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INTELIGO SAB
PERU: 201PERU: 201PERU: 201PERU: 2014444 OUTLOOK AND OUTLOOK AND OUTLOOK AND OUTLOOK AND
STRATEGYSTRATEGYSTRATEGYSTRATEGY
SUMMARY • We expect Peru’s GDP to grow 5.5% in 2014. In contrast to last year, the “Mining” activity would
lead the way buoyed by the higher copper output. The “Manufacturing” sector, especially the non-primary segment, is also expected to pick up. Meanwhile, the “Construction” sector should slightly ease, while “Commerce” and “Service” will remain strong.
• The Consumer Price Index (CPI) will remain within the Central Bank’s target band (2.0% +/-1.0%) during 2014, in a context in which imported inflation will remain subdued.
• The better prospects for the US economy this year will continue to spur the demand for dollars from institutional investors. Moreover, the expectations around US tapering effects will continue to hit the PEN performance. Nevertheless, the BCRP will maintain an active participation in the FX market in order to limit a further depreciation of the local currency.
• The government will post a fiscal surplus of 0.1% of GDP. The fiscal expenditures will climb, as the expansionary stance of the government will spur both current and capital expenses. As per the external sector, we foresee a 4.9% of GDP Current Account deficit for 2014. We forecast a bounce back in exports (+6.0%); however, this will not be sufficient to reduce the current account gap.
• Inteligo’s sample net earnings will grow 8.9% in 2014, after decreasing 20.5% in 2013. The Fishing sector (+126.3%) will lead the earnings growth, as Exalmar’s net result will experience a strong bounce back on higher fishing quotas. The Banking sector’s net income (+31.0%) will be supported by their loan portfolio growth, in a context in which the BCRP may continue to use monetary tools in order to boost the system’s liquidity. Likewise, the Construction sector (+31.7%) will gain ground, benefited by the dynamism in local activity, which will continue boosting revenues. Moreover, we believe that the solid performance of private consumption will back the Consumer Goods sector’s earnings (+20.3%). Regarding the Electric Utilities sector (+7.5%), we expect Enersur to outperform this year. On the other hand, the Mining sector’s net income (-2.8%) will remain lagged, mainly due to lower precious metal prices. Finally, the Oil & Gas (n.m,) and Agriculture (n.m.) would be the worst performing sectors in 2014 in terms of earnings.
• The LSE Selective index should increase 18.0% in 2014 in dollar terms (please note that this estimate already includes the YTD return of 6.0% in the ISBVL). In our opinion, investors will recognize that the strong fundamentals and good outlook of local activity should be reflected in the value of the equity market. Nonetheless, we also consider that investors will be selective and will make a very careful stock-picking. In this sense, we remain committed to long positions in domestic demand related shares, as they offer favorable prospects and attractive valuations. We remain cautious in the Mining sector, especially in those companies producing precious metals. However, we believe that Milpo and Volcan are companies with interesting prospects and projects. All in all, considering our recommended balanced portfolio, our top picks are Credicorp, Unacem, Continental, Enersur, Graña y Montero and Milpo. As per the MILA market, Banco de Chile, Censosud and Falabella in Chile as well as Grupo Argos, Grupo Sura and Davivienda in Colombia are part of our MILA portfolio.
• In 2014, the sovereign curve will continue to shift upwards, although with different behaviors by segment. In the short end we expect a lower volatility since the strategy of reducing duration and the significant presence of off-shore investors would limit upward pressures. In the middle segment, we believe that the liquidity of some papers and the appeal for the yields should open trading opportunities. Finally, the bonds at the long end will be most sensitive to interest rate changes.
• We expect the FED to keep its key interest rate on hold, as the US economy would regain momentum and the global economy recovers. Therefore, the Treasury yield curve will steepen from current levels; however, the shift will not be as drastic as it happened in 2013. In this scenario, we anticipate the 10-year U.S. Treasury yield to end the year at 3.40%. Regarding Peru’s sovereign spread, we project a 12-month SSOT of 130bps.
January 21, 2014 INTELIGO RESEARCH TEAM: INTELIGO.RESEARCH@INTELIGOGROUP.COM
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TABLE OF CONTENTS
Summary
Macroeconomics .............................................................................................................................. 3
Overview ...................................................................................................................................... 3
Gross Domestic Product .............................................................................................................. 5
Inflation & FX Market ................................................................................................................... 7
Fiscal Balance ............................................................................................................................. 8
Current Account Balance ............................................................................................................. 9
Local Politics ..............................................................................................................................11
International Assumptions .........................................................................................................13
Metal Prices ....................................................................................................................................16
Precious Metals .........................................................................................................................16
Base Metals ...............................................................................................................................17
Financial Markets ...........................................................................................................................23
Lima Stock Exchange ................................................................................................................23
Fixed Income Market .................................................................................................................24
Sovereign Debt Market .......................................................................................................29
Equity Market .............................................................................................................................31
Valuation by Sector .............................................................................................................34
Mining ...........................................................................................................................35
Construction ..................................................................................................................51
Consumer Goods ..........................................................................................................59
Electric Utilities ..............................................................................................................61
Oil & Gas .......................................................................................................................69
Banking .........................................................................................................................71
Fishing ..........................................................................................................................75
Agriculture .....................................................................................................................77
Revenues: CAGR by Sector ...............................................................................................80
EBITDA: CAGR by Sector ..................................................................................................81
Multiples Analysis................................................................................................................82
Recommended Portfolios ....................................................................................................89
MILA Market ....................................................................................................................................90
Common Market ........................................................................................................................90
Performance by Individual Market .............................................................................................91
Chile ....................................................................................................................................91
Colombia .............................................................................................................................92
Valuation ....................................................................................................................................93
Chile ....................................................................................................................................93
Colombia .............................................................................................................................94
Focus List and MILA recommended portfolio ............................................................................95
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January 21, 2014
MACROECONOMICS
OVERVIEW • The Peruvian economy exhibited a slowdown in 2013, closing the year with a real GDP growth of
5.0% (below the 6.3% registered in 2012). Unlike the previous two years, both Inteligo and market consensus expected a better growth figure in 2013 (around 6.0%-6.3%); however, we had to revised downwards our estimate during the year, affected by the decline of business and household confidence indices, as well as the contraction observed in exports, mainly due to the moderation of the Chinese economy. The domestic demand lost momentum due to the lower-than-expected private consumption growth (from 5.8% to 5.3%) and the drastic adjustment in private investment (from 13.5% to 4.3%). However, public investment continued to post a robust expansion (+18.5%), boosted by the increase in regional and local government spending. Likewise, public consumption remained at good levels (+5.5%), as the increase of salaries to public employees came into force. Furthermore, it is important to note that the economic activity started to show a gradual recovery since October, in line with the favorable progress on most of the leading indicators, especially those related to consumer and business expectations.
• On the supply side, the non-primary activities slowed (from 7.0% to 5.2%), reflecting the deceleration of domestic demand. Despite this, the economic activity demonstrated some resilience to negative external shocks, supported by the solid fundamentals of Peruvian economy, such as the consolidation of middle class and the sophistication of large companies in terms of productivity. In this context, the “Construction” activity (+9.0%) led the way, though down from the two-digit the sector showed in 2012 (+15.1%). The cement consumption, as well as the greater development of public projects continued to support the activity throughout the year. In the same way, the “Services” (+5.7%) and “Commerce” (+5.7%) sectors climbed, boosted by the higher dynamism within the financial and insurance subsector (+8.9%) and the excellent performance on wholesale (+5.4%) and retail sales (+6.6%). Likewise, the “Electricity and Water” sector (+5.7%) surged on higher thermoelectric output from the Chilca cluster. Lastly, the “Manufacturing” (+1.7%) managed to end up given that the industrial production showed some signs of recovery in IIH13. Meanwhile, the primary activities also advanced over the year, albeit at a modest pace than expected. Certainly, the external demand remained subdued, leading the “Mining, Oil & Gas” (+2.9%) and “Agro” (+2.6%) to exhibit a very weak expansion. The former group jumped, following the higher production in copper (+7.3%), zinc (+4.9%), lead (+4.8%) and silver (+3.9%), which offset the decline in tin (-10.7%) and gold (-6.5%). Similarly, the “Agro” sector gained ground due to the higher production in the “Agriculture” (rice and fruits) and “Livestock” (poultry) sub-sectors. Finally, the “Fishing” (+6.9%) activity registered a positive gauge on the back of the higher human consumption and the increase in the elaboration of frozen seafood products.
• The inflation rate reached 2.86% in 2013, remaining within the central bank’s target range (1.0%-
3.0%). During the year, the annual inflation fluctuated around 3.0%, standing temporarily above (July and August) the upper level of the BCRP’s band, as a consequence of several supply shocks that exerted upward pressures over food inflation (fruits, vegetables, fish and seafood), as well as isolated cases (higher educational fees) and unique seasonal effects. In this sense, the “Housing Rent, Fuels & Electricity” (+4.4%) group led the advance, basically due to the increase in fuel oil and natural gas prices for households. Additionally, residential electricity tariffs were adjusted upwards according to the annual revision of prices. The “Healthcare” (+4.3%) group escalated, backed by the greater medical services prices and the increase in pharmaceutical and medical products. In the same matter, the “Transport & Communications” (+3.4%) group was fueled by the higher bus fares and aircraft tickets, especially on holiday season. Finally, the “Dress & Footwear” (+2.4%), “Food & Beverages” (+2.2%), “Furniture & Home Maintenance” (+2.1%) and “Others” (+1.9%) groups closed on positive ground.
• On the monetary front, after more than 30 months of holding a neutral stance, the Peruvian
Central Bank (BCRP) reduced its benchmark rate by 25bps (from 4.25% to 4.00%) on its November meeting, surprising market expectations. According to BCRP, the leading indicators weakness of local and the contraction in exports given the economic slowdown of our main business partners and the lower export prices guided the decision. Regarding other monetary policy measures, we saw a central bank with two different behaviour patterns during the year.
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First, the monetary authority continued to hike the reserve requirement rates in Soles and US dollars during the first months of the year, in order to contain credit growth and rein in speculative action of non-resident investors in the FX market. Nevertheless, since IIH13 the BCRP started to reduce its reserve requirements rates, especially in Soles with the purpose to prevent a further slowdown of local activity. At the end of December, the BCRP raised the limit of investments abroad of Private Pension Funds from 36% to 40%, under a gradual increase schedule. It is worth to highlight that Drago Kisic, Gustavo Yamada and Francisco Gonzalez Garcia were appointed as Directors of the BCRP in December. With them, now the Board is complete after more than two years.
• Regarding the FX market, the Peruvian Nuevo Sol depreciated 9.6% against the US Dollar in
2013. During the first four months of the year, the local currency climbed from 2.53 to 2.59. The measures adopted by the BCRP in terms of reserve requirements and the increase of the Pension Fund’s foreign investment limit (from 30% to 36%) triggered this modest depreciation of the Nuevo Sol. Then, speculations around potential acquisition of Refineria La Pampilla by the Peruvian government coupled with expectations of a reduction of the FED’s QE3 exacerbated the pressures over local currency, leading the FX rate to stand above PEN 2.80, its highest level since May 2011. This sudden situation affected most of the companies on the LSE that have liabilities in Dollars or issued debt in this currency, which ultimately hit the companies’ bottom line. In this scenario, the BCRP took an active role in the spot market that successfully stabilized the FX rate between 2.79 and 2.82. Thus, the BCRP sold near to $5.0bln in IIH13 (even though on a YTD basis the BCRP ended as net buyer) and placed USD 3.8bln in adjustable certificate of deposits (CDR) throughout the year. As a result, the PEN closed at 2.80.
• Peruvian exports posted a decline in 2013 (-6.5%) for the second consecutive year, affected by
the lower terms of trade and the lower-than-expected economic growth of our trade partners. The slowdown in global economy took a toll on sales volume in traditional exports (fishmeal, gold and copper) and non-traditional exports (textiles). In both cases exports ended down, but with a sharper drop in traditional exports (-10.1%) than non-traditional exports (-3.0%). In contrast, imports (+4.6%) continued to be supported by the domestic demand dynamism. The consumer goods and capital orders outperformed. As a result, the trade balance posted a deficit ($331m). For the first time since 2001. Furthermore, the outflows for investment income (-10.7%) remained at high levels although the above account contracted on a YoY basis, leading the Current Account Balance to end the year reporting a 4.9% of GDP deficit. In the Fiscal Sector, current revenues rose 3.6%, supported by the higher tax revenues (+2.9%). The higher VAT collection (+4.8%) coupled with the increase in other taxes group (+24.0%) offset the lower income tax collection (-5.1%). During the year, the “Mining” sector reduced its share within income tax collection, due to the lower metal prices that severely hit the companies’ financial performance. The “Services” and “Commerce” sectors are now the main contributors in terms of income tax revenues. Meanwhile, the fiscal expenditures climbed 9.2%, in line with the measures implemented by the government at the end of the year (2012) that benefited doctors, policemen and military. In the same way, capital expenditures (+17.6%) continued to register a strong advance, as a result of the greater investments of regional governments. All in all, the government posted a fiscal surplus of 0.7% of GDP in 2013.
• In 2014, we expect the Peruvian economy to show a better performance, following the recovery of
global economy. The domestic demand will continue to be supported by the dynamism of private activity, as the bounce back in business confidence in IVQ13 should boost private investment during 2014. According to our estimates, the private consumption will remain relatively flat (+5.3%). Private investment will accelerate its expansion rate (+6.0% vs. +4.3% in 2013), but it will remain below the last four years (+12.9%). On the other hand, public investment will remain in high levels, especially after the government took several measures to improve efficiency in the investment execution, as well as to mitigate existing bureaucratic barriers. On the supply side, we anticipate that “Manufacturing” and “Mining” sectors should pick up amid a better context in the global scenario, propelled by the strong private consumption and the stabilization of the Chinese economy. Consequently, both traditional and non-traditional exports would rebound. In fact, the exports growth rate would exceed the growth rate of the economy. In terms of monetary policy, the BCRP will continue to use the reserve requirements as its main tool, monitoring the economic data very close. In our baseline scenario, we foresee central bank to keep unchanged the reference
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January 21, 2014
rate at 4.0%, considering only reducing it if the economic environment worsens. Finally, the government’s capacity to resolve current social demands (security, education and public health service) coupled with the political response of Humala’s administration to generate the right signs in terms of creating a stable local investment environment will continue to weigh on business expectations.
GROSS DOMESTIC PRODUCT • We estimate that Peru’s GDP will grow 5.5% in 2014. In contrast to the previous year, we expect
the “Mining” activity to lead the way. “Construction” sector should slightly ease, while “Commerce” and “Service” will remain strong. “Manufacturing”, especially the non-primary segment is also expected to pick up.
• Agro: The “Agro” sector production will maintain the upward trend observed over the past four years. The performance of the “Agriculture” sub-sector will find support on the recovery of global demand. In this regard, the rice, cassava, potato and banana will be the main agriculture products that should rise up in terms of production. In addition, we expect the owners of coffee plantations to apply sanitary measures to avoid production losses of last year. As per “Livestock” sub-sector, the demand for poultry will remain at high levels, especially in Lima. In this context, considering a normalization of weather conditions, the “Agro” sector should grow 4.1%.
• Fishing: The “Fishing” sector will exhibit a better performance in 2014, after the Ministry of
Production (PRODUCE) established a higher anchovy quota for the second season of last year (November 2013 to January 2014). This higher quota will increase fishmeal and fish oil output in IH14. Likewise, the strong human consumption coupled with the growing demand for frozen products should provide support to the sector by the second half of the year. Thus, the “Fishing” sector will climb 6.8%.
• Mining & Hydrocarbons: The “Mining” sub-sector will be the stellar activity in 2014, as the
copper production will expand significantly, backed by the entry of commercial operations of Toromocho (Chinalco) and Constancia (Hudbay). We also believe that the stabilization in the Chinese economy will provide some support for the production of industrial metals. In the same line, the “Oil & Gas” industry will accelerate its growth pace, due to the beginning of operation of Lote 67 (Loreto), as well as the higher production of natural gas liquids. All in all, we foresee that “Mining & Hydrocarbons” sector will report a 8.3% growth.
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
-18.0%
-12.0%
-6.0%
0.0%
6.0%
12.0%
18.0%
24.0%
30.0%
36.0%
2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e
Pub. Inv.Domestic Demand Components
Private Consumption Private Investment Public Consumption
Public Investment Domestic Demand
Source: BCRP and Inteligo's estimates
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January 21, 2014
• Manufacturing: After a weak performance in 2013, the Manufacturing sector will experience a strong rebound this year, boosted by the gradual recovery of foreign demand, especially related to non-primary products. The expected acceleration of the US economy, our second trade partner, and the still high economic growth of China will support the primary industry. In the same way, domestic demand should play an important role for non-primary products, as the middle class increases its consumption. Overall, we expect the “Manufacturing” sector to grow 4.0% in 2014, up from 1.7% in 2013.
• Construction: The “Construction” sector will continue to outperform in terms of growth, albeit
registering some moderation in comparison with 2012 and 2013. The real estate market will soft this year, as the sale of new homes and corporate offices rents within the high income segment has already begun to cool since IIIQ13. Nonetheless, the dynamism in the development of housing projects in the middle segment will remain, providing support to the sector. Moreover, the building of new malls outside Lima and the execution of important public projects, such as Via Parque Rimac, Metropolitano Tramo 2 (Linea 1), Linea 2 y Ramal Av. Faucett – Av. Gambetta, Chavimochic and Tramo 2: Longitudinal de la Sierra (Cajamarca & La Libertad) will continue to underpin the cement and steel production. In this scenario, we foresee the “Construction” sector will grow 8.1% in 2014.
• Commerce: We forecast that the “Commerce” sector will grow 6.0%. As we stated before, the
soundness of personnel consumption would have an impact in the wholesale and retail sales throughout the year. The massive consumption industry will contribute to the sector’s growth, following the aggressive plans of some companies, such as the Chilean Cencosud and Falabella and the Peruvian Inretail, among other malls operators. Furthermore, durable goods sales, especially of new vehicles, will also spur the sector performance.
• Services: The “Services” sector growth will jump in 2014. The “Financial & Insurance” industry will
advance at a higher pace than in 2013, due to the measures adopted by the BCRP (lower reserve requirements). Also, the “Transport & Communication” activity should maintain the same dynamism exhibited last year. Meanwhile, the “Tourism” industry will jump, supported by higher income of households, allowing an increase in inbound tourism. According to our estimates, the “Services” sector will grow 5.8%.
• Electricity & Water: We believe the “Electricity & Water” sector will rise 5.4% in 2014. Electric
Utilities will be boosted by the higher production of “Mining” and “Manufacturing” activities. Similarly, the entry of operations of several hydroelectric projects to the SEIN will contribute to increase the total energy production. Meanwhile, the “Water” sub-sector will continue to be benefited by the expansion and improvement of the potable water network.
Sector 2011 2012 2013e 2014e 2015e
Agro +3.8% +5.7% +2.6% +4.1% +4.0%
Fishing +29.7% -11.7% +6.9% +6.8% +3.3%
Mining & Hydrocarbons -0.2% +2.2% +2.9% +8.3% +11.5%
Manufacturing +5.6% +1.5% +1.7% +4.0% +4.5%
Construction +3.4% +15.1% +9.0% +8.1% +8.0%
Commerce +8.8% +6.7% +5.7% +6.0% +6.0%
Services +8.3% +7.1% +5.8% +5.8% +6.0%
Electricity & Water +7.4% +5.2% +5.7% +5.4% +6.1%
Other taxes +7.1% +6.5% +3.4% +3.6% +3.6%
GDP +6.9% +6.3% +5.0% +5.5% +5.8%
Source: INEI, BCRP and Inteligo 's estimates
GDP Growth - by sectors
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INFLATION & FX MARKET • We expect the Consumer Price Index to remain within the Central Bank’s target band (+2.0% +/-
1.0%) towards the end of 2014. According to our estimates, the inflation will continue to fluctuate very close to the upper limit of the band (3.0%) in coming months and stabilize starting in IIH14. Food prices should maintain a stable behaviour; amid favorable weather conditions. Furthermore, the “imported inflation” will carry on a downward trend, especially in food commodities. In the meantime, oil prices should remain subdued, as the recovery of global economy slowly takes place through the year. Even though we anticipate a slight rebound for Peruvian economy in terms of growth, the fact that it would remain below its potential GDP level (+6.0%) should reduce the upward pressures over the CPI, especially in an environment of expectations anchored to the central bank's target. In this scenario, we expect the Peruvian Central Bank to keep on hold its benchmark interest rate. Nonetheless, in our opinion, the BCRP has some leeway to reduce reserve requirement in case activity cools. All in all, we are projecting a yearend inflation rate of 2.6% for 2014.
• We foresee that the PEN/USD will end the year at 2.85 (+1.9%). The better prospects for the US economy this year will continue to spur the demand for dollars from institutional investors. Moreover, the expectations around US tapering effects will continue to pressure up the Nuevo Sol. Despite investors have already interiorized this event, we could observe some volatility in the FX-market, especially during the IH14. Also, the BCRP measure to increase gradually Pension Funds’ foreign investment limit points to the same direction. Nevertheless, we deem that the central bank will maintain its active role in both the spot market and through the placement of CDR, partially mitigating the depreciation of PEN. Additionally, the fundamentals of Peruvian economy in tandem with the recovery of exports should prevent a further PEN depreciation.
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
IVQ10 IIQ11 IVQ11 IIQ12 IVQ12 IIQ13 IVQ13 IIQ14EIVQ14E
GDP Quarterly Growth
Source: BCRP and Inteligo's estimates
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
De
c-0
9
Ma
r-1
0
Jun
-10
Se
p-1
0
De
c-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
De
c-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
De
c-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
De
c-1
3
Ma
r-1
4
Jun
-14
Se
p-1
4
De
c-1
4
YoY Inflation
Source: BCRP , INEI and Inteligo's estimates.
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January 21, 2014
2.9%2.4%
-1.3%
-0.2%
2.0% 2.1%
0.7%
0.1% 0.1%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2007 2008 2009 2010 2011 2012 2013e 2014e 2015e
Fiscal Balance (% of GDP)
Source: BCRP and Inteligo's estimates
2009 2010 2011 2012 2013 2014e
FX (end of period) 2.890 2.808 2.695 2.551 2.796 2.850
% -8.0% -2.8% -4.0% -5.4% 9.6% 1.9%
FX (average) 3.012 2.826 2.754 2.637 2.704 2.836
% 2.9% -6.2% -2.6% -4.2% 2.6% 4.8%
Source: BCRP and Inteligo 's estimates.
Peruvian Nuevo Sol Performance (PEN/USD)
FISCAL BALANCE • According to our projections, fiscal revenues will increase by 5.3% on a YoY basis in 2014. The
increase in tax revenues will guide the advance, mainly supported by the recovery of income tax collection, especially from domestic demand related activities and a mild recovery from mining companies. The VAT collection will continue to outperform as SUNAT measures to force payments will continue. In addition, the resilience of private consumption will also push up VAT revenues. In this scenario, the tax pressure index would be at the same level of 2013 (16.4% of GDP). Meanwhile, fiscal expenditures will climb, as the expansionary stance of the government will spur both current expenses (+13.9%) and capital expenses (+6.0%). Moreover, the investment in regional and local governments will post similar growth figures in 2014. In this context, we expect government to post a fiscal surplus of 0.1% of GDP.
• In 2014, the government will continue to issue debt instruments in order to improve further the country’s debt profile and extend the average maturity of the debt. The placements would be concentrated on the sovereign bond market and small amounts in Treasury Bills, as the government seeks to continue to increase its exposure to the local currency (the share of debt denominated in Nuevos Soles has climbed from 14.9% in 2002 to 47.0% in 2013). Nevertheless, the higher stock of debt will be offset not only by the higher economic activity but also by the higher deposits from the public sector. In this sense, gross and net debt in terms of GDP will continue to decrease. According to our projections, the Gross Public Debt / GDP ratio will decline from 18.1% in 2013 to 17.4% in 2014. The net public debt would stand around 2.0% of GDP.
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CURRENT ACCOUNT BALANCE • We forecast a 4.9% of GDP Current Account deficit for 2014, the same gauge observed in
2013, as trade surplus will show only a mild recovery. Even though we foresee a bounce back in exports (+6.0%), this will not be sufficient to reduce the current account deficit. The better performance of developed countries would bring some improvement, albeit this will be moderated. The imports will increase 5.0%, backed by the domestic demand momentum and the higher demand for capital goods. As a result, the trade balance will register a mild surplus (USD 79m). On the other hand, we expect a higher investment income deficit, mainly due to the higher earnings generated in the country by non-resident companies, leading the current account deficit from $10.3bln to $10.7bln.
0.1%
-1.7% -1.9%
-3.6%
-4.9% -4.9%
-4.2%
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
2009 2010 2011 2012 2013e 2014e 2015e
Current Account Balance (% of GDP)
Source: BCRP and Inteligo's estimates
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January 21, 2014
Peru, January 2014 2009 2010 2011 2012 2013E 2014E 2015E
GDP Grow th (%) 0.9 8.8 6.9 6.3 5.1 5.5 5.8
Domestic Demand growth (%) -2.8 13.1 7.2 7.4 5.8 5.6 5.7
Gross Fixed Investment Growth (%) -9.2 23.2 5.1 14.9 6.9 8.1 7.8
Nominal GDP (Billion USD) 127.2 153.9 176.8 199.8 207.7 216.1 231.5
per Capita GDP (thousand USD) 4.4 5.2 5.9 6.6 6.8 7.0 7.4
Foreign Direct investment - FDI (Billion USD) 6.0 8.2 8.2 12.2 11.2 9.9 9.4
% Annual Growth -2.7 36.0 0.5 48.2 -8.2 -11.6 -5.1
Foreign Exchange (EOY) 2.890 2.808 2.695 2.551 2.796 2.850 2.900
Depreciation rate -8.0 -2.8 -4.0 -5.4 9.6 1.9 1.8
Consumer Price Index (CPI) (% ) 0.2 2.1 4.7 2.7 2.9 2.6 2.8
Total Public Sector Result (% GDP) -1.3 -0.2 2.0 2.1 0.7 0.1 0.1
Foreign Reserves (Billion USD) 33.1 44.1 48.8 64.0 66.9 66.8 66.9
Total Public Debt (% GDP) 26.1 22.3 20.7 19.8 18.1 17.4 16.3
Current Account (% of GDP) 0.1 -1.7 -1.9 -3.6 -4.9 -4.9 -4.2
Trade Balance (Billion USD) 5.9 6.7 9.3 4.5 -0.3 0.1 1.7
% GDP 4.6 4.4 5.3 2.3 -0.2 0.0 0.7
Total Exports (Billion USD) 26.9 35.6 46.3 45.6 42.7 45.2 49.3
% Annual Growth -14.7 32.3 30.1 -1.4 -6.5 6.0 9.0
Total Imports (Billion USD) 21.0 28.8 37.0 41.1 43.0 45.2 47.6
% Annual Growth -26.1 37.1 28.3 11.2 4.6 5.0 5.5
Months of Imports (Reserves / Imports) 18.9 18.4 15.8 18.7 18.7 17.7 16.9
Source: BCRP, INEI & Inteligo 's estimates
Selected Macroeconomic Figures
INTELIGO SAB
11
January 21, 2014
LOCAL POLITICS • The political landscape for Humala’s government changed drastically in 2013, reaching the lowest
approval level (28% in October) since the beginning of its term of office. According to Datum International, the approval rating for Mr. Humala closed the 2013 at 30% in a context in which the Executive started to show signs of wear. Given this deterioration of confidence towards the government and the challenging global economic scenario in 2013, market agents reduced their expectations around the performance of local economy at the mid of the year.
• During the first half of the year, the main even that captured investors’ attention was the potential
acquisition of Refineria La Pampilla by the government. Although Mr. Humala pointed out that the government was evaluating the possibility to participate in a small share together with other private company in the acquisition process, the debate for itself raised concerns about a potential return to statist policies. It should be emphasized that despite Mr. Humala's pragmatic orientation to manage the economy for the last couple of years, a large part of citizens are still skeptics about its real idiosyncrasy. In that sense, the SNI (Sociedad Nacional de Industrias), prominent entrepreneurs and opposition leaders carried out a campaign against this purpose, which ultimately obligated the Executive to decline its participation in the bidding process.
• During the year, there were other situations that affected Humala’s political capital: (i) Rumors
around a future participation of Nadine Heredia in the upcoming 2016 presidential elections, (ii) unsuccessful appointment of the ombudsman, BCRP directors and members of the Constitutional Court, (iii) Toledo’s scandal for Ecoteva case (major political ally), (iv) Cabinet reshuffle (Cesar Villanueva in place of Juan Jimenez) and (v) Cesar Meneses scandal (former member of Montesinos’s intelligence team). All these facts created the environment exacerbated the fall of Humala’s approval, especially after he also fought with the major political forces of opposition, APRA and Fuerza Popular. The first was initiated because of the investigation conducted by the Congress over Alan Garcia’s past mandate; and the second for the Keiko Fujimori’s father pardon.
• On the social front, the worsening of social demands and the potential materialization of latent
conflicts, which have not changed substantially since our last review in June-13, could harm even more the execution of diverse investment projects, especially those related to the mining sector. Also, the lack of clarity in the implementation of the rules of the “Consulta Previa” law could aggravate the weak relationships with communities as happened with the Conga project. Thus, Humala’s administration must continue to enhance its ability to negotiate with communities and mining companies in order to find a solution that benefits both sides. Fortunately, the willingness to dialogue and the actions taken since 2012 aimed to that direction. As a result, the social environment related cases have decreased for the last months, as the department of social conflicts, in charge of Vladimiro Huaroc, began to have some success.
6.3%
6.6%6.5%
5.9%
4.6%
5.6%
4.4%
5.6%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
IQ12 IIQ12 IIIQ12 IVQ12 IQ13 IIQ13 IIIQ13 IVQ13e
Source: INEI
Peru's GDP performance (YoY)
58.0%
57.0%
52.0%
59.0%
54.0%
44.0%
39.0% 35.0%
31.0%
28.0%
33.0%
30.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Approval Rating for Ollanta Humala during 2013
Source: Datum
INTELIGO SAB
12
January 21, 2014
20.0
30.0
40.0
50.0
60.0
70.0
80.0
De
c-0
7
Ap
r-0
8
Au
g-0
8
De
c-0
8
Ap
r-0
9
Au
g-0
9
De
c-0
9
Ap
r-1
0
Au
g-1
0
De
c-1
0
Ap
r-1
1
Au
g-1
1
De
c-1
1
Ap
r-1
2
Au
g-1
2
De
c-1
2
Ap
r-1
3
Au
g-1
3
De
c-1
3
Source: BCRP & Apoyo Consultoría
Business and Consumer Confidence indices
Business Confidence (BCRP)
Consumer Confidence (Apoyo Consultoria)
Optimism
Pessimism
• In IVQ13, the consumer and business indices started to show some improvement, bringing a modest acceleration of local economy. Indeed, since September all the components of Apoyo Consultoria’s consumer index climbed, pointing out a better outlook for 2014. In our view, these indices should remain within the optimism zone, albeit not reaching the high levels registered in 2012. Given the moderation of economic growth figures for the upcoming years, and the weakness of Humala’s government, as population is requiring greater accountability and tangible results on the major issues that affect the country. However, we expect a calmer environment in the political arena, but with the risk to worsen if the government continues to make the same mistakes of the past year.
