Equity Research & Strategy Mexico Top picks Special Note January 22, 2016 www.banorte.com Attractive stocks in a challenging environment www.ixe.com.mx @analisis_fundam . This year began with a high degree of risk aversion. However, we Manuel Jiménez Director Equity Research believe that the recent selloff in the equity market opens up Telecommunications/Media opportunities for long-term investors to take long positions in good- [email protected] looking stocks Marissa Garza . Given the current highly-volatile scenario, we believe that equity Senior Equity Research Analyst Conglomerates/Financials/Mining/Chemicals portfolios should be more exposed to consumer stocks, as well as [email protected] airports, and exports-related firms Marisol Huerta . We have picked five stocks, among the companies we have under Senior Equity Research Analyst coverage, that could outperform in 1H16 because of their expected Food/Beverages/Retail [email protected] earnings growth, solid financial structure, and attractive valuation José Espitia The recent correction in equity markets open up investment Equity Research Analyst opportunities. YTD the world market capitalization has declined 11%, Airports/Cement/Infrastructure/Fibras [email protected] amounting a loss of US$10tr. This has been the worst start of the year in the history of some markets. Risk apetite has remained low among investors Valentín Mendoza Equity Research Analyst because of the uncertainty regarding the economic slowdown in China and the Auto Parts slump in global commodity prices. The Mexbol fell sharply following its [email protected] international peers, dragging valuation levels downward as well. Up to day, the index trades at 9.45x FV/EBITDA, a discount of 1.8% against the L3Y average. We believe that the recent selloff implies an interesting window of opportunity with compelling valuation levels, below historical averages. Which are our top picks? Based purely on fundamental criteria, we have chosen five stocks that we believe are the best investment ideas for this year, among Mexican stocks. We’ve favored companies with expected operational growth either related to sectorial dynamics, or specific corporate strategies, companies whose financial structure could improve, firms currently trading at unusually low valuation levels, or a combination between these factors. So, our top picks 2016 are: Alpek, Alsea, Asur, Nemak and Soriana. Why these companies? Alsea is attractive because of its potential growth and synergies, while the leverage ratio is expected to decrease; Alpek has shown a sustained recovery in its results and is implementing operating efficiencies. Besides, the stock trades at attractive valuation levels; Asur has a strong positioning to support the expected growth within the sector and has a solid cash flow generation, along with a compelling dividend yield; Nemak competes in a sector that should continue to observe quite positive dynamics, particullary as the expected growth in NAFTA’s vehicle production should bolster results, while the impact of the exchange rate depreciation is positive for growth and valuation purposes; Soriana because we expect that the integration of Comerci’s operations will boost the company’s performance. Document for distribution among public 1 ALPEK January 21, 2016 2016: On the road to recovery Marissa Garza Senior Equity Research Analyst . Alpek is strongly positioned to start 2016. The sustained recovery in Conglomerates/Financials/Mining/Chemicals [email protected] its results and the US dollar strength should be favorable for the company performance . The firm’s strategy to maximize operating efficiencies and the vertical integration strengthening will help to compensate volatility in BUY crude oil prices, deriving in better margins Current Price P$21.99 PT2016 P$29.50 Dividend (%) 3.0% . Alpek trades at attractive valuation levels. Our PT 2016 of P$29.50 Upside Potential 37.2% implies a 2016E FV/EBITDA multiple of 7.9x, which is below the Maximum – Minimum LTM 26.96-15.51 three-year average of 8.2x. We maintain our BUY rating Market Cap (US$m) 2,502.9 Shares Outstanding (m) 2,778 Positive outlook. We believe that the Company results in the last three Float 17.9% Daily Turnover (P$m) 31.6 quarters showed an important inflection point. The margins recovery should continue in 2016 supported by the strategies implemented by the firm. We acknowledge the possibility of having inventory devaluation charges because Relative performance to Mexbol of the crude oil prices slump; nevertheless, we think that those should be (LTM) compensated by the favorable dynamics in the PTA/PET industries, along with 80% 70% the important strategies focused on maximizing operating efficiencies. 