recommendation: market perform - burkenroad reports femsa... · femsa has presented double-digit...

Valuation 2013A 2014E 2015E

EPS $4.45 $5.21 $5.88

P/E 22.08 24.95 23.64

EBITDA PS 10.98 12.95 14.07

EV/EBITDA 10.83 12.06 11.63

October 2014 Fomento Económico Mexicano, S.A.B de C.V. FEMSAUBD.MX

Initiating coverage: Aggressive growth within a challenging economy.

Recommendation: Market Perform

Price: $ 124.04 MXN IPC (MEXBOL INDEX): 43,630.58

Fomento Económico Mexicano is the largest franchiser bottler of Coca-Cola trademark beverages

in the world in terms of volume by unit cases. As of June 30, 2014, KOF had sales of 845.5 million unit cases and 32,940 employees. The company is also present in the retail market, with 12,204 OXXO stores in operation in the second quarter of 2014.

FEMSA has presented double-digit growth rates for most of the past ten years, which have been

driven by the company’s aggressive M&A’s strategy and the strong expansion of its OXXO stores.

Although FEMSA presents solid financials, a significant economic moat and a positive mid / long

term outlook, we consider that better opportunities can be found in the market, either bottlers or

retailers, which are showing better margins or present more attractive growth expectations.

Target price: $139.17

With the company public information and team estimations.

Stock Data

52-week range $108.90-130.95 Shares Outstanding (Millions 3,578.2 Return LTM 3.80% Market Capitaliation (MXN Millions) $428,561.01 Average Daily Volume (LTM) 2.4 Float 92.20 % BV per Share $46.11 Beta 0.69

Company Overview Location: The headquarters are located in Monterrey, Nuevo León, in the following address: General Anaya No. 601 Pte. Col. Bella Vista Apdo. Postal 2001 Monterrey, N.L. México C.P. 64410, Tel. (01-81) 8328-6000

Sector: Consumer Staples

Subsector: Food, beverages and tobacco

Class: Beverages

Subclass: Various Beverages

Economic activity: is the largest beverage company in Mexico and in Latin America.

Products and services: FEMSA conducts operations through three principal sub-holding companies: (1)

Coca-Cola FEMSA: engages in the production, distribution and marketing of beverages; (2) FEMSA Comercio: operates small-format stores; and (3) CB Equity: holds the investment in Heineken.

Internet webpage: http://www.femsa.com/

Analysts: Melissa Treviño

Ulises Mata D. Ricardo Peredo S. Martin Amarante

Pedro Cantú

Research Advisors:

Ma. Concepción del Alto Hernández

Jesús David Valverde

Burkenroad Reports are produced by a select group of students at ITESM. This report is based on information available

to the public and does not purport to be a complete statement of all data relevant to the securities mentioned and its

accuracy cannot be guaranteed. Furthermore, this report is not an offer to buy or sell the securities mentioned.

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Table 1. Market Profile

Closing price (MXN) $124.04

52-Week Price Range $108.90-$130.95

Average Daily Volume

(Millions)

2.4

Shares Outstanding

(Millions)

3,578.2

Market Cap (MXN Millions) 428,561.01

Free Float (%) 92.20%

Dividend Yield 1.6%

P/E 29.1x

P/B 2.7

EV/EBITDA 17.6

Source: S&P Capital IQ

FEMSA

FEMSA Comercio

Oxxo Stores (100%)

HEINEKEN

Beer (20%)

Coca-Cola FEMSA Soft

Drinks (47.9%)

KOF (28.1%)

Public (24%)

Highlights

We issue a HOLD recommendation for “Fomento Económico Mexicano” (FEMSAUBD) with a target price of MXN 139.17 by the end of 2015 (Figure 1) representing an upside potential of

12.19% in capital gains, from its closing price of MXN 124.04 on October 21, 2014. The target price was reached through 3 valuations models: DCF (60%), SOTP (20%) and Relative Valuation (20%).

“HOLD” foundation: our equity research rating guideline indicates “Hold” based on the upside potential of capital gains. Besides that, although FEMSA presents solid financials, a significant economic moat and a positive mid / long term outlook, we consider that better opportunities can be found in the market, either bottlers or retailers, which are showing better margins or present more attractive growth expectations.

Tough short – term outlook: Current economic conditions are expected to decelerate FEMSA’s growth pace as most of its expansion is financed by cash from operations. Weak consumer data lead us to believe revenues will remain flat in the next quarters slowing the store expansion and acquisitions pace and recovering afterwards, representing a compounded annual increase of 10.74% for the next 5 years.

Maintaining Retail Dominance: FEMSA will maintain its leading position as the second grocery

retailer in Mexico with OXXO, just behind Walmex, and its leading position in the convenience store sector with 17,410 stores expected at the end of 2018, and a sales CAGR (2014-2018) of 8.74% in the base scenario.

Strong Regional Presence in Soft-Drinks: Coca-Cola FEMSA, as the second largest bottler company of Coca-Cola in the world, has been increasing its presence in Latin America through an aggressive acquisitions strategy in the last 5 years, this represents an expected sales volume of 5,342 mn unit cases at the end of 2018 with a sales CAGR (2014-2018) of 11.90%.

Strong Cash Generation: FEMSA’s cash generation ability is highly notarial given that for every Mexican peso sold, FEMSA obtains around 14 cents in cash from operations which is in line with the relation seen in other bottlers and quite superior to the figures shown by retailers in Mexico.

Healthy Financial Position: FEMSA’s assets are mainly composed by non-current assets as it has a high negotiation power and, thus, does not fund its clients nor require having high levels of inventory outstanding. The company is currently able to cover its interest expense up to 6.3 times.

Business Description

Fomento Económico Mexicano (FEMSA) is the largest beverage company in Mexico and in Latin

America. Having its origins back in 1890, FEMSA has now operations in Mexico, Latin America, and Asia. The company is listed on the Mexican Stock Exchange under the tickers FEMSAUBD, FEMSAUB and KOFL; in the New York Stock Exchange as an ADR under the ticker FMX, and KOF. FEMSA conducts operations through three principal sub-holding companies: (1) Coca-Cola FEMSA: engages in the production, distribution and marketing of beverages; (2) FEMSA Comercio: operates small-format stores; and (3) CB Equity: holds the investment in Heineken (Figure 3). FEMSA has also small business segments focused in providing such as logistics and refrigeration operations. Other services include strategic logistics management primarily for FEMSA’s subsidiaries companies, as well as for external customers.

Coca-Cola FEMSA (from now on “KOF”) is the largest franchiser bottler of Coca-Cola trademark

beverages in the world in terms of volume by unit cases (Table 2). KOF has operations in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil, Argentina, and recently in Philippines through a joint venture with The Coca-Cola Company (KO) (Figure 4). As of June 30, 2014, KOF had sales of 845.5 million unit cases and 32,940 employees.

FEMSA Comercio (from now on “FC”) owns and operates OXXO stores and pharmacies. FEMSA opened its first OXXO store in Monterrey, Nuevo León in 1978. OXXO is now the largest and fastest-growing chain of small-format convenience stores in Latin America in terms of number of stores. In late June, 2014, the company had 12,204 stores in operation.

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IPC Femsa UBD

Source: Bloomberg

Figure 1. Target Price Scenarios.