• For us, there are three main political events in 2014. First, the outcome of International Court of Justice, regarding the maritime dispute between Peru and Chile. We believe that, regardless the final result, the commercial relation between both countries will not be altered. Second, the potential changes in some government ministers, which may include the minister of Economic and Finance (Luis Miguel Castilla). If this happens, we anticipate that the new cabinet would not change the current economic orientation. Finally, the regional elections in October which could decide the future in some regions where the private investment is still perceived as a negative issue among population (such Cajamarca, Puno and Arequipa).
0
10
20
30
40
50
60
70
Prices Household Country Work Home
Consumer confidence index by components Apoyo Consultoria (bps)
September October November DecemberSource: Apoyo Consultoria
228
221
125
143
120
125
130
135
140
145
150
155
160
210
215
220
225
230
235
240
245
250
Jan
-12
Feb-1
2
Mar-
12
Ap
r-12
May-1
2
Jun
-12
Jul-
12
Aug
-12
Sep
-12
Oct-
12
No
v-1
2
Dec-1
2
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Evolution of Social Conflicts and Social-Enviroment related cases
Social Conflicts Social-Environment related cases
Source: Peruvian Ombudsman
INTELIGO SAB
13
January 21, 2014
INTERNATIONAL ASSUMPTIONS United States
• Private consumption will continue guiding the growth of activity in 2014, thanks to the combination of higher wealth effect, given the sustained recovery in the housing sector and to a lesser extent to the good performance of the stock market, and the increased income effect, as a result of the growing dynamism of employment. Moreover, the absence of a new round of tax increases ("fiscal cliff") frames a much more favorable scenario for household spending to continue to gain momentum. According to the last set of surveys to the corporate sector, private investment should pick up throughout the year. In fact, the CEOs of the leading firms in the country expect their CAPEX to increase 12% in the IH14, amid favorable financial conditions.
• On the monetary side, the FED will decrease its monthly purchases of Treasuries (from $45.0 to
$40.0bln) and MBS (from $40.0 to $35.0bln) starting in January 2014. Also, to the extent that macroeconomic conditions continue to improve, the FED would approve cuts in a similar way in each of its meetings in 2014, which implies that the QE3 would end by the end of this year. To sum up, 2014 should be a good year for the US. We expect that GDP will grow 2.6% and the unemployment rate will end the year around 6.5%, the lowest rate in the last six years.
Euro Zone
• After leaving the double-dip recession earlier than expected, the economy of the Euro area lost momentum again towards the end of the year, albeit remaining in positive territory. This dynamic of fragile and uneven recovery will remain throughout 2014, influenced by the still divergence between the various economies of the common area. Germany will continue to lead the recovery, supported by the domestic demand which in turn will be boosted by the advance in private investment. Meanwhile, France will remain relatively lagged, since the measures to relax and boost the labor market (unemployment rate of 11%) will begin to be tangible in 2015. Likewise, Italy and Spain will continue to struggle to stop the credit crunch, while Portugal would conclude three years of recession.
-400
-300
-200
-100
0
100
200
300
400
500
600
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
De
c-0
9
Mar-
10
Jun
-10
Sep
-10
De
c-1
0
Mar-
11
Jun
-11
Sep
-11
De
c-1
1
Mar-
12
Jun
-12
Sep
-12
De
c-1
2
Mar-
13
Jun
-13
Sep
-13
De
c-1
3
US Unemployment Performance
Non-Farm Payrolls Unemployment Rate
Source: Bloomberg
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
120
135
150
165
180
195
210
Oct-
07
Ap
r-08
Oct-
08
Ap
r-09
Oct-
09
Ap
r-10
Oct-
10
Ap
r-11
Oct-
11
Ap
r-12
Oct-
12
Ap
r-13
Oct-
13
Foreclosure FilingsIndex
US Real Estate
US Home Foreclosure Filings total S&P Case-Shiller price index
Source: Bloomberg
INTELIGO SAB
14
January 21, 2014
• In terms of monetary policy, the low inflation (less than 1.0%) that is accompanying the still mild
recovery would force the ECB to inject more liquidity into the market, choosing between the conventional (benchmark rate at 0%), the heterodox (negative deposit rates), or the unconventional (new round of LTRO's). In any case, the goal is the same: to provide support for the recovery and eliminate deflation risks.
Japan
• The measures implemented by Prime Minister Abe will continue to have a direct effect on activity in 2014, mostly through private investment. Moreover, consumption will be driven by higher wages in a context in which the job-to-application ratio is at a maximum of five years. This would offset to some extent the impact of the hike in the VAT (from 5% to 8%), which will come into force on April 1. With the increase in the sales tax, inflation would jump in 2014, reaching 2.6% at the end of the year, an unexpected figure for Japan's economy. However, the BoJ will continue to expand its balance sheet through a major purchase of assets in order to keep inflation above 2.00% beyond 2014. With almost conflicting monetary policies (the BoJ increasing stimulus vs. the FED removing its QE3), the Yen would continue to lose value against the dollar, which fits perfectly into Abe’s plan to maintain the Yen cheap. This will support the export sector, but also pushing the CPI up.
25
30
35
40
45
50
55
60
65
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
PMI: Main Euro zone Economies
Euro zone Germany Italy France
Expansionzone
Contractionzone
Source: Bloomberg
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
3.00
3.50
4.00
4.50
5.00
5.50
6.00
Fe
b-0
8
Ma
y-0
8
Au
g-0
8
No
v-0
8
Fe
b-0
9
Ma
y-0
9
Au
g-0
9
No
v-0
9
Fe
b-1
0
Ma
y-1
0
Au
g-1
0
No
v-1
0
Fe
b-1
1
Ma
y-1
1
Au
g-1
1
No
v-1
1
Fe
b-1
2
Ma
y-1
2
Au
g-1
2
No
v-1
2
Fe
b-1
3
Ma
y-1
3
Au
g-1
3
No
v-1
3
Labor Market (Japan)
Unemployment Rate (%) Jobs-to-Applicants Ratio
Source: Bloomberg
-3.00
-2.00
-1.00
0.00
1.00
2.00
Ma
r-0
8
Jun
-08
Se
p-0
8
De
c-0
8
Ma
r-0
9
Jun
-09
Se
p-0
9
De
c-0
9
Ma
r-1
0
Jun
-10
Se
p-1
0
De
c-1
0
Ma
r-1
1
Jun
-11
Se
p-1
1
De
c-1
1
Ma
r-1
2
Jun
-12
Se
p-1
2
De
c-1
2
Ma
r-1
3
Jun
-13
Se
p-1
3
De
c-1
3
YoY Inflation (Japan)
Source: Bloomberg
0
5
10
15
20
25
30
35
40
0
2
4
6
8
10
12
14
16
18
Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13
10-year Bond Yields
Spain
Italy
Portugal
Greece
Source: Bloomberg
INTELIGO SAB
15
January 21, 2014
China
• In IVQ13, China moderated its pace of growth with respect to IIIQ13, as the sharp rise in the interbank rate in June had a delayed effect on aggregate demand. The manufacturing PMI indicator has remained relatively stable although only slightly above the 50 level. As per inflation, the CPI has also retreated in November thanks to a moderation in food prices, however, prices in the real estate sector continued to surge. For 2014, the economy is expected to maintain a growth rate very close to government’s objective, closing the year with growth of 7.3%, a slight slowdown compared to 2013 (7.6%) since the People's Bank of China will continue to take action to prevent further escalation in housing prices. It should be noted that economic reforms unveiled in the last Congress of the Communist Party (November) seek a rebalancing of power between government and the market to guide the economy to a stable growth path. Although it is not known what reforms will be implemented in the short term or if some suffer opposition from interest groups, the market considers them as a key catalyst to ensure sustained growth over the long term.
Latin America • The beginning of the FED’s tapering along with the stabilization in the growth rate of China would
confirm the gradual recovery of the global economy, which will bring a moderate rebound in activity in Latin America. Though the major economies of the region have manageable external and fiscal balances (except Brazil which faces a more complicated scenario), the process of rising interest rates will impact financing costs for companies, and exert stress over local currencies. In terms of monetary policy, central banks still have room to further implement an expansionary stance, as being done by Mexico, Chile and Peru, with the exception of Brazil that it is facing high inflation.
• Peru and Chile will continue to lead growth in the region benefited by the dynamism of their domestic demand, while Venezuela and Argentina will remain lagged. Meanwhile, the rising costs of doing business in Brazil and the increased risk perception should keep the economy growing below its potential level for a while. In Mexico, the reforms approved by President Peña Nieto are going on the right direction to gain competitiveness, besides the economy is being driven by the recovery cycle in the U.S. All in all, Latin America would grow from 2.4% in 2013 to 2.9% in 2014.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Brazil Mexico Chile Colombia Peru
LatAm: Real GDP Growth (%)
2012 2013e 2014eSource: Bloomberg
38
40
42
44
46
48
50
52
54
56
58
60
Jun
-07
Dec-0
7
Jun
-08
Dec-0
8
Jun
-09
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
Dec-1
3
China's PMI Manufacturing
Source: Bloomberg
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Dec-0
9
Mar-
10
Jun
-10
Sep
-10
Dec-1
0
Mar-
11
Jun
-11
Sep
-11
Dec-1
1
Mar-
12
Jun
-12
Sep
-12
Dec-1
2
Mar-
13
Jun
-13
Sep
-13
Dec-1
3
LatAm: Reference Rate
Brazil Chile Colombia Peru
Source: Bloomberg
INTELIGO SAB
16
January 21, 2014
METAL PRICES
PRECIOUS METALS
• Last year revealed a change in investors’ mood and perspectives towards precious metals, in particular gold. In this sense, gold posted its first annual drop in 13 years mainly affected by i) a low global inflation environment, ii) increasing signals of moderate recovery in US, which led to a higher appetite for risky assets, iii) less concerns about a major crisis in Europe, and iv) expectations of a reduction in the pace of asset purchases by the FED, which actually materialized in December.
• Bernanke’s comments about a possible reduction in the pace of the QE3 program began in IIQ13 and certainly became investor’s focus for the rest of the year. With no inflationary pressures in the short term and the FED possibly reducing the size of the QE3, the expected pick-up in inflation was no longer a driver to support a strong demand for gold as a safe haven asset. Thereby, the result was seen in the sharp reduction in ETF holdings during 2013, to a level similar to that of 2009. Furthermore, the expectations around the tapering had an impact on the US Treasury yields, especially in the medium and long term rates since the outlook for the short term yields is different and dependent on the FED’s target fund rate which is expected to remain at a record low at least until 2015. Given the anticipated reduction in demand from the FED, yields rose, and due to the lack of inflationary pressures, real yields also jumped and increased the opportunity cost of holding gold.
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5600
800
1,000
1,200
1,400
1,600
1,800
2,000
2008 2009 2010 2011 2012 2013 2014
Gold Price & US Real Yield
Gold - left axis 10 year US real yield - right axis (inverted)
%$/troy oz
Source: Bloomberg
• Even when the FED did not start the tapering in
September, the reaction of gold was certainly muted and the price failed to sustain a strong upward trend; a signal that investors saw the FED’s move as a delay rather than a permanent halt. The beginning of the tapering was imminent and weighed on investors’ sentiment, despite the volatility induced by the debt ceiling debate and the partial government shutdown in October.
• Although the beginning of the tapering was likely to occur at any time, gold continued to react negatively to the release of further macroeconomic indicators that reinforced the view that the US economy was recovering. In fact, after the announcement on December 18
th,
the gold price plunged closer to $/oz 1,200 and traded around that level for the rest of the year. In addition, silver followed almost the same path as gold during the year despite the industrial uses of the former. As gold approached $/oz 1,200, silver moved towards $/oz 20.00
50,000
55,000
60,000
65,000
70,000
75,000
80,000
85,000
90,000J
an
-10
Ap
r-1
0
Jul-
10
Oc
t-1
0
Jan
-11
Ap
r-1
1
Jul-
11
Oc
t-1
1
Jan
-12
Ap
r-1
2
Jul-
12
Oc
t-1
2
Jan
-13
Ap
r-1
3
Jul-
13
Oc
t-1
3
Jan
-14
000 troy ouncesETFs Gold holdings
Source: Bloomberg
10.00
20.00
30.00
40.00
50.00
60.00
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan
-11
Mar-
11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May
-12
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May
-13
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Precious metals performance
Gold ($/oz) - left axis Silver ($/oz) - right axis
Source: Bloomberg
INTELIGO SAB
17
January 21, 2014
• On the physical front, Chinese gold demand picked up to take advantage of falling prices; nevertheless, this effect was somewhat countered by the easing of Indian demand in response to the measures outlined by the government to restrict gold imports. In fact, according to data from the World Gold Council, China surpassed India as the largest consumer of gold for jewelry purposes in IIIQ13. Despite the strength in Chinese physical demand, the overall pessimistic mood for holding gold as an alternative investment prevailed during 2013 and was reflected in additional supply from investor liquidations.
Gold: supply/demand balance (MT)
2010 2011 2012 2013e 2014e
Supply
Mine production 2,739 2,839 2,864 2,930 2,903
Net producer hedging 0 11 0 0 24
Old gold scrap 1,768 1,649 1,591 1,348 1,159
Implied net disinvestment 0 0 0 338 184
Total supply 4,507 4,499 4,455 4,616 4,270
Demand
Fabrication (inc. jewelry) 2,787 2,760 2,613 3,012 3,070
Official sector purchases 77 457 544 351 275
Physical bar investment 886 1,186 945 1,203 925
Net producer de-hedging 106 0 40 50 0
Implied net investment 651 97 313 0 0
Total demand 4,507 4,499 4,455 4,616 4,270
Source: Thomson Reuters GFMS • In the short term, gold may find support from increased Chinese buying, as demand remains
sensitive to prices. However, the overall outlook for gold is not encouraging given the absence of important inflationary pressures and the better prospects for advanced economies, which should continue to attract investors’ attention towards equity markets. Moreover, despite that silver demand could find support on industrial consumption, the price may find it hard to dissociate from the negative sentiment around gold.
Precious Metals
Average Prices 2010 2011 2012 2013 2014e 2015e
Gold $/oz 1,227 1,573 1,669 1,409 1,240 1,200
Silver $/oz 20.24 35.32 31.16 23.81 20.50 21.00 BASE METALS
• Expectations around the tapering and concerns about Chinese growth drove the performance of
base metals throughout the year. After following a downward trend through May, prices have traded sideways, as investors began to focus on the timing of the tapering by the FED and on the release of activity indicators in China. Even though base metal prices followed a somewhat similar path during 2013, it is important to address market-specific factors ahead of 2014.
Copper:
• In 2013, global mine output increased following the start up of projects; nevertheless, this scenario
of higher supply was not directly reflected on the refined copper market amid problems in getting concentrates to market and smelter outages. For instance, Rio Tinto started operations of its Oyu Tolgoi mine in Mongolia by mid 2013, but was forced to stockpile concentrates at Chinese warehouses and at the mine itself given that Chinese smelters were having trouble negotiating import permits with customs officials. Moreover, in November, Glencore Xstrata announced that typhoon Haiyan had severely damaged its Pasar copper smelter in Philippines and that it would take at least four or six weeks to bring the plant back to normal operations. In this scenario,
INTELIGO SAB
18
January 21, 2014
inventories monitored by the London Metal Exchange posted a sharp decline, reflecting the tightness on the refined stage and providing support to the copper price. Nevertheless, it is worth to mention that part of this decline in inventories may not actually reflect higher consumption given that some of these stocks have probably shifted into Chinese off-exchange warehouses.
0
100
200
300
400
500
600
700
800
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May-1
3
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
00
0 to
nn
es
US
$/lb
CopperLME Stocks Spot Price
Source: Bloomberg
• According to the International Copper Study Group, strong growth in mine production is
anticipated to continue in 2014 and 2015, as certain projects that have been delayed during the financial crisis begin operations. In fact, the start of operations of Toromocho, the expansion at Southern Copper’s Buenavista in Mexico and the expansion at Cerro Verde are examples of additional copper output during the forecast period. Furthermore, the flow of mine output from concentrates into refined metal should improve next year as smelter expansions in China that have started operations later in 2013 pick up and output at existing plants recovers. In this context, the refined market surplus should widen in coming years, setting downward pressures on the copper price. Nevertheless, looking further ahead, after the current wave of additional production comes into the market and demand regains momentum, in line with the improvement in global economic growth, the copper market could eventually tighten again, especially if the downward price trend materializes and reduces the appeal of new projects.
Copper: supply/demand balance (000 MT)
2010 2011 2012 2013e 2014e
Global production 19,003 19,598 20,048 20,730 21,855
Global consumption 19,127 19,736 19,827 20,554 21,410
Metal balance -124 -138 221 176 445
Source: Thomson Reuters GFM S- December 2013
• All in all, taking into account the expected improvement in refined copper supply, which should translate into a higher surplus, the copper price profile shows a downward trend.
Lead:
• The outlook for lead points to a tightening in the global supply/demand balance in coming years
which would end up in deficit. Nevertheless, there is no consensus on when this tightening will begin, as the International Lead and Zinc Study Group (ILZSG) expects it to start as early as this year and others in 2015. In any case, demand from the auto sector is expected to remain sound in 2014, backed by China and US. On the other hand, global production would increase at a lower rate given that environmental concerns are pushing companies to halt production.
31%
25%17%
12%
10%
5%
Copper: Consumption by sector
Electrical/Electronic
Construction
Consumer & General
Transport
Industrial Machinery
Other
Source: LME
INTELIGO SAB
19
January 21, 2014
0
100
200
300
400
500
600
1,000
1,500
2,000
2,500
3,000
3,500
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May-1
3
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
00
0 to
nn
es
US
$/M
T
Lead
LME Stocks Spot Price
Source: Bloomberg
• For instance, on December 31st 2013, Doe Run closed its primary lead smelter Herculaneum in
US. The closure was due to a settlement that the company signed with the US Environmental Protection Agency in 2010. According to Doe Run, the company spent millions of dollars in environmental improvement; however, further upgrades to the smelter in order to meet increasing environmental regulations were no longer economically feasible. Herculaneum was the last primary lead smelter in US and its closure means that now the country only has secondary smelters (recycling facilities). Another company that was at risk of closure is Exide Technologies, which in April received an order to suspend operations at its Vernon secondary lead recycling facility amid allegations of contamination. Nevertheless, the company received in July a permit to remain open.
• On the other hand, the ILZSG anticipates higher output from Australia, Belgium and India. Regarding Peru, there is still some uncertainty about production in Doe Run’s La Oroya metallurgical complex. According to Doe Run, the zinc and lead circuits have resumed operations, while the copper circuit is still on hold, waiting the completion of the environmental requirements that would probably take a couple of years. Nonetheless, considering data from the Ministry of Energy and Mines, zinc output, which was restarted in 2012, has not reached historical levels and lead production only occurred in a couple of months in 2013. Some forecasts are counting on the restart of La Oroya and the ramp-up of projects in other countries to ease the closure of Herculaneum.
Lead: supply/demand balance (000 MT)
2010 2011 2012 2013e 2014e
Global production 9,777 10,455 10,841 11,065 11,504
Global consumption 9,797 10,152 10,649 11,035 11,553
Metal balance -20 303 192 30 -49
Source: Credit Suisse - January 2014
• As aforementioned, there is no agreement on when the market will fall into deficit (2014 or 2015) but the lead price would eventually find support on this increasing tightness. For this reason, the price vector shows an upward trend.
Zinc:
• Expectations of a supply tightening have surrounded the zinc market in the past years. Despite
that some mine closures have already materialized last year, the zinc market is expected to remain in surplus in the medium term, yet the surplus would trend lower, leading to tight refined market in the future. As in the case of lead, there is no consensus on the timing, with the more bullish views pointing between 2014 -2016 and others after 2019.
80%
20%
Lead: Consumption by sector
Battery uses
Others
Source: LME
INTELIGO SAB
20
January 21, 2014
Zinc: supply/demand balance (000 MT)
2010 2011 2012 2013e 2014e
Global production 12,883 13,121 12,607 13,126 13,650
Global consumption 12,640 12,748 12,350 13,003 13,587
Metal balance 243 373 257 123 63
Source: Thomson Reuters GFM S- December 2013
• In 2013 North American output suffered from the closure of two mines in Canada. Reserve depletion led Xstrata to close its Brunswick and Perseverance mines in IH13; however, the company recovered part of the lost output with operations in Australia. Indeed, the company has an additional expansion project at McArthur River that is expected to be commissioned in IH14. Looking ahead, another major closure in the pipeline is MMG’s Century (Zn/Pb) mine in Australia. According to MMG’s website, Century, which produces around 500,000 MT of zinc per year, is currently in a transition phase, as it prepares for the end of the open-cut zinc production and the closure of the open-pit by mid-2015 (previously expected by 2016). The company is looking for possible ways to replace part of the lost output at Century by targeting new deposits in Australia and evaluating smaller zinc/lead/silver targets on the Century mine. On the demand side, the US is expected to continue supporting demand for zinc in line with the recovery of the housing and auto sectors.
0
200
400
600
800
1,000
1,200
1,400
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May-1
3
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
00
0 M
T
US
$/M
T
Zinc
LME Stocks Spot price
Source: Bloomberg
• In this context, the zinc price could find support in a market that will gradually shift to a more
balanced stance in the upcoming years. Nevertheless, the presence of surplus may prevent prices from posting a sharp increase.
Tin:
• The performance of tin in 2013 was guided by news from Indonesia, the world’s largest exporter of
the metal. After falling through IH13, the tin price bounced back after the government of Indonesia introduced a regulation forcing all registered tin exporters to trade on a domestic exchange (Indonesia Commodity and Derivatives Exchange –ICDX) before shipping material. The rule, which came into force on August 30
th 2013, forced some Indonesian smelters, including PT
Timah, to declare force majeure (halt shipments) because most of their customers were not registered on the ICDX. For instance, PT Timah just recently lifted this measure given that the transaction on ICDX was improving and there was a better distribution channel. As a result of the trading rule imposed by Indonesia, stocks monitored by the LME fell sharply.
50%
17%
17%
6%
6%4%
Zinc: Consumption by sector
Galvanizing
Zinc Alloying
Brass and Bronze
Zinc Semi-manufactures
Chemicals
Miscellaneous
Source: ILZSG
INTELIGO SAB
21
January 21, 2014
0
5
10
15
20
25
30
10,000
15,000
20,000
25,000
30,000
35,000
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
May-1
3
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
00
0 to
nn
es
US
$/M
T
Tin
LME Stocks Spot Price
Source: Bloomberg
• Overall, the tin market is expected to remain in deficit during the coming years as demand
continues to gain momentum and there are no immediate plans to lift mine production considerably. It is worth to note that demand for tin comes from different sources including electronics (mobile phones, tablets, etc).
Tin: supply/demand balance (000 MT)
2010 2011 2012 2013e 2014e
Global production 354 367 349 347 361
Global consumption 368 381 349 352 364
Metal balance -14 -14 -1 -5 -3
Source: Thomson Reuters GFM S- December 2013
• The following table summarizes the base metal price vector that we are using to update our valuation on mining companies.
Base Metals
Average Prices 2010 2011 2012 2013 2014e 2015e
Copper $/lb 3.42 4.00 3.61 3.33 3.20 3.10
Zinc $/Mt 2,159 2,193 1,947 1,911 2,100 2,225
Lead $/Mt 2,147 2,397 2,062 2,140 2,230 2,300
Tin $/Mt 20,408 25,958 21,077 22,265 22,500 23,500
• All in all, we believe that the release of economic indicators in China will continue to guide investors’ sentiment towards the metal base complex and that regulations coming from Indonesia need to be continuously monitored. After regulating the tin market in 2013, the Parliament approved a new regulation that forbids exports of raw mineral ore starting on January 12
th. The
measure, which is expected to have a bigger impact on the nickel market, attempts to increase the value of mineral exports by allowing only processed mineral to be sold while boosting manufacturing activity in the country.
• Some companies, whose major exports are concentrates and not refined products, were worried that the government would not allow them to continue shipping their products following this new regulation. For instance, Freeport was seeking approval from the government to keep selling copper concentrates from its Grasberg mine in Indonesia. The company produces concentrates but only 40% is further processed at a local smelter; therefore, Freeport warned that if the ban was imposed and they do not get approval to ship they would have to cut output to 30% or 40% of the maximum. After months of concerns, the government finally ruled that companies will be allowed to export concentrates for three years as long as they meet minimum purity levels, and increased the export tax on concentrates shipments from 20% to 25%, climbing gradually towards 60% in 2016. According to media reports, Freeport has suspended exports of concentrates from Grasberg since December 15
th and has not resumed shipments waiting for the government to clarify the
51%
17%
15%
5%
2%
10%
Tin: Consumption by sector
Solder
Tinplate
Chemicals
Brass & Bronze
Glass
Others
Source: LME
INTELIGO SAB
22
January 21, 2014
measure and the tax hike. In this scenario, if concerns over shipments from Indonesia continue and the expected increase in production flow from concentrates to refined metal does not materialize, especially by IIH14, copper forecasts may need an upward revision.
INTELIGO SAB
23
January 21, 2014
FINANCIAL MARKETS
LIMA STOCK EXCHANGE
• The LSE total traded volume significantly decreased in 2013, reaching $6.00bln (-21.2%). Trading activity showed a weak performance during the year, in line with other emerging markets due to concerns regarding the economic performance of China. In this sense, trading activity reached its lower point in September, as worries around the beginning of the tapering and the US government shutdown reached their peaks, bringing a higher risk perception towards high beta markets. Nevertheless, better-than-expected IIIQ13 economic results in China and the lower uncertainty regarding the QE3 program reduction in the US partially offset the foreign investors’ trend to reduce their investments in emerging markets, so we observed a slight recovery in the traded volume by the end of the year.
• Equity traded volume fell 32.9% from $6.11bln in 2012 to $4.10bln in 2013, accounting for 68.3%
of total traded volume. The decrease in total traded volume was primarily explained by the sharp fall of commodity prices, as well as the outperformance of devoloped markets (such as US, Europe and Japan) vs. emerging markets. Nevertheless, if we exclude the transfer of Telefonica del Peru’s shares to Telefonica Latinoamericana Holding for $1.52bln (the biggest trade registered in the history of the LSE) the contraction of the equity traded volume would have been 8%. Other important trades were those of Luz del Sur and Credicorp, which totaled $61m and $34m, respectively. In addition, Graña y Montero became the first peruvian construction company to list in the NYSE. The company raised $413m through the placement of 19.5m American Depositary Shares (ADS) with the objective to finance the future growth of the company; the price set was $21.13. On the other hand, the steel based company, Siderperu, recived from its holding company, Gerdau, a capital injection of PEN 310m in order to expand and modernize Siderperu´s plant. Likewise, the mining company El Brocal announced a capital increase of PEN196m to fund the higher costs of their concentrator expansion.
• Meanwhile, fixed income traded volume (+69.3%) posted a significant increase from $515.4m in 2012 to $872.6m in 2013, as institutional investors still showed an important participation in the secondary market in line with the higher activity in the primary market in terms of new issuances of corporate bonds. The number of trades decreased 24.3% in the equity market (from 237,137 in 2012 to 179,459 in 2013) and increased 70.6% in the fixed income market (from 1,212 in 2012 to 2,068 in 2013).
• Pension Fund’s (PF) portfolios exposure to
equities declined 26.7% YoY in 2013. PF’s exposure to local shares decreased (-32.6%), while its holdings in abroad companies shares increased from 4.1% to 4.4% of the total portfolio. Meanwhile, their position in fixed income instruments went from 44% to 39%. PF’s decreased its exposure to local debt market from 31.0% to 26.0%; in the same line, they reduced its exposure to Peruvian government denominated securities from 17.5% in Dec-12 to 14.1% in Nov-13.
• Furthermore, PF’s exposure to foreign debt markets fell from 4.8% to 3.9% of the total portfolio.
More specifically, exposure to external sovereign debt decreased from 1.8% to 1.2%, mainly explained by the uncertain international scenario. On the other hand, PF’s increased their time
0%
20%
40%
60%
80%
100%
Dec-07 Dec-08 Dec-09 Dec-10 Nov-11 Dec-12 Nov-13
% S
hare
Pension Funds' managed portfolio
Other securities Time Deposits Fixed Income Equity
Source: Pension Funds Regulator
Month Company DescriptionAmount (in
millions)
April AFP Integra Capital increase PEN 670
July Graña y Montero ADS issuance USD 413
August Siderperu Capital increase PEN 310
December El Brocal Capital increase PEN 196
Source: BVL
IPO and Capital Increases in 2013
INTELIGO SAB
24
January 21, 2014
deposits from 8.9% in Dec-12 to 21.7% in Nov-13. During 2013, the Central Bank increased the maximum limit for PF’s foreign investments from 30% to 36.5%; moreover, in late December the monetary authority approved to increase the threshold by 50bps every month (starting Jan-2014) until it reaches 40%. We consider that investments abroad will gradually increase during IQ14 as PF will continue to benefit from the higher set of investment alternatives abroad.
• The high uncertinty in 2013 regarding the development of exploration projects in Peru’s mining sector, as a consequence of the downfall of precious and base metal prices, influenced the portfolio composition of the main institutional investors in the local market. In this sense, the Pension Funds (PF) and Mutual Funds (MF) reduced their exposure to mining companies shares. Nevertheless, both had different points of view regarding the Construction and Financial sectors (PF overweighted construction shares and sold financial shares, while MF did the opposite). Additionally, PF and MF increased their exposure to utilities and consumer goods related shares, while decreasing their participation on the Oil & Gas sector.
FIXED INCOME MARKET
• In 2013, the fixed income assets underperformed other types of investments. After Bernanke’s comments in May about the possibility to reduce the size of QE3, market agents discounted this event, which led the 10-year US treasury in that month (1.62%) to nearly reach 3.0% at the end of the year. This situation had an effect in all the yield curves around the world (upside move), especially on emerging markets, even though major central banks kept their loose monetary policies. During the IIH13, prospects for US and global economy began to improve, leading to the “Great Rotation” (flows from fixed income markets to developed equity markets). In this sense, bond yields ended up, as investors rebalanced their portfolios toward more risky assets.
