,067 4,122 (121%) (477%) 64% 1% 7% Tax rate 31.9% 35.8% 4.5% 35.0% 35.0% 12% (87%) 680% (0%) 2% Net Profit Before Minorities 6,829 (1,186) 3,931 7,553 7,655 (117%) (432%) 92% 1% 3% Minority Interest (34) (291) (324) (329) (332) 756% 11% 2% 1% 77% Net Profit 5,926 (2,259) 2,125 5,717 5,803 (138%) (194%) 169% 1% (1%) N° of Shares 5,143 5,135 5,135 5,135 5,135 (0%) 0% 0% 0% Average N° of Shares 5,144 5,139 5,135 5,135 5,135 (0%) (0%) 0% 0% EPS 1.152 (0.440) 0.414 1.113 1 (138%) (194%) 169% 1% Balance Sheet 2013 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E CAGR TOTAL ASSETS 165,390 232,540 224,352 222,523 220,973 41% (4%) (1%) (1%) 8% Current Assets 59,651 85,219 77,911 77,814 81,635 43% (9%) (0%) 5% 8% Cash and Temporary Investments 11,902 22,141 17,917 15,150 19,061 86% (19%) (15%) 26% 12% Accounts Receivable 23,564 30,233 28,163 29,386 29,344 28% (7%) 4% (0%) 6% % of Sales 12% 13% 12% 12% 12% 14% (11%) 3% (1%) 1% Inventories 22,692 30,758 29,063 30,373 30,329 36% (6%) 5% (0%) 8% % of COGS 14% 16% 20% 15% 15% 20% 21% (23%) (1%) 3% TOTAL LIABILITIES 100,221 163,619 159,273 156,503 153,957 63% (3%) (2%) (2%) 11% Suppliers 20,934 35,167 32,662 34,432 34,382 68% (7%) 5% (0%) 13% % of COGS 13% 19% 22% 17% 17% 49% 19% (23%) (1%) 8% Long Term Liabilities 57,521 101,504 101,702 101,702 101,702 76% 0% 0% 0% 15% TOTAL DEBT 57,454 91,920 90,495 85,156 82,685 60% (2%) (6%) (3%) 10% NET DEBT 45,552 75,251 74,742 72,170 65,788 65% (1%) (3%) (9%) 10% TOTAL CAPITAL 65,169 68,921 65,079 66,020 67,016 6% (6%) 1% 2% 1% Shareholder's Equity 56,441 55,156 51,510 52,254 53,043 (2%) (7%) 1% 2% (2%) Minority Interest 8,728 13,765 13,569 13,765 13,973 58% (1%) 1% 2% 12% Cash Flow Statement 2013 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E CAGR OPERATING ACTIVITIES Net income 6,795 (1,476) 3,607 7,224 7,323 (122%) (344%) 100% 1% 2% Depreciation, amortization and depletion 7,932 9,607 15,229 18,076 18,537 21% 59% 19% 3% 24% Cash used for operating assets and liabilities (4,017) (2,187) (212) (102) 16 (46%) (90%) (52%) (115%) NA Other, net (40,475) 17,989 6,221 0 0 (144%) (65%) (100%) NA (100%) Net cash provided from operating activities (29,766) 23,932 24,846 25,198 25,875 (180%) 4% 1% 3% NA INVESTING ACTIVITIES NA NA NA NA NA Capital expenditures (13,638) (9,323) (14,405) (16,343) (13,166) (32%) 55% 13% (19%) (1%) Other, net (5,264) (19,147) (401) 0 0 264% (98%) (100%) NA (100%) Net cash used for investing activities (18,903) (28,470) (14,806) (16,343) (13,166) 51% (48%) 10% (19%) (9%) FINANCING ACTIVITIES NA NA NA NA NA Change in Debt 4,918 15,677 (2,568) (5,339) (2,471) 219% (116%) 108% (54%) NA Dividends paid (5,117) (183) (2,759) (1,284) (1,284) (96%) 1,406% (53%) 0% (29%) Distributions to non-controlling interest (3,631) (4,490) (4,919) (5,000) (5,043) 24% 10% 2% 1% 9% Common shares buyback (98) (257) 0 0 0 163% (100%) NA NA (100%) Other 1,158 (2,134) (556) 0 0 (284%) (74%) (100%) NA (100%) Net cash used for financing activities (2,770) 8,612 (10,803) (11,622) (8,798) (411%) (225%) 8% (24%) 33% Effect of exchange rate changes on cash 49,680 693 (153) 0 0 (99%) (122%) (100%) NA (100%) Increase (decrease) in cash and cash equivalents (1,759) 4,767 (916) (2,767) 3,911 (371%) (119%) 202% (241%) NA Source: Actinver 3 Equity, Economic, Quantitative and Fixed Income Research Departments Equity Research Senior Analysts Telecommunications, Media and Martín Lara (52) 55 1103-6600 x1840 [email protected] Financials Carlos Hermosillo Bernal Consumption (52) 55 1103-6600 x4134 [email protected] Pablo Duarte de León FIBRAs (REITs) (52) 55 1103-6600 x4334 [email protected] Mining, Metals, Paper and Pablo Abraham Peregrina (52) 55 1103-6600 x1395 [email protected] Conglomerates Ramón Ortiz Reyes Cement, Construction and Concessions (52) 55 1103-6600 x1835 [email protected] Federico Robinson Bours Energy, Chemicals and Industrial (52)