Figure 2. Appreciation base 100, FEMSA UBD vs IPC

Figure 3. FEMSA’s holdings

Source: Company Annual Report

3

CB Equity (from now on “CB”) holds Heineken (HKN) N.V. and Heineken Holding N.V. shares, which represents in the aggregate a 20% economic interest in both entities. Even though FEMSA now participates in the Heineken Holding N.V. Board of Directors, FEMSA is not a majority or controlling shareholder of Heineken Group, nor does it control the decision of the Heineken Holding Board or its Supervisory Board.

Business Drivers

Coca-Cola FEMSA

Sales Volume (Unit Cases) The volume of unit cases sold has shown a volatile growth in the last 5 years, going from 2.91% in 2010 to 14.87% in 2012. The CAGR for the 2009-2013 period is 5.70%. The sales volume has grown mainly because of the acquisitions done by the company in the last 5 years. Revenue and EBITDA by Region Most of KOF revenues and EBITDA is generated from Mexico operations. 45.97% of revenues come from sales in Mexico and Central America countries, and 54.03% is due to South America

operations. In the case of EBITDA, most of it is generated at Mexico and Central America regions; meanwhile only 43.22 % comes from South America. Product Packaging & Size KOF’s revenues originate mainly from non-returnable package category, with a proportion of 77% on average along Latin America region. Also, products size is relevant for revenues and profitability, actually the company shows a higher proportion of multi-serve products’ sales with an average of 71% of total sales.

Distribution KOF has a total execution of 2.9 million points of sale. Distribution channels share (%) is shown in for the entire Latin America region, where independent small grocery stores lead with a 33.5%, followed by supermarkets and hypermarkets with around 28%. The company has a higher presence in Mexico with 883,692 points of sale but it serves more population in Brazil with a lower presence of points of sale, representing a growth opportunity as market penetration can be increased.

FEMSA Comercio

Sales floor Each OXXO store is adapted to every location according to the needs of the customers. As such, outlets characteristics differ between residential, commercial and office centers, as well as stores near schools, universities and other specialized locations. In general terms, the average size of an OXXO store is approximately 104 square meters, not including the space dedicated to refrigeration, storage and parking. Sales per square meter (SSM) are the second best compared from its peers, having $21,978 pesos (SSM) in the second quarter of 2014. Farmacias Guadalajara is the leader in this

indicator, with $28,208 pesos (SSM). One of the main advantages for OXXO stores is that the number of outlets considerably surpasses their peers. While supermarkets such as Walmart, Soriana and Comercial Mexicana have a bigger base in terms of sales floor, the number of stores is considerably higher for OXXO, with 12,204 outlets. This allows a better coverage for customers’ needs while maximizing sales with the least sales floor as possible. Same-store-sales growth An important strategy to position OXXO as one of the main retailers in Mexico has been the rapid

expansion of new stores, which has contributed to OXXO total sales growth for the last ten years. As the base of stores is increasing, total sales growth is diminishing year by year, as it can be seen on Figure 11. OXXO Same-store sales (SSS) growth was high and consistent until 2006, when average ticket growth diminished in the subsequent three years. Crisis subprime in the United States provoked a strong recession that was reflected on consumer’s confidence in Mexico. While in 2006, this index was 109.65 (2003 = base 100), by the end of 2009 its value was 80.13. 2008 had the lowest (SSS)

growth from the last 10 years, with a 0.4% growth compared to previous year. This was caused by a decrease of average ticket for 11.2% and an increase of in store traffic of 13%.

Table 2. KOF Geographic footprint

Country

Population

(millions)

Beverage

per Capita

(8 oz.)

Points of

Sale

Mexico 67.6 654 883,692

Central

America 20.7 181 109,830

Colombia 43.9 151 401,500

Venezuela 28.9 185 183,879

Brazil 72.1 253 292,949

Argentina 11.9 457 75,506

Philippines 101.0 122 925,000

Mexico & Central

America, 57%

South America,

43%

Figure 4. KOF: Revenue by Region

Source: Company Reports


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Mexico Central America

Colombia Venezuela

Brazil Argentina

Figure 5. KOF Volume Growth by Region

Source: Team Estimates

4

After 2009, OXXO stores increased their (SSS) as a combination of an increase in both average customer ticket and in store traffic. 2011 was a particularly good year in terms of (SSS), increasing 9.2% of which 4.6% was an increase from in store traffic and 4.3% from average customer ticket growth. This trend continued in 2012, but declined once again in 2013. Customer confidence also

declined in the last three years, having a value of 89.66 by the end of 2013. Overall, recovery of sales growth has not been achieved on a consistent basis, and this is partly due to prolonged exposure to difficult economic conditions. As of 2014, on the first quarter in traffic store increased 0.4% while average ticket remained stable, while in the second quarter in traffic store diminished 0.2% and average ticket grew 2.3%. With the expected economic rebound at the end of the year and the following, along with the increasing relevance of the segment of prepared food on FC, (SSS) is expected to be of 4% in 2014 and 5.5% in 2015.

Average customer ticket Average customer ticket decreased considerably in the first quarter of 2008 as a result of the financial crisis. While in the last quarter of 2007 the average ticket was $28.80, in the next quarter it reached a value of $26.80. On the third quarter of 2009, average customer ticket reached its minimum level from the ten-year’s frame, with a value of $24.3. According to the last quarterly report, average ticket reached a value of $28.80, but this has still not reached its maximum of $29.2 in the third quarter of 2007.

Even though an increase in real GDP is a signal for economic growth and welfare of population, which would ultimately be linked to spending and average ticket growth, the historical relationship between these two sets of information is not entirely linear. Prior to the 2008 crisis, average ticket deflated was maintaining its constant value over time, regardless positive real growth on Mexican GDP. Average ticket deflated had an important drop during 2008 and 2009 along with real GDP growth. After 2009, real GDP growth increased while average ticket deflated remained stable, on a $22-$24 range, not being able to rebound on the last five years. This relationship shows that, on normal economic conditions, average ticket grows as per inflation, while on crisis the GDP contraction also affects average ticket growth.

According to estimates of the United States Department of Agriculture, GDP per capita in real terms for Mexico is expected to increase for the following years. On 2013, GDP per Capita was calculated at $9,673.79 USD, but by the end of 2018, this value is expected to be of $11,155.85 USD. In store traffic Number of transactions is steadily increasing as a result of the opening of OXXO stores in the country. Average CAGR for the 2008-2013 period is 11.17%, which is in line with a CAGR of

10.21% in number of stores and 10.52% in total sales. As of 2013, total transactions were 3,200 million. In store traffic from sales stores has been consistent from the last ten years, being the main outliers an increase of 13% in 2008 and a decrease of -0.5% in 2013. This result from last year could be a sign of market saturation. As penetration increases in the number of convenience stores in Mexico, the decrease in the number of viable locations to establish an OXXO; and new store locations may be less favorable in terms of same-store sales, average ticket and store traffic. As such, total sales are

increasing at a lower rate than historic trends, but they still remain at double-digit growths. Even though in store traffic shrunk 0.5% during 2013, OXXO stores had been less affected than supermarkets in this aspect. Walmart, the largest retailer in terms of sales, had a slump of 1.7% of traffic during the last year. Overall, self-service retailers had a growth of same-sale stores of 0.1%, which highly contrasts with a 4.6% growth on 2012 according to ANTAD.1 This marginal growth was explained by this slump on traffic, which was fueled by weak economic conditions in 2013. As the economic conditions were not the best, Mexican consumers moved their purchases on

supermarkets to other formats such as grocery stores and convenience stores. This occurs because the consumer tends to evaluate their spending as expenditure per occasion, not in unit price. While in Oxxo, the average ticket is around $27.50, a supermarket ticket such as Comercial Mexicana is around $200.00, so the consumer tends to avoid supermarkets to have a better control of expenditure. Fixed Cost Structure FEMSA Comercio operations result in a low margin business with relatively high fixed costs. Two important inputs for the business are the electricity and fuel.