• As aforementioned, the Treasury yield curve showed meaningful changes compared to the levels of 2012. It should be pointed out that a great part of investors speculated about when the FED
BAP 16.0%
ALICORC1 12.4%
GRAMONC1 12.1%
ENERSUC1 8.9%
VOLCABC1 8.8%
Equity Portfolio of PF by stocks - Top 5(As of Aug-2013)
GRAMONC1 11.3%
BAP 10.2%
UNACEMC1 9.7%
CPACASC1 7.9%
FERREYC1 7.5%
Equity Portfolio of MF by stocks - Top 5(As of Nov-2013)
0 2,000 4,000 6,000 8,000 10,000
Fishing
Others
Oil & Gas
Consumer Goods …
Electric Utilities
Construction
Financials
Mining
Equity Portfolio of PF by sectors(PEN millions)
Dec-12
Aug-13
Source: SBS
0 100,000 200,000 300,000 400,000
Fishing
Agro
Electric Utilities
Oil & Gas
Consumer Goods
Financials
Mining
Construction
Equity Portfolio of MF by sectors(PEN millions)
Nov-12
Nov-13
Source: SBS
INTELIGO SAB
25
January 21, 2014
effectively would start the “tapering”. For that reason, portfolio managers reduced their exposure to longer-term US Treasuries (higher duration risk), which resulted in a steeper curve at the end of the year. Although the monetary authority would still purchase long-term Treasuries and mortgage backed securities (MBS) at a slower pace, the upside movement was fast enough to create an important decline in bond prices. Due to the concerns of a further increase in the cost of debt on private companies and the incipient improvement on US real estate market, the Federal Reserve highlighted in a clear way the difference between its reduction of its asset purchase program (QE3) and the fact that its benchmark rate would remain at a low levels (0.00-0.25%) for a long period (until the FED sees a substantial improvement in the economy). As result, upside pressures over US treasury eased somewhat, exhibiting a more stable behaviour since IVQ13.
• We expect the FED to keep its interest rate on hold, in line with the latest statements of the FOMC members, as the US economy would regain momentum and the global economy recovers. Therefore, the Treasury yield curve will be pushed upwards from current levels; however, the shift will not be as drastic as it happened in 2013. In this scenario, we are increasing our risk free rate (US T-10 yield) from 3.00% to 3.40%.
• As per the Peruvian sovereign fixed income market, the traded volume in the secondary market retreated in 2013, following the increase in yields across the global fixed income market. As same as other fixed income curves, the Peruvian sovereign curve got steeper as investors overweighted short duration bonds in order to avoid the effect of the expected increase in interest rates. Likewise, the better outlook for the US economy moved on a shift in the preference of investment assets, mostly towards US equity shares. Moreover, the local currency depreciated 9.6% against the Dollar, removing partially the initial attractiveness whereby investors previously entered to this market. All in all, the traded volume reached PEN 34.2bln in 2013 (-10.0% YoY). The 12AGO2020 and 12SEP2023 sovereign bonds were the most traded.
• Although the sovereign yield curve shifted up, both S&P and Fitch ratings upgraded Peru’s long-term foreign currency debt rating (from “BBB” to “BBB+”), as well as the local currency debt rating (from “BBB+” to “A-“). According to these agencies, the upgrade reflects that the country has reduced its vulnerability to external shocks and enhanced its capacity for stable long-term GDP growth. In addition, it also demonstrates the strength of the external and fiscal balance sheets, as well as the continuous growth outperformance in relation to its “BBB” peers. In fact, the pragmatism under Humala’s management coupled with the progress on government’s reforms suggest that the risk of a marked departure of economic policies has reduced. Despite this, the impact on the market was null since this information has already incorporated into the agents’ expectations, albeit it constitutes good news for the medium term. In this context, the presence of non-resident in the domestic market remained at high levels (between 55% and 56%), especially in the short end. Additionally, the annual inflation closed within the BCRP’s target range (+2.86%), in an environment of expectations anchored to the central bank's target.
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0 5 10 15 20 25 30
US Treasury Yield Curve
Dec-12 Jun-13 Dec-13Source: Bloomberg
INTELIGO SAB
26
January 21, 2014
• The Peruvian government showed an active role in the fixed income market. The Government
debt issuances in sovereign bonds reached PEN 3.9bln in 2013, significantly higher than 2012 (PEN 2.7bln) and 2011 (PEN 1.1bln). In February, the government issued PEN 1.2bln of 12SEP2023 sovereign bonds at 4.20% yield. At the same time, it placed PEN 720.3m of 12FEB2042 sovereign bonds at 5.14%. The funds were directed to the prepayment of debt with the aim of exchanging USD debt for PEN debt. Furthermore, at the mid of April, the Executive also placed PEN 716.6m of 12SEP2023 and PEN 465.0m of 12FEB2042, at 3.99% and 4.98%, respectively. During the rest of the year, the government issued more sovereign bonds, but small amounts. As observed, the yields through the year increased, in line with the main references of the market.
• According to the guidelines of the document “Estrategia de Gestión Global de Activos y Pasivos 2013-2016” published by the Ministry of Economy and Finance (MEF) in April of 2013, the government decided to start the auction in July with a new point reference in the sovereign curve, the bond 12FEB2029. Similarly, the Executive also started the issue of Treasury Bills since the IIH13 in order to provide new benchmarks into the market, completing successfully their placements (the demand always exceeded the supply in 2013).
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
0 5 10 15 20 25
Sovereign Bonds Yield Curve
Dec-12 Jun-13 Dec-13
Source: Bloomberg
INTELIGO SAB
27
January 21, 2014
Feb-13 12SEP2023 PEN 2,272.8 4.20% 1,184.4
Feb-13 12FEB2042 PEN 1,040.5 5.14% 720.3
Apr-13 12SEP2023 PEN 1,218.5 3.99% 716.6
Apr-13 12FEB2042 PEN 849.0 4.98% 465.0
Jul-13 12AGO2017 PEN 61.5 4.24% 33.8
Jul-13 12FEB2029 PEN 58.3 6.01% 25.0
Jul-13 12FEB2018 PEN 50.3 2.20% 22.5
Jul-13 12FEB2023 PEN 64.5 5.04% 24.4
Jul-13 12AGO2046 PEN 55.5 2.41% 18.5
Aug-13 12FEB2029 PEN 31.3 6.25% 16.3
Aug-13 12FEB2018 PEN 32.0 2.02% 27.5
Aug-13 12AGO2017 PEN 46.7 4.48% 20.7
Aug-13 12AGO2046 PEN 34.3 2.58% 21.3
Aug-13 12FEB2042 PEN 44.3 7.02% 26.0
Sep-13 12FEB2018 PEN 18.0 2.16% 5.0
Sep-13 12AGO2017 PEN 71.6 4.86% 44.3
Sep-13 12AGO2046 PEN 28.0 2.68% 22.0
Sep-13 12FEB2042 PEN 25.5 6.51% 7.1
Sep-13 12FEB2023 PEN 41.0 5.23% 26.2
Oct-13 12AGO2027 PEN 70.6 4.55% 40.1
Oct-13 12FEB2018 PEN 31.0 2.00% 15.0
Oct-13 12FEB2029 PEN 16.6 -- 0.0
Oct-13 12SEP2023 PEN 77.0 5.18% 50.0
Oct-13 12FEB2042 PEN 32.0 6.43% 16.0
Oct-13 12AGO2046 PEN 37.5 2.77% 16.7
Nov-13 12AGO2017 PEN 190.0 4.42% 125.0
Nov-13 12FEB2018 PEN 30.0 2.18% 16.0
Nov-13 12FEB2029 PEN 18.0 6.45% 7.0
Nov-13 12FEB2023 PEN 81.0 5.49% 53.8
Nov-13 12FEB2042 PEN 48.5 6.92% 20.0
Nov-13 12AGO2046 PEN 29.0 2.79% 14.0
Dec-13 12AGO2017 PEN 297.0 4.07% 101.3
Dec-13 12FEB2018 PEN 73.6 2.08% 31.7
Dec-13 12FEB2029 PEN 24.3 6.75% 19.8
Source: MEF
Government Debt Issuances (PEN million)
Date Security Curency Demand YieldTotal amount
awarded
INTELIGO SAB
28
January 21, 2014
• Regarding the bondholder’s structure of Peruvian sovereign bonds, non-residents, private pension
funds and banks accounted 56.5%, 26.5% and 7.1% of total bonds, respectively.
• Corporate fixed income placements in the domestic market reached PEN 2.6bln and $865m in 2013 as local companies continued to finance with debt instruments, especially in local currency. The main corporate issuers in Nuevo Soles were BCP and Crediscotia Financiera, while the main issuers in dollars were Luz del Sur, Hunt Oil and ATN. It is worth to mention that even if the total amount issued has grown over time, the number of issuers experienced a mild decline.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
<2 años 2-6 años >6 años
Main domestic bond holdings per time bracket
Others Private Funds Banks Private Pension Funds No-residents
Source: MEF
Date Maturity Term YieldTotal amount
awarded
07/03/13 10/01/13 90 days 3.94% 8.4
07/03/13 03/30/14 270 days 3.91% 6.3
07/17/13 01/13/14 180 days 3.96% 9.3
07/17/13 07/12/14 360 days 4.01% 7.8
08/07/13 11/05/13 90 days 4.10% 11.9
08/07/13 05/04/14 270 days 4.16% 8.8
08/21/13 02/17/14 180 days 4.12% 15.8
08/21/13 08/16/14 360 days 4.17% 10.1
09/03/13 12/03/13 90 days 4.15% 18.0
09/03/13 06/01/14 270 days 4.21% 15.0
09/17/13 03/17/14 180 days 4.19% 14.2
09/17/13 09/13/14 360 days 4.23% 8.5
10/09/13 01/13/14 95 days 4.17% 19.4
10/09/13 07/12/14 275 days 4.22% 9.5
10/22/13 05/04/14 193 days 4.19% 15.8
10/22/13 10/18/14 360 days 4.26% 9.1
11/05/13 02/17/14 103 days 4.19% 22.8
11/05/13 08/16/14 283 days 4.26% 17.8
11/19/13 06/01/14 193 days 4.05% 15.5
11/19/13 11/15/14 360 days 4.10% 15.8
12/03/13 03/17/14 103 days 3.99% 15.4
12/03/13 09/13/14 283 days 4.07% 15.0
12/17/13 06/01/14 165 days 3.96% 15.4
12/17/13 12/13/14 360 days 4.06% 17.1
Source: MEF
Treasury Bills Issuances (PEN million)
INTELIGO SAB
29
January 21, 2014
258.8
285.1
297.3
451.0
500.0
886.5
Crediscotia Financiera
Interbank
ATN
Luz del Sur
BCP
Hunt Oil
Main Corporate Issuers 2013(PEN million, considering both currencies)
Source: Inteligo
• We expect an increase in corporate bonds placements, as the demand for debt instruments will
remain high, similar to the levels of the last year. Furthermore, companies will continue to issue debt in foreign markets in a context where interest rates are still at low levels and the liquidity of the market is increasing. For instance, with current information, Compañía Minera Ares from Hochschild Group ($300m) and BCP ($200m) issued up to $500m in separate bonds in the international market in the last days.
• In 2014, the sovereign curve will continue to shift upwards, although with different behaviors by segment. In the short end we expect a lower volatility since the strategy of reducing duration and the significant presence of off-shore investors would limit upward pressures. Besides, given our baseline scenario in which the BCRP maintains a neutral monetary policy stance in term of its reference rate, the short end of the curve is not expected to show greater movements. In the middle segment, we believe that the liquidity of some papers and the appeal for the yields should open trading opportunities. Finally, the bonds at the long end will be most sensitive to interest rate changes (already anticipated by the market). It is important to note that inflation expectations remain anchored within the target range of BCRP.
Sovereign Debt Market
• Peru’s sovereign spread, measured by the EMBI+ index, increased to 159bps in 2013 (vs. 114bps in December 2012). Several factors explained the increase in the risk perception towards the country. First of all, the lower-than-expected macro-economic figures and the disappointing outlook for the region and for EM in general, triggered a lower appetite for Peruvian fixed income securities. Nevertheless, the fact that the government has been reducing reserve requirements in local and foreign currency, as well as reducing the reference rate from 4.25% to 4.00% to boost the economy should contribute to improve the risk perception towards the country. In this sense, Standard & Poor´s and Fitch Ratings upgraded the country’s long-term debt rating in foreign and local currency from “BBB” to BBB+” and from “BBB+” to “A-“, respectively. With these results and according to Standard & Poor´s, Peru holds the same rating of Mexico, and stands only below Chile (AA-) in Latin America.
66%
34%
Corporate issuance by currency
PEN
USD
Source: Inteligo
INTELIGO SAB
30
January 21, 2014
• We consider that the SSOT should experience a downward bias in 2014. The more stable global
picture and the favorable outlook for Peru´s economic performance, along with the improvement in the debt/GDP ratio, lower dollarization of the financial system and the lower foreign debt in USD will support the EMBI+ Peru. Nonetheless, there are risks associated with the regional and municipal elections that could affect investors’ risk perception, as well as social and environmental conflicts regarding mining projects. In this sense, we do not rule out some mini-cycles of volatility. All in all, we are setting our 12-month instrumental sovereign spread estimate at 130bps.
50
150
250
350
450
Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13
Country Risk (EMBI+)
LatAm
Peru
Source: Bloomberg
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
0 5 10 15 20 25 30 35 40
Peru Global Bonds Yield Curve
Dec-12 nov-13 dic-13
Source: Bloomberg
INTELIGO SAB
31
January 21, 2014
EQUITY MARKET • The Peruvian equity market showed a dramatic decline in 2013 (-30.3%), leading losses among
global equity markets, mainly due to: i) the retreat in commodity prices, ii) China´s lower-than-expected economic expansion, iii) discouraging local activity data and iv) a contraction in compaines’ EPS. In 2013, the concerns regarding the fiscal budget and debt ceiling in US brought some volatility down to equity indices. Additionally, the conversations of a possible reduction of the QE3 program by the FED (which ended up announcing on December) caused a higher risk aversion towards EM markets among investors.
• In 2013, the recovery of the labor market and GDP growth in US increased speculations of a QE3 tapering during the year but since the FED postponed the decision until December, market agents reduced their exposure to fixed income, commodities and FX markets and decided to allocate capital in the equity market, leading the S&P 500, Nasdaq and Dow Jones indices to all-time record highs. As it was expected, Europe started showing its first signs of recovery along further actions of the ECB (reducing the reference rate from 0.75% to 0.25%) and better-than-expected corporate results . In the same way, Japan´s equity market benefited from: i) the Yen´s depreciation, ii) the positive impact of the BoJ´s quantitative easing and ii) the aggressive public infrastructure spending, all of them know as Abenomics. As per EM, China´s economic performance was one of the main contributors of the underperformance of emerging economies. In this sense, the efforts to change the economic growth model (from exports to local demand) came along with weaker PMI data, lower GDP growth expectations and worse-than-expected trade balance; not to mention that the government had to face a credit crunch due to the unexpected shadow banking growth. In the local area, Standard & Poor’s upgraded Peru’s long-term foreign and local currency debt rating to from “BBB” to BBB+” and from “BBB+” to “A-“, respectively, while the outlook remained stable. Two month later Fitch Rating issued the exact same ratings and outlook, reaffirming the solid perspective for the Peruvian economy. In economic news, Peru’s GDP grew less than the 6.3% initially estimated by the BCRP in 2013 (as of November 4.9% and estimates indicate it will close at 5.0%) but will still be one of the top performers among the region. The economic expansion was subdued by the mining activity but somewhat offset by non-primary activities such as “Construction” and “Services”. All in all, the General (-30.3%), Selective (-32.6%) and INCA (-25.9%) indices in Dollar terms ended the year posting losses.
• Almost all the sectors posted a negative performance. The “Agriculture” index (-48.9%) was the
main loser among the LSE sector indices. Casagrande (-48.6%) led the decline, as the company continued to be affected by lower sugar prices. In the same line, the “Mining” index (-47.5%) was affected by lower commodity prices, the main driver on this sector. The gold based companies were the most hit by the gold´s first yearly drop in 13 years. In that sense, Buenaventura (-71.5%) and Rio Alto (-70.5%) collapsed. Volcan B (-55.8%) also slumped on lower-than-expected financial results. Other companies like Milpo (-34.1%) and Minsur I (-44.5%) also ended down. The “Banking” index (-7.8%) lost ground due to Interbank (-26.0%), Scotiabank (-22.0%) and Banco Continental (-11.2%) weak performance, in a context in whin credit growth slowed during most part of the year. Regarding the “Others” index (-2.5%), Graña y Montero (+11.9%) managed to end on positive ground due to the new projects the company was awarded, as well as the
5,000.0
6,000.0
7,000.0
8,000.0
9,000.0
0
200
400
600
800
1,000
Dec-1
2
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
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No
v-1
3
Dec-1
3
IGB
VL
Vo
lum
e (M
illio
ns)
IGBVL High-Low-Close-Volume (US$)
Volumen Close
Source: Economatica
4.8
8.4
17.8
37.3
20.6
16.1
19.9
24.7 24.3
16.1
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
LSE average daily trading volume (USD million)
Source: LSE
INTELIGO SAB
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January 21, 2014
acquisition of the Chilean company DSD Construcciones. Despite that, IFS (-21.0%), Credicorp (-18.3%) and Inretail (-30.8%) dragged the index down. The latter was impacted by the release of dissapointing financial results, mainly explained by big FX losses.
Month Sector Company Acquisition/Merger Amount (in millions)
January Banking & Financial Holdings Grupo Sura AFP Integra and Wealth Management S.A. n.a.
February Consumption Alicorp Pastif icio Santa Amalia US$ 95
February Oil & Gas Shell Repsol US$ 6.6
March Construction Ferreycorp S.A.A. Mercalsa de C.V. n.a.
March Construction Ferreycorp S.A.A. Exxon Mobil n.a.
April Telecommunications Entel Chile Nextel del Perú (NII Holdings) US$ 400
April Banking & Financial HoldingsAFP Integra and ProFuturo
AFPAFP Horizonte US$ 514
August Construction Graña & Montero DSD Construcciones y Montajes US$ 41
August Consumption Intercorp San Miguel Industrias PET n.a.
August Fishing China Fishery Group Copeinca US$ 801.9
* Selected companies
Source: Media
Summary of M&A in 2013
• The “Industrial” index (-17.6%) also fell, affected by the negative performance of Cementos
Pacasmayo (-14.8%), Maple Energy (-58.5%), Aceros Arequipa I (-32.5%), Siderperu (-11.3%) and Refineria La Pampilla (-40.0%). The latter gained ground as the Government made public its intentions to buy a stake in the company, but then corrected on very discouraging results. Finally, the “Services” index (+11.3%) was the only one who registered gains, buoyed by the strong demand for defensive shares in a context of high uncertainty. In this sense, Telefonica (+11.7%), Edelnor (+0.3%) and Edegel (+3.4%) continued to surge, backed by higher electricity prices. In the case of Enersur (+25.0%), the company was benefited by the entry of the full operation of ChilcaUno plant (270MW) and the Reserva Fria (460MW), which in turn boosted company’s revenues and improved operating margin.
Agriculture -48.9% Banking -7.8% Others -2.5%
Casagrande -48.6% Bco. Continental -11.2% Ferreycorp -5.8%
Agro. Ind. Pomalca -53.2% Scotiabank -22.0% Graña & Montero 11.9%
Tumán -56.8% Bco. de Crédito -1.4% IFS -21.0%
Interbank -26.0% Credicorp -18.3%
Industrial -17.6% Mining -47.5% Services 11.3%
Alicorp 0.0% Volcan B -55.8% Luz del Sur -0.8%
UNACEM 6.1% Rio Alto -70.5% EDEGEL 3.4%
C. Pacasmayo -14.8% Minsur -44.5% EDELNOR 0.3%
Relapa -40.0% Buenaventura -71.5% Telefónica 11.7%
• In 2013, investors reduced the amount traded in the LSE, due to concerns about the economic
performance of emerging markets. In this context, resident investors decreased the amount traded by 13.9%, and among them, retail (-52.8%) and other investors (-57.2%) reported the sharpest lose. In the same line, the behavior of non-resident investors was equal. The recovery of advanced financial markets dominated investors’ sentiment during most part of the year, the demand for higher returns motivated investors to allocate their resources to developed equity markets. In this scenario, the traded volume from non-resident investors retreated (-49.0%). In addition, their share of the total volume traded fell from 55.5% to 42.5%.
INTELIGO SAB
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January 21, 2014
20.2% 22.3%
71.8%
54.4%
8.01%
23.27%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2012 2013
Share of Investors within the LSE's volume traded
Retail Institutional Pension Funds
Type of investor 2012 2013 %
Retail 2,241.5 1,057.1 -52.84
Institutional 1,840.3 2,338.7 27.08
Pension Funds 950.9 1,128.4 18.66
Others 437.0 186.8 -57.24
Total Residents 5,469.8 4,711.1 -13.87
Retail 152.6 25.7 -83.14
Institutional 6,681.9 299.3 -95.52
Total Non-Residents 6,834.6 3,489.0 -48.95
Amount Traded 12,304.4 8,200.0 -33.36
Source: Cavali
Amount Traded (USD in millions)
44.5%
57.5%55.5%
42.5%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2012 2013
Share of investors within the LSE's volume traded
Residents Non-ResidentsSource: Cavali
• Looking into 2014, we believe global equity markets will continue to be driven by news from advanced economies. In fact, investors have turned their attention to the tapering of the QE3 program. In this sense, if US economy mantains the recovery trend we should expect the FED to complete a tapering by the end of this year. Another event to watch is the release of economic data in Europe, this will dictate the growth pace of struggling economies such as Germany, France, Spain and Italy; which could confirm the so awaited recovery from the 2008 financial crisis. Potencial risks could appear if we start observing a lateralization of such growth indicators, meaning that recession is not over yet.
• Regarding emerging markets, the release of activity indicators in China is the main event to watch as they will not only influence commodity prices performance but also support the appetite for emerging markets’ assets. We expect that the recent reforms dictated by the Communist Party, along with an active participation of the People´s Bank of China should guide the economic growth rate to similar levels than the ones dictated by the government. In this scenario, we expect Latin American markets to benefit from investors’ higher risk demand and among them, MILA equity markets should stand out backed by the sound macroeconomic fundamentals, domestic demand performance and room for monetary policy action in case the external outlook deteriorates.
• Peru should be no exception and given the better outlook for activity, the local equity market is expected to post a better performance than 2013. From a macroeconomic perspective, domestic demand should continue to post a solid performance. Nevertheless, we consider that investors should continue to be selective when evaluating investment opportunities in the LSE. We believe that cyclical shares will continue to outperform this year. However, in contrast to last year, we are somewhat more optimistic about the mining sector mainly due to the better production profile of some companies.
INTELIGO SAB
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January 21, 2014
Valuation by Sector
• Regarding our sample, the Oil & Gas sector will be affected by the downward pressures over fuel prices spreads in 2014. However, Relapa should improve its gross margin due to the lower volatility in crude oil prices (WTI and Brent). It is worth to mention that the company is still struggling to adapt its operations to the ministry resolution n°139-2012. We do not believe this situation will reverse in the short term, limiting the upside potential of the share. We expect the Fishing sector to recover ground during 2014, as we anticipate fishing quotas above the average of recent years. Moreover, the 2013 second season quota (volume that will be materialized in the IQ14 sales) represented almost three times the 2012 second season quota (which affected IQ13 sales). Within the Mining sector, we maintain a supportive view on Milpo, backed by the good performance of its Cerro Lindo unit. Volcan is also expected to receive a boost from the start of operations of Silver Oxides at Cerro de Pasco and Alpamarca – Rio Pallanga by the end of IQ14. Furthermore, although SCCO has a modest upside potential given the revision to the copper price and our expectations of relatively high costs this year, the upcoming portfolio of projects are expected to support an upward trend in the production profile starting on the second half of this year. In addition, we deem important to monitor the approval of Tia Maria in coming months as this event would stand as an important catalyst for our valuation and SCCO’s shares performance. On the other hand, the financial performance of Cerro Verde may not be encouraging until 2015 and amount of capex disbursements are expected to exert downward pressures on cash flows; yet on a longer view, Cerro Verde will benefit from a larger scale of operations. Finally, after the successful start of operations of Pucamarca last year, we consider that Minsur’s long term strategy to diversify its sources of revenues while maintaining a strong position in the tin market will continue to deliver value in coming years.
• Within the Construction sector, we expect the dynamism in local activity to continue boosting revenues growth. We expect Ferreycorp to outperform due to the development of new infrastructure and mining projects. In case of the cement industry, we will still observe high requirements of cement from the self-construction sector, benefiting Cementos Pacasmayo and Unacem. It is also worth to note that Graña y Montero mantains solid fundamentals but since investors have incorporated great part of its value, we see GM a long term play. As for the Consumer Goods sector, the low levels of private consumption (compared to regional peers) should represent an important growth catalyst for Inretail and Alicorp’s consumer goods segment; however, the upside potential is not as high as in other years for the latter. Within Electric Utilities, EneSur should outperform this year, backed by their portfolio of projects and the increase in energy output. The rest of the companies in the sector have a limited expected return; however, they still offer an appealing opportunity in terms of dividend yield. Finally, we remain negative towards the Agriculture sector. Sugar prices will continue to decline on higher global supply, dragging down Casagrande’s revenues and margins.
• Overall, considering our new target prices, our P/E2014e analysis of the ISBVL (see the Multiples Analysis section in page 82) and our general outlook for the local equity market, we expect the LSE Selective index to increase 18.0% in dollar terms in 2014 (12% during the rest of the year).
INTELIGO SAB
35
January 21, 2014
VOLCAN COMPAÑÍA MINERA
INVESTMENT THESIS
• We are updating our coverage on Volcan B shares, setting a 12-month fundamental target price of PEN 1.62 and a BUY+ rating.
• In 2013 Volcan faced a challenging scenario, since the sharp decline of silver came at a time when costs were still up and projects were on the pipeline. Nevertheless, we believe that shares have overreacted to this scenario, especially now that the company is ready to deliver two additional projects. In fact, last year, Volcan concluded the expansion of the Animon plant in Chungar (to 5,200 tpd) and the Andaychagua and Victoria plants in Yauli (to 10,500 tpd). Furthermore, given the new price scenario, Volcan has been working on cost control measures that we expect to be fully reflected in this year’s financial results.
• Regarding upcoming projects, the Silver Oxides plant at Cerro de Pasco and the Alpamarca –Rio Pallanga (Zn/Pb/Ag) projects are scheduled to start operations by the end of IQ14. These projects, coupled with the new size of operations at Yauli and Chungar, will support production in 2014. In fact, we expect silver output to increase from 20.4m oz in 2013 to around 26.0m oz in 2014, before jumping to over 28.0m oz in 2015, in line with the recovery of grades at Islay and the full contribution from Oxides and Alpamarca. Moreover, the Silver Pyrites project would contribute with additional 1.5m - 2.0m oz Ag coming from stockpiles starting in 2016.
• We believe that Volcan is on track to continue with its growth strategy given the potential for exploration that includes polymetallic and copper targets, as well as additional works on the West Wall of the Raul Rojas pit. Furthermore, Volcan’s strategy to increase its energy supply stands as an additional value driver in the long term.
OUTLOOK 2014
• We expect Volcan to post a consolidated net result of $206.8m, as the cost reduction measures, the contribution from Oxides and Alpamarca, and the expected increase in zinc and lead prices would help ease the weak performance of silver.
RISK TO OUR VALUATION
• Higher-than-expected volatility in commodity markets and delays in the start up of projects are the main risks to our valuation.
TTAARRGGEETT PPRRIICCEE:: PPEENN 11..6622 RRAATTIINNGG:: BBUUYY++
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Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
Volcan B
Mining Index
Source: Economática
Volcan B shares' price sensitivity (PEN)
Silver $/oz price vector
-20% -10% 0% 10% 20%
W 8.9% 1.32 1.54 1.75 1.97 2.19
A 9.4% 1.27 1.47 1.68 1.89 2.10
C 9.9% 1.21 1.42 1.62 1.82 2.02
C 10.4% 1.17 1.36 1.56 1.75 1.95
10.9% 1.12 1.31 1.50 1.69 1.88
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range S/. 1.07 - S/. 2.45
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
615.4
2,241,418
2.0%
2,291
53.5%
1.5x
VOLCABC1
Buy+
Outperform
S/. 1.26
S/. 1.62
28.5%
-48.3%
INTELIGO SAB
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January 21, 2014
VOLCAN B Current Price: PEN 1.26 Target Price: PEN 1.62 Rating: BUY+
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Volcan B 12-month performance
Volume PriceSource: Economática
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2012 2013e 2014e 2015e
mill
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oz
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00
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Volcan: Concentrates and silver production
Zn Pb Cu Ag
Source: Volcan, Inteligo's estimates
15%
25%
35%
45%
2012 2013e 2014e 2015e
Volcan Margins
Operating Margin EBITDA margin Net Margin
Source: Volcan, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 1,160.8 1,133.8 1,202.4 1,287.5
Gross Profit 424.2 388.5 428.7 488.6
Operating Expenses 94.8 98.8 99.9 107.8
EBIT 329.4 289.7 328.8 380.8
EBITDA 449.4 399.3 475.7 542.2
Net Income 211.0 181.5 206.8 242.7
EPS 0.05 0.04 0.05 0.06
DPS 0.02 0.01 0.01 0.01
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -4.2% -2.3% 6.1% 7.1%
EBIT Growth -35.5% -12.1% 13.5% 15.8%
EBITDA Growth -26.9% -11.1% 19.1% 14.0%
Net Income Growth -35.9% -13.9% 13.9% 17.3%
Gross Margin 36.5% 34.3% 35.7% 37.9%
Operating Margin 28.4% 25.6% 27.3% 29.6%
EBITDA Margin 38.7% 35.2% 39.6% 42.1%
Net Margin 18.2% 16.0% 17.2% 18.8%
Equity / Assets 52.1% 56.1% 58.7% 61.5%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 574.9 165.0 131.9 243.1
Assets 2,643.2 2,705.4 2,873.2 3,070.0
Financial Debt 706.1 624.7 615.8 607.2
Liabilities 1,266.3 1,187.1 1,185.3 1,183.2
Equity 1,376.9 1,518.3 1,687.9 1,886.9
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 449.4 399.3 475.7 542.2
CAPEX -380.8 -587.0 -334.0 -230.0
Taxes -115.1 -96.9 -104.8 -121.3
Working Capital Change 50.8 4.9 0.4 -2.0
Free Cash Flow 4.3 -279.8 37.3 188.9
Value Indicators2012 2013e 2014e 2015e
P/E 9.0x 10.5x 9.2x 7.9x
EV/EBITDA 6.1x 6.9x 5.8x 5.1x
P/BV 1.7x 1.5x 1.4x 1.2
P/Sales 2.0x 2.0x 1.9x 1.8
ROA 8.0% 6.7% 7.2% 7.9%
ROE 15.3% 12.0% 12.3% 12.9%
INTELIGO SAB
37
January 21, 2014
SOUTHERN COPPER
INVESTMENT THESIS
• We are updating our Southern Copper (SCCO) valuation model with a 12-month fundamental target price of $31.44 and a HOLD rating. The revision to copper price forecasts has limited somewhat the favorable contribution from incoming projects, yet we maintain our positive view on SCCO based on the overall strength of its production profile and its long life of mine of reserves, which supports further expansions.