60% Especially, we think that the increase in the PTA formula in North America 50% 40% should continue being favorable for the results until 1Q16, at least. Moreover, 30% 20% the cost-savings derived from the cogeneration plant in Cosoleacaque and the 10% better-than-expected margins in polypropylene (PP) and expanded polystyrene 0% -10% (EPS) should continue, given the decrease in the offer in in North America. It Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 MEXBOL ALPEKA is important to mention as well, that Alpek is one of the few companies in the country in which the effect of the Mexican peso’s depreciation is positive for the results, since most of the operations are US dollar-denominated, which not only implies really compelling growth rates but also derives in an attractive valuation. Financial Statements Financial Ratios and Multiples (MXN, million) 2013 2014 2015E 2016E 2013 2014 2015E 2016E Revenues 90,061 86,072 84,963 100,886 FV/EBITDA 8.5x 11.2x 7.0x 6.3x Operating Income 2,926 3,739 7,604 8,774 P/E 178.2x 58.2x 13.9x 10.5x EBITDA 7,344 5,707 9,316 11,241 P/Book 1.9x 1.8x 1.6x 1.5x EBITDA Margin 8.15% 6.63% 10.96% 11.14% Net Income 261 801 3,345 4,417 ROE 1.1% 3.1% 11.6% 14.0% Net Margin 0.29% 0.93% 3.94% 4.38% ROA 0.4% 1.2% 4.6% 5.6% EBITDA/Interest expenses 7.1x 6.4x 9.2x 9.7x Total Assets 58,128 65,371 72,423 78,742 Net Debt/EBITDA 1.3x 1.8x 1.3x 1.5x Cash 4,737 5,744 6,823 3,121 Debt/Equity 0.6x 0.6x 0.7x 0.6x Total Liabilities 31,040 35,526 39,163 42,056 Debt 14,509 15,993 18,749 19,552 Common Equity 24,018 25,949 28,834 31,555 Source: Company reports and Banorte-Ixe 2 Aggressive investment plans. Alpek has aggressive investment plans for the next three years. Those include several projects to maximize operating efficiencies, leveraging the advantages of using natural gas, ethane and propane in North America (vertical integration) as well as continuing the analysis of strategic alliances and acquisitions. The total estimated amount for these investments could reach up to US$2bn (including a possible agreement with Pemex for the integration towards the MEG-US$1bn, even though the date has not been defined yet) in order to increase EBITDA by ~US$500m (nearly doubling the 2015E EBITDA of US$585m). The most outstanding projects are the PET/PTA plant in Corpus Christi (1Q17), the EPS operations acquired from BASF and the MEG supplying agreement (the main input for PET/PTA) with Huntsman. Regarding the cogeneration plant in Altamira, the estimated required investment amounts US$350m with a capacity of 350MW and it is expected to be fully operational in 1H18. Alpek has also started implementing selective expansion initiatives, mainly related to the EPS business, that imply a capacity expansion of 75,000 annual tons in Altamira’s plant. Furthermore, they have signed and agreement with BASF in Chile to acquire the EPS plant in Concón, which has a capacity of 20,000 annual tons. It’s been estimated that expansion in Altamira will start operations by the end of 2017 while for Concón the acquisition should be completed early this year. Thus, Alpek’s EPS production capacity will increase by ~40%, once both initiatives conclude. Regarding the polyester fiber business, the company has started and expansion plan of 110,000 annual tons in the plant of Pearl River, leveraging the on-site infrastructure. The expectation is that this project, which aims to increase the capacity for Central America, will start operations by the end of this year. Estimates. In 2016 we expect solid results for the Company with estimated revenues of US5.9bn (P$100.8bn) and EBITDA of US$658m (P$11.2bn). These figures represent YoY growth rates of 10.4% & 12.0% against our 2015 estimates, respectively. We believe that the announced projects should support better results. We also think that it’s quite positive that Alpek is dynamically strengthening its operations within an environment that remains challenging because of the low crude oil prices and high volatility. Alpek maintains a solid financial structure. The net debt to EBITDA ratio in 3Q15 was 1.3x. Even when considering the aggressive investment plans of the company, according to our estimates we could expect that the Net Debt to EBITDA ratio will increase to 1.5x in 2016. Attractive valuation. Currently, Alpek trades at 7.0x FV/EBITDA, a very attractive level, in our view. Our price target for 2016 of P$29.50 implies a 2016E FV/EBITDA multiple of 7.9x, which is below the average of this ratio in the last three years (8.2x) and above the current level. 3 ALSEA January 21, 2016 Defensive, with a strengthening strategy Marisol Huerta Senior Equity Research Analyst . Alsea’s latest acquisitions could derive in sustainable revenue and Food/Beverages/Retail [email protected] EBITDA growth, along with improvements in its profitability and significant cash flow generation .