Fuel cost is an expense that increases from month to month as per adjustments done by the Federal Government. However, in 2015, and in accordance to the objectives of the Energy Reform, fuel costs will remain stable all over the year, only to be adjusted at the start of every year according to annual inflation. It is expected that by 2015, the cost of fuel reaches to more than $14 pesos per liter.

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Bottled water Carbonated

Fruit/Vegetable juice Soft drink

Figure 6. Latin America Soft Drinks Sales Volume (mn liters)

Growth %

Source: Business Monitor

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dri

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Figure 7. Latin America Soft Drinks Sales Volume CAGR %

(2009 - 2013)

Source: Business Monitor

6,542 7,334

8,426 9,561

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s

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Stores Transactions (millions)

Figure 8. Number of stores vs Transactions

Source: Company´s Annual Reports

5

Average electricity prices have followed an upward trend since 2002, and are now 25% higher than the rate in the United States. The main reason for this is the inherent inefficiency of the state dominated model of energy provision which prevented private sector companies from generating and

transmitting power, according to Business Monitor. The energy reform aims to address these underlying problems by allowing competition to drive up profitability and investment. This expected increase in Mexico’s installed generation capacity, and improve in the quality of infrastructure will eventually bring down electricity prices. As of 2013, average price per kWh was of $1.5241. According to projections from SENER, by 2027, the cost of electricity will reach a value of $1.52 on a high growth economy, $1.39 on a medium scenario, and $1.30 on a pessimistic projection. FEMSA expects that by the end of next year, 85% of all their operations will be supplied by clean

and renewable energy. Certain subsidiaries of FEMSA, FEMSA Comercio and Coca-Cola FEMSA have entered into a 20-year wind power supply agreements with the Mareña Renovables Wind Farm (a 396 megawatt late-stage wind energy project) to purchase energy output produced by it. The Farm is expected to begin operations in 2015, and will provide electrical energy for use at production and distribution facilities, as well as for a significant number of OXXO stores. A system called “Sistema Tienda Inteligente” has been implemented in about 78% of OXXO stores, resulting in savings of 14% of the electric energy used. The system automates refrigerators, air

conditioning, and interior/exterior illumination.

Corporate Governance By basing its corporate governance practices in Mexican Legislation, FEMSA complies with the

Mexican Securities Law and completely adheres to the principles of the Mexican Code of Best Corporate Practices, sponsored by the Consejo Coordinador Empresarial (CCE). In addition, FEMSA’s shares in the New York Stock Exchange, reflect the compliance with the applicable provisions for foreign issuers contained in the Sarbanes-Oxley Act of the United States. In this way, FEMSA expresses its commitment to demonstrate reliability and transparency for the long-term success. FEMSA’s Corporate Governance objective is to promote financial transparency, responsibility and

high ethical standards. The Board consists of 17 members, of which 13 members are independent. The board gets support by the Audit Committee, the Finance and Planning Committee and the Corporate Practices Committee. However, the Corporate Governance Structure is not completely optimal as members of the FEMSA’s founding families still hold several positions in the board. Considering the close family ties and that 6 out of the 13 independent members are considered Alternate Directors, strategic decisions may not always align with the interests of minority shareholders.

Social Responsibility Since 2008, FEMSA Foundation was created as an instrument of social investment seeking projects that relate to their strategic areas and that could be replicated in an effective way in other parts of the world by international entities It operates through Latin America & the Caribbean, especially in those

countries where FEMSA has operations. The Foundation focuses on two main strategic areas: Sustainable Development of Water Resources & Quality of Life. 2013 results were: +3.4 acres of conserved watersheds, +4,600 people with nutritional education, 48 communities supported and +790 water directors and professionals trained. Water Link is an undergoing initiative that will provide water and cover 110,000 people in 5 Latin American countries in the next 2 years. The Company seeks to enhance the participation of strategic partners; especially in projects were they are founders or the ones they undertake. FEMSA is also part of the IPC Sustainability index, which means the company complies with international sustainability standards.

The Mexican Center for Philanthropy (Cemefi) and the Alliance for Social Responsibility (AliaRSE), recognized FEMSA Corporativo for the eight consecutive year as a Socially Responsible Company (ESR). KOF, FC, Femsa Logística & Femsa Empaques have been awarded with this recognition for 10 consecutive years.

Figure 9. OXXO’s presence in Mexico

Source: Company´s Annual Report

47%

20%

5% 2%

26%

The Coca-Cola Company PepsiCo, Inc

Dr Pepper Shapple Group, Inc Cott Corporation

Other

Figure 10. Global carbonated soft drinks market share: % share,

by volume, 2013

Source: Euromonitor

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Figure 10. OXXO’s Total Sales and Total Sales Growth

Source: Company´s Annual Reports

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Industry Overview and Competitive Positioning

Mexican Retail Sector FC competes in the overall retail market facing strong competition from other small-format stores such as 7-Eleven, Circle K, Super Extra, and Super City stores and other big retailers across Mexico. However, FC’s main competition comes from small informal grocery stores/mom and pops, which

sometimes avoid regulatory oversight and taxation, allowing them to sell certain products at below market prices. The behavior of this industry is largely driven by the purchasing power of the population. Changes in prices due to inflation or taxation have an impact on both the store traffic and average ticket, which are the main indicators to measure the comportment of this business. Seasonality is also experienced with increases in demand in the months of December, July and August. November and February are generally the weakest sales months for OXXO stores as colder weather reduces traffic and

consumption of cold beverages. The demographics also play a major role in the Mexican Retail Sector. Significant opportunities lie in cities other than the major metropolises like Mexico City, Guadalajara or Monterrey. Currently there are more than 29 cities with more than 500,000 habitants that are underserved by organized retail spaces. Business Monitor International (BMI) estimates that by 2018, 80% of the Mexican population will live in urban areas. FC is targeting these areas to keep the growth pace of the past years.

Latin America Beverages Sector

Latin America represents a strategic position for non-alcoholic drinks, mainly because of a growing modern urban-retailing environment; a raising preference for flavored beverages; and a young population with an increasing purchasing power, the population aged 15-39 is expected to grow by 4.5% upon to 2017, with the 2016 Olympic Games representing a quite important opportunity to reach this young generation of consumers. The sales volume growth shows a general downward trend (Figure 6), due to weak GDP growth, tax increase and high inflationary conditions among the

countries in the region. The raising concern about healthier consumption is becoming a main driver in the region reflected a decreasing growth rate in carbonates from 7% in 2010 to 3% in 2013 (Figure 6). Mexico tax imposition on sugary drinks has forced bottlers to come up with product innovation, launching products such as stevia-sweetened Coca-Cola life which was previously launched in Argentina in 2013, due to a fast declining carbonates consumption and a CAGR (2009 – 2013) of 6.2% on the fruit/vegetable juice category (Figure 7), which represents the highest growth rate among soft drinks

categories. Besides, the large scale flow of population toward cities and urban areas represents new opportunities for reaching consumers in the region; the change to a modern retail environment comes with an increase in the retailer power, increasing the private-label brands and resulting in a larger offer for the consumer. The direct-to-consumer sales of 10 and 20 liters bottles which represent most of Mexico’s water sales volume, is expected to slowly shift to a convenient individual presentation, this category shows a CAGR (2009 – 2013) of 3.82% (Figure 7).