• SCCO is in the progress of developing projects to increase copper output considerably in coming years. In Mexico, projects are centered on the Buenavista complex and include i) a molybdenum plant, which was already completed in 2013, ii) a new concentrator (IH15) with an additional molybdenum plant, and iii) a new SXEW facility (IH14). In Peru, SCCO is looking forward to get the approval for the Toquepala expansion and is currently completing the HPGR project that should boost recovery rates at Cuajone. As a result, SCCO’s production profile shows an upward trend, reaching over 1 million MT Cu in 2016. However, this aggressive portfolio of projects requires a heavy capital expenditure program and we expect disbursements to be quite high in 2014.
• The public hearing on Tia Maria was held last December and the project finally received the community’s approval. Despite this positive result, Tia Maria is not included in our valuation and we would consider its addition once the EIA is approved by the government and the uncertainty over its execution eases. All in all, Tia Maria stands as a favorable catalyst for SCCO shares.
OUTLOOK 2014
• SCCO’s financial performance will be affected by the decline in the average copper price. However; this effect will be partially offset by higher output from Buenavista when the new SXEW plant is completed by IH14. Therefore, we expect SCCO to register a net result of $1.5bln in 2014.
RISK TO OUR VALUATION
• A further decline in the copper price could hamper the company’s results. Furthermore, delays in the approval of permits for Toquepala may delay the project further. On the other hand, the approval of Tia Maria’s EIA stands as an upside risk to our valuation.
TTAARRGGEETT PPRRIICCEE:: $$ 3311..4444 RRAATTIINNGG:: HHOOLLDD
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Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
SCCO
Mining Index
Source: Economática
SCCO shares' price sensitivity ($)
Copper $/lb price vector
-20% -10% 0% 10% 20%
W 8.4% 23.32 29.03 34.73 40.44 46.15
A 8.9% 22.10 27.56 33.01 38.47 43.93
C 9.4% 20.99 26.22 31.44 36.67 41.89
C 9.9% 19.97 24.99 30.00 35.02 40.03
10.4% 19.03 23.85 28.67 33.49 38.31
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range $24.85 - $40.80
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
25.1
845,600
2.4%
24,565
20.0%
4.2x
SCCO
Hold
Outperform
$29.05
$31.44
8.2%
-29.1%
INTELIGO SAB
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January 21, 2014
SOUTHERN COPPER Current Price: $ 29.05 Target Price: $ 31.44 Rating: HOLD
0
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8,000
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Source: SCCO, Inteligo's estimates
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S$)
SCCO 12-month performance
Volume PriceSource: Economática
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 6,669.3 5,825.9 6,132.7 7,073.3
Gross Profit 3,574.3 2,645.5 2,573.5 3,087.9
Operating Expenses 149.2 145.9 144.7 162.4
EBIT 3,425.1 2,499.5 2,428.7 2,925.5
EBITDA 3,750.9 2,877.3 2,894.2 3,492.3
Net Income 1,934.6 1,598.3 1,482.6 1,787.9
EPS 2.29 1.89 1.75 2.11
DPS 3.71 0.68 0.70 1.06
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -2.2% -12.6% 5.3% 15.3%
EBIT Growth -5.5% -27.0% -2.8% 20.5%
EBITDA Growth -4.2% -23.3% 0.6% 20.7%
Net Income Growth -17.2% -17.4% -7.2% 20.6%
Gross Margin 53.6% 45.4% 42.0% 43.7%
Operating Margin 51.4% 42.9% 39.6% 41.4%
EBITDA Margin 56.2% 49.4% 47.2% 49.4%
Net Margin 29.0% 27.4% 24.2% 25.3%
Equity / Assets 46.1% 50.9% 54.2% 57.9%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 2,459 2,436 1,907 2,044
Assets 10,384 11,411 12,356 13,113
Financial Debt 4,214 4,204 4,204 4,004
Liabilities 5,595 5,597 5,653 5,516
Equity 4,789 5,813 6,703 7,597
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 3,750.9 2,877.3 2,894.2 3,492.3
CAPEX -1,052 -1,599 -1,878 -996
Taxes -1,062 -780 -833 -1,016
Working Capital Change 42 97 25 -32
Free Cash Flow 1,679 595 209 1,448
Value Indicators2012 2013e 2014e 2015e
P/E 12.7x 15.4x 16.6x 13.7x
EV/EBITDA 7.0x 9.3x 9.2x 7.5x
P/BV 5.1x 4.2x 3.7x 3.2x
P/Sales 3.7x 4.2x 4.0x 3.5x
ROA 18.6% 14.0% 12.0% 13.6%
ROE 40.4% 27.5% 22.1% 23.5%
INTELIGO SAB
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January 21, 2014
CERRO VERDE
INVESTMENT THESIS
• We are updating our coverage on Cerro Verde’s shares, setting a 12-month fundamental target price of $28.64 and a BUY rating. Although the production profile may not be encouraging until 2015 and the outlook for the copper price may be weak in the short term as well, we maintain our favorable view on the firm’s long term performance.
• Since Cerro Verde is focusing its efforts on the ongoing concentrator expansion (from 120,000 tpd to 360,000 tpd), we are keeping copper output relatively stable until the project’s completion in 2016. Then, copper output will climb considerably, countering the effect of lower grades at the mine. Regarding COGS, we are not assuming major savings before the expansion, yet with the new capacity, we foresee that Cerro Verde will benefit from economies of scale.
• On the other hand, Freeport adjusted the total budget for the project from $4.4bln to $4.6bln and considering the rate at which Cerro Verde disbursed its capex last year, we adjusted our capex profile for 2014 - 2015, period in which disbursements will be considerably high. In this scenario, and considering the outlook for copper, we believe that the company may issue debt this year, yet we have not taken this assumption into our valuation so far. Finally, along with the project’s execution and as part of an agreement with the government of Arequipa, Cerro Verde will finance the engineering and construction of a wastewater treatment plant (PTAR) that will serve the Arequipa community and supplement the existing water supply of the company once the expansion is complete. In fact, the company received the approval of the EIA for this treatment plant last August.
OUTLOOK 2014
• Cerro Verde’s financial performance will be guided by the expected decline in the average copper price this year. In this scenario, we expect the company to post a net result of $538.3m.
RISK TO OUR VALUATION
• Changes in the outlook for copper, delays in the execution of the concentrator expansion or further increases in the capital expenditure budget will prompt us to adjust our valuation. If the company issues debt, we would also need to review our forecasts.
TTAARRGGEETT PPRRIICCEE:: $$ 2288..6644 RRAATTIINNGG:: BBUUYY
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range $20.30 - $38.50
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
2.1x
CVERDEC1
Buy
Outperform
$24.20
$28.64
18.3%
-38.7%
132.8
350,056
0.0%
8,471
5.2%
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ja
n-1
3
Feb-1
3
Ma
r-1
3
Ap
r-13
May
-13
Ju
n-1
3
Ju
l-13
Aug
-13
Sep
-13
Oc
t-13
No
v-1
3
Dec-1
3
Ja
n-1
4Share Price Performance vs. IGBVL vs.
Mining Index
IGBVL
Cerro Verde
Mining Index
Source: Economática
Cerro Verde shares' price sensitivity ($)
Copper $/lb price vector
-20% -10% 0% 10% 20%
W 11.8% 22.24 26.52 30.80 35.08 39.36
A 12.3% 21.41 25.55 29.68 33.82 37.96
C 12.8% 20.64 24.64 28.64 32.64 36.64
C 13.3% 19.91 23.78 27.66 31.53 35.40
13.8% 19.22 22.98 26.73 30.48 34.24
INTELIGO SAB
40
January 21, 2014
CERRO VERDE Current Price: $ 24.20 Target Price: $ 28.64 Rating: BUY
0
150
300
450
600
750
900
1,050
1,200
2012 2013e 2014e 2015e 2016e
Cerro Verde Copper Output (million lb)*
*Cathodes equivalentSource: Cerro Verde, Inteligo's estimates
0
200
400
600
800
1,000
1,200
1,400
2012 2013e 2014e 2015e
Cerro Verde: Earnings ($ million)
Gross Result Net Result
Source: Cerro Verde, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 2,127.0 1,710.8 1,677.0 1,656.5
Gross Profit 1,325.5 958.6 873.9 800.2
Operating Expenses 78.7 64.6 58.8 59.2
EBIT 1,246.8 894.0 815.1 741.0
EBITDA 1,342.7 1,002.3 983.4 968.7
Net Income 772.1 578.5 538.3 488.5
EPS 2.21 1.65 1.54 1.40
DPS 0.00 0.00 0.00 0.00
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -15.6% -19.6% -2.0% -1.2%
EBIT Growth -22.6% -28.3% -8.8% -9.1%
EBITDA Growth -20.8% -25.3% -1.9% -1.5%
Net Income Growth -28.4% -25.1% -6.9% -9.2%
Gross Margin 62.3% 56.0% 52.1% 48.3%
Operating Margin 58.6% 52.3% 48.6% 44.7%
EBITDA Margin 63.1% 58.6% 58.6% 58.5%
Net Margin 36.3% 33.8% 32.1% 29.5%
Equity / Assets 85.3% 87.3% 88.5% 89.3%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 1,427.5 1,097.7 662.8 84.7
Assets 4,042.8 4,612.2 5,159.8 5,658.0
Financial Debt 0.0 0.0 0.0 0.0
Liabilities 593.1 584.1 593.3 603.1
Equity 3,449.7 4,028.2 4,566.4 5,054.9
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 1,342.7 1,002.3 983.4 968.7
CAPEX -600.9 -1,108.8 -1,159.0 -1,309.0
Taxes -434.5 -309.6 -264.1 -239.1
Working Capital Change 11.2 54.1 14.4 12.8
Free Cash Flow 318.5 -362.0 -425.3 -566.6
Value Indicators2012 2013e 2014e 2015e
P/E 11.0x 14.6x 15.7x 17.3x
EV/EBITDA 5.5x 7.4x 7.5x 7.6x
P/BV 2.5x 2.1x 1.9x 1.7x
P/Sales 4.0x 5.0x 5.1x 5.1x
ROA 19.1% 12.5% 10.4% 8.6%
ROE 22.4% 14.4% 11.8% 9.7%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
15.00
20.00
25.00
30.00
35.00
40.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Vo
lum
e (U
S$000)
Pri
ce (U
S$)
Cerro Verde 12-month performance
Volume Price
Source: Economática
INTELIGO SAB
41
January 21, 2014
SOCIEDAD MINERA EL BROCAL
INVESTMENT THESIS
• We are updating our coverage on El Brocal, setting a 12-month fundamental target price of PEN 11.45 and a BUY rating for the company’s C shares. The upward adjustment to the COGS profile during our valuation horizon is one of the main reasons behind the change in our target. Although our rating is BUY, we deem important to monitor the progress on the expansion project.
• The concentrator expansion to 18,000 tpd took longer than anticipated and, in 2013, El Brocal’s operating performance suffered from volatility in commodity markets. The project should be completed this year, yet with a new operating guidance, and we assume a ramp up until IIQ14. The new mining plan states that 7,000 tpd will be covered with copper ore from Marcapunta Norte and 11,000 tpd from Colquijirca Tajo Norte (Zn/Pb). This plan compares to the previous 3K tpd Cu/ 15Ktpd Zn/Pb.
• Regarding COGS, we still expect the higher level of output to have a favorable impact on costs by diluting fix costs; nevertheless, in a more conservative approach, we no longer assume important cost savings in coming years to meet declining ore grades.
• Without major news from San Gregorio and Marcapunta Oeste, we continue to exclude them from our valuation. Indeed, last year, exploration expenditures on non-operating areas retreated considerably. Finally, it is worth to mention that we are including the capital increase completed in December 2013.
OUTLOOK 2014
• El Brocal’s financial performance is expected to bounce back following the completion of the concentrator expansion. On the other hand, we foresee an increase in the company’s financial expenditures as the Board approved a new financing line with a higher interest rate. All in all, we expect El Brocal’s net earnings to reach $26.8m.
RISK TO OUR VALUATION
• Further delays in the expansion stand as the main risk to our valuation. On the other hand, additional costs savings, better ore grades and recoveries after the expansion would benefit our view on El Brocal, especially since the valuation is sensitive to our assumptions on ore grades and recoveries.
TTAARRGGEETT PPRRIICCEE:: PPEENN 1111..4455 RRAATTIINNGG:: BBUUYY
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ja
n-1
3
Feb
-13
Ma
r-1
3
Ap
r-13
Ma
y-1
3
Ju
n-1
3
Ju
l-13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Ja
n-1
4
Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
El Brocal C
Mining Index
Source: Economática
El Brocal shares' price sensitivity (PEN)
Zinc $/MT price vector
-20% -10% 0% 10% 20%
W 8.8% 10.45 11.25 12.06 12.86 13.66
A 9.3% 10.18 10.96 11.75 12.53 13.32
C 9.8% 9.92 10.69 11.45 12.21 12.98
C 10.3% 9.67 10.42 11.16 11.91 12.65
10.8% 9.43 10.16 10.88 11.61 12.34
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range S/. 9.90 - S/. 35.90
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
1.1x
BROCALC1
Buy
Outperform
S/. 9.90
S/. 11.45
15.7%
-73.4%
12.6
125,037
1.0%
461
40.6%
INTELIGO SAB
42
January 21, 2014
EL BROCAL C Current Price: PEN 9.90 Target Price: PEN 11.45 Rating: BUY
0
50
100
150
200
250
300
350
400
450
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Au
g-1
3
Oc
t-13
No
v-1
3
Jan
-14
Vo
lum
e (U
S$000)
Pri
ce (P
EN
)
El Brocal C 12-month performance
Volume Price
Source: Economática
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 268.5 181.9 274.8 332.5
Gross Profit 84.4 21.4 80.4 119.9
Operating Expenses 46.0 31.6 31.6 35.8
EBIT 38.4 -10.2 48.8 84.1
EBITDA 65.5 30.9 95.5 133.0
Net Income 24.5 -10.6 26.8 52.0
EPS 0.19 -0.08 0.21 0.40
DPS 0.25 0.04 0.04 0.08
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 1.5% -32.3% 51.1% 21.0%
EBIT Growth -65.2% n.m. n.m. 72.3%
EBITDA Growth -46.8% -52.8% 208.9% 39.3%
Net Income Growth -68.6% n.m. n.m. 94.3%
Gross Margin 31.4% 11.8% 29.3% 36.0%
Operating Margin 14.3% -5.6% 17.8% 25.3%
EBITDA Margin 24.4% 17.0% 34.8% 40.0%
Net Margin 9.1% -5.8% 9.7% 15.6%
Equity / Assets 68.3% 60.2% 63.5% 63.0%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 23.4 75.0 12.1 39.9
Assets 561.0 727.9 725.7 797.5
Financial Debt 60.3 180.1 144.1 168.1
Liabilities 177.7 289.5 265.1 295.3
Equity 383.3 438.4 460.6 502.2
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 65.5 30.9 95.5 133.0
CAPEX -113.3 -190.0 -70.3 -60.6
Taxes -14.3 3.1 -15.4 -26.8
Working Capital Change -11.6 13.0 -11.1 -7.8
Free Cash Flow -73.7 -143.0 -1.3 37.8
Value Indicators2012 2013e 2014e 2015e
P/E 18.7x n.m. 17.1x 8.8x
EV/EBITDA 8.6x 18.3x 5.9x 4.3x
P/BV 1.2x 1.1x 1.0x .9x
P/Sales 1.7x 2.5x 1.7x 1.4x
ROA 4.4% -1.4% 3.7% 6.5%
ROE 6.4% -2.4% 5.8% 10.4%
-10%
0%
10%
20%
30%
40%
50%
2012 2013e 2014e 2015e
El Brocal's Margins
Operating Margin EBITDA margin Net Margin
Source: El Brocal, Inteligo's estimates
50
100
150
200
250
300
350
400
2012 2013e 2014e 2015e
Revenues ($ million)
Source: El Brocal, Inteligo's estimates
INTELIGO SAB
43
January 21, 2014
COMPAÑÍA DE MINAS BUENAVENTURA
INVESTMENT THESIS
• We are updating our BVN valuation model, setting a 12-month fundamental target price of $15.56 and a BUY+ rating. Changes in metal prices and our downward revision to the NAV multiple on precious metals operations from 1.5x to 1.0x explain the revision. Despite these changes, we believe BVN still offers upside potential.
• Our view on silver output is more encouraging than that of gold, as the completion of the Rio Seco plant would increase recovery rates at Uchucchacua. Regarding gold, we assume a decline in output from direct operations given our cautious view on Orcopampa at least until the release of a reserves update. As per COGS, we expect BVN to continue with cost reduction efforts while improving the efficiency of operating units. Indeed, in 2013, BVN halted operations at three small units that were unprofitable under the new price scenario.
• Without major news from Conga, we also foresee a decline in Yanacocha’s gold output for this year, yet it is worth to mention that Newmont has not disclosed its 2014 forecast. Although Yanacocha’s revenues will suffer from lower output and price, we do not expect the same amount of charges due to inventories write-down as in 2013
• We believe that BVN is going through a period of adjustment to the new price scenario. Although its main focus is on current operations, we expect BVN to continue evaluating oportunitites to deliver value in the long term. Indeed, BVN signed an agreement with Mexican company Surutato Mining to explore a Ag/Zn/Pb deposit in Sinaloa. We look forward to news on this matter as well as progress on the Tambomayo project, which is not included in our valuation.
OUTLOOK 2014
• BVN’s performance will be affected by the decline on the average price of gold and silver. However, cost reduction measures, higher silver output, less extraordinary charges in Yanacocha and an improvement in El Brocal would help ease the decline of gold. In this context, we expect BVN to post a net result of $256.6m in 2014.
RISK TO OUR VALUATION
• A further decline in precious metals prices and failure to keep reducing costs stand as the main risks to our valuation. On the other hand, a reserves update on Orcopampa that supports gold output would be favorable for our financial model.
TTAARRGGEETT PPRRIICCEE:: $$ 1155..5566 RRAATTIINNGG:: BBUUYY++
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ja
n-1
3
Feb
-13
Ma
r-13
Ap
r-13
Ma
y-1
3
Ju
n-1
3
Ju
l-13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Ja
n-1
4
Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
BVN
Mining Index
Source: Economática
BVN shares' price sensitivity ($)
Gold $/oz price vector
-20% -10% 0% 10% 20%
W 8.2% 14.12 15.20 16.27 17.34 18.42
A 8.7% 13.76 14.83 15.90 16.98 18.05
C 9.2% 13.42 14.49 15.56 16.63 17.70
C 9.7% 13.09 14.16 15.23 16.30 17.37
10.2% 12.78 13.85 14.92 15.99 17.05
Market IndicatorsShares outstanding (000)
ADR Ratio 1
Dividend yield 2014e
52-week range $10.70 - $30.45
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
72.1
254,442
0.7%
3,188
67.1%
0.8x
BVN
Buy+
Outperform
$12.50
$15.56
24.5%
-64.8%
INTELIGO SAB
44
January 21, 2014
BUENAVENTURA Current Price: $ 12.50 Target Price: $ 15.56 Rating: BUY+
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Vo
lum
e (U
S$000)
Pri
ce (U
S$)
BVN 12-month performance
Volume Price
Source: Economática
0
200
400
600
800
1,000
1,200
1,400
2012 2013e 2014e 2015e
Gold Output (000 oz)
Gold Direct Production Yanacocha
Source: BVN, Inteligo's estimates
17.0
17.5
18.0
18.5
19.0
19.5
20.0
20.5
21.0
2012 2013e 2014e 2015e
Silver Output (million oz)
Source: BVN, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 1,563.5 1,275.0 1,230.5 1,261.2
Gross Profit 620.3 252.4 267.3 387.5
Operating Expenses 117.4 87.9 88.6 88.9
EBIT 502.9 164.5 178.8 298.7
EBITDA 626.0 323.3 369.5 498.9
Net Income 684.7 245.7 256.6 323.2
EPS 2.69 0.97 1.01 1.27
DPS 0.60 0.31 0.09 0.14
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 0.4% -18.5% -3.5% 2.5%
EBIT Growth -33.6% -67.3% 8.6% 67.1%
EBITDA Growth -26.7% -48.3% 14.3% 35.0%
Net Income Growth -20.3% -64.1% 4.4% 25.9%
Gross Margin 39.7% 19.8% 21.7% 30.7%
Operating Margin 32.2% 12.9% 14.5% 23.7%
EBITDA Margin 40.0% 25.4% 30.0% 39.6%
Net Margin 43.8% 19.3% 20.9% 25.6%
Equity / Assets 86.4% 83.8% 85.0% 85.3%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 186.7 146.6 81.9 153.8
Assets 4,588.7 4,699.2 4,690.7 4,804.7
Financial Debt 179.3 299.2 253.2 277.2
Liabilities 624.3 760.9 702.4 707.4
Equity 3,964.4 3,938.3 3,988.4 4,097.2
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 626.0 323.3 369.5 498.9
CAPEX -442.9 -386.9 -258.9 -234.1
Taxes -168.1 -51.8 -56.3 -94.8
Working Capital Change -26.7 64.1 -5.3 -24.0
Free Cash Flow -11.7 -51.3 49.0 146.1
Value Indicators2012 2013e 2014e 2015e
P/E 4.7x 13.0x 12.4x 9.9x
EV/EBITDA 5.3x 10.3x 9.0x 6.7x
P/BV 0.8x 0.8x 0.8x 0.8x
P/Sales 2.0x 2.5x 2.6x 2.5x
ROA 14.9% 5.2% 5.5% 6.7%
ROE 17.3% 6.2% 6.4% 7.9%
INTELIGO SAB
45
January 21, 2014
COMPAÑÍA MINERA ATACOCHA
INVESTMENT THESIS
• We are updating our coverage on Atacocha B shares, setting a 12-month fundamental target price of PEN 0.105 and a SELL rating. The improvement in COGS performance in the last quarters has prompted an upward revision to our target price; nonetheless, we still maintain a cautious view on the company.
• In 2013, when metal prices began to fall, Atacocha found itself with a high cost structure that led the company to post important losses. However, throughout the year, Milpo has managed to reduce Atacocha’s cash cost despite that the unit still requires expenditures to increase its reserves and resources base. It is worth to stress the importance of Milpo’s exploration efforts to increase the life of mine of this unit and we believe the company could provide an update on the results of ongoing explorations this year.
• The short life of mine of Atacocha is limiting the production profile as no expansions can be planned withouth the appropiate reserves base to support them. For this reason, we are maintaing Atacocha’s concentrates production fairly stable during our valuation horizon. In addition, we expect Milpo’s cost reduction measures to continue this year, allowing Atacocha to improve its financial performance compared to 2013; nonetheless, volatility scenarios cannot be discarded since Atacocha’s cost structure remains high. Moreover, it is worth to stress the sensitivity of Atacocha’s forecasts given its short life of mine.
OUTLOOK 2014
• We expect costs to continue to ease this year; yet the need for further exploration works may limit the potential for high savings. In this scenario, Atacocha’s net result would still end on negative ground, but the losses would be lower than those registered in 2013.
RISK TO OUR VALUATION • A higher-than-expected volatility in commodity
prices stands as the main risk to our valuation due to the high cost structure of the company. On the other hand, a favorable update on the reserves and resources base that increases the life of mine would benefit our view on Atacocha.
TTAARRGGEETT PPRRIICCEE:: PPEENN 00..110055 RRAATTIINNGG:: SSEELLLL
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ja
n-1
3
Feb-1
3
Ma
r-1
3
Ap
r-13
May
-13
Ju
n-1
3
Ju
l-13
Aug
-13
Sep
-13
Oc
t-13
No
v-1
3
Dec-1
3
Ja
n-1
4
Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
Atacocha B
Mining Index
Source: Economática
Atacocha B shares' price sensitivity (PEN)
Zinc $/MT price vector
-20% -10% 0% 10% 20%
W 10.4% 0.051 0.079 0.107 0.136 0.164
A 10.9% 0.050 0.078 0.106 0.134 0.162
C 11.4% 0.049 0.077 0.105 0.133 0.161
C 11.9% 0.048 0.076 0.104 0.132 0.159
12.4% 0.048 0.075 0.103 0.130 0.158
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range S/. 0.10 - S/. 0.25
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
0.7x
ATACOBC1
Sell
Outperform
S/. 0.12
S/. 0.105
-12.5%
-50.0%
64.4
427,550
0.0%
58.2
25.0%
INTELIGO SAB
46
January 21, 2014
ATACOCHA B Current Price: PEN 0.12 Target Price: PEN 0.105 Rating: SELL
0
50
100
150
200
250
300
0.00
0.05
0.10
0.15
0.20
0.25
0.30
Ja
n-1
3
Mar-
13
Ap
r-13
Ju
n-1
3
Jul-
13
Au
g-1
3
Oct-
13
No
v-1
3
Ja
n-1
4
Vo
lum
e (U
S$
000
)
Pri
ce
(P
EN
)
Atacocha B 12-month performance
Volume Price
Source: Economática
0
10
20
30
40
50
60
70
80
90
100
2012 2013e 2014e 2015e
Concentrates output (000 MT)
Lead Zinc Copper
Source: Atacocha, Inteligo's estimates
70
80
90
100
110
120
130
2012 2013e 2014e 2015e
Revenues ($ million)
Source: Atacocha, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 111.2 98.8 101.4 105.1
Gross Profit 1.4 0.5 9.3 14.2
Operating Expenses 9.8 8.4 8.7 9.1
EBIT -8.5 -7.9 0.6 5.2
EBITDA 23.7 20.1 26.0 29.1
Net Income -8.7 -12.2 -1.3 2.2
EPS -0.01 -0.01 0.00 0.00
DPS 0.00 0.00 0.00 0.00
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -17.5% -11.1% 2.6% 3.6%
EBIT Growth n.m. n.m. n.m. 711.1%
EBITDA Growth -56.5% -15.0% 29.3% 11.9%
Net Income Growth n.m. n.m. n.m. n.m.
Gross Margin 1.2% 0.5% 9.2% 13.5%
Operating Margin -7.6% -8.0% 0.6% 4.9%
EBITDA Margin 21.3% 20.4% 25.7% 27.7%
Net Margin -7.8% -12.3% -1.3% 2.1%
Equity / Assets 51.5% 51.7% 51.6% 52.4%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 22.3 10.5 13.0 14.2
Assets 189.3 164.8 162.5 164.5
Financial Debt 22.9 12.5 12.5 12.5
Liabilities 91.9 79.6 78.6 78.4
Equity 97.4 85.2 83.9 86.1
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 23.7 20.1 26.0 29.1
CAPEX -14.3 -18.0 -20.0 -24.0
Taxes 2.4 2.7 -0.2 -1.7
Working Capital Change 4.2 -1.0 -1.2 -0.5
Free Cash Flow 16.0 3.8 4.6 3.0
Value Indicators2012 2013e 2014e 2015e
P/E n.m. n.m. n.m. 20.0x
EV/EBITDA 2.5x 3.0x 2.3x 2.1x
P/BV 0.6x 0.7x 0.7x 0.7x
P/Sales 0.5x 0.6x 0.6x 0.6x
ROA -4.6% -7.4% -0.8% 1.3%
ROE -9.0% -14.3% -1.6% 2.6%
INTELIGO SAB
47
January 21, 2014
COMPAÑÍA MINERA MILPO
INVESTMENT THESIS
• We are updating our Milpo valuation model, setting a 12-month fundamental target price of PEN 2.97 for the company’s C shares and a BUY+ rating.
• The expansion of Cerro Lindo has proved to be a good strategy for Milpo in 2013, allowing the company to face the volatility in commodity prices by increasing concentrates output and supporting margins. We maintain our favorable view on this unit and the contribution to Milpo’s financial performance in the coming years. Indeed, Cerro Lindo has been working at full capacity over the last quarters and we now believe that rather than slowing down, Milpo will keep this rate of production, pushing an upward revision to our forecasts. For 2014, we also foresee that El Porvenir would pick up the pace of production, coming closer to its 5,600 tpd capacity, yet in Atacocha we do not expect further changes.
• In addition to Cerro Lindo, the long term performance of Milpo will be guided by the results of exploration works to expand the life of mine of its current operations (Atacocha, El Porvenir), additional cost reduction efforts, which we expect to continue this year, and the development of its portfolio of projects. Regarding costs, Milpo is working to integrate the operational overhead of Atacocha and El Porvenir, measure that will bring costs savings by eliminating redundant expenses. Moreover, the company is focusing its growth strategy on exploration at its copper operations currently on hold (Chapi, Ivan) and on reviewing alternative mine plans for the Greenfield projects (Pukaqaqa, Hilarion, Magistral) - included in our valuation through their in situ value - in order to bring them into production sooner; nonetheless, this may be accomplished at a smaller scale.
OUTLOOK 2014
• Higher output at Cerro Lindo and further costs reductions at El Porvenir and Atacocha will support Milpo’s financial performance this year. Overall, we expect the company’s net earnings to reach $87.1m in 2014.
RISK TO OUR VALUATION
• Lower-than-expected base metal prices would affect our forecasts. On the other hand, news from Pukaqaqa, Hilarion and Magistral would prompt us to adjust our valuation model.