Competitive Positioning

Economic Moat Femsa Comercio: Oxxo stores have a strong presence in Mexico compared to other similar schemes from competitors. According to Euromonitor Data, by the end of 2013, Oxxo stores had 76.1% of market share in terms of number of stores, with 10,711 stores at that time; this number has been increased at 12,204 stores by June 30, 2014. The second largest convenience stores chains is Seven

Eleven, with 11.0% of market share. Other competitors represent only a small percentage of total outlets in the country. Geographic coverage advantage is an important factor for FC competitive advantage as it maintains Oxxo as a top of mind brand when it comes to convenience stores. Considering that each Oxxo store needs a relatively low cost to start-up and that there’s still room for more outlets in Mexico (Figure 10), FC has potential growth in Southern Mexico for the following years.

Source: Company’s Annual Report

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Figure 12. FC Peers: Sales per m2 second quarter 2014


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Figure 13. FC number of stores and sales per m2

Source: Company’s Annual Report

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Figure 14. KOF Sales Volume Growth (2013-2018)


7

Unlike most convenient stores which are franchised, FC firmly believes that the best way to operate its stores is through complete control of their outlets. In this way, FC has a better control of quality of products and services, logistics, as well as a quick implementation of promotions and marketing campaigns. While in franchises, every change in products or practices needs to be negotiated and

reach an agreement with franchisees, company-owned business models allow freedom to institute changes with greater speed and ease. Considering the ever changing environment in the retail industry, this model is a competitive advantage as it maintains flexibility for FC to switch to better strategies. Another important competitive advantage is an effective strategy of recognizing multiple needs of customers that can be fulfilled on an OXXO store. The introduction of new services such as the sale of coffee, fast food and financial services will serve to increase average ticket per consumer and in

traffic store on a long term basis. Coca-Cola Femsa: One of the main competitive advantages of KOF is its relationship with The Coca-Cola Company. Coca-Cola’s products have a good brand positioning all over the world, which is maintained through multi-segmentation and strong campaigns and marketing. The merchandising of valuable products to clients is the base for a solid financial performance on a long-term basis. Another competitive advantage of KOF is its backward integration with its other business segment,

Femsa Comercio. FC’s outlets are an important distribution channel for the sale of its products, thus making KOFL not dependent on any retailer. Overall, a backward integration allows the company to improve profit margins and reduce costs for synergies.

Investment Summary

Aggressive growth within a challenging economic environment Valuation and fundamentals are an indication of a Market Perform recommendation. With a 12.19% upside potential with a target price of MXN 139.17, we believe that FEMSA’s stock will not outperform the market. Valuation methods used are grounded in the company’s growth opportunities in both the retail and beverages industries along Mexico and Latin America, where the macroeconomic conditions are not favorable in a short-term outlook. However, the company has maintained a constant cash flow generation in the last years.

Maintaining Dominance in Retail Industry OXXO has been increasing its presence throughout Mexico with an aggressive expansion strategy. Stores units are estimated to reach a level of 17,410 at the end of 2018 in the base scenario with a CAGR (2014-2018) of 2% in the average ticket, resulting in a total sales CAGR of 8.74%.

KOF Expansion As with expansion sales volume is expected to reach 5,342 mn unit cases at the end of 2018 with

business growth opportunities mainly in Brazil and Mexico with an expected consumption volume growth of 12.10% and 5.5% respectively, compounded at the end of 2018 (Figure 14). Total sales CAGR (2014-2018) is expected as 11.90%, with a level of MXN 267,217 million at the end of 2018.

Solid Financial Position FEMSA’s cash generation ability is highly notarial given that for every Mexican peso sold, the company obtains around 14 cents in cash from operations which is in line with the relation seen in other bottlers and quite superior to the figures shown by retailers in Mexico. FEMSA’s assets are

mainly composed by non-current assets, which less than 40% is financed from outsiders. The company is currently able to cover its interest expense up to 6.3 times with a Net-Debt to EBITDA ratio of 0.97 and a quick ratio at 1. ROE and ROA are in levels of 12.1% and 6 % above its peers’ average.

Financial Analysis

2 different stories: Organic vs non-organic growth FEMSA has presented double-digit growth rates for most of the past ten years, which have been driven by the company’s aggressive M&A’s strategy and the strong expansion of its OXXO stores. This scheme was prompted by the successful acquisition of Panamco in 2003, which lead FEMSA to expand overseas. It was then reassured in 2010 when FEMSA ditched its beer business operations to lever on its bottling and retail businesses and focus on recovering their expansion after a drop in

revenues in 2010. On the other hand, as most of its products are already well positioned in the

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markets it participates, the organic increases in revenues are not as remarkable. These are mainly explained by changes in population, household income and surges in prices derived from higher excise taxes or inflationary effects. For this reason, the current state of the economies and the recent changes in regulations in the countries where FEMSA operates has slowed down its organic growth.

KOF averages a 0.66% organic growth in the last 4 quarters while FC averages a 2.03% increase in SSS (Same-Store Sales) in the same period. Thus, it is expected that FEMSA will continue with its aggressive expansion via acquisitions and new store openings in the mid-term so we expect to see similar growth rates as the past 2-3 years, with a minor setback in the short-term due to the economic slowdown present in the Latin American countries, especially Mexico and Brazil. (Sales Scenarios)

Steady Margins FEMSA’s gross margins have been slightly increasing since its decline in 2008 when they dropped 4.2 p.p. to 41.70% due to the financial crisis. Since then, the gross margin has been increasing by 26 bps annually. The same is not seen with the EBITDA margin which also presented a decline from 18.6% in 2007 to 15.7% in 2008 but that has been swinging between 16.5% and 14.9% for the last 5 years. The net income margin has remained constant located around 6%, in line with the last 10 years average not taking into account the spike in 2010 explained by the gain on the exchange of shares with HKN.

In order to have better insight on how FEMSA is performing, we analyze the two core businesses separately. Referring to KOF, its margins are located slightly below the average of other soft drinks bottlers in the world with the gross, EBITDA and Net margins placed around 47%, 18% and 6.5% respectively. The gross margin has remained constant as the increases in the cost of its inputs has been in line with the price increases of its products, however, the EBITDA margin has deteriorated around 3 p.p. as the inclusion of new acquisitions have impacted the operating costs. The same is seen with the net margin which was situated at 11.6% in 2004, a 4.8 p.p decrease compared the reported on the last quarter. On the other hand, FC has better than average margins compared to other

convenience and retail stores in Mexico and Latam. For instance, FC is placed above its peers with a 34% gross margin against the average of 25%. Considering the EBITDA margin, FC’s figure is well situated at 10.30% whereas other retailers’ margins step around 7%. FEMSA levers its efficiency on its sophisticated supply chain system, which enables them to reduce costs by delivering the exact amounts to be sold based on demand in a timeliness manner. In terms of profitability, FEMSA is experimenting a tough year due to the economy stagnation and the impact of changes in regulations and taxes. The current ROE (9.95%) is placed below its 10-year

average (12.26%). Decomposing this figure into its components through the DuPont analysis, we can notice its asset turnover has remained almost unchanged for the last 20 years at 0.8x, which is line with other bottlers though lower than other retailers. The financial leverage is placed at historical low levels since it reached its latest significant peak in 2003 with the purchase of Panamco and has been gradually decreasing since then. This has been the main factor contributing to the decline of the ROE in the same period, as seen in Figure 18; the difference between the ROE and Profit Margin has narrowed along with the leverage.