TTAARRGGEETT PPRRIICCEE:: PPEENN 22..9977 RRAATTIINNGG:: BBUUYY++
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jan
-13
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Jun
-13
Jul-
13
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Jan
-14
Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
Milpo C
Mining Index
Source: Economática
Milpo shares' price sensitivity (PEN)
Zinc $/MT price vector
-20% -10% 0% 10% 20%
W 10.2% 2.54 2.81 3.08 3.35 3.62
A 10.7% 2.49 2.76 3.02 3.28 3.55
C 11.2% 2.45 2.71 2.97 3.22 3.48
C 11.7% 2.40 2.66 2.91 3.17 3.42
12.2% 2.36 2.61 2.86 3.11 3.36
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range S/. 1.13 - S/. 3.01
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
199.0
1,098,963
0.0%
899
31.6%
1.6x
MILPOC1
Buy+
Outperform
S/. 2.28
S/. 2.97
30.1%
-16.8%
INTELIGO SAB
48
January 21, 2014
MILPO C Current Price: PEN 2.28 Target Price: PEN 2.97 Rating: BUY+
0
150
300
450
600
0.00
1.00
2.00
3.00
4.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Vo
lum
e (U
S$000)
Pri
ce (P
EN
)
Milpo C 12-month performance
Volume Price
Source: Economática
600
650
700
750
800
2012 2013e 2014e 2015e
Milpo: Consolidated Revenues ($ million)
Source: Milpo, Inteligo's estimates
0
50
100
150
200
250
300
350
400
450
500
2012 2013e 2014e 2015e
Concentrates output (000 MT)*
Lead Zinc Copper
*Includes only Cerro Lindo and El Porvenir production.Source: Milpo, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 691.0 710.5 748.9 762.9
Gross Profit 239.9 270.0 293.6 312.7
Operating Expenses 135.3 107.1 109.1 113.3
EBIT 104.7 162.9 184.5 199.4
EBITDA 276.4 319.6 341.2 356.3
Net Income 21.2 70.9 87.1 94.7
EPS 0.02 0.06 0.08 0.09
DPS 0.01 0.00 0.00 0.03
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -6.4% 2.8% 5.4% 1.9%
EBIT Growth -52.9% 55.7% 13.2% 8.1%
EBITDA Growth -20.1% 15.6% 6.8% 4.4%
Net Income Growth -84.2% 234.7% 22.8% 8.8%
Gross Margin 34.7% 38.0% 39.2% 41.0%
Operating Margin 15.1% 22.9% 24.6% 26.1%
EBITDA Margin 40.0% 45.0% 45.6% 46.7%
Net Margin 3.1% 10.0% 11.6% 12.4%
Equity / Assets 48.1% 46.0% 50.1% 52.6%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 113.7 297.8 361.7 382.1
Assets 1,033.2 1,222.3 1,295.8 1,351.9
Financial Debt 249.5 375.2 359.2 354.2
Liabilities 536.4 660.0 647.0 640.9
Equity 496.7 562.3 648.8 711.0
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 276.4 319.6 341.2 356.3
CAPEX -248.3 -157.1 -157.4 -189.4
Taxes -42.9 -59.4 -66.9 -72.9
Working Capital Change -8.5 -4.8 -2.2 -3.0
Free Cash Flow -23.3 98.3 114.7 91.0
Value Indicators2012 2013e 2014e 2015e
P/E 42.6x 12.7x 10.4x 9.5x
EV/EBITDA 3.5x 3.1x 2.9x 2.7x
P/BV 1.8x 1.6x 1.4x 1.3
P/Sales 1.3x 1.3x 1.2x 1.2
ROA 2.1% 5.8% 6.7% 7.0%
ROE 4.3% 12.6% 13.4% 13.3%
INTELIGO SAB
49
January 21, 2014
MINSUR
INVESTMENT THESIS
• We are updating our coverage on Minsur’s I shares, setting a 12-month fundamental target price of PEN 1.98 and a BUY rating.
• The start of operations of Pucamarca in 2013 allowed Minsur to ease the effect of lower tin production at the San Rafael mine. Pucamarca was expected to produce around 75,000 oz Au per year; however, output came well above guidance and stood over 100,000 oz. This favorable surprise, coupled with the low cash cost, prevented a further decline in Minsur’s bottom line. We expect Pucamarca to continue benefiting Minsur in the coming years, but the contribution would be lower due to the weak outlook for gold.
• Regarding tin, we do not foresee major changes in the production profile of the San Rafael mine, yet we believe that the fundamentals of the tin market remain supportive for Minsur. On the other hand, the short life of mine of San Rafael has prompted us to review our costs forecasts upwards, as we foresee high development expenditures and exploration requirements.
• Regarding projects, the treatment of old tailings at the San Rafael mine (at pre feasibility phase and not included in our valuation) would increase tin output by around 6.3 MT for 6 - 8 years starting in 2016. Moreover, looking forward, Minsur has developed a growth strategy that includes consolidating the operation of Taboca’s Pitinga mine (Sb/Nb/Ta) and in the future boost Niobium and Tantalum production, and developing the Mina Justa copper mine, in which Minsur has a 70% stake through its Cumbres Andinas subsidiary. On this matter, we continue to take the contribution of subsidiaries through its book value with a P/BV ratio of 0.7x.
OUTLOOK 2014
• Tin revenues will benefit from the expected increase in prices, yet total revenues will decline in line with the lower contribution from Pucamarca given the gold price forecast and our estimate of lower output (80K oz). In this scenario, we expect Minsur’s net earnings to reach $222.6m in 2014.
RISK TO OUR VALUATION
• Lower-than-expected tin and gold prices stand as the main risk to our valuation. Furthermore, failure to replenish San Rafael’s reserves & resources base or to improve Taboca’s performance would affect our long term view on Minsur.
TTAARRGGEETT PPRRIICCEE:: PPEENN 11..9988 RRAATTIINNGG:: BBUUYY
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jan
-13
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Jun
-13
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct
-13
No
v-1
3
De
c-1
3
Jan
-14
Share Price Performance vs. IGBVL vs. Mining Index
IGBVL
Minsur I
Mining Index
Source: Economática
Minsur shares' price sensitivity (PEN)
Tin $/MT price vector
-20% -10% 0% 10% 20%
W 11.5% 1.76 1.88 1.99 2.11 2.22
A 12.0% 1.76 1.87 1.99 2.10 2.22
C 12.5% 1.76 1.87 1.98 2.10 2.21
C 13.0% 1.75 1.87 1.98 2.09 2.20
13.5% 1.75 1.86 1.97 2.09 2.20
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-week range S/. 1.15 - S/. 2.56
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
0.8x
MINSURI1
Buy
Outperform
S/. 1.65
S/. 1.98
20.2%
-29.8%
731.4
2,883,001
3.9%
1,693
28.0%
INTELIGO SAB
50
January 21, 2014
MINSUR I Current Price: PEN 1.65 Target Price: PEN 1.98 Rating: BUY
22,500
23,000
23,500
24,000
24,500
25,000
25,500
26,000
2012 2013e 2014e 2015e
Tin Output (MT)
Source: Minsur, Inteligo's estimates
0
100
200
300
400
500
600
700
800
900
1,000
0.50
1.00
1.50
2.00
2.50
3.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Vo
lum
e (U
S$000)
Pri
ce (P
EN
)
Minsur I 12-month performance
Volume Price
Source: Economática
0
100
200
300
400
500
2012 2013e 2014e 2015e
Minsur's Earnings ($million)
Gross Result Net Result
Source: Minsur, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 640.5 743.1 692.5 709.7
Gross Profit 443.7 448.9 397.6 414.7
Operating Expenses 45.6 45.1 42.6 45.7
EBIT 398.1 403.8 355.0 368.9
EBITDA 429.3 462.8 414.0 428.8
Net Income 261.4 247.2 222.6 235.4
EPS 0.09 0.09 0.08 0.08
DPS 0.05 0.02 0.02 0.02
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -21.6% 16.0% -6.8% 2.5%
EBIT Growth -35.1% 1.4% -12.1% 3.9%
EBITDA Growth -33.3% 7.8% -10.6% 3.6%
Net Income Growth -36.2% -5.4% -10.0% 5.8%
Gross Margin 69.3% 60.4% 57.4% 58.4%
Operating Margin 62.2% 54.3% 51.3% 52.0%
EBITDA Margin 67.0% 62.3% 59.8% 60.4%
Net Margin 40.8% 33.3% 32.1% 33.2%
Equity / Assets 84.4% 85.6% 86.5% 87.3%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 91.3 243.3 405.0 561.9
Assets 2,367.6 2,563.4 2,719.3 2,882.4
Financial Debt 202.3 201.7 201.7 200.0
Liabilities 370.2 368.3 368.3 366.7
Equity 1,997.4 2,195.1 2,351.0 2,515.8
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 429.3 462.8 414.0 428.8
CAPEX -128.8 -59.0 -65.1 -62.1
Taxes -142.4 -142.9 -125.6 -130.6
Working Capital Change 25.3 -27.7 3.5 -1.2
Free Cash Flow 183.5 233.2 226.7 235.0
Value Indicators2012 2013e 2014e 2015e
P/E 6.5x 6.8x 7.6x 7.2x
EV/EBITDA 3.8x 3.6x 4.0x 3.9x
P/BV 0.8x 0.8x 0.7x 0.7x
P/Sales 2.6x 2.3x 2.4x 2.4
ROA 11.0% 9.6% 8.2% 8.2%
ROE 13.1% 11.3% 9.5% 9.4%
INTELIGO SAB
51
January 21, 2014
UNACEM INVESTMENT THESIS
• We are updating our UNACEM’s valuation model, setting a 12-month fundamental target price of PEN 4.30 and a BUY rating.
• The development of important infrastructure projects will continue to boost the firm´s sales volume. This, coupled with the dynamism of the self-construction segment and the expansion of the emerging middle-class, will bring support to Unacem´s cement dispatches growth in the upcoming years. Furthermore, if we consider that 30% of the actual infrastructure deficit ($88mbln) is in Lima, we can assume that this will provide the company with an ample scope to keep on growing in the long-term.
• The merger with Cemento Andino brought sooner-than-expected operating efficiencies but we believe there is further room for improvements in terms of supply chain integration and brand penetration; therefore, margins should continue improving. Moreover, this will be the first full year in which the company will have its furnaces operating at 100% and without clinker imports, meaning that 2014 will be a key year for Unacem because they will be able to quantify their recent plant expansion investments.
• El Platanal hydroelectric plant (90% of Unacem) continues showing important returns and Drake cement plant is showing higher activity, in response to the recovery of the real estate market in the US. Thereby, we continue expecting higher contributions from Unacem´s subsidiaries in the coming years.
OUTLOOK 2014
• UNACEM’s revenues will maintain a solid growth rate in 2014, in line with the strong activity in the self-construction segment and the development of infrastructure projects in Lima. The higher production capacity will also contribute to the increase in sales. Thus, UNACEM will post net earnings of $123.0m in 2014.
RISK TO OUR VALUATION
• The main risks to our valuation are represented by a new cycle of economic slowdown that could reduce cement demand and the entry of new competitors in the central region of Peru.
TTAARRGGEETT PPRRIICCEE:: PPEENN 44..3300 RRAATTIINNGG:: BBUUYY
50
60
70
80
90
100
110
120
130
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Unacem
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
3.8% 4.3% 4.8% 5.3% 5.8%
W 7.4% 4.60 5.05 5.68 6.59 8.05A 7.9% 4.18 4.52 4.96 5.57 6.46C 8.4% 3.86 4.12 4.30 4.87 5.46C 8.9% 3.60 3.81 4.05 4.37 4.79
9.4% 3.39 3.55 3.75 3.99 4.30
UNACEM shares' price sensitivity (PEN)Perpetuity Growth
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 2.68 S/. 4.20
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating Market Perform
S/. 3.78
S/. 4.305.6%
13.9%
BuyUNACEMC1
1.8x
1,646,503
1.4%
405.8
12.0%
2,215.2
INTELIGO SAB
52
January 21, 2014
UNACEM Current Price: PEN 3.78 Target Price: PEN 4.30 Rating: BUY
34.0%
34.5%
35.0%
35.5%
36.0%
36.5%
0.0
150.0
300.0
450.0
2012 2013e 2014e 2015e
Profit & Margins
Gross Result Net Income EBITDA Margin
Source: UNACEM , Inteligo´s estimates
$million
42%
42%
43%
43%
44%
44%
45%
45%
46%
46%
0
150
300
450
600
750
900
2012 2013e 2014e 2015e
Sales vs. Gross Margin
Sales Gross Margin
Source: UNACEM , Inteligo´s estimates
$million
Income Statement (US$m)
2012 2013e 2014e 2015eRevenues 605.6 622.3 679.2 751.5
Gross Result 258.7 269.2 298.0 335.7
Operating Expenses 89.0 82.9 94.8 106.5
EBIT 169.7 186.3 203.3 229.2
EBITDA 207.5 222.9 240.6 267.4
Net Income 126.2 82.1 123.0 146.8
EPS 0.08 0.05 0.07 0.09
DPS 0.02 0.01 0.02 0.02
Growth and Margins
2012 2013e 2014e 2015eRevenues growth 14.0% 2.8% 9.1% 10.7%
EBIT growth 14.8% 9.8% 9.1% 12.8%
EBITDA growth 12.5% 7.4% 8.0% 11.1%
Net Income growth 16.7% -35.0% 49.8% 19.4%
Gross Margin 42.7% 43.3% 43.9% 44.7%
Operating Margin 28.0% 29.9% 29.9% 30.5%
EBITDA Margin 34.3% 35.8% 35.4% 35.6%
Net Margin 20.8% 13.2% 18.1% 19.5%
Equity / Assets 54.5% 57.8% 58.0% 58.2%
Balance Sheet (US$m)
2012 2013e 2014e 2015eCash 26.0 33.8 32.1 31.5
Assets 2,127.2 2,109.3 2,260.7 2,444.1
Financial Debt 681.7 659.3 711.6 776.4
Liabilities 968.4 889.1 948.6 1,022.4
Equity 1,158.8 1,220.1 1,312.0 1,421.8
Free Cash Flow (US$m)
2012 2013e 2014e 2015eEBITDA 207.5 222.9 240.6 267.4
CAPEX -116.8 -49.1 -19.6 -19.6
Taxes -59.4 -65.2 -71.1 -80.2
Working Capital Change 4.3 0.0 1.7 1.9
Free Cash Flow 35.6 108.5 151.5 169.4
Value Indicators
2012 2013e 2014e 2015eP/E 17.3x 26.6x 17.8x 14.9x
EV/EBITDA 13.7x 12.7x 11.8x 10.6x
P/BV 1.9x 1.8x 1.7x 1.5x
P/Sales 3.6x 3.5x 3.2x 2.9x
ROA 5.9% 3.9% 5.4% 6.0%
ROE 10.9% 6.7% 9.4% 10.3%
0
700
1,400
2,100
2,800
3,500
4,200
2.50
2.70
2.90
3.10
3.30
3.50
3.70
3.90
4.10
4.30
Jan
-13
Feb
-13
Mar-
13
Ap
r-13
May-1
3
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oc
t-13
Oc
t-13
No
v-1
3
Dec-1
3
Jan
-14
Volu
me (U
S$000)
Price (P
EN
)
Unacem's C share 12-month performance
Volume PriceSource: Economatica
INTELIGO SAB
53
January 21, 2014
CEMENTOS PACASMAYO
INVESTMENT THESIS
• We are updating our coverage on Cementos Pacasmayo (CP), setting a 12-month target price of PEN 7.31 and a BUY rating. In terms of the ADS and considering the 5 to 1 ratio, the target price at New York stands at $12.82.
• We consider that sales volume will continue to grow in line with the sound performance of the construction sector in the northern of Peru. Moreover, cement dispatches will be boosted by the development of projects in the retail and real estate markets, as well as public projects. Likewise, the self-construction segment should keep the high cement requirements, in line with the expansion of the emerging middle class.
• The new facility in Piura (expected in 2015) will add 1.6m MT and 1.0m MT to the company’s cement and clinker output capacity, respectively. This higher capacity will allow the company to meet the growing demand for cement and other related materials with higher operating efficiencies.
• Fosfatos del Pacífico (FOSPAC) accounts for 7.8% of our target price (PEN 0.51). The project just finished the basic engineering but still needs the approval of Mitsubishi Corp. (owner of 30% of the project) before it is released to the market. It is worth to mention that the Salmueras Sudamericanas project is not included in our CP’s valuation.
OUTLOOK 2014 • We expect revenues to increase around 9.6%
guided by the demand from the self-construction segment. In terms of COGS, productive efficiency is almost complete, so we should not expect significant margin changes. All in all, we foresee that CP will post net earnings of $71.3m
(+15.2%) in 2014.
RISK TO OUR VALUATION
• The main risks to our valuation are: i) lower-than-expected local economic growth, ii) a decrease in the prices of brine and phosphate rock that could affect CP´s mining projects expected returns and ii) the entry of new competitors.
TTAARRGGEETT PPRRIICCEE:: PPEENN 77..3311 RRAATTIINNGG:: BBUUYY
3.4% 3.9% 4.4% 4.9% 5.4%
W 7.8% 7.14 7.66 8.34 9.25 10.53
A 8.3% 6.59 7.00 7.51 8.17 9.05
C 8.8% 6.15 6.47 7.31 7.36 8.00
C 9.3% 5.79 6.05 7.07 6.74 7.229.8% 5.48 5.70 6.96 6.25 6.62
Cementos Pacasmayo shares' price sensitivity (PEN)Perpetuity Growth
50
60
70
80
90
100
110
120
130
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Pacasmayo
Inteligo´s domestic demand index
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 5.57 S/. 7.71
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating Market Perform
S/. 6.46
S/. 7.31-7.7%
13.2%
BuyCPACASC1
1.7x
531,461
2.4%
503.3
15.9%
1,292.07
INTELIGO SAB
54
January 21, 2014
CEMENTOS PACASMAYO Current Price: PEN 6.46 Target Price: PEN 7.31 Rating: BUY
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
50
100
150
200
250
300
350
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
Cement dispatches growth (000 MT)
Peru Cementos Pacasmayo Market Share
Source: CP, Inteligo, INEI
0
300
600
900
1,200
1,500
1,800
4.00
4.80
5.60
6.40
7.20
8.00
8.80
Jan
-13
Ma
r-1
3
Ap
r-1
3
May
-13
Jun
-13
Jul-
13
Au
g-1
3
Oct-
13
No
v-1
3
De
c-1
3
Jan
-14
Cementos Pacasmayo's C shares 12-month performance
Volume PriceSource: Economatica
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 410.5 442.6 485.1 520.4
COGS 250 252 275 290
Gross Profit 160.3 190.8 210.6 230.1
Operating Expenses 82.1 79.2 94.5 103.4
EBIT 78.2 111.6 116.1 126.7
EBITDA 95.0 130.8 141.3 155.5
Net Income 54.6 61.9 71.3 79.6
EPS 0.10 0.12 0.13 0.15
DPS 0.03 0.05 0.06 0.06
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 59.4% 7.8% 9.6% 7.3%
EBIT Growth 17.7% 42.7% 4.0% 9.1%
EBITDA Growth 22.3% 37.7% 8.0% 10.1%
Net Income Growth 137.7% 13.3% 15.2% 11.7%
Gross Margin 39.0% 43.1% 43.4% 44.2%
Operating Margin 19.0% 25.2% 23.9% 24.3%
EBITDA Margin 23.1% 29.6% 29.1% 29.9%
Net Margin 13.3% 14.0% 14.7% 15.3%
Equity/Assets 79.5% 67.6% 68.5% 66.3%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 24.5 163.3 9.6 4.6
Assets 836.3 1,033.0 1,076.4 1,180.1
Financial Debt 75.6 287.5 287.5 343.7
Liabilities 171.7 334.4 338.6 397.7
Equity 664.6 698.6 737.8 782.4
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 95.0 130.8 141.3 155.5
CAPEX -105.9 -115.5 -200.0 -120.0
Taxes -27.4 -39.1 -40.6 -44.3
Working Capital Change -24.0 -3.2 -8.1 -6.1
Free Cash Flow -62.3 -26.9 -107.4 -15.0
Value Indicators2012 2013e 2014e 2015e
P/E 22.1x 19.5x 16.9x 15.1x
EV/EBITDA 14.0x 10.2x 9.4x 8.5x
P/BV 1.8x 1.7x 1.6x 1.5x
P/Sales 2.9x 2.7x 2.5x 2.3x
ROA 6.5% 6.0% 6.6% 6.7%
ROE 8.2% 8.9% 9.7% 10.2%
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
0.0
150.0
300.0
2012 2013e 2014e 2015e
Profit & Margins
Gross Result Net Income EBITDA Margin
$million
Source: CP , Inteligo´s estimates
INTELIGO SAB
55
January 21, 2014
FERREYCORP
INVESTMENT THESIS
• We are updating our Ferreycorp valuation model, setting a 12-month fundamental target price of PEN 2.59 and a BUY+ rating.
• Ferreycorp’s sales volume should keep an upward trend due to the ongoing expansion of important mining projects. Also, the higher presence of the company in other sectors such as Construction, Transport and Agriculture & Foresty will be a key factor in terms of diversification in case the mining activity decelerates.
• The company is making significant progress in terms of inventory control and efficient asset management. Therefore we should expect better margins; specially in terms of net margin, which should not be affected by FX volatility in this period.
• We believe the expansion stategy of Ferreycorp in the intenational market will also contribute to achieve higher revenues and margins, specially as the new subsidiaries have consolidated sooner-than-expected. In this sense, we remain positive regarding the contribution of Gentrac to the company. In the local front, the acquisition of Bucyrus has allowed the firm to regain market share on the Global Mining segment and to have a more complete machinery equipment, that will allow it to compete with new market entrants.
OUTLOOK 2014 • Althought the mining companies will keep
tightening their budgets for new exploration projects, we believe they will focus their capital expenditures on improving current operations or developing projects that are already on the pipeline. This represents an important catalyst for Ferreycorp´s revenues this year. Furthermore, the portfolio of infrastructure projects should boost demand for capital goods. In this context, Ferreycorp will post a net result of $77.5m (+80.9%).
RISK TO OUR VALUATION
• The potential worsening of social conflicts in the mining sector would have a direct impact on our growth estimates. Moreover, a sharper decline in commodity prices may affect the demand for capital goods.
TTAARRGGEETT PPRRIICCEE:: PPEENN 22..5599 RRAATTIINNGG:: BBUUYY++
50
60
70
80
90
100
110
120
130
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May
-13
Jun
-13
Jul-
13
Au
g-1
3
Se
p-1
3
Oc
t-13
No
v-1
3
Dec
-13
Jan
-14
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Ferreycorp
Inteligo´s domestic demand index
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 1.53 S/. 2.40
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
FERREYC1
Market Perform
945,227
3.7%
730.2
19.3%
639.21
1.2x
S/. 1.90
S/. 2.59-13.0%
36.6%
Buy+
1.9% 2.4% 2.9% 3.4% 3.9%
W 9.7% 2.68 2.79 2.92 3.07 3.25A 10.2% 2.54 2.63 2.74 2.87 3.02C 10.7% 2.42 2.50 2.59 2.70 2.83C 11.2% 2.31 2.38 2.46 2.56 2.66
11.7% 2.21 2.28 2.35 2.43 2.52
Ferreycorp shares' price sensitivity (PEN)Perpetuity Growth
INTELIGO SAB
56
January 21, 2014
FERREYCORP Current Price: PEN 1.90 Target Price: PEN 2.59 Rating: BUY+
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1.00
1.50
2.00
2.50
3.00
Jan
-13
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Ju
l-13
Aug-1
3
Oc
t-13
Nov-1
3
Dec-1
3
Jan
-14
Vo
lum
e $
(000
)
Price
(P
EN
)
Ferreycorp' shares 12-month performance
Volume PriceSource: Economatica
Income Statement (US$m)
2012e 2013e 2014e 2015eRevenues 1,639.2 1,750.8 1,843.4 1,938.0
Gross Result 323.3 376.0 407.3 429.9
Operating Expenses 228.9 243.7 259.9 273.2
EBIT 94.4 132.3 147.4 156.7
EBITDA 148.0 212.8 227.5 235.3
Net Income 77.3 42.8 77.5 82.8
EPS 0.08 0.05 0.08 0.09
DPS 0.01 0.00 0.01 0.02
Growth and Margins
2012e 2013e 2014e 2015eRevenues growth 22.1% 6.8% 5.3% 5.1%
EBIT growth 0.0% 40.1% 11.4% 6.3%
EBITDA growth 11.8% 43.8% 6.9% 3.4%
Net Income growth 13.0% -44.6% 80.9% 7.0%
Gross Margin 19.7% 21.5% 22.1% 22.2%
Operating Margin 5.8% 7.6% 8.0% 8.1%
EBITDA Margin 9.0% 12.2% 12.3% 12.1%
Net Margin 4.7% 2.4% 4.2% 4.3%
Equity / Assets 35.0% 33.3% 35.2% 36.5%
Balance Sheet (US$m)
2012e 2013e 2014e 2015eCash 60.8 145.6 148.3 141.0
Assets 1,428.9 1,592.0 1,656.2 1,712.9
Financial Debt 591.9 703.4 698.3 696.0
Liabilities 929.4 1,062.6 1,072.6 1,087.8
Equity 499.4 529.4 583.6 625.1
Free Cash Flow (US$m)
2012e 2013e 2014e 2015eEBITDA 148.0 212.8 227.5 235.3
CAPEX -115.0 -93.0 -93.0 -93.0
Taxes -33.1 -46.3 -51.6 -54.8
Working Capital Change 3.5 -7.5 -3.1 -0.9
Free Cash Flow 3.4 66.0 79.8 86.6
Value Indicators
2012e 2013e 2014e 2015eP/E 8.1x 14.7x 8.1x 7.6x
EV/EBITDA 7.8x 5.5x 5.1x 4.9x
P/BV 1.3x 1.2x 1.1x 1.0x
P/Sales 0.4x 0.4x 0.3x 0.3x
ROA 5.4% 2.7% 4.7% 4.8%
ROE 15.5% 8.1% 13.3% 13.3%
-
200
400
600
800
1,000
1,200
1,400
1,600
2012 2013e 2014e 2015e
Ferreycorp's Sales by Economic Sector (US$m)
Other
Energy
Fishing
Agriculture
Transport
Government
Construction
Mining
Source: Ferreycorp, Inteligo s estimates
5.0%
10.0%
15.0%
0
150
300
450
600
2012 2013e 2014e 2015e
Profit & Margins
Gross Result Net Income EBITDA Margin
Source: Ferreycorp, Inteligo s estimates
INTELIGO SAB
57
January 21, 2014
GRAÑA & MONTERO
INVESTMENT THESIS
• We are updating our coverage on Graña & Montero (GM), setting a 12-month fundamental target price of PEN 13.12 and a HOLD rating. In terms of the ADS and considering the 5 to 1 ratio, the target price at New York stands at $23.02.
• The Engineering & Construction business line will still be the main contributor to GM´s revenues as we expect the firm to sign new contracts and increase its backlog. In that sense, GM acquired DSD Construcciones y Montajes (DSD) to increase its presence in Chile. Further, the development of private-public works will bring dynamism to the Infrastructure business area. In this regard, projects like: i) Via Expresa´s expansion, ii) the III phase of Chavimochic irrigation project and iii) the II phase of the Ancon-Huacho-Pativilca concession will be the main contributors in the mid-term.
• GM currently has a $4.0bln backlog (backlog/revenues 2013e is 1.95x), $1.0bln in projects that are pending signatures and $17bln in projects under evaluation. We believe this will ensure the company´s growth in the coming years. Due to the cash acquired through the IPO in the NYSE and low leverage ratios we expect GM to continue signing new contracts and extending its backlog this year. On the other hand, we consider that GM´s size enables the firm to develop (without partners) medium size projects in a range of $0.5bln and $1.0bln
OUTLOOK 2014
• Revenues should grow in line with the higher execution of backlog, the higher participation in concessionaries and the contribution from the international subsidiaries. In this scenario, GM’s bottom line would end this year at $119.8m (+8.3%).
RISK TO OUR VALUATION
• Social demands and lower commodity prices could affect private investment, taking a toll on the company’s mining backlog. Moreover, legal issues could delay the start up of some projects.
TTAARRGGEETT PPRRIICCEE:: PPEENN 1133..1122 RRAATTIINNGG:: HHOOLLDD
50
60
70
80
90
100
110
120
130
Ja
n-1
3
Feb
-13
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec
-13
Ja
n-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Graña y Montero
Inteligo´s domestic demand index
Source: Economática, Inteligo's estimates
Perpetuity Growth3.1% 3.6% 4.1% 4.6% 5.1%
W 7.4% 13.11 14.37 16.02 18.25 21.44
A 7.9% 11.71 12.69 13.92 15.52 17.69
C 8.4% 11.40 12.17 13.12 14.31 15.87
C 8.9% 9.63 10.25 11.00 11.92 13.099.4% 8.83 9.34 9.94 10.67 11.57
Graña & Montero shares' price sensitivity (PEN)
Market IndicatorsShares outstanding (000)
Divided yield 2014e
52-w eek range S/. 10.31 S/. 12.79
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating Market Perform
S/. 13.122.7%
7.2%
HoldGRAMONC1
660,054
0.8%
1,127.9
30.0%
2,873.2
3.9x
S/. 12.23
INTELIGO SAB
58
January 21, 2014
GRAÑA Y MONTERO Current Price: PEN 12.23 Target Price: PEN 13.12 Rating: HOLD
0
1,500
3,000
4,500
6,000
7,500
10.00
10.85
11.70
12.55
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Ju
n-1
3
Ju
l-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Ja
n-1
4
Volu
me ($00
0)
Price (P
EN
)
Graña Shares 12-month performance
Volume Price
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
201
2
2013
e
2014
e
2015
e
EB
ITD
A M
arg
in
US
$ (0
00)
EBITDA
Source: GM, Inteligo´s estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 1,868.5 2,077.4 2,224.3 2,321.7
Gross Profit 254.3 341.1 368.0 388.8
Operating Expenses 92.4 128.4 133.1 136.7
EBIT 189.0 212.8 234.9 252.1
EBITDA 262.7 355.2 380.1 409.0
Net Income 103.6 110.6 119.8 127.3
EPS 0.16 0.17 0.18 0.19
DPS 0.03 0.03 0.04 0.06
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 23.4% 11.2% 7.1% 4.4%
EBIT Growth 9.0% 12.6% 10.4% 7.3%
EBITDA Growth 10.9% 35.2% 7.0% 7.6%
Net Income Growth 0.3% 6.8% 8.3% 6.3%
Gross Margin 13.6% 16.4% 16.5% 16.7%
Operating Margin 10.1% 10.2% 10.6% 10.9%
EBITDA Margin 14.1% 17.1% 17.1% 17.6%
Net Margin 5.5% 5.3% 5.4% 5.5%
Equity / Assets 35.2% 44.4% 46.1% 47.7%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 198.6 45.5 180.5 164.9
Assets 1,801.8 1,626.1 1,776.5 1,901.9
Financial Debt 302.0 330.6 347.1 358.1
Liabilities 1,167.5 903.4 957.9 994.1
Equity 634.3 722.8 818.6 907.8
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 262.7 355.2 380.1 409.0
CAPEX -320.0 -400.0 -310.6 -294.9
Taxes -66.2 -74.5 -82.2 -88.2
Changes in Working Capital -29.3 92.5 2.0 0.6
Free Cash Flow -152.8 -26.8 -10.8 26.5
Value Indicators2012 2013e 2014e 2015e
P/E 27.4x 25.6x 23.6x 22.2x
EV/EBITDA 11.2x 8.8x 7.9x 7.4x
P/BV 4.5x 3.9x 3.5x 3.1x
P/Sales 1.5x 1.4x 1.3x 1.2x
ROA 5.7% 6.8% 6.7% 6.7%
ROE 16.3% 15.3% 14.6% 14.0%
0
400
800
1,200
1,600
2,000
2,400
2,800
0.00%
5.00%
10.00%
15.00%
20.00%
2012 2013e 2014e 2015e
Revenues vs. GDP Construction
Revenues Construction GDP
Source: GM, Inteligo´s estimates
INTELIGO SAB
59
January 21, 2014
ALICORP INVESTMENT THESIS • We are updating our Alicorp C financial model,
setting a fundamental target price of PEN 9.44 and a HOLD rating. The growing demand for consumer goods in Peru, as well as the consolidation of subsidiaries abroad should support revenues growth.