Healthy Balance Sheet FEMSA’s assets are mainly composed by non-current assets as it has a high negotiation power and, thus, does not fund its clients nor require having too much inventory outstanding. Though FEMSA has a lower inventory turnover (9.9x) compared to peers such as Arca and Cultiba, 14.5x and 11.8x respectively, its great bargaining power allows FEMSA to have a negative cash conversion cycle. The non-current assets, which represent almost four fifths of the total assets mainly consist of PPE, intangible assets and its 20% participation in Heineken. In terms of liquidity, FEMSA is well positioned with a current ratio of 1. 5x, above its bottler and retailer peers.

Relating to its capital structure, FEMSA funds less than 40% of its assets from outsiders, thus, it has room for more leverage considering its intentions to keep this growth strategy in the mid-term. Taking advantage of the historical low interest rates FEMSA is currently able to cover its interest expense up to 6.3 times; however, an increase in the interest rates could affect its solvency as almost 20% of its debt bears interest at floating rates. Current FEMSA’s Net-debt-to-EBITDA is 0.97644.

Strong Cash Generator FEMSA has been a consistent cash generator for the last decade; its aggressive expansion mostly

funded by cash from operations speaks for itself. As seen in Figure 19, the CFO and the CFI present an almost symmetric shape supporting that the invested amounts depend on the business performance though this is altered in 2013 when FEMSA issued more debt to finance more acquisitions. To assess FEMSA’s cash generation ability it is relevant to note that for every peso sold, FEMSA obtains

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around 14 cents in cash from operations which is in line with the relation seen in other bottlers and quite superior to the figures shown by other retailers. Moreover, taking a look at the historical behavior of its free cash flow, it has been very consistent considering FEMSA’s aggressive growth presented in the last ten years and compared to other companies in similar stages. For instance, the

levered free cash flow variability of the last 10 years of FEMSA is 56.6% while Arca presents a 247.8% variability, Embotelladora Andina 81.49%, Soriana 421.36% and Wal-Mart de Mexico a 53.1%, not to mention FEMSA’s figures have remained always positive.

Valuation We used three approaches to estimate our 12-month weighted target price: Discounted Cash Flow (DCF) Valuation, Sum of the parts (SOTP), and Relative valuation.

DCF Valuation For the DCF, a two-stage growth model was used, where in the first growth stage we forecasted in detail the Free Cash Flow for the Firm (FCFF) year-to-year up to 2025, then we assumed a perpetuity

with a constant long-term growth. After obtaining the expected value of the equity and adjusting it for estimated net debt and minority interest, we derived FEMSA’s 2015-estimated intrinsic value per common share of $143. We gave a 60% weight to the DCF approach because we believe that a share value relies more on the fundamentals and therefore is unbiased by a bullish or bearish market (market sentiment). The DCF is sensitive to the following factors:

Forecasting Sales

Consolidated sales were obtained by forecasting the sales of both FC and KOF business segments separately. FC revenues are determined by the behavior of the same-store sales and the aggressive store expansion intended by FC’s management. FC guidance sets a goal of opening 8,000 stores in the next eight years. Weak economic data from the IGAE and ANTAD indicators led us to believe revenues will, at least, stay flat in the short-term. From this point on, we expect a recovery in the store expansion later decelerating, as the market will start to become saturated. (17,410 stores by the

end of 2018) The average sales per store were forecasted based on traffic in stores and average ticket by transaction. The average ticket is expected to follow the inflation as it has done for the last five years (Figure 24), added to the fact that the economic outlook for the next five years stays conservative thus the purchasing power of the population won’t increase significantly in this same period. A similar analysis was applied to obtain the store traffic.

In our base scenario, sales will grow at different rates for the next five years with an 8.74% compound annual growth rate. KOF revenues were estimated by the analysis of both sales volume, measured by unit cases, and the average price per region including Mexico, Central America and South America. Besides incorporating past performances, volume and average price per unit cases were adjusted with soft-drinks volume growth estimates taken from forecasts made by Euromonitor in Mexico, Costa Rica, Guatemala, Argentina, Brazil, Colombia and Venezuela from 2014 to 2018; with the average

price per unit case at domestic currency estimated to grow in line with expected inflation in each country and with forward exchange rates provided by Bloomberg. Assuming the behavior levels in both volume and prices, gave a result of 11.90% CAGR for the next 5 years.

Adjustments to Non-cash charges, changes to working capital, and CAPEX Working capital (WC) and CAPEX are based in their relative proportion to historical sales given that FEMSA has reported steady margins and thus presenting a constant relation between these factors, allowing us to forecast a reasonable CAPEX and changes to WC. Thus, depreciation and amortization were forecasted by a proportion of CAPEX, and therefore in line with forecasted sales.

Long-term growth rate We expect FEMSA to grow over the long-term at least to the same level as the US expected inflation, thus terminal growth rate was based on the expected long-term inflation rate derived from a term structure model that follows an Ornstein-Uhlenbeck process. In this case, our model follows a macroeconomic process, where we developed a “term structure” which is based on changes in the inflation rate. After gathering the historical monthly-annualized inflation rate and calculated the

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Figure 21. Number of Stores Forecast (2010-2018)


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Figure 23. Sales Growth Scenarios (2003-2018)


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expected inflation rate over several horizons, the infinitely-long rate was computed, which we used as the terminal growth rate: 2.2%

WACC The cost of equity of 9.96% was calculated using the CAPM. We utilized a 10-year US government bond rate of 2.25%, adjusting it to the inflation rate between the U.S. and Mexico and adding a premium of 45 bps for the expected increase in interest rates, resulting in a risk-free rate of 5.23%. Beta adjusted of 0.83 was computed regressing FEMSA monthly returns with the Mexican Stock Exchange (MEXBOL) monthly returns for the last five years. The total equity risk premium is equal to 4.41%; additionally we added a country risk premium of 1.30% (CDS). The cost of debt of 7.5%

was calculated as a weighted sum of the estimated outstanding debt with different average rates and its weight to total debt. The after-tax debt is equal to 5.2%, using a tax rate of 30%. Thus, based on the 2015 expected capital structure for 2015, estimated WACC equals to 9.35%.

SOTP Valuation Given that various businesses segments compose FEMSA, we believed that the SOTP is suitable for the company, thus analyzing the enterprise value of each business separately, knowing that the beverage business is significantly different to the retail business, and the Heineken economic interest

is not an operating business for the company. In order to obtain a target price using this approach, we valued KOF and FC on the basis of each 2015 estimated EBITDA, and current EV/EBITDA multiples by being conservative as today’s willingness of investors to pay for the stock. In this manner, we derived an estimated enterprise value for the year-end 2015 for each business and then weighted it to FEMSA’s current ownership, being approximately 48% for KOF and 100% for FC. For Heineken ownership, we calculated the annualized return for the last 10 years of historical prices

for both series owned by FEMSA and added that expected return as an appreciation for the stock prices and multiply them for the EUR/MXN forward rate and the total percentage of ownership. Finally, we multiplied them for the shares outstanding for each one of the series, thus giving us the expected economic interest value in Heineken by the end of 2015. Other businesses include two smaller operating businesses: FEMSA Logística and Invera. These two operations account approximately for 2.5% of total sales.

Finally, we proceeded to adjust this expected total EV for net debt and minority interest and dividing it by the total number of shares outstanding, resulting in a target price of $128 per common share. We gave a 20% weight to this approach because, even though is based on expected values, the SOTP is relevant to value FEMSA’s portfolio businesses.