• Alicorp’s growth strategy is focused in developing the most profitable products within its brand portfolio, both in Peru or in the region. Therefore, we expect a further consolidation in the consumer goods business line with core segments such as: i) pasta, ii) cookies, iii) home care, iv) edible oils, v) detergents and vi) sauces. Additionally, the subsidiaries Pastificio Santa Amalia, Industrias Teal and Salmofood should continue contributing to the sales volume growth over the next years.
• In 2013, the firm sold its pet food division to Empresas Carozzi and in the past years they got rid of the ice cream division as well, meaning that in order to develop their core segments the company could continue with this trend if they feel they can obtain higher returns in other categories. That said, the company is focusing its efforts in developing a new distribution center (Lurin) and a warehouse (Chilca). Moreover, the expansion of the detergent, cookie and pasta plants is also planned by the management
OUTLOOK 2014 • Alicorp´s revenues will climb around 10% in
2014, baked by the higher sales volume, product of the consolidations of its subsidiaries. On the other hand, the company’s margins should post better results, in line with the more efficient management of COGS and operating expenses. In this context, Alicorp’s net earnings will reach $152.1m (+20.3%) in 2014.
RISK TO OUR VALUATION • We believe that a further slowdown of private
consumption could affect our projections. Also, continuous volatility scenarios for soft commodities could affect COGS. On the other hand, the potential announcement of a new acquisition represents an upside risk to our valuation.
TTAARRGGEETT PPRRIICCEE:: PPEENN 99..4444 RRAATTIINNGG:: HHOOLLDD
50
60
70
80
90
100
110
120
130
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Alicorp
Inteligo´s domestic demand index
Source: Economática, Inteligo's estimates
2.5% 3.0% 3.5% 4.0% 4.5%
W 6.4% 10.06 11.20 12.73 14.89 18.16A 6.9% 8.98 9.84 10.95 12.44 14.54C 7.4% 8.13 8.79 9.44 10.71 12.16C 7.9% 7.43 7.96 8.61 9.43 10.48
8.4% 6.86 7.29 7.80 8.44 9.23
Alicorp shares' price sensitivity (PEN)Perpetuity Growth
Market Indicators
Shares outstanding (000)
Dividend yield
52-w eek range S/. 8.26 S/. 10.40
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
Rating Parameters
Current Price
Target price
Yield 12 months
Upside
Rating
Stock Ticker
Sector recommendation
3.4x
847,192
1,011.9
54.7%
2,828.73
2.5%
Underperform
S/. 9.30
S/. 9.44
5.6%
1.5%
Hold
ALICORC1
INTELIGO SAB
60
January 21, 2014
ALICORP Current Price: PEN 9.30 Target Price: PEN 9.44 Rating: HOLD
0
1,000
2,000
3,000
4,000
5,000
5.00
6.00
7.00
8.00
9.00
10.00
11.00
Jan-1
3
Ma
r-13
Apr-
13
May-1
3
Jun-1
3
Ju
l-13
Aug-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Volu
me
($00
0)
Pri
ce (P
EN
)
Alicorp´s shares 12-month performance
Volume Price
Source: Economatica
Income Statement (US$m)
2012 2013e 2014e 2015eRevenues 1,569.7 2,015.6 2,204.3 2,402.5
Gross Result 427.8 547.5 611.7 671.1
Operating Expenses 259.0 366.6 370.2 403.5
EBIT 168.9 180.9 241.4 267.6
EBITDA 194.1 260.7 295.4 327.9
Net Income 123.3 126.4 152.1 159.8
EPS 0.15 0.15 0.18 0.19
DPS 0.07 0.07 0.08 0.08
Growth and Margins
2012 2013e 2014e 2015eRevenues growth 5.1% 28.4% 9.4% 9.0%
EBIT growth -4.7% 7.1% 33.5% 10.8%
EBITDA growth -4.3% 34.3% 13.3% 11.0%
Net Income growth 6.3% 2.5% 20.3% 5.1%
Gross Margin 27.3% 27.2% 27.7% 27.9%
Operating Margin 10.8% 9.0% 11.0% 11.1%
EBITDA Margin 12.4% 12.9% 13.4% 13.6%
Net Margin 7.9% 6.3% 6.9% 6.7%
Equity / Assets 49.2% 42.6% 41.6% 43.9%
Balance Sheet (US$m)
2012 2013e 2014e 2015eCash 174.1 203.0 175.4 147.3
Assets 1,503.2 1,901.9 2,146.2 2,232.2
Financial Debt 466.2 719.3 709.5 735.8
Liabilities 763.2 1,092.5 1,253.2 1,251.2
Equity 740.0 809.5 893.1 981.0
Free Cash Flow (US$m)
2012 2013e 2014e 2015eEBITDA 194.1 260.7 295.4 327.9
CAPEX -158.3 -145.6 -145.6 -120.1
Taxes -59.1 -63.3 -84.5 -93.7
Working Capital Change -145.8 -107.3 -47.8 -48.8
Free Cash Flow -169.2 -55.5 17.4 65.3
Value Indicators
2012 2013e 2014e 2015eP/E 22.4x 21.9x 18.2x 17.3x
EV/EBITDA 15.7x 11.7x 10.3x 9.3x
P/BV 3.7x 3.4x 3.1x 2.8x
P/Sales 1.8x 1.4x 1.3x 1.2x
ROA 8.2% 6.6% 7.1% 7.2%
ROE 16.7% 15.6% 17.0% 16.3%
27%
27%
27%
27%
27%
28%
28%
28%
0150300450600750900
1,0501,2001,3501,5001,6501,8001,9502,1002,250
2012 2013e 2014e 2015e
Sales vs. Gross Margin
Sales Gross Margin
Source: Alicorp , Inteligo´ s estimates
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
0.0
150.0
300.0
450.0
600.0
750.0
2012 2013e 2014e 2015e
Profit & Margins
Gross Result Net Income EBITDA Margin
Source: Alicorp , Inteligo´ s estimates
INTELIGO SAB
61
January 21, 2014
Edegel shares' Price Sensitivity (PEN)Perpetuity Growth Rate
2.0% 2.5% 3.0% 3.5% 4.0%
6.7% 2.70 2.85 3.03 3.23 3.47
W 7.2% 2.59 2.73 2.89 3.08 3.30
A 7.7% 2.57 2.71 2.87 3.06 3.29
C 8.2% 2.39 2.51 2.65 2.82 3.02
C 8.7% 2.30 2.42 2.55 2.71 2.90
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector Rating
S/.2.59
S/.2.87
10.81%
-1.15%
EDEGELC1
Hold
Underperform
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4Share price performance vs. IGBVL vs.
Inteligo's domestic demand index
IGBVL
Edegel
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/.2.24 - S/.2.77
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
2,293,669
6.1%
2,114.4
2.2x
83.0
6.5%
EDEGEL INVESTMENT THESIS • We are updating our Edegel financial model,
determining a HOLD rating and a 12-month fundamental target price of PEN 2.87. Our long-term prospects for Edegel are encouraging, as we believe that the company production would pick up, in line with the entry of new contrants with regulated and non-regulated clients.
• The dynamism of the domestic demand and the higher activity in the mining sector will boost the electricity sector in upcoming years. In this sense, Edegel will have the opportunity to take advantage of its strategic position, as the company will be able to attract new non-regulated clients and to extend existing contracts, especially from the mining industry, which will benefit the company’s revenues.
• Edegel’s management is searching for new energy projects, in order to capitalize additional opportunity on the Peruvian electricity market. We believe this represent an upside risk for the share, as the company may kick off any of them in the medium term. In addition, it is worth to mention that we have updated the beginning of Curibamba project (from IQ17 to IQ18), as well as the disbursement of the investment.
OUTLOOK 2014
• The increase in sales volume, especially from thermoelectric output, along with the higher electricity prices will support the company’s revenues. COGS will surge as well, in line with the higher volume of energy purchases in the spot market. The gross margin should show an important improvement given the better performance of Ventanilla plant this year. On non-operating terms, the company will post greater financial expenses due to higher debt outstanding. In this context, Edegel will post a consolidated net result of $172.9m (+17.9%) in 2014.
RISK TO OUR VALUATION • The main risk would be a slower-than-expected
growth of Peruvian economy or a decline on the pace of investments within the mining sector, especially in the south of the country. Likewise, higher costs and a further delay of Curibamba project may affect the company’s performance.
TTAARRGGEETT PPRRIICCEE:: PPEENN 22..8877 RRAATTIINNGG:: HHOOLLDD
INTELIGO SAB
62
January 21, 2014
EDEGEL Current Price: PEN 2.59 Target Price: PEN 2.87 Rating: HOLD
0
1,000
2,000
3,000
4,000
5,000
6,000
2012 2013e 2014e 2015e
Edegel's Production (GWh)
Hydroelectric Thermoelectric
Source: Edegel, Inteligo's estimates
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2.00
2.10
2.20
2.30
2.40
2.50
2.60
2.70
2.80
2.90
3.00
Jan
-13
Mar-
13
May-1
3
Jun
-13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Vo
lum
e (
US
$00
0)
Pri
ce
(P
EN
)
Edegel C 12-month performance
Volume PriceSource: Economática
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 534.8 528.5 603.8 625.6
Gross Profit 208.6 209.1 269.5 273.5
Operating Expenses 17.4 18.4 21.3 21.6
EBIT 191.2 190.7 248.2 251.9
EBITDA 265.0 264.0 320.0 325.2
Net Income 135.7 146.7 172.9 165.8
EPS 0.06 0.06 0.08 0.07
DPS 0.03 0.05 0.06 0.06
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 11.8% -1.2% 14.2% 3.6%
EBIT Growth 7.4% -0.2% 30.1% 1.5%
EBITDA Growth 5.5% -0.4% 21.2% 1.6%
Net Income Growth 24.9% 8.0% 17.9% -4.1%
Gross Margin 39.0% 39.6% 44.6% 43.7%
Operating Margin 35.7% 36.1% 41.1% 40.3%
EBITDA Margin 49.6% 50.0% 53.0% 52.0%
Net Margin 25.4% 27.7% 28.6% 26.5%
Equity / Assets 56.8% 57.9% 59.8% 56.2%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 65.7 81.2 34.2 35.9
Assets 1,591.7 1,601.2 1,593.0 1,738.4
Financial Debt 307.6 294.6 256.2 371.5
Liabilities 687.1 674.6 640.5 761.0
Equity 904.6 926.6 952.5 977.4
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 265.0 264.0 320.0 325.2
CAPEX -23.9 -45.0 -100.0 -213.0
Taxes -62.2 -64.8 -74.5 -75.6
Working Capital Change 15.3 -15.2 -5.6 2.3
Free Cash Flow 194.3 139.0 139.9 38.9
Value Indicators2012 2013e 2014e 2015e
P/E 15.4x 14.2x 12.1x 12.6x
EV/EBITDA 8.7x 8.7x 7.2x 7.1x
P/BV 2.3x 2.2x 2.2x 2.1x
P/Sales 4.1x 3.7x 3.5x 2.9x
ROA 8.5% 9.2% 10.9% 9.5%
ROE 15.0% 15.8% 18.2% 17.0%
47.0%
48.0%
49.0%
50.0%
51.0%
52.0%
53.0%
54.0%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2012 2013e 2014e 2015e
Profit & Margins
Gross Profit Net Income EBITDA Margin
Source: Edegel, Inteligo's estimates
INTELIGO SAB
63
January 21, 2014
Enersur shares' Price Sensitivity (PEN)Perpetuity Growth Rate
2.0% 2.5% 3.0% 3.5% 4.0%
6.6% 31.35 33.81 36.72 40.18 44.40
W 7.1% 29.32 31.55 34.18 37.30 41.08
A 7.6% 27.11 29.12 31.47 34.25 37.62
C 8.1% 26.04 27.96 30.22 32.89 36.13
C 8.6% 22.56 26.48 28.60 31.12 34.15
Market IndicatorsShares outstanding (000)
Dividend Yield 2014
52-w eek range S/. 22.9 - S/. 26.8
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value 3.1x
353.7
4.2%
224,297
3.2%
2,039.7
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
Buy+ENERSUC1
S/. 25.55
S/. 31.47
23.17%
Underperform
21.67%
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
140.0
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Enersur
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
ENERSUR INVESTMENT THESIS • We are updating our Enersur valuation model,
with a 12-month fundamental target price of PEN 31.47 and a BUY+ rating. We remain positive about Enersur’s aggressive investment portfolio and its contribution to value generation. In this report, we are also including our projections regarding the start of operation of the new thermoelectric plant, which was granted by Proinversion last November (the Peru’s South Energy Node project). This plant is located in Ilo, Moquegua and will have a capacity of 600 MW. The construction will require an estimated investment of $500m and the entry into commercial operations is planned in IQ17. First, the project will operate with diesel B5 in which Enersur will be compensated only with the capacity price (from IQ17 to IQ21). In the second phase of the project, the company will invest another $400m (between 2018 and 2021) to convert this facility (dual simple cycle) into a combined cycle plant. In this sense, the plant should begin full operation in IQ21. Peru’s southern gas pipeline should be ready by 2021, which provides the firm room to manage any delay risk, as the government estimates to conclude this project in 2018. All in all, the total contribution of this project reaches PEN 7.30, which represents 23.2% of the target price.
• Regarding the other projects, the company
maintains its scheduled investments as planned. In this sense, its hydroelectric plant in Ancash (Quitaracsa) should start operations in IVQ14. OUTLOOK 2014
• Enersur’s revenues will increase this year, on the
back of the higher sales volume, in response to the growing domestic demand. COGS will surge as well, albeit at a slower pace. On non-operating terms, the higher debt outstanding, in line with the investments needed to develop the company’s projects, will boost financial expenses. In this context, we estimate that Enersur will register a net result of $142.1m (+5.1%) in 2014.
RISK TO OUR VALUATION • A further delay in the construction of Peru's
southern gas pipeline or its complete cancellation by the government.
TTAARRGGEETT PPRRIICCEE:: PPEENN 3311..4477 RRAATTIINNGG:: BBUUYY++
INTELIGO SAB
64
January 21, 2014
ENERSUR Current Price: PEN 25.55 Target Price: PEN 31.47 Rating: BUY+
0
500
1,000
1,500
2,000
2,500
3,000
19.00
20.00
21.00
22.00
23.00
24.00
25.00
26.00
27.00
28.00
Jan
-13
Mar-
13
Ap
r-13
Jun
-13
Jul-
13
Sep
-13
Oct-
13
Dec-1
3
Jan
-14
Volu
me
(U
S$0
00)
Pri
ce (
PE
N)
Enersur 12-month performance
Volume PriceSource: Economática
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2013e 2014e 2015e
Energy and Capacity Sales ($m)
Regulated Clients Non-Regulated Clients Spot Market
Source: Enersur, Inteligo's estimates
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2012 2013e 2014e 2015e
Enersur's output breakdown by source (GWh)
Natural Gas Coal Fuels Water
Source: Enersur, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 496.1 623.9 681.6 740.6
Gross Profit 175.8 265.9 293.1 326.4
Operating Expenses 21.2 32.0 32.0 36.4
EBIT 154.6 233.9 261.0 290.0
EBITDA 190.0 277.3 308.4 342.5
Net Income 100.6 135.2 142.1 164.2
EPS 0.449 0.603 0.634 0.732
DPS 0.124 0.181 0.317 0.366
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 19.1% 25.8% 9.3% 8.7%
EBIT Growth 17.0% 51.3% 11.6% 11.1%
EBITDA Growth 14.3% 45.9% 11.2% 11.1%
Net Income Growth 17.5% 34.4% 5.1% 15.5%
Gross Margin 35.4% 42.6% 43.0% 44.1%
Operating Margin 31.2% 37.5% 38.3% 39.2%
EBITDA Margin 38.3% 44.5% 45.2% 46.3%
Net Margin 20.3% 21.7% 20.9% 22.2%
Equity / Assets 40.9% 45.9% 45.5% 46.6%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 96.9 13.8 42.7 64.6
Assets 1,344.2 1,405.4 1,574.3 1,713.8
Financial Debt 664.2 627.4 717.4 770.7
Liabilities 794.1 760.6 858.4 915.8
Equity 550.1 644.8 715.9 798.0
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 190.0 277.3 308.4 342.5
CAPEX -429.6 -143.1 -175.3 -160.0
Taxes -46.2 -59.4 -78.3 -87.0
Working Capital Change -19.1 -23.6 3.1 -5.9
Free Cash Flow -304.8 51.3 58.0 89.6
Value Indicators2012 2013e 2014e 2015e
P/E 20.0x 14.9x 14.1x 12.2x
EV/EBITDA 13.8x 9.5x 8.5x 7.7x
P/BV 3.7x 3.1x 2.8x 2.5x
P/Sales 4.1x 3.2x 2.9x 2.7x
ROA 7.5% 9.6% 9.0% 9.6%
ROE 18.3% 21.0% 19.9% 20.6%
INTELIGO SAB
65
January 21, 2014
Luz del Sur shares' Price Sensitivity (PEN)Perpetuity Growth Rate
1.8% 2.3% 2.8% 3.3% 3.8%
7.4% 10.06 10.62 11.25 11.97 12.81
W 7.9% 9.53 10.02 10.58 11.22 11.96
A 8.4% 8.95 9.39 9.88 10.44 11.08
C 8.9% 8.64 9.06 9.52 10.05 10.65
C 9.4% 8.27 8.66 9.09 9.57 10.13
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Luz del Sur
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 8.58 - S/. 9.94
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value 3.0x
757.87
7.0%
1,572.0
486,951
5.8%
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
8.93%
-6.49%
S/. 9.88
HoldLUSURC1
Underperform
S/. 9.07
LUZ DEL SUR INVESTMENT THESIS • We are updating our Luz del Sur (LdS) valuation
model, setting a 12-month fundamental target price of PEN 9.88 and a HOLD rating.
• The robust domestic demand growth will continue to support the electricity demand for the upcoming years. Residential clients will lead the way in terms of electricity consumption, backed by the better living standards of the population under LdS’s coverage area. In the case of commercial clients, this segment will also play an important role in electricity demand, supported by the development of malls and strip centers.
• The full operation of the 98MW Santa Teresa I hydroelectric plant will boost the company’s revenues and improve its margins. According to LdS’s management, Santa Teresa I would initiate operations in IVQ14. As we have mentioned before, LdS decision to enter the generation segment is an aggressive strategy that aims to diversify the company’s source of revenues. Therefore, the potential of generating value in the long-term increases, as LdS growth will not be limited by its concession area in Lima.
OUTLOOK 2014
• Firm’s revenues will climb due to the increase in sales volume, especially from residential and commercial client, as well as the entry of Santa Teresa I project, which will offset the downward revision of the Distribution Added Value (DAV). COGS will also jump, in line with the higher energy purchases, albeit at a slower pace. In this sense, we expect gross margin to show an improvement. On non-operating terms, the higher debt outstanding will push financial expenses up, albeit the net margin will not be considerably affected. In this scenario, LdS will register a net result of $114.2m (+9.8%) in 2014.
RISK TO OUR VALUATION • The main risk to our valuation is a slowdown in
domestic activity, particularly in private consumption. As per Santa Teresa project, the risk is a further delay in the execution of the investment, which may defer the expected start of operations.
TTAARRGGEETT PPRRIICCEE:: PPEENN 99..8888 RRAATTIINNGG:: HHOOLLDD
INTELIGO SAB
66
January 21, 2014
LUZ DEL SUR Current Price: PEN 9.07 Target Price: PEN 9.88 Rating: HOLD
8.07%7.88% 7.67%
7.28%
7.07%7.11%
2008 2009 2010 2011 2012 2013e
Luz del Sur's Energy Losses
Source: Luz del Sur
0
500
1,000
1,500
2,000
2,500
7.00
7.50
8.00
8.50
9.00
9.50
10.00
10.50
Jan
-13
Feb-1
3
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Volu
me (U
S$000)
Price (P
EN
)
Luz del Sur C 12-month performance
Volume PriceSource: Economática
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2012 2013e 2014e 2015e
Profit & Margins
Gross profit Net income EBITDA margin
Source: LdS, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 717.8 749.6 811.0 884.9
Gross Profit 211.8 192.5 223.8 258.7
Operating Expenses 43.6 36.4 48.2 51.3
EBIT 168.1 156.0 175.6 207.4
EBITDA 192.0 181.3 202.4 235.8
Net Income 107.4 104.0 114.2 137.2
EPS 0.22 0.21 0.23 0.28
DPS 0.17 0.17 0.19 0.23
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 12.8% 4.4% 8.2% 9.1%
EBIT Growth 7.2% -7.2% 12.5% 18.1%
EBITDA Growth 6.6% -5.6% 11.7% 16.5%
Net Income Growth 3.2% -3.2% 9.8% 20.2%
Gross Margin 29.5% 25.7% 27.6% 29.2%
Operating Margin 23.4% 20.8% 21.7% 23.4%
EBITDA Margin 26.7% 24.2% 25.0% 26.6%
Net Margin 15.0% 13.9% 14.1% 15.5%
Equity / Assets 48.9% 46.2% 44.7% 45.9%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 7.2 52.6 78.3 84.9
Assets 1,014.3 1,119.1 1,208.8 1,236.6
Financial Debt 293.0 367.1 427.9 420.4
Liabilities 517.8 601.8 668.7 669.0
Equity 496.5 517.3 540.1 567.6
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 192.0 181.3 202.4 235.8
CAPEX -102.8 -78.3 -81.1 -37.7
Taxes -49.9 -45.7 -52.7 -62.2
Working Capital Change -4.8 5.5 -3.2 -3.3
Free Cash Flow 34.5 62.9 65.4 132.6
Value Indicators2012 2013e 2014e 2015e
P/E 14.4x 14.9x 13.6x 11.3x
EV/EBITDA 9.7x 10.3x 9.2x 7.9x
P/BV 3.2x 3.0x 2.9x 2.8x
P/Sales 2.2x 2.1x 1.9x 1.8x
ROA 10.6% 9.3% 9.4% 11.1%
ROE 21.6% 20.1% 21.1% 24.2%
INTELIGO SAB
67
January 21, 2014
Edelnor C shares' Price Sensitivity (PEN)Perpetuity Growth Rate
1.5% 2.0% 2.5% 3.0% 3.5%
6.6% 5.16 5.37 5.62 5.93 6.29
W 7.1% 4.87 5.08 5.33 5.62 5.98
A 7.6% 4.73 4.93 5.18 5.46 5.81
C 8.1% 4.41 4.61 4.85 5.13 5.47
C 8.6% 4.18 4.42 4.65 4.92 5.26
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector Rating
S/.4.75
S/.5.18
9.05%
Underperform
EDELNOC1
-4.62%
Hold
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Edelnor
Inteligo's domestic demand index
Source: Economática, Inteligo's estimatesSource: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 4.28 - S/. 5.25
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
638,564
5.1%
57.25
1,079.6
5.6%
2.6x
EDELNOR INVESTMENT THESIS • We are updating our Edelnor valuation model,
setting a 12-month fundamental target price of PEN 5.18 and a HOLD rating.
• The economic dynamism of Edelnor's concession
area will prompt a significant increase on electricity demand in the coming years, despite the softer expected economic growth. The commercial and industrial sectors will lead the way in terms of electricity consumption, supported by the performance of private investment and the favorable outlook for retail companies. Likewise, higher household average income coupled with the development of multifamily housing projects in the northern area of Lima will continue supporting the electricity consumption of residential clients.
• Edelnor’s predictable demand along with its investment program in the maintenance and the efficiency enhancement of its distribution network provide stability to the firm's cash flow. As a result, we forecast that the company’s margins will remain flat in our analysis period.
• A key aspect is the attractiveness of Edelnor’s dividend policy, which is also an important source of value, as the company has one of the highest dividend yields among electricity companies listed at the LSE.
OUTLOOK 2014 • Despite the reduction in the DAV, we are
estimating a 5.2% increase in revenues given the higher electricity sales volume. In the same line, COGS will increase on the back of higher energy purchases. Since the increase in COGS will exceed the increase in revenues, Edelnor’s gross margin will end down. With regard to the company’s non-operating performance, financial expenses will rise up due to the higher debt outstanding. All in all, Edelnor’s net earnings will decline to $88.8m (-7.7%) in 2014. It is important to highlight that the company recognized a special revenue by the works of “Consorcio Tren Electrico” ($19.4m) in 2013.
RISK TO OUR VALUATION
• A slower-than-expected growth of Peruvian economy.
TTAARRGGEETT PPRRIICCEE:: PPEENN 55..1188 RRAATTIINNGG:: HHOOLLDD
INTELIGO SAB
68
January 21, 2014
37.2%
22.2%
18.3%
22.3%
Edelnor Sales Volume Composition - MW (2013e)
Residential
Commercial
Industrial
Others
Source: Edelnor
EDELNOR Current Price: PEN 4.75 Target Price: PEN 5.18 Rating: HOLD
0
200
400
600
800
1,000
1,200
4.00
4.20
4.40
4.60
4.80
5.00
5.20
5.40
Jan
-13
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Volu
me (U
S$0
00)
Pri
ce (P
EN
)
Edelnor C 12-month performance
Volume PriceSource: Economática
4.4%
3.1%
5.6%
3.9%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
2012 2013e 2014e 2015e
Edelnor Sales Volume Growth
Source: Edelnor, Inteligo 's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 735.3 771.7 811.6 885.3
Gross Profit 191.2 209.6 215.1 234.6
Operating Expenses 62.6 57.7 58.1 66.3
EBIT 128.6 151.9 157.0 168.3
EBITDA 173.3 198.3 204.4 217.2
Net Income 76.0 96.2 88.8 97.0
EPS 0.12 0.15 0.14 0.15
DPS 0.08 0.11 0.10 0.11
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 11.5% 4.9% 5.2% 9.1%
EBIT Growth 3.9% 18.1% 3.3% 7.2%
EBITDA Growth 4.9% 14.4% 3.1% 6.2%
Net Income Growth 4.9% 26.5% -7.7% 9.3%
Gross Margin 26.0% 27.2% 26.5% 26.5%
Operating Margin 17.5% 19.7% 19.3% 19.0%
EBITDA Margin 23.6% 25.7% 25.2% 24.5%
Net Margin 10.3% 12.5% 10.9% 11.0%
Equity / Assets 38.0% 39.8% 41.3% 42.8%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 26.1 18.4 13.5 12.9
Assets 995.1 1,022.4 1,050.8 1,081.9
Financial Debt 338.2 330.2 339.4 335.4
Liabilities 605.0 603.2 604.5 619.1
Equity 378.2 407.0 433.6 462.8
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 173.3 198.3 204.4 217.2
CAPEX -103.0 -75.2 -79.6 -83.1
Taxes -35.3 -40.1 -47.1 -50.5
Working Capital Change 49.2 1.7 -8.4 5.5
Free Cash Flow 84.2 84.7 69.4 89.1
Value Indicators2012 2013e 2014e 2015e
P/E 14.0x 11.1x 12.0x 11.0x
EV/EBITDA 7.9x 6.9x 6.7x 6.3x
P/BV 2.8x 2.6x 2.5x 2.3x
P/Sales 1.5x 1.4x 1.3x 1.2x
ROA 7.6% 9.4% 8.4% 9.0%
ROE 20.1% 23.6% 20.5% 21.0%
INTELIGO SAB
69
January 21, 2014
Relapa shares' Price Sensitivity (PEN)Perpetuity Growth Rate
2.0% 2.5% 3.0% 3.5% 4.0%
10.5% 0.10 0.27 0.47 0.72 1.03
W 11.0% 0.05 0.21 0.41 0.65 0.95
A 11.5% n.m. 0.16 0.35 0.59 0.88C 12.0% n.m. 0.11 0.30 0.53 0.81
C 12.5% n.m. 0.06 0.24 0.47 0.74
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 0.29 - S/. 0.57
90-day average volume (US$000)
Float
Market Cap. (US$m)
Price to Book Value
1,244,680
6.1%
128.5
0.3x
87.06
14.4%
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector Rating
S/. 0.29
S/. 0.35
20.69%
-41.98%
BuyRELAPAC1
Market Perform
50.0
60.0
70.0
80.0
90.0
100.0
110.0
120.0
130.0
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.Inteligo's domestic demand index
IGBVL
Relapa
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
REFINERIA LA PAMPILLA
INVESTMENT THESIS
• We are updating our Refineria La Pampilla (Relapa) financial model, determining a 12-month fundamental target price of PEN 0.35 and a BUY rating.
• Fundamental changes within the global Oil & Gas sector, such as the increase of unconventional sources (oil sands and shale gas), growing supply of conventional oil (especially from non-OPEC countries), among others, represent a challenging scenario for Relapa in the upcoming years, as they will put downward pressures over fuel price spreads. On the local front, the company is still struggling to adapt its operations to the ministry resolution n°139-2012. We do not believe this situation will reverse in the short term, as the company should build new units for the treatment of diesel and gasoline in order to adjust its production to the new regulation. We expect these new units to start operations in IH17. Thereby, we also anticipate the firm will continue importing diesel with the new specification (below 50ppm), forcing the firm to reduce the amount of crude oil refined (lower utilization factor in its refinery plant), which will continue to hit operating margins.
• We are somewhat concerned about the financing of the refinery adaptation project, since we do not have a clear guidance about it and the company has not yet released further information. In addition, assuming the company raises debt with favorable terms, we foresee a greater stress in the company’s coverage and leverage ratios for next years.
OUTLOOK 2014 • Relapa will post a net loss of $14.2m in 2014.
Revenues will decline 2.2% as a result of lower fuel price spread. COGS will follow the same path, albeit registering a stronger decline. Thus, the gross margin is expected to recover. Likewise, the financial debt will increase, in line with beginning of its refinery adaptation project.