Relative Valuation As FEMSA is a unique company considering the variety of its businesses, it is difficult to find similar

companies to compare with. Thus, in order to get a target price based on the multiples the markets are currently paying we considered different peers of the two main businesses: bottlers and retailers. 30 companies were taken into account (15 for each business segment) and the weighting was based on the revenues share of each (60% KOF, 40% FC). The multiples considered were EV/EBITDA and Price to Earnings, leading to a target price of $137 equally weighting the two inputs, as there is no evidence of predominance of one over the other. We gave a 20% weight to this approach because current peer multiples might be biased by a bullish

or a bear market (market sentiment) and, therefore, completely relying on public investors willingness.

Investment Risks

Overall Risks MARKET RISK | Fluctuations of exchange rates The exchange rate risk involves changes in the value of the local currency, of each country where FEMSA operates, relative to the US dollar where about 66.4% of the consolidated revenues arise from Mexico and Central America (Mexican peso, Quetzal, Balboa, Colón and US dollar), 12.2% from Venezuela (Bolívar fuerte), and the last 21.4% from South America (Brazilian real, Argentine peso, and Colombian peso).

Table 3. FEMSA WACC Computation

Risk-free Rate 5.23%

Beta 0.828

Market Risk Premium 5.71%

Cost of equity 9.96%

Cost of debt 7.5%

Marginal tax rate 30%

Cost of debt, after tax 5.2%

Weight of equity 87%

Weight of debt 13%

WACC 9.35%

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Figure 24. Average Ticket Behavior (2009-2014)


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Figure 25. Sales Scenarios (2003-2018)


Source: Team Estimates. Company Data

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REGULATORY RISK | Taxes FEMSA´s products are subject to diverse taxes in the majority of countries, including Mexico, not guaranteeing that any of the governmental authorities in the countries where FEMSA operates

throughout its subsidiaries may result in new taxes or will not increase the existing tax rates on products in the future. Example of this risk is the new calorie-based tax imposed on food in Mexico, which can lead to a reduction in consumption on FEMSA products. ECONOMIC RISK | Mexican and other countries economies Being FEMSA a Mexican corporation, Mexican operations are the most important geographic territory. FEMSA consolidated total revenues, which approximately 63% is attributable to Mexico, are highly correlated to Mexico GDP which means that a change in GDP growth rate can positively

or negatively affect FEMSA results, based on demand for the company products. In addition, Mexican economy continues to be heavily influenced by the U.S. economy. Also, operations in other countries, such as Argentina and Venezuela where the economy seems weak and vulnerable, might lead in adverse outcomes to the company. ECONOMIC RISK | New acquisitions New acquisitions in other geographic territories, such as the 51% acquisition of the Coca-Cola

Bottlers Philippines, Inc. (CCBPI), may result in different risks and competition than those from Latin America, which is the “native” market for FEMSA. This kind of exposure can led to unsuccessful acquisitions integrations, that can represent a huge investment and hence a significant impact on the company results.

Risks by business segments

Operational Risks

FEMSA Comercio IT systems IT is crucial to the daily and efficient operation of FC. Failure in IT might result in losses of sales and therefore negatively affecting the company. Systems may be subject to defects, interruptions, or security breaches such as viruses or data theft. IT systems are used to manage its data, communications, connectivity, and other business processes. Communication system

It is important to FC to handle an effective communication system for an optimal calculation of the inventory needed in every OXXO store to avoid a loss of sales (due to lack of inventory) or not being able to sell in time merchandise.

Coca-Cola FEMSA Distribution Efficiency in product distribution is crucial for KOF. Risks may arise for either damage to distribution centers, such as natural disasters, or failure in distribution logistics. Failure to create new

challenges for distribution logistics might result in either a shortage of products in a determined area or in an unsatisfactory time allocation of the products. Relationship with The Coca-Cola Co Coca-Cola Co has significant negotiating power over KOF. Coca-Cola can increase the price for its concentrate, forbids KOF from bottling or distributing any other beverages without it authorization or consent, and can discontinue or reduce contributions such as marketing expenses any time.

Competition Risks

FEMSA Comercio Competition from other retailers Direct competition for FC includes other convenience stores chains as well as small informal grocery stores. The latter, can sometimes avoid regulatory oversight and taxation, allowing them to sell some products at below market prices.

Coca-Cola FEMSA Competition

KOF competes in sparkling beverages, water, juice-based beverages, teas, sport drinks and value-added dairy products principally with Coca-Cola Co and PepsiCo’s bottlers. KOF also face competition from “B brands”, which are other soft drinks that focuses on low prices as a way to increase their market share.

Table 4. Weights for Target Price

Valuation method Price Weight WxP

DCF $143 60% $86

SOTP $128 20% $26

Relative Valuation $137 20% $27

Target Price $139

Table 6. Monte Carlo Simulation

Price (Oct-21-2014) $124

Daily Vol (5Y) 1.4624%

Daily R (5Y) 0.0756%

Mean Price $144.58

Median Price $140.65

Std Dev $33.44

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Table 5. Weights for Relative Valuation

Weight Target Price W x P EV/EBITDA 1/2 $131.47 $65.74

P/E 1/2 $142.94 $71.47

Price From Relative Valuation $137.21

Source: Team Computations

Source: Team Estimates.

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Figure 27. Historical and forecasted EBITDA for FC

Source: Team Estimates. Company data


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Figure 28. Monte Carlo simulation


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Regulatory and Political Risks Coca-Cola FEMSA Regulations in each territory The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which KOF operates may

increase its operating costs or impose restrictions on its operations which, in turn, may adversely affect KOF´s financial condition, business, and results. Political and social events in each country The new administrations elected or to be elected in the countries where the company operates may implement significant changes in laws, public policy and/or regulations that could affect the political and economic conditions in these countries.

Risks in Heineken stake

Holding of Heineken N.V. and Heineken Holding N.V. Shares. Not controlling HKN decisions FEMSA is not a majority or controlling shareholder of HKN N.V. or HKN Holding N.V., nor does it control the decisions of the HKN Holding Board or the HKN Supervisory Board. Therefore, the decisions made by the majority or controlling shareholders may not be consistent with or may not consider the interests of FEMSA´s shareholders or may adverse to the interests of FEMSA´s shareholders. HKN is exposed to several countries: By this way, FEMSA shareholders are exposed to the political, economic and social circumstances affecting the markets in which HKN is present, which may be result negatively to the value of the company´s interest in HKN, and hence,

the value of FEMSA shares.

Monte Carlo Simulation After calculating the expected daily volatility and the expected daily return of the stock from the last five historical prices, we computed a Monte Carlo Simulation in order to visualize the probabilities of the share price one year ahead (252 trading days). The Monte Carlo Simulation showed that there is a probability of 18.9% that the price might fall beyond $115 per share, a 23.94% of holding the stock, as it will result in flat returns over the next twelve months; and a 57.16% of gaining at least thirteen percent.