RISK TO OUR VALUATION • The main risks are an increasing volatility in crude
oil prices, deeper-than-expected slowdown of the Peruvian economy and higher costs and delay of its Refinery adaption project.
TTAARRGGEETT PPRRIICCEE:: PPEENN 00..3355 RRAATTIINNGG:: BBUUYY
INTELIGO SAB
70
January 21, 2014
RELAPA Current Price: PEN 0.29 Target Price: PEN 0.35 Rating: BUY
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
0.28
0.33
0.38
0.43
0.48
0.53
0.58
Dec-1
2
Feb-1
3
Mar-
13
May-1
3
Jul-
13
Aug
-13
Oct-
13
No
v-1
3
Jan
-14
Volu
me (U
S$000)
Price (P
EN
)
RELAPAC1 12-month performance
Volume PriceSource: Economática
20,000
22,000
24,000
26,000
28,000
30,000
32,000
34,000
2012 2013e 2014e 2015e
Crude Oil Purchases (thousands of barrels)
Foreign Market Local Market
Source: Relapa, Inteligo's estimates
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2012 2013e 2014e 2015e
Refined Products Sales ($m)
Others
Asphalt
Residuals and VGO
LPG
Gasolines
Distilled Fuels
Source: Relapa, Inteligo's estimates
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 4,682.1 4,344.1 4,249.6 4,274.6
Gross Profit 120.4 76.8 83.5 97.5
Operating Expenses 97.7 96.2 88.8 91.4
EBIT 22.7 -19.4 -5.3 6.1
EBITDA 48.2 6.2 24.5 45.0
Net Income 29.5 -31.9 -14.2 -17.0
EPS 0.02 -0.03 -0.01 -0.01
DPS 0.02 0.01 0.01 0.01
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth 7.7% -7.2% -2.2% 0.6%
EBIT Growth -83.2% n.m. n.m. n.m.
EBITDA Growth -70.3% -87.2% 298.6% 83.4%
Net Income Growth -69.9% n.m. n.m. n.m.
Gross Margin 2.6% 1.8% 2.0% 2.3%
Operating Margin 0.5% -0.4% -0.1% 0.1%
EBITDA Margin 1.0% 0.1% 0.6% 1.1%
Net Margin 0.6% -0.7% -0.3% -0.4%
Equity / Assets 37.2% 35.4% 30.6% 25.7%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 34.7 16.9 25.9 26.2
Assets 1,297.5 1,251.3 1,372.0 1,536.4
Financial Debt 480.4 438.0 587.2 775.9
Liabilities 814.9 808.7 951.6 1,140.9
Equity 482.5 442.6 420.5 395.5
Free Cash Flow (US$m)2012 2013e 2014e 2015e
EBITDA 48.2 6.2 24.5 45.0
CAPEX 0.9 5.8 1.6 -1.8
Taxes 9.6 -9.4 1.0 1.0
Working Capital Change -26.3 -90.0 -165.0 -207.5
Free Cash Flow 32.4 -87.4 -137.9 -163.3
Value Indicators2012 2013e 2014e 2015e
P/E 4.3x n.m. n.m. n.m.
EV/EBITDA 11.6x 91.1x 22.9x 12.5x
P/BV 0.3x 0.3x 0.3x 0.3x
P/Sales 0.03x 0.03x 0.03x 0.03x
ROA 2.3% -2.5% -1.0% -1.1%
ROE 6.1% -7.2% -3.4% -4.3%
INTELIGO SAB
71
January 21, 2014
Credicorp shares' price sensitivity (US$)Long-term ROE
18.0% 19.0% 20.0% 21.0% 22.0%
10.0% 191.9 198.1 204.3 210.6 216.811.0% 165.3 170.5 175.7 180.9 186.112.2% 143.5 147.9 152.2 156.6 160.913.0% 132.0 135.9 139.8 143.7 147.614.0% 120.8 124.3 127.7 131.2 134.7
Credicorp shares' price sensitivity (US$)Perpetuity Growth Rate
4.0% 4.5% 5.0% 5.5% 6.0%
10.0% 185.2 193.9 204.3 217.1 233.011.0% 163.2 169.0 175.7 183.7 193.212.2% 144.2 148.0 152.2 157.1 162.813.0% 133.8 136.6 139.8 143.4 147.514.0% 123.5 125.5 127.7 130.3 133.1
COK
COK
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4Share price performance vs. IGBVL vs.
Inteligo's domestic demand index
IGBVL
Credicorp
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range $111.9 $164.4
90-day average volume (US$ 000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
BAP
79,761
2.2%
324.8
60.8%
10,532.5
2.8x
Market Perform
$132.1
$152.2-17.4%
15.3%
Buy
CREDICORP
INVESTMENT THESIS
• We are updating our CREDICORP (BAP) valuation model to include our new assumptions for the Peruvian economy and for the local banking sector. We are setting a 12-month fundamental target price of $152.2 and a BUY rating.
• We expect local activity to regain strength in 2014,
supported by the recovery of global economy and the renewed soundness of domestic demand. In this context, we anticipate that banking sector will continue on its solid growth path. We believe that BCP, as the largest commercial bank in terms of loans and deposits, would be the most benefited in this growing context. Moreover, the strong fundamentals of the Peruvian banking industry (lower banking penetration, growing emerging middle class, increase in population income), provide a significant scope for a sustainable growth in the long term.
• The bank will continue with its internal efficiency enhancement strategy, trying to identify those segments in which it considers more competitive and may capture higher returns. Likewise, we expect the pension fund, insurance and private banking business to continue with their current growth strategies, betting on the soundness of local activity.
OUTLOOK 2014
• We foresee an expansion of about 14.6% in the BAP’s loan portfolio during 2014, allowing an advance of 14.3% in NII, which will also be accompanied by an improvement in the NIM. On the other hand, provisions will not register drastic changes, as we believe the company feels comfortable with the current coverage ratio. Operating expenses should increase in line with credit and deposits portfolio growth. All in all, we estimate a 2014 net income of $901m (+45.0%).
RISK TO OUR VALUATION
• The main risk to our valuation is a new slowdown cycle in local activity, affected by a worst global economic scenario. Moreover, some political noise may affect again the business and household confidence, moderating the credit expansion momentum. Nonetheless, we consider that the BCRP has a large scope to reduce reserve requirements and the reference rate in order to boost financial liquidity, if it is necessary.
TTAARRGGEETT PPRRIICCEE:: $$ 115522..22 RRAATTIINNGG:: BBUUYY
INTELIGO SAB
72
January 21, 2014
CREDICORP Current Price: $ 132.1 Target Price: $152.2 Rating: BUY
1.00%
1.40%
1.80%
2.20%
2.60%
50.0%
90.0%
130.0%
170.0%
210.0%
2012 2013e 2014e 2015e
Credicorp's Asset Quality
Coverage Ratio PDL ratio
Source: Credicorp, Inteligo's estimates
0.0%
10.0%
20.0%
30.0%
2012 2013e 2014e 2015e
ROE
Source: Credicorp, Inteligo's estimates
0
1,000
2,000
3,000
4,000
5,000
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
Jan
-13
Feb-1
3
Mar-
13
Ap
r-1
3
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Vo
lum
e (
US
$ 0
00)
Pri
ce (U
S$)
Credicorp 12-month performance
Volume PriceSource: Economatica
Income Statement (US$m)2012 2013e 2014e 2015e
Net interest income (NII) 1,612 1,832 2,095 2,420
Loan loss provisions 378 443 444 509
Total other income 1,205 1,251 1,307 1,458
Operating Expenses 1,454 1,611 1,691 1,946
Net Income 789 621 901 1,014
EPS 9.89 7.79 11.29 12.71
DPS 2.60 2.02 2.94 3.30
Balance Sheet (US$m)2012 2013e 2014e 2015e
Gross Loans 21,477 24,096 27,609 31,656
Loan Loss Reserves 699 844 998 1,164
Past Due Loans 372 524 630 756
Total Assets 41,147 41,916 47,494 54,057
Deposits and Obligations 24,051 27,001 30,869 35,321
Equity 4,168 3,715 4,178 4,586
Grow th and Margins2012 2013e 2014e 2015e
Net interest income Grow th 23.4% 13.6% 14.3% 15.5%
Loan loss prov. Grow th 75.8% 17.3% 0.2% 14.7%
Total other income Grow th 21.4% 3.8% 4.5% 11.5%
Operating Expenses Grow th 22.5% 10.7% 5.0% 15.1%
Net Income Grow th 11.2% -21.2% 45.0% 12.6%
Gross Loans 23.1% 12.2% 14.6% 14.7%
Loan Loss Reserves 34.5% 20.8% 18.2% 16.6%
Past Due Loans 43.7% 40.7% 20.2% 20.0%
Deposits and Obligations 26.7% 12.3% 14.3% 14.4%
Selected Financial Indicators2012 2013e 2014e 2015e
PDL/Gross Loans 1.73% 2.17% 2.28% 2.39%
Provisions/PDL 187.7% 161.1% 158.5% 154.0%
(PDL-Prov.)/Equity -7.8% -8.6% -8.8% -8.9%
Loans/Deposits 89.3% 89.2% 89.4% 89.6%
P/E 13.4x 17.0x 11.7x 10.4x
P/BV 2.5x 2.8x 2.5x 2.3x
Dividend Yield 2.0% 1.5% 2.2% 2.5%
Net income/ Interest income 34.1% 23.9% 30.6% 29.9%
Net interest margin (NIM) 5.02% 4.90% 5.05% 5.08%
ROA 2.2% 1.5% 2.0% 2.0%
ROE 20.7% 15.4% 21.7% 22.0%
Opex (% total income) 43.6% 42.0% 38.4% 38.3%
Opex (% av. tot. assets) 15.7% 15.0% 14.6% 14.8%
Source: Credicorp, Inteligo's estimates
INTELIGO SAB
73
January 21, 2014
Continental shares' price sensitivity (US$)Long-term ROE
16.5% 18.5% 20.5% 22.5% 24.5%
10.0% 7.63 8.24 8.86 9.47 10.0911.0% 6.68 7.20 7.73 8.25 8.7812.2% 5.85 6.30 6.75 7.21 7.6613.0% 5.40 5.81 6.22 6.63 7.0414.0% 4.96 5.33 5.70 6.07 6.43
Continental shares' price sensitivity (US$)Perpetuity Growth Rate
3.0% 3.5% 4.0% 4.5% 5.0%
10.0% 8.14 8.47 8.86 9.32 9.8711.0% 7.23 7.46 7.73 8.03 8.3912.2% 6.42 6.58 6.75 6.95 7.1813.0% 5.97 6.09 6.22 6.37 6.5414.0% 5.51 5.60 5.70 5.80 5.92
COK
COK
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 4.58 - S/. 6.17
90-day average volume (US$ 000)
Float
Market Cap. (US$m)
Price to Book Value
Rating ParametersCurrent Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
CONTINC1
2,724,770
4.7%
252.80
7.76%
5,450
3.2x
Market Perform
S/. 5.70
S/. 6.75-0.5%
18.5%
Buy
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4Share price performance vs. IGBVL vs.
Inteligo's domestic demand index
IGBVL
Continental
Inteligo's domestic demand index
Source: Economática, Inteligo's estimates
BBVA CONTINENTAL
INVESTMENT THESIS
• We are updating our BBVA Continental valuation model, including our new assumptions for the Peruvian economy and for the financial system. We are setting a 12-month fundamental target price of S/. 6.75 and a BUY rating.
• We expect Continental to continue posting an
outstanding financial performance in upcoming years, on the back of the renewed soundness of local economy, in a context in which we foresee that the global economy will consolidate its recovery. Furthermore, the strong sector fundamentals allow us to be optimistic about the positive performance of the banking shares in the long term. In this sense, Continental, as the second biggest bank in terms of loans and deposit, represents a very interesting choice to take a long position in Peru.
• Despite some deterioration of the PDL ratio, as the firm increased the exposure to riskier segments (particularly SME and consumer segments), the bank managed to post a still-exceptional ROE during 2013. If in an adverse scenario the bank maintained its high profitability, we believe the bank will not have problems to repeat that performance in a more benign scenario. At this regard, the bank’s operational efficiencies and good risk management ability supported its above-average profitability. Moreover, we expect the bank to continue with its network expansion, in order to support its future growth activity.
OUTLOOK 2014
• Continental’s net interest income will increase around 14%, in line with the expected expansion of loans (+11.4%). NIM would show a very similar level to 2013. Provisions will continue increasing, in order to maintain bank’s high asset quality, albeit at a slower pace (+10%). Furthermore, operating expenses will advance, as the bank expects to open around 25 branches, both in 2014 and 2015. In this scenario, we estimate a net income of $513m in 2014.
RISK TO OUR VALUATION
• A new economic moderation scenario and eventual negative political events in 2014 would reduce Continental’s loan portfolio expansion. In addition, a deeper deterioration of asset quality may put some pressure on company’s margins. Nevertheless, the bank is currently adopting corrective measures to solve this issue and ensure long term above-average profitability figures.
TTAARRGGEETT PPRRIICCEE:: PPEENN 66..7755 RRAATTIINNGG:: BBUUYY
INTELIGO SAB
74
January 21, 2014
BBVA CONTINENTAL Current Price: PEN 5.70 Target Price: PEN 6.75 Rating: BUY
0
1,000
2,000
3,000
4,000
5,000
4.5
5.0
5.5
6.0
6.5
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Vo
lum
e (
US
$ 0
00)
Pri
ce (P
EN
)
Continental 12-month performance
Volume PriceSource: Economática
Income Statement (US$m)2012 2013 2014e 2015e
Net interest income (NII) 882 984 1,121 1,278
Loan loss provisions -156 -183 -196 -219
Total other income 229 403 426 431
Operating Expenses -385 -469 -480 -530
Net Income 437 458 513 563
EPS 0.20 0.17 0.19 0.21
DPS 0.10 0.08 0.09 0.10
Balance Sheet (US$m)2012 2013 2014e 2015e
Gross Loans 11,661 14,047 15,653 17,537
Loan Loss Reserves -514 -628 -691 -821
Past Due Loans 138 239 258 307
Total Assets 17,444 19,842 21,198 22,778
Deposits and Obligations 11,537 13,144 14,223 15,496
Equity 1,484 1,716 1,995 2,301
Growth and Margins2012 2013 2014e 2015e
Net interest income Grow th -7.7% 11.6% 13.9% 14.0%
Loan loss prov. Grow th 61.0% 17.0% 7.2% 11.9%
Total other income Grow th 9.0% 76.4% 5.6% 1.2%
Operating Expenses Grow th 13.8% 21.7% 2.4% 10.3%
Net Income Grow th 10.3% 4.7% 12.1% 9.6%
Gross Loans 10.2% 20.5% 11.4% 12.0%
Loan Loss Reserves 17.2% 22.1% 10.0% 18.9%
Past Due Loans 43.4% 73.1% 8.1% 18.8%
Deposits and Obligations 7.7% 13.9% 8.2% 9.0%
Selected Financial Indicators2012 2013 2014e 2015e
PDL/Gross Loans 1.18% 1.70% 1.65% 1.75%
Provisions/PDL 372.1% 262.6% 267.4% 267.6%
(PDL-Prov.)/Equity 43.9% 50.5% 47.6% 49.0%
Loans/Deposits 101.1% 106.9% 110.1% 113.2%
P/E 10.2x 11.9x 10.6x 9.7x
P/BV 3.7x 3.2x 2.7x 2.4x
Dividend Yield 4.9% 4.2% 4.7% 5.2%
Net income/ Interest income 49.5% 46.5% 45.8% 44.0%
Net interest margin (NIM) 6.12% 4.88% 4.92% 5.20%
ROA 2.7% 2.5% 2.5% 2.6%
ROE 31.4% 28.6% 27.7% 26.2%
Source: Continental Inteligo's estimates
1.00%
1.40%
1.80%
0.0%
100.0%
200.0%
300.0%
400.0%
2012 2013 2014e 2015e
Continental's Asset Quality
Coverage Ratio PDL ratio
Source: Continental, Inteligo's estimates
22.0%
24.0%
26.0%
28.0%
30.0%
32.0%
2012 2013 2014e 2015e
ROE
Source: Continental, Inteligo's estimates
INTELIGO SAB
75
January 21, 2014
Exalmar shares' price sensitivity (PEN)Perpetuity Growth Rate
3.0% 4.0% 4.1% 6.0% 7.0%
W 9.0% 2.87 3.49 3.59 6.00 9.14
A 10.0% 2.23 2.66 2.72 4.14 5.63
C 11.2% 1.68 1.96 2.00 2.86 3.63
C 12.0% 1.39 1.61 1.64 2.28 2.81
13.0% 1.09 1.26 1.28 1.74 2.10
40.000
60.000
80.000
100.000
120.000
140.000
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4Share price performance vs. IGBVL
IGBVL Exalmar
Source: Economática, Inteligo's estimates
Market IndicatorsShares outstanding (000)
Dividend yield 2014e
52-w eek range S/. 1.35 S/. 1.75
90-day average volume (US$ 000)
Float
Market Cap. (US$m)
Price to Book Value
Rating Parameters
Current Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating
296,997
0.9%
110.90
25.9%
165.7
0.9x
S/. 1.59
S/. 2.00
6.0%
Outperform
25.8%
Buy+
EXALMC1
PESQUERA EXALMAR
INVESTMENT THESIS
• We are updating our Exalmar valuation model, setting a 12-month fundamental target price of PEN 2.00 and a BUY+ rating. In this update, we are including our new outlook and assumptions about the company and the sector.
• The fishing sector showed a more stable behavior during 2013, after the plunge observed in 2012, in a context in which the Ministry of Fisheries increased the fishing quota, which also fueled expectations of quota normalization in subsequent years. Moreover, last year will be remembered as one with a lot of M&A noise, as many of Asian companies expressed strong interest to acquire Peruvian fishing companies, which materialized in the adquisition of Copeinca by Chinese CFG. In this sense, we strongly believe that demand from Asian countries (mainly from the aquaculture market) will continue representing a key value generation driver for the sector and for Exalmar.
• We foresee a normalization of fishing quotas starting this year. In this sense, we expect a first season quota of about 2.5 MT and a second season quota of 2.0 MT. Therefore, we expect some downward pressure on the oilmeal and fish oil prices. It is also worth to hightligth that the 2013 second season fishing quota, which will be sold during 2014, already represents about 85% of the 2013 quota processed, indicating a better 2014 financial performance.
OUTLOOK 2014
• We expect a 19% increase in sales, mainly due to a higher sales volume. COGS and operating expenses will also increase, in line with the increasing activity of the company. Furthermore, Exalmar will show an improvement in margins, as the negative effect of the decline in prices would be offset by the increase in production. All in all, we estimate a net income of $14.7m in 2014.
RISK TO OUR VALUATION
• The main risk to our valuation is a sharp correction in fishmeal prices or a lower-than expected fishing quota. On the other hand, although the experts have virtually ruled weather anomalies such as La Niña or El Niño, we cannot discard eventual weather risks that could affect biomass.
TTAARRGGEETT PPRRIICCEE:: PPEENN 22..0000 RRAATTIINNGG:: BBUUYY++
INTELIGO SAB
76
January 21, 2014
EXALMAR Current Price: PEN 1.59 Target Price: PEN 2.00 Rating: BUY+
Income Statement (US$m)
2012 2013e 2014e 2015e
Revenues 217.0 173.1 205.9 196.5
Gross Profit 59.2 43.8 53.5 51.1
Operating Expenses 20.3 18.1 18.9 17.8
EBIT 38.9 25.8 34.7 33.3
EBITDA 55.2 42.4 52.3 50.9
Net Income 19.4 6.4 14.5 14.7
EPS 0.07 0.02 0.05 0.05
DPS 0.02 0.01 0.01 0.01
Growth and Margins
2012 2013e 2014e 2015e
Revenues Growth 13.5% -20.2% 19.0% -4.6%
EBIT Growth -12.6% -33.9% 34.6% -4.1%
EBITDA Growth -8.5% -23.2% 23.3% -2.7%
Net Income Growth -16.3% -66.9% 126.3% 1.5%
Gross Margin 27.3% 25.3% 26.0% 26.0%
Operating Margin 17.9% 14.9% 16.8% 16.9%
EBITDA Margin 25.5% 24.5% 25.4% 25.9%
Net Margin 8.9% 3.7% 7.0% 7.5%
Equity/Assets 49.3% 46.3% 50.8% 54.3%
Balance Sheet (US$m)
2012 2013e 2014e 2015e
Cash 15.0 16.7 5.6 3.8
Assets 471.9 499.6 480.5 468.2
Financial Debt 184.8 222.8 195.2 172.8
Liabilities 239.5 268.2 236.6 213.8
Equity 232.4 231.4 244.0 254.3
Free Cash Flow (US$m)
2012 2013e 2014e 2015e
EBITDA 55.2 42.4 52.3 50.9
CAPEX -31.0 -36.0 -20.0 -8.0
Taxes -10.5 3.2 -7.8 -7.9
Change in Working Capital 0.9 -17.5 6.3 0.6
Free Cash Flow 14.7 -7.9 30.8 35.5
Value Indicators
2012 2013e 2014e 2015e
P/E 10.8x 32.5x 14.4x 14.2x
EV/EBITDA 6.8x 8.9x 7.2x 7.4x
P/BV 0.9x 0.9x 0.8x 0.8x
P/Sales 1.0x 1.2x 1.0x 1.1x
ROE 8.1% 2.8% 6.1% 5.9%
ROA 4.2% 1.3% 3.0% 3.1%
6.0%
6.4%
6.8%
80.0
90.0
100.0
110.0
120.0
130.0
2011 2012 2013e 2014e
Fishmeal sales volume and fishing cuota
Fishmeal sales volume (MT) Fishing quota (%)
Source: Exalmar, Inteligo's estimates
2.0%
4.0%
6.0%
8.0%
10.0%
2011 2012 2013e 2014e
ROE
Source: Exalmar, Inteligo's estimates
0
200
400
600
800
1.30
1.40
1.50
1.60
1.70
1.80
Jan
-13
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Jun
-13
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct
-13
No
v-1
3
De
c-1
3
Jan
-14
Vo
lum
e (
US
$ 0
00
)
Pri
ce
(PE
N)
Exalmar 12-month performance
Volume Price
Source: Economática
INTELIGO SAB
77
January 21, 2014
Casa Grande shares' price sensitivity (PEN)Perpetuity Growth Rate
1.0% 1.5% 2.0% 2.5% 3.0%
W 11.5% 12.96 13.33 13.75 14.21 14.73A 12.0% 12.19 12.52 12.88 13.28 13.73C 12.5% 11.50 11.79 12.10 12.45 12.84C 13.0% 10.87 11.12 11.40 11.70 12.04
13.5% 10.29 10.51 10.76 11.03 11.32
40.00
60.00
80.00
100.00
120.00
Jan-1
3
Feb-1
3
Mar-
13
Apr-
13
May-1
3
Jun-1
3
Jul-13
Aug-1
3
Sep-1
3
Oct-
13
Nov-1
3
Dec-1
3
Jan-1
4
Share price performance vs. IGBVL vs.International Sugar Price
IGBVL Casa Grande Sugar Price
Source: Economática, Inteligo's estimates
Market Indicators
Shares outstanding (000)
Dividend yield (2014e)
52-w eek range S/. 7.53 S/. 14.15
90-day average volume (US$ 000)
Float
Market Cap. (US$m)
Price to Book Value
Rating Parameters
Current Price
Target price
Yield 12 months
Upside potential
Rating
Stock Ticker
Sector rating Outperform
60.7%
Buy+
CASAGRC1
S/. 7.53
S/. 12.10
-46.0%
42.9%
222.6
0.5x
84,235
0.0%
38.37
CASA GRANDE
INVESTMENT THESIS
• We are updating our Casa Grande valuation model to include the new company’s developments, as well as our new assumptions for the international sugar market, determining a 12-month fundamental target price of PEN 12.10 and a BUY+ rating.
• We expect that excess supply and weak demand on
the sugar global market will continue during 2014, further dragging down sugar price, even though it has already plunged more than 30% last year. Moreover, the expected lower demand for ethanol would exacerbate the decline of sugar, as it increases sugar production, widening the market oversupply.
• On the long run, we foresee a sustained (but slow)
rebound in price starting in 2015/2016, on the back of the expected global economic recovery consolidation. By that time, the main market value drivers (population growth, urbanization and higher income levels) will regain importance in global demand for sugar. Likewise, the increase in the Brazilian auto fleet represents a value driver for the demand of ethanol, pushing up sugar price in the long term.
• Regarding the new refinery plant project, we prefer to
not yet include this improvement in our forecast, even though the company’s management recently stated that it will be finished at the end of year. It is worth to recall that this project was planned one year and a half ago, but for political issues the construction was delayed.
• Despite the significant upside potential, we
recommend this stock to investors with a long term horizon and high tolerance to risk given its illiquidity.
OUTLOOK 2014
• We expect Casa Grande’s margins to deteriorate in the next two years, mainly due to the challenging sugar price scenario, as we do not foresee significant improvements in the sugar and alcohol output capacity, at least in the mid-term. Nonetheless, we believe that company’s results will improve in the long term, accompanying the global sugar price recovery. All in all, we estimate a net loss of $2.7m in 2014.
RISK TO OUR VALUATION
• The main risk to our valuation is a further deterioration and volatility of sugar prices. On the other hand, the execution of the refinery plant project represents an upward risk to our target price.
TTAARRGGEETT PPRRIICCEE:: PPEENN 1122..1100 RRAATTIINNGG:: BBUUYY++
INTELIGO SAB
78
January 21, 2014
CASA GRANDE Current Price: PEN 7.53 Target Price: PEN 12.10 Rating: BUY+
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2012 2013e 2014e 2015e
EB
ITD
A M
arg
in
EB
ITD
A (U
S$m
)
EBITDA Margin
Source: Casa Grande, Inteligo's estimates
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2012 2013e 2014e 2015e
ROE
Source: Casa Grande, Inteligo's estimates
0
200
400
600
800
1,000
1,200
6.00
9.00
12.00
15.00
Jan
-13
Feb-1
3
Mar-
13
Ap
r-13
May-1
3
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct-
13
No
v-1
3
Dec-1
3
Jan
-14
Vo
lum
e (
US
$ 0
00)
Pri
ce (P
EN
)
Casa Grande: 12-month performance
Volume Price
Source: Economática
Income Statement (US$m)2012 2013e 2014e 2015e
Revenues 179.4 151.2 150.4 150.3
Gross Profit 71.9 32.2 21.9 22.8
Operating Expenses 15.4 17.7 18.6 18.6
EBIT 39.9 13.3 0.8 -1.0
EBITDA 54.0 28.9 16.3 14.4
Net Income 34.0 2.5 -2.7 -4.3
EPS 0.40 0.03 -0.03 -0.05
DPS 0.00 0.00 0.00 0.00
Growth and Margins2012 2013e 2014e 2015e
Revenues Growth -12.4% -15.7% -0.5% -0.1%
EBIT Growth -69.1% -66.7% -94.0% n.m.
EBITDA Growth -61.7% -46.5% -43.5% -11.8%
Net Income Growth -68.9% -92.8% n.m. n.m.
Gross Margin 40.1% 21.3% 14.6% 15.2%
Operating Margin 22.2% 8.8% 0.5% -0.7%
EBITDA Margin 30.1% 19.1% 10.8% 9.6%
Net Margin 18.9% 1.6% -1.8% -2.8%
Balance Sheet (US$m)2012 2013e 2014e 2015e
Cash 6.0 3.3 2.3 19.3
Assets 610.6 628.3 626.7 646.9
Financial Debt 2.4 7.2 7.2 31.7
Liabilities 185.4 207.7 208.8 233.2
Equity 425.2 420.7 418.0 413.7
Free Cash Flow (US$m)2012 2013 2014 2015
EBITDA 54.0 28.9 16.3 14.4
CAPEX -25.1 -14.7 -15.5 -15.4
Taxes -6.0 -0.7 0.5 0.7
Change in Working Capital 93.9 -3.8 1.7 -3.3
Free Cash Flow 116.9 9.7 2.9 -3.5
Value Indicators2012 2013e 2014e 2015e
P/E 6.6x 90.5x n.m. n.m.
EV/EBITDA 6.7x 12.5x 22.2x 25.2x
P/BV 0.5x 0.5x 0.5x 0.5x
P/Sales 1.2x 1.5x 1.5x 1.5x
ROE 7.7% 0.6% -0.6% -1.0%
ROA 5.6% 0.4% -0.4% -0.7%
INTELIGO SAB
79
January 21, 2014
FY14 Results Preview
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1/ Expressed in US$(,000) term
s. FX rate: 2.85
*Denominated in US Dollars.
N.M., not meaningful; Neg., negative; U.R., under review.
U.P., Underperform
; M.P., Market Perform
; O.P., Outperform
Source: Inteligo's estimates
Ex
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INTELIGO SAB
80
January 21, 2014
REVENUES: COMPOUND ANNUAL GROWTH BY SECTOR
-7.6% -4.6%-9.5%
-3.3%
-14.4%-17.6%
-1.9%
-17.1%
10.2%
-2.3% -0.5%
6.6%3.1%
-1.6%
3.6%
35.2%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
SCCO Minsur BVN Volcan Atacocha Cerro Verde
Milpo Brocal
Mining Sector
2012-2013
2014-2015
18.4%
2.7%
14.9%
10.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
BAP Continental
Banking Sector
2012-2013
2014-2015
0.0%
8.2%
-4.9%
-20.0%
-0.8%
9.2%
6.5%
-1.1%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
Relapa Alicorp Exalmar Casa Grande
Other Sectors
2012-2013
2014-2015
0.8%
29.0%
10.0%
6.3%
9.9%8.4%
5.7% 5.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Unacem C. Pacasmayo Graña Ferreycorp
Construction Sector
2012-2013
2014-2015
5.1%
8.8% 8.5%8.2%
8.8%
10.1%
8.7%
7.1%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Edegel Enersur Luz del Sur Edelnor
Electric Utilities2012-2013
2014-2015
INTELIGO SAB
81
January 21, 2014
-14.3%-15.2%
-38.5%
-19.4%
-39.2%
-23.1%
-3.9%
-49.9%
10.2%
-3.7%
24.2%
16.5%20.3%
-1.7%
5.6%
107.4%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
SCCO Minsur BVN Volcan Atacocha Cerro Verde
Milpo Brocal
Mining Sector
2012-2013
2014-2015
-80.5%
5.6%
-16.4%
-50.1%
170.4%
12.1% 9.5%
-35.2%
-100.0%
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
Relapa Alicorp Exalmar Casa Grande
Other Sectors
2012-2013
2014-2015
EBITDA: COMPOUND ANNUAL GROWTH BY SECTOR
-0.3%
57.5%
15.0%18.0%
9.5% 9.0% 7.3%5.2%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Unacem C. Pacasmayo Graña Ferreycorp
Construction Sector
2012-2013
2014-2015
2.5%
29.1%
0.3%
9.5%11.0% 11.1%
14.1%
4.6%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Edegel Enersur Luz del Sur Edelnor
Electric Utilities
2012-2013
2014-2015
INTELIGO SAB
82
January 21, 2014
MULTIPLES ANALYSIS
• We have performed a PER analysis based on Inteligo’s companies sample, which is a proxy of the ISBVL as it accounts for more than 80% of that index in terms of volume traded. Looking at the trailing P/E ratio, our sample seems to be fairly priced, as the P/E ratio stands slightly below historical average. Local equity market has reacted to the disappointing earnings in the Mining sector, as well as to concerns of a major slowdown in the domestic demand related shares, which were also affected by FX losses during 2013.