Keep in mind that this simulation was run using historical values, and thus, remembering that past performance is not a guarantee of future results. This is why we did not use this approach for our target price, as it does not rely on its fundamental, but follows a stochastic process. (Figure28)

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Appendix 1. Income Statement Income Statement 2013 2014F 2015F 2016F 2017F 2018F

Currency: MXN

In millions

12 months

DEC-31

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DEC-31

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DEC-31

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DEC-31

Total Revenues

258,097.0

270,569.5

294,105.0

333,484.9

374,567.9

422,574.2

COGS (148,443.0) (151,916.9) (165,131.5) (187,242.1) (210,309.1) (237,263.2)

Gross Profit 109,654.0 118,652.5 128,973.5 146,242.7 164,258.8 185,311.0

SG&A (80,124.0) (82,814.3) (90,017.9) (102,071.0) (114,645.5) (129,338.9)

EBIT 29,530.0 35,838.3 38,955.7 44,171.7 49,613.4 55,972.0

EBITDA 39,226.0 46,339.8 50,331.4 56,496.5 62,968.6 70,446.3

Interest Expenses (4,331.0) (4,121.0) (2,894.0) (2,834.0) (2,808.0) (2,667.0)

Interest Earned 1,225.0 1,541.6 1,675.7 1,900.1 2,134.2 2,407.7

Other Income & expenses (1,931.0) (908.3) (1,406.0) (1,081.5) (1,318.8) (993.1)

EBT 25,080.0 32,350.6 36,331.3 42,156.3 47,620.8 54,719.6

Tax (7,756.0) (9,705.2) (10,899.4) (12,646.9) (14,286.2) (16,415.9)

SP & Minority Interest (1,402.0) (4,010.8) (4,379.9) (4,733.7) (3,710.9) (3,830.9)

Net Income 15,922.0 18,634.7 21,052.1 24,775.7 29,623.6 34,472.9

Consolidated Net Income 22,155.0 28,094.7 31,958.2 36,971.1 42,555.1 49,349.5

Basic EPS $4.45 $5.21 $5.88 $6.92 $8.28 $9.63

EBITDA % 15.20% 17.13% 17.11% 16.94% 16.81% 16.67%

Appendix 2. Balance Sheet

Balance Sheet 2013 2014F 2015F 2016F 2017F 2018F

Currency: MXN

In millions

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

ASSETS 359,192.5 385,700.0 403,192.7 430,269.4 458,439.8 494,070.2

I. Current Assets 73,568.7 94,315.8 105,724.3 111,293.8 125,217.6 140,003.6

Cash & Near Cash Items 27,259.2 41,239.2 46,082.2 46,680.2 52,000.2 57,292.2

Short-Term Investments 126.1 987.4 3,478.0 677.0 2,916.1 4,567.0

Accounts & Notes Receivables 9,042.1 12,310.4 13,381.3 15,173.0 17,042.2 19,226.4

Inventories 18,288.7 19,071.8 20,730.8 23,506.6 26,402.4 29,786.3

Other Current Assets 18,852.6 20,707.0 22,052.0 25,257.0 26,856.7 29,131.7

II. Long-Term Assets 285,623.8 291,384.2 297,468.5 318,975.7 333,222.2 354,066.6

LT Invest. & LT Receivables 1,120.3 193.0 206.0 7,322.0 3,884.6 6,977.1

Net Fixed Assets 73,955.0 77,502.1 81,219.4 85,115.0 89,197.4 93,475.6

Gross Fixed Assets 119,968.8 133,014.5 146,978.7 161,928.3 177,935.5 195,077.9

Acc. Depreciation 46,013.8 55,512.4 65,759.3 76,813.3 88,738.1 101,602.3

Other LT Assets 210,548.5 213,689.1 216,043.1 226,538.7 240,140.2 253,613.9

Total Intangible Assets, net 103,293.4 104,834.1 105,989.0 111,138.1 117,810.9 124,421.0

Investment in Affiliates/JV 98,330.7 99,797.4 100,896.8 105,798.5 112,150.7 118,443.2

Other Non-Current Assets 8,924.4 9,057.5 9,157.3 9,602.1 10,178.7 10,749.8

LIABILITIES 136,642.4 145,427.5 144,934.7 151,163.9 155,627.1 163,391.0

I. Current Liabilities 48,868.9 55,022.2 60,870.1 66,184.7 69,490.2 74,836.3

Accounts Payable 26,632.0 29,968.8 33,723.6 37,948.9 42,703.5 48,053.9

Short-Term Borrowings 3,826.8 4,836.4 5,623.5 4,485.9 3,498.3 1,953.0

Other Short-Term Liabilities 18,410.1 20,217.0 21,523.0 23,750.0 23,288.4 24,829.4

II. Long-Term Liabilities 87,773.5 90,405.3 84,064.7 84,979.2 86,136.9 88,554.7

LT Borrowings 72,921.9 68,800.9 65,906.9 66,185.9 66,685.9 68,422.9

Other LT Borrowings 14,851.6 21,604.4 18,157.8 18,793.3 19,451.0 20,131.8

EQUITY 222,550.1 240,272.6 258,258.0 280,581.5 302,812.6 330,679.2

14

TOTAL LIABILITIES & EQUITY 359,192.5 385,700.0 403,192.7 430,269.4 458,439.8 494,070.2

Appendix 3. Statement of Cash Flows

Cash Flow Statement 2013 2014F 2015F 2016F 2017F 2018F

Currency: MXN

In millions

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

Cash From Operating Activities 28,712.2 36,937.0 43,145.5 45,115.7 51,709.7 56,577.6

Net Income 15,921.9 18,634.7 21,052.1 24,775.7 29,623.6 34,472.9

Depreciation & Amortization 9,695.7 10,501.5 11,375.8 12,324.8 13,355.2 14,474.3

Other Non-Cash Adjustments 7,226.7 10,370.0 11,037.6 11,562.5 10,340.9 10,123.1

Changes in Non-Cash Capital (4,132.1) (2,569.1) (320.0) (3,547.2) (1,610.1) (2,492.7)

Cash From Investing Activities (53,616.5) (19,523.7) (18,388.7) (22,774.0) (24,429.9) (30,125.6)

Disposal of Fixed Assets 251.7 2,994.52 1,789.00 3,476.00 4,493.00 3,487.00

CAPEX (16,380.4) (18,652.0) (16,721.7) (18,960.7) (21,296.6) (24,026.0)

Increase in Investments (9,357.5) (1,469.8) (1,781.2) (859.7) (254.3) (795.1)

Decrease in Investments 1,487.5 2,170.6 1,780.2 2,526.4 2,183.0 2,553.6

Other Investing Activities (29,617.8) (4,567.0) (3,455.0) (8,956.0) (9,555.0) (11,345.0)

Cash From Financing Activities 15,642.4 (3,433.2) (19,913.4) (21,744.1) (21,959.9) (21,159.6)

Dividends Paid (16,493.5) - (16,493.5) (16,493.5) (16,493.5) (16,493.5)

Increase in LT Borrowings 78,906.6 5,344.0 4,567.0 7,234.0 3,308.0 22,345.0

Decrease in LT Borrowings (39,961.7) (4,121.0) (2,894.0) (6,955.0) (2,808.0) (20,608.0)

Other Financing Activities (6,809.0) (4,656.2) (5,092.9) (5,529.6) (5,966.4) (6,403.1)

Net Changes in Cash (9,262.0) 13,980.0 4,843.0 598.0 5,320.0 5,292.0

Appendix 4. Common-size Balance Sheet

Balance Sheet 2013 2014F 2015F 2016F 2017F 2018F

Currency: MXN

In millions

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

I. Current Assets 20.48% 24.45% 26.22% 25.87% 27.31% 28.34%

Cash & Near Cash Items 7.59% 10.69% 11.43% 10.85% 11.34% 11.60%

Short-Term Investments 0.04% 0.26% 0.86% 0.16% 0.64% 0.92%

Accounts & Notes Receivables 2.52% 3.19% 3.32% 3.53% 3.72% 3.89%

Inventories 5.09% 4.94% 5.14% 5.46% 5.76% 6.03%

Other Current Assets 5.25% 5.37% 5.47% 5.87% 5.86% 5.90%

II. Long-Term Assets 79.52% 75.55% 73.78% 74.13% 72.69% 71.66%

LT Invest. & LT Receivables 0.31% 0.05% 0.05% 1.70% 0.85% 1.41%

Net Fixed Assets 20.59% 20.09% 20.14% 19.78% 19.46% 18.92%

Gross Fixed Assets 33.40% 34.49% 36.45% 37.63% 38.81% 39.48%

Acc. Depreciation 12.81% 14.39% 16.31% 17.85% 19.36% 20.56%

Other LT Assets 58.62% 55.40% 53.58% 52.65% 52.38% 51.33%

Total Intangible Assets, net 58.62% 55.40% 53.58% 52.65% 52.38% 51.33%

Investment in Affiliates/JV 28.76% 27.18% 26.29% 25.83% 25.70% 25.18%

Other Non-Current Assets 27.38% 25.87% 25.02% 24.59% 24.46% 23.97%

LIABILITIES 38.04% 37.70% 35.95% 35.13% 33.95% 33.07%

I. Current Liabilities 13.61% 14.27% 15.10% 15.38% 15.16% 15.15%

Accounts Payable 7.41% 7.77% 8.36% 8.82% 9.31% 9.73%

Short-Term Borrowings 1.07% 1.25% 1.39% 1.04% 0.76% 0.40%

Other Short-Term Liabilities 5.13% 5.24% 5.34% 5.52% 5.08% 5.03%

II. Long-Term Liabilities 24.44% 23.44% 20.85% 19.75% 18.79% 17.92%

LT Borrowings 20.30% 17.84% 16.35% 15.38% 14.55% 13.85%

Other LT Borrowings 4.13% 5.60% 4.50% 4.37% 4.24% 4.07%

EQUITY 61.96% 62.30% 64.05% 64.87% 66.05% 66.93%

15

TOTAL LIABILITIES & EQUITY 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Appendix 5. Key Financial Ratios Ratios 2013 2014F 2015F 2016F 2017F 2018F

For The Fiscal Period Ending (Average accounts) 12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

12 months

DEC-31

Profitability

Return on Assets % 5.6% 6.0% 6.2% 6.6% 7.0% 7.3%

Return on Equity % 10.2% 12.1% 12.8% 13.8% 14.6% 15.6%

Return on CE % 10.1% 11.2% 11.6% 12.4% 13.4% 14.0%

Margin Analysis

Gross Margin % 42.5% 43.9% 43.9% 43.9% 43.9% 43.9%

EBITDA Margin % 15.1% 15.8% 15.8% 15.6% 15.5% 15.3%

EBIT Margin % 11.3% 13.2% 13.2% 13.2% 13.2% 13.2%

Net Income Margin % 6.2% 6.9% 7.2% 7.4% 7.9% 8.2%

Asset Turnover

Total Asset Turnover 0.79x 0.73x 0.75x 0.80x 0.84x 0.89x

Fixed Asset Turnover 3.81x 3.57x 3.71x 4.01x 4.30x 4.63x

Acc. Rec. Turnover 29.4x 25.3x 22.9x 23.4x 23.3x 23.3x

Inventory Turnover 8.6x 8.1x 8.3x 8.5x 8.4x 8.4x

Short-Term Liquidity

Current Ratio 1.5x 1.7x 1.7x 1.7x 1.8x 1.9x

Quick Ratio 1.0x 1.0x 1.0x 0.9x 1.0x 1.1x

Cash from Ops. To CL 0.59x 0.67x 0.71x 0.68x 0.74x 0.76x

Avg. Days Sales Out. 12.4 14.5 16.0 15.7 15.8 15.8

Avg. Days Inventory Out. 42.6 44.9 44.0 43.1 43.3 43.2

Avg. Days Payable Out. 78.5 67.6 69.7 68.8 69.0 68.8

Avg. Cash Conv. Cycle (23.5) (8.3) (9.7) (10.0) (9.9) (9.8)

Long Term Solvency

Total Debt/Equity 34.5% 30.6% 27.7% 25.3% 23.2% 21.3%

Total Debt/Capital 25.6% 23.5% 21.7% 20.2% 18.8% 17.5%

LT Debt/Equity 32.8% 28.6% 25.5% 23.7% 22.0% 20.7%

LT Debt/Capital 24.4% 21.9% 20.0% 18.9% 17.9% 17.1%

Total Liabilities/Total Assets 38.0% 37.7% 35.9% 35.1% 33.9% 33.1%

EBIT/Interest Expense 7.2x 8.7x 10.4x 11.3x 12.0x 13.3x

EBITDA/Interest Exp. 9.6x 11.2x 13.5x 14.5x 15.3x 16.7x

(EBITDA-CAPEX)/Int. Exp. 5.5x 6.7x 9.0x 9.6x 10.1x 11.0x

Total Debt/EBITDA 2.0x 1.6x 1.4x 1.3x 1.1x 1.0x

Net Debt/EBITDA 1.27x 0.68x 0.44x 0.41x 0.24x 0.12x

Depreciation/CAPEX 53.8% 50.9% 61.3% 58.3% 56.0% 53.5%

Growth Over Prior Year

Total Revenue 8.3% 4.8% 8.7% 13.4% 12.3% 12.8%

Gross Profit 8.2% 8.2% 8.7% 13.4% 12.3% 12.8%

EBITDA 9.5% 18.1% 8.6% 12.2% 11.5% 11.9%

EBIT 5.6% 21.4% 8.7% 13.4% 12.3% 12.8%

Net Income (23.1%) 17.0% 13.0% 17.7% 19.6% 16.4%

16

The Latin America Burkenroad Reports are financial analysis of companies listed in the Mexican Stock Exchange, and capital budgeting of medium and small companies. They are elaborated by students of the Bachelor of Financial Management and Accounting & Finance, under the supervision of professors from

the Accounting and Finance Department of ITESM, Monterrey Campus. The ITESM, Instituto de Estudios Superiores de Administración de Venezuela (IESA), and Universidad de los Andes from Colombia, along with Tulane University, started the Latin America Burkenroad Program with the support of Multilateral Investment Fund of the Interamerican Development Bank in 2001. Actually it has been expanded to other countries, to Guatemala by the Escuela Superior Politécnica Litoral, to Perú by the Universidad Catolica de Perú, to Colombia by the EAFIT, ICESI, and the Universidad Del Norte, as well as Argentina by the Universidad de Belgrano, and soon to Brazil and

Chile. This program enriches human capital by providing training in financial analysis techniques, and also intends to facilitate access of companies to financing sources by providing financial information to investors and financial institutions. The reports prepared by this program, evaluate financial conditions and investment opportunities in Latin American companies. Financial reports of listed companies are distributed to national and foreign

investors through publications and financial information systems such as Infosel Financiero and Finsat, among others. Investment capital budgeting reports are distributed only to beneficiary companies for future private presentations to financial institutions or potential investors. Investment plans and financial situation, of the analyzed companies are presented to the financial community in an Annual Meeting.

For more information about the Burkenroad Latin America Program please visit the following websites:

http://burkenroad.mty.itesm.mx

www.latinburkenroad.com

María Concepción del Alto Ph.D. [email protected] Research Director

Burkenroad Reports, Mexico Departamento Académico de Contabilidad y Finanzas

Escuela de Negocios, Ciencias Sociales y Humanidades ITESM, Campus Monterrey

Tel +52(81)83582000 ext. 4331

http://burkenroad.mty.itesm.mx/

http://www.latinburkenroad.com/

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