35
45
55
65
75
85
95
105
Jan
-09
Ap
r-09
Jul-
09
Oct-
09
Jan
-10
Ap
r-10
Jul-
10
Oct-
10
Jan
-11
Ap
r-11
Jul-
11
Oct-
11
Jan
-12
Ap
r-12
Jul-
12
Oct-
12
Jan
-13
Ap
r-13
Jul-
13
Oct-
13
Jan
-14
Trailing Price to Earnings ratio (P/E)
Average
Source: Bloomberg, Inteligo
+1σ
-1σ
• Looking forward and according to our 2014 earnings estimates, the P/E ratio reaches 14.1x, below historical average of 14.6x. This is indicative that market has not fully priced in the estimated financial performance of the companies of our sample during 2014. In this sense, based on our P/E2014e analysis, we can infer that at current prices the Selective index has a 12-month upside potential of 3.2%.
9
11
13
15
17
19
21
Jan
-09
Ap
r-09
Jul-
09
Oct-
09
Jan
-10
Ap
r-10
Jul-
10
Oct-
10
Jan
-11
Ap
r-11
Jul-
11
Oct-
11
Jan
-12
Ap
r-12
Jul-
12
Oct-
12
Jan
-13
Ap
r-13
Jul-
13
Oct-
13
Jan
-14
Forward- looking Price to Earnings ratio (P/E e)
Average
Source: Bloomberg, Inteligo's estimates
+1σ
-1σ
• All in all, considering our fundametal analysis (upside potential of 13.9%) and P/E2014e assesment (upside potential of 3.2%) and applying a 80% weight to the fundamental analysis, we can conclude that the LSE Selective index should increase around 12.0% in 2014 in dollar terms (18% considering the full year).
INTELIGO SAB
83
January 21, 2014
FORWARD LOOKING P/E AND EV/EBITDA
23.6
18.2
17.8
17.1
16.9
16.5
15.7
14.4
14.1
13.6
13.3
12.4
12.1
11.7
10.6
10.4
9.2
8.1
7.6
0.0 5.0 10.0 15.0 20.0 25.0
Graña y Montero
Alicorp
Unacem
El Brocal
C. Pacasmayo
SCCO
Cerro Verde
Exalmar
Enersur
Luz del Sur
Edelnor
BVN
Edegel
BAP
Continental
Milpo
Volcan
Ferreycorp
Minsur
P/E 2014e
22.9
22.2
11.8
10.3
9.4
9.4
9.2
9.0
8.4
8.4
7.9
7.5
7.2
7.2
6.8
5.9
5.8
5.1
4.0
2.9
2.3
0.0 5.0 10.0 15.0 20.0 25.0
RelapaCasa Grande
UnacemAlicorp
C. PacasmayoLuz del Sur
SCCOBVN
EnersurEnersur
Graña y MonteroCerro Verde
ExalmarEdegel
EdelnorEl Brocal
Volcan Ferreycorp
Minsur Milpo
Atacocha
EV/EBITDA 2014e
COMPARABLES ANALYSIS
1. Mining
1.1. Precious Metals Producers
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
BVN Peru 9.6 12.4 8.2 9.0
Yamana Gold Canada 21.4 22.6 9.1 9.2
Goldcorp Canada 35.0 25.0 13.1 12.0
Kinross Gold Corp Canada 4.1 14.3 4.2 4.8
Newmont Mining US 10.9 13.1 8.3 7.7
Newcrest Mining Australia n.a. 29.3 8.9 9.3
Average 16.2 19.4 8.6 8.7
Source: Bloomberg, Inteligo's estimates
1.2. Copper Producers
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Cerro Verde Peru 15.1 15.7 7.0 7.5
Southern Copper Peru 14.1 16.6 8.5 9.2
Antofagasta Plc UK 17.6 16.2 4.4 5.5
Freeport McMoRan US 12.8 13.8 8.2 7.5
Grupo Mexico Mexico 12.5 13.8 6.2 6.8
Jiangxi Copper Co China 9.8 12.1 8.3 7.9
Average 13.6 14.7 7.1 7.4
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
84
January 21, 2014
1.3. Diversified Producers
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Milpo Peru 21.3 10.4 3.0 2.9
Volcan Peru 9.4 9.2 6.5 5.8
El Brocal Peru n.m. 17.1 18.4 5.9
Atacocha Peru n.m. n.m. 2.5 2.3
Vedanta Resources UK n.a. 32.2 5.5 5.5
Teck Resources Canada 14.7 16.5 6.4 6.7
Hindustan Zinc India 7.9 n.a. 4.6 n.a.
Boliden Sweden 16.4 21.1 7.3 7.6
Average 13.9 17.7 6.8 5.2
Source: Bloomberg, Inteligo's estimates
1.4. Tin Producers
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Minsur Peru 7.3 7.6 4.1 4.0
PT Timah Indonesia 21.5 17.3 7.9 8.6
Malaysia Smelting Corp Malaysia n.a. 6.8 6.1 7.5
Average 14.4 10.6 6.0 6.7
Source: Bloomberg, Inteligo's estimates
2. Construction
2.1. Capital Goods and Machinery
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Ferreycorp Peru 14.7 8.1 6.3 5.1
CAT US 15.4 16.7 6.6 8.0
Finning Canada 13.3 14.0 8.3 8.6
Toromont Canada 14.8 15.4 7.7 8.7
H&E Equipment US 29.1 15.4 6.4 8.7
Average 17.5 13.9 7.1 7.8
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
85
January 21, 2014
2.2. Engineering and Construction
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Graña y Montero Peru 20.0 23.6 8.8 7.9
Caputo Argentina 5.8 n.a. 7.9 n.a.
Besalco Chile 25.2 17.5 14.8 11.4
Salfacorp Chile 8.7 9.1 11.4 10.6
Average 14.9 16.8 10.7 10.0
Source: Bloomberg, Inteligo's estimates
2.3. Cement
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
UNACEM Peru 24.5 17.8 10.0 11.8
Cem. Pacasmayo Peru 23.3 16.9 10.4 9.4
Cementos Argos Colombia 122.1 46.8 13.6 13.6
Melon Chile 24.7 n.a. n.a. n.a.
Lafarge France 33.0 21.8 8.5 8.5
Heidelberg Germany 15.8 14.9 7.0 7.0
Holcim Switzerland 24.0 17.5 8.5 8.5
Titan Greece n.a. n.a. 12.6 12.6
Italcementi Italy n.a. n.a. 7.7 7.7
Cemex LatAm Mexico 14.8 13.7 9.2 9.2
Average 35.3 21.3 9.7 9.8
Source: Bloomberg, Inteligo's estimates
3. Consumer Goods
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Alicorp Peru 29.8 18.2 11.7 10.3
Nutresa Colombia 30.6 27.2 n.a. 14.3
Molinos Rio Argentina n.a. n.a. 29.1 37.3
Hypermarcas Brazil n.a. 33.3 14.4 12.9
Bimbo Mexico 52.2 39.1 13.8 12.2
Average 37.5 29.4 17.2 17.4
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
86
January 21, 2014
4. Electric Utilities
4.1. Generation Companies
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Edegel Peru 15.1 12.1 9.7 7.2
EnerSur Peru 16.5 14.0 10.7 8.4
Colbun Chile 35.4 37.6 17.9 15.5
Endesa Chile 22.2 17.3 9.2 8.8
Enersis Chile 12.4 12.3 5.7 5.6
Gener Chile 21.1 11.2 7.0 7.3
Isagen Colombia 20.5 n.a. 13.5 14.9
Average 20.5 17.4 10.5 9.7
Source: Bloomberg, Inteligo's estimates
4.2. Distribution Companies
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Edelnor Peru 12.9 12.1 7.4 6.8
Luz del Sur Peru 14.3 13.8 10.3 9.4
Energia de Bogota Colombia 16.3 n.a. n.a. 10.4
Chilectra Chile 8.0 n.a. 12.4 n.a.
CGE Chile 21.1 11.2 7.0 7.3
Coelce Brazil 13.0 15.8 8.0 8.6
CPFL Energia Brazil 19.8 19.6 9.8 9.1
Average 15.0 14.5 9.2 8.6
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
87
January 21, 2014
5. Oil & Gas
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Refinería La Pampilla Peru n.m. n.m. 27.2 22.9
Chevron Texaco US 10.1 10.5 5.5 4.4
Murphy Oil US 10.0 11.6 3.5 3.7
Exxon Mobil US 13.2 13.3 6.7 5.9
Ecopetrol Colombia 10.0 10.0 6.6 5.1
Petrobras Brazil 8.4 8.9 7.1 5.9
Average 10.3 10.9 9.4 8.0
Source: Bloomberg, Inteligo's estimates
6. Banking
Company CountryP/E
12m
P/E
2014e
P/BV
12m
Credicorp Peru 17.0 11.7 2.8
Continental Peru 11.9 10.6 3.2
IFS Peru 12.5 11.5 3.0
Davivienda Colombia 14.0 12.7 1.7
Bancolombia Colombia 12.8 12.2 1.6
Banco de Bogotá Colombia 14.4 n.a. 2.5
Banco de Chile Chile 12.9 13.0 3.0
Santander Chile Chile 14.8 14.9 2.6
Bradesco Brazil 10.4 9.9 1.8
Itau Brazil 10.3 9.9 1.9
Average 13.1 11.8 2.4
Source: Bloomberg, Inteligo's estimates
7. Fishing
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Exalmar Peru 32.5 14.4 8.9 7.2
Nippon Suisan Japan n.a. 14.2 12.4 11.8
Nutreco Holanda 16.3 14.5 9.4 9.6
Omega Protein US 10.2 8.6 3.3 3.4
Austevoll Seafood Norway 12.3 12.4 7.3 6.6
China Fishery Group Hong Kong 5.8 6.1 6.3 6.6
Average 15.4 11.7 7.9 7.5
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
88
January 21, 2014
8. Agriculture
Company CountryP/E
12m
P/E
2014e
EV/EBITDA
12m
EV/EBITDA
2014e
Casa Grande Peru 90.5 n.m. 12.5 22.2
Cartavio Peru 15.5 n.a. 6.5 n.a.
San Jacinto Peru 20.0 n.a. 3.3 n.a.
Sao Martinho Brazil 25.6 17.3 n.a. 4.8
Cosan Brazil n.a. 22.4 n.a. 1.8
Suedzucker AG Germany 9.3 11.4 5.3 6.2
Average 32.2 17.0 6.9 8.7
Source: Bloomberg, Inteligo's estimates
INTELIGO SAB
89
January 21, 2014
RECOMMENDED PORTFOLIOS
• Based on our valuation models, multiple analysis and expectations for the local equity market, and consdiering the risk-return profile of our companies sample, we have constructed two recommended portfolios: o Balanced: This portfolio is still tilted toward domestic demand related shares (90% of the
portfolio). We strongly believe that the Financial and Construction sectors will outperform during 2014, due to their encouraging prospects and attractive valuation. On the other hand, we have decided to reincorporate the Mining sector into our recommendations, as we believe the market overreacted last year and it is possible to capture the upside potential of some shares of the sector. Nonetheless, in an attempt to protect the portfolio from drastic swings, we are also including our favorite Electric Utility, Enersur. According to our estimates, our balanced portfolio has an expected return of 17.1%.
Composition Exp. Return Weight Distribution by Sector
Credicorp Ltd 15.3% 20.0% Financials 40.0%
Union Andina de Cementos SAA 13.8% 20.0% Construction 35.0%
BBVA Banco Continental SA 18.4% 20.0% Electric Utilities 15.0%
Enersur SA 23.2% 15.0% Mining 10.0%
Grana y Montero SA 7.3% 15.0%
Cia Minera Milpo SAA 30.3% 10.0% Expected Return 17.1%
Inteligo's Balanced Portfolio
o Aggressive: Domestic demand related shares still account for an important portion of the portfolio. However, this portfolio has a larger exposure to mining companies’ shares, in order to capture the higher (but riskier) potential of this sector. Moreover, we are also including Ferreycorp, a company with an important presence in the Construction sector, but that continues to be sensitive to the Mining activity. According to our estimates, the aggressive portfolio has an expected return of 23.6%.
Composition Exp. Return Weight Distribution by Sector
Credicorp Ltd 15.3% 20.0% Construction 35.0%
Union Andina de Cementos SAA 13.8% 20.0% Mining 30.0%
Ferreycorp SAA 36.3% 15.0% Financials 20.0%
Enersur SA 23.2% 15.0% Electric Utilities 15.0%
Cia Minera Milpo SAA 30.3% 15.0%
Volcan Cia Minera SAA 28.6% 15.0% Expected Return 23.6%
Inteligo's Agressive Portfolio
INTELIGO SAB
90
January 21, 2014
MILA MARKET COMMON MARKET
• MILA equity indices posted a negative performance during 2013, primarily affected by the recomposition of global investment portfolios, due to the increasing aversion to emerging markets. Moreover, the slowdown in the growth pace of the domestic demand component was a common issue among The region’s countries, exacerbating the decline of the stock indices. It worth to mention that the first half of the year largely explains most of the annual performance of the MILA markets. In this sense, the decline and volatility of commodity prices affected to a greater extent the IGBVL (-30.8%) and the IGBC indices (-19.7%) in IH13, while the IPSA (-11.6%) index did not fall as much as they did, supported by its lower beta exposure compared to the Peruvian and Colombian markets. Nonetheless, during the second half of 2013 the Chilean equity market underperformed its regional peers, posting a decline of 11.3%, while the IGBC (+1.7%) and IGBVL (+0.8%) indices recovered some ground. It is also important to recall that the Mexican Stock Exchange entered into the final stage for the MILA integration, after the approval of financial reforms in the country. To sum up, the IPSA (-21.6%), IGBC (-18.4%) and IGBVL (-30.3%) indices plunged. In this context, the S&P MILA 40 index lost ground (-22.6%) during 2013.
85.0
90.0
95.0
100.0
105.0
110.0
115.0
2-Jul
28-Jul
23-Aug
18-Sep
14-Oct
9-No
v
5-Dec
31-Dec
MILA Relative Performance
S&P MILA 40 IGBVL IPSA IGBC IPyC
• The most traded stocks since the inception of the MILA platform are: S.A.C.I. Falabella ($146.2m), Ecopetrol ($13.5m), Aguas Andinas ($9.5m), Pacific Rubiales ($7.7m), Empresa Nacional de Telecomunicaciones ($7.5m), Sigdo Koppers ($5.2m), Sonda ($5.2m), Nutresa ($4.4m), Ferreycorp ($4.1m) and Graña y Montero ($2.9m). In general terms, the most traded stocks since inception of MILA are the Chilean with 78.8%, followed by the Colombian with 15.5% and the Peruvian with 5.7%. All in all, the traded volume through the MILA platform reached $140.2m during 2013, which represented an advance of 75.1% YoY.
INTELIGO SAB
91
January 21, 2014
PERFORMANCE BY INDIVIDUAL MARKETS Chile
• During 2013, the IPSA index fell sharply, following the sell off that affected most of Latin American
equity markets. The release of weak economic indicators throughout the year and disappointing corporate results dragged down the IPSA index. Furthermore, the slowdown of local activity and the uncertainty about the economic measures announced by Michelle Bachelet (such as higher taxes for companies and the proposal for a new constitution) added more downward pressures to Chilean equity market. On the monetary front, the CPI remained within the central bank’s target objective (2.0% - 4.0%), but with a slightly upward trend. However, the surprise came from the central bank’s decision to cut unexpectedly the reference rate in two consecutive meetings in IVQ13 (from 5.0% to 4.5%), in line with the deceleration of domestic demand activities and private consumption.
• On the corporate front, Latam Airlines (-32.5%) ended down due to concerns about the increase in operational expenses after the merger with TAM. Likewise, the company approved in June a capital increase of around 63.5m shares to renovate its aircraft fleet by 2017, which implies an investment of $11bln. In the same way, CCU (-20.9%) tumbled after the company announced in May a capital increase of approximately $695m. In the energy sector, Enersis (-13.9%) increased by $6.0bln its capital with ADS’s in the US market at the beginning of the year with the purpose to finance its growth plan in LatAm region. On the other hand, Falabella (-11.8%) confirmed its expansion plan in Colombia and Peru in the near future given the strategy to gain more market share in each country. In this way, the firm announced an investment of $40.0m to open 5 stores in 2013 in Peru. Moreover, Falabella estimated to open 40 new stores until 2015 in Peru. Within the telecommunication sector, Entel (-31.4%) slumped since most analysts pointed out its concerns about the acquisition of Nextel Peru, arguing it may not be a profitable operation for the company. Despite this, the firm promised an investment of around $150m in Peru. Finally, Cencosud (-31.8%) experienced a strong decline, as investors weighted if the company would have success on its expansion plan in Colombia (with the purchase of Carrefour) and Brazil, in which the agreement between Cencosud and Itau related to the sale of the retailer’s consumer finance business did not materialize. All in all, the IPSA index decreased 21.6% in dollar terms. Total traded volume in the IPSA index reached $40.7 bln (+2.1% YoY).
Best Performers % Worst Performers %
Corpbanca 16.8% La Polar -66.4%Concha y Toro 7.6% SQM/B -49.5%Banco de Chile 5.2% Salfacorp -48.9%Copec 5.1% ECL -38.1%Aguas 3.6% CAP -35.4%Source: Bloomberg
Issuer Sector DateAmount
(CLP Bln)Price(CLP)
Moller & Pérez-Cotapos S.A. Construction mar-13 26.68 400.0
Source: Corpbanca
Initial Public Offerings in 2013
6.0
7.0
8.0
9.0
10.0
11.0
0
1,000
2,000
3,000
4,000
5,000
6,000
Dic
-12
En
e-13
Feb
-13
Mar
-13
Abr
-13
May
-13
Jun
-13
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13
Ag
o-1
3
Sep
-13
Oct
-13
No
v-13
Dic
-13
IPS
A
Vo
lum
en
(M
illio
nes)
IPSA Máximo-Mínimo-Cierre-Volumen (US$)
Volumen CierreFuente: Economatica
INTELIGO SAB
92
January 21, 2014
Best Performers % Worst Performers %
Canacol Energy 127.8% Carvajal Empaques -30.5%Petrominerales 52.0% Ecopetrol -28.0%Banco de Bogotá 35.7% BVC -20.8%Isagen 32.6% Bancolombia-Pref -19.1%Banco Occidente 30.9% Bancolombia -18.3%Source: Bloomberg
Issuer Sector DateAmount
(COP Bln)Price(COP)
Cementos Argos S.A. Infrastructure may-13 1,925.00 7,700.0
Source: Serfinco
Initial Public Offerings in 2013
Colombia
• The Colombian stock market showed a negative performance in 2013 amid a higher risk aversion towards the MILA market. Due to the structure of the Colombian index, the retreat of Ecopetrol (-34.0%) and Pacific Rubiales (-22.5%) explained most of the downside movement as both represent nearly 40% of the index. The main reason for this behavior was the lower average oil price in 2013 compared to 2012 (-3.4%) and the higher operating costs, which ultimetely affected Colombian oil companies. In the case of Ecopetrol, the company also suffered a strike in its Rubiales field in November, while Pacific Rubiales plunged after financial results missed market expectations. On the monetary front, the central bank adopted a more dovish stance at the beginning of the year, cutting its reference rate three consecutive times from 4.25% to 3.25%. In the opinion of the monetary authority, the economy was growing below its potential. After a modest desaceleration of domestic demand in IH13, the Colombian economy started a slow recovery process, supported by the positive trend on private consumption and investment.
• On the corporate front, the most important announcement was the acquisition of Petrominerales (+39.3%) by Pacific Rubiales for $935m. In addition, Pacific Rubiales proposed to Ecopetrol the extension of the partnership contract in Campo Rubiales, which ends in 2016. With the extension, the Canadian oil company plans to move from a current production of 260,000 bpd to 500,000 bpd. On the other hand, Avianca (-23.5%) announced an IPO in the NSYE, in order to raise $504m by offering 27.2 ADSs at a price of $17 to $20. Nevertheless, the company raised less capital than initially expected. In fact, the firm’s ADS began trading at $15.0 each. Within the financial sector, Bancolombia (-25.8%) announced the acquistion of HSBC Panama for $2.1bln in IQ13. However, the company was affected by the lower income from its fixed income portfolio during the year, as well as the deterioration of its operating indicators. In contrast, Banco Davivienda only retreated 5.5%, as the company continued to focus its credits on the retail segment and its returns indicators remained at good level. In this context, the IGBC (-18.4%) and COLCAP (-19.4%) indices lost ground. Total traded volume in the IGBC and COLCAP indices reached $20.9 bln (-6.7% YoY) and $21.3 bln (-4.9% YoY), respectively.
6.0
7.0
8.0
9.0
10.0
11.0
0
500
1,000
1,500
2,000
2,500
3,000
Dec
-12
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Feb
-13
Mar
-13
Ap
r-13
May
-13
Jun
-13
Jul-
13
Aug
-13
Sep
-13
Oct
-13
No
v-13
Dec
-13
IGB
C
Vo
lum
e (
Milli
on
s)
IGBC High-Low-Close-Volume (US$)
Volume CloseSource: Economatica
INTELIGO SAB
93
January 21, 2014
VALUATION • In the following charts, we present a summary of the target prices for the main companies listed at the
Chilean and Colombian equity markets. We are considering the valuation from CorpBanca (Chile) and Serfinco (Colombia) for the companies covered by these two brokerage houses. For some stocks, however, we are taking into account the average target price compilled by Bloomberg.
Current Price Target Price Upside (%)Utilities
Enersis 159.5 170.0 6.6%Endesa 787.9 890.0 13.0%Colbún 120.0 160.0 33.3%Aes Gener 269.3 400.0 48.6%IAM 860.8 1,190.0 38.2%Aguas 326.9 390.0 19.3%ECL (*) 685.0 935.9 36.6%Mining
SQM/B (*) 14,831.0 14,620.0 -1.4%CAP (*) 9,364.1 13,325.0 42.3%Banking
Banco de Chile 71.8 84.0 16.9%Santander Chile 30.2 33.0 9.3%Corpbanca (*) 7.4 6.6 -10.3%BCI 31,597.0 34,500.0 9.2%SM-Chile (*) 181.9 228.0 25.3%Construction
Besalco 503.2 850.0 68.9%Salfacorp 485.0 590.0 21.6%ILC (*) 7,470.0 8,511.0 13.9%Sigdo Koppers 830.0 1,360.0 63.9%Healthcare
Cruz Blanca 485.0 450.0 -7.2%Paz 285.1 n.a. n.a.CFR (*) 118.0 160.0 35.6%Consumer Goods & Beverages
Andina B 2,225.5 2,800.0 25.8%CCU 6,000.4 7,500.0 25.0%Embonor 1,090.0 1,300.0 19.3%Concha y Toro 952.2 1,034.0 8.6%Commerce & Retail
Cencosud 1,741.2 3,050.0 75.2%Falabella 4,415.9 6,000.0 35.9%Ripley 360.0 540.0 50.0%Forus 2,820.0 3,260.0 15.6%Hites 375.0 485.0 29.3%La Polar 60.1 n.a. n.a.Parque Arauco 969.9 1,300.0 34.0%Telecom & TI
Entel 7,196.1 9,450.0 31.3%Sonda (*) 1,172.3 1,542.5 31.6%Transport
Latam Airlnes (*) 8,737.0 9,245.0 5.8%SMSAAM 46.7 67.0 43.5%Vapores 32.7 n.a. n.a.Forestry
Copec 7,000.7 7,850.0 12.1%CMPC 1,289.7 1,850.0 43.4%Antarchile 7,150.0 8,800.0 23.1%Source: Corpbanca, (*) Bloomberg
CHILE - RATING SUMMARY (CLP)
INTELIGO SAB
94
January 21, 2014
Current Price Target Price Upside (%)Utilities
EEB 1,435.0 1,630.0 13.6%Isagen 3,130.0 2,996.0 -4.3%ISA 8,500.0 10,500.0 23.5%Celsia 5,190.0 7,011.0 35.1%Canacol Energy (*) 12,020.0 15,508.3 29.0%Energy
Ecopetrol 3,490.0 5,070.0 45.3%Pacific Rubiales 32,100.0 55,920.1 74.2%Materials
Cemex Latam Holdings (*) 15,080.0 16,753.8 11.1%Cemargos (*) 8,940.0 10,431.4 16.7%Grupo Argos 19,120.0 25,000.0 30.8%Grupo Argos-Pref 18,800.0 25,025.0 33.1%Mineros 3,095.0 5,500.0 77.7%Carvajal Empaques 3,050.0 n.a. n.a.Financials
Bancolombia-Pref 23,260.0 33,572.0 44.3%Bancolombia 22,300.0 33,122.0 48.5%Grupo Sura-Pref 32,740.0 54,000.0 64.9%Grupo Sura 32,000.0 52,200.0 63.1%Grupo Aval-Pref (*) 1,205.0 1,460.0 21.2%Davivienda 22,680.0 32,929.0 45.2%Corficolombiana (*) 39,400.0 41,660.0 5.7%Banco de Bogotá (*) 68,980.0 69,910.0 1.3%BVC 22.9 32.7 42.8%Construction
Avianca (*) 4,425.0 5,595.0 26.4%Odinsa 8,070.0 n.a. n.a.El Condor (*) 1,315.0 1,627.0 23.7%Conconcreto (*) 1,430.0 1,470.0 2.8%Consumer Goods & Beverages
Nutresa 26,300.0 26,800.0 1.9%Commerce & Retail
Éxito 28,100.0 33,300.0 18.5%Telecom & TI
ETB 442.0 n.a. n.a.Source: Serfinco, (*) Bloomberg
COLOMBIA - RATING SUMMARY (COP)
INTELIGO SAB
95
January 21, 2014
• As in the case of the Peruvian market, we expect the Chilean and Colombian markets to recover in 2014, on the back of the global recovery and the expected stabilization of the Chinese economy. Despite some moderation in the pace of domestic demand growth, we believe that the long-term macroeconomic fundamentals will prevail. Global investors will recognize that the MILA economies are well-managed in macroeconomic terms, providing the best prospects for sustainable growth in the region.
• In Chile, according to Corpbanca, companies related to domestic demand will lead the performance of
the stock market. In this sense, we expect that the consolidation of international operations of Falabella and Cencosud will boost corporate results during 2014. In the banking sector, Banco de Chile appears as a good choice due to its strong fundamentals. In that regard, past due loans and non-performing loans continue to decrease, while efficiency ratio are still in low levels. Moreover, we foresee that its loan portfolio will increase around 10%, above market average.
• In Colombia, according to Serfinco, Grupo Argos has a good upside potencial due to the value generation added in the short-term by Cemargos and Celsia. In the mid term, we believe that the ports and infrastructure business would be one of the main drivers of Grupo Argos. Additionally, we are currently waiting for the possible acquisition of the government’s participation in Isagen, the third largest generator in the country; this process will begin in late January. On the other hand, we also recommend taking exposure to Grupo Sura, due to the favorable outlook for Sura Asset Management in the region and the Suramericana insurance business in Colombia. We are also optimistic about the recovery of the companies that belong to its investment portfolio (GEA companies). Finally, Davivienda represents a significant structural investment opportunity because of the value added by the HSBC business in Central America.
FOCUS LIST AND MILA RECOMMENDED PORTFOLIO • Based on these stocks and our top picks in Peru, we have created a MILA recommended portfolio:
Composition Exp. Return Weight Country Distribution by Sector
1 Grupo de Inversiones Surameric 64.9% 12.6% COLOMBIA Financials 44.2%
2 SACI Falabella 35.9% 12.4% CHILE Retail 23.1%
3 Grupo Argos SA/Colombia 30.8% 11.9% COLOMBIA Holdings 11.9%
4 Credicorp Ltd 15.3% 11.2% PERU Construction 8.0%
5 Cencosud SA 75.2% 10.7% CHILE Mining 7.2%
6 Banco Davivienda SA 45.2% 10.5% COLOMBIA Electric Utilities 5.6%
7 Banco de Chile 16.9% 9.9% CHILE
8 Union Andina de Cementos SAA 13.8% 8.0% PERU
9 Cia Minera Milpo SAA 30.3% 7.2% PERU
10 Enersur SA 23.2% 5.6% PERU Expected Return 37.0%
MILA Portfolio
BANCO DE CHILE
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (CLP)
Targe Price (CLP)
Upside Potential
52-Week range (CLP) 69.01 - 79.82
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
Price to Book Value
Price to Earnings
Return on Equity
Return on Assets
EPS (CLP)
DPS (CLP)
Bloomberg Ticker: CHILE CI
Sector:
Banco de Chile attracts deposits and offers retail and commercial bankingservices. The Bank offers credit, mortgage loans, co-branded credit cards,securities brokerage services, mutual funds, factoring, insurance, andinvestment products.
www.bancochile.cl
2.16%
5.60
3.35
CHILE
CLP
IPSA
3.55%
0.00
93,175.04
48.7%
A+
A+
3.01x
12.82x
25.55%
0.86
71.84
84.00
16.9%
-5.85%
5.19%
Financials
-1.76%
2,904.45
67.95%
4.7%0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
62.00
64.00
66.00
68.00
70.00
72.00
74.00
76.00
78.00
80.00
82.00
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
75
85
95
105
115
Relative to Benchmark Performance
CHILE CI IPSA
Management
Chairman
Co-Vice Chairman
Co-Vice Chairman
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
LTM Net Interest Income (NII) 1,204.3 1,512.5 1,906.7 1,877.3 2,137.3
LTM Net Interest Margin (NIM) 4.29% 4.86% 5.09% 4.40% 4.68%
LTM Operating Income 533.1 817.8 1,005.9 1,071.7 1,229.8
LTM Net Income 463.5 743.8 888.0 958.4 1,069.2
Total Loans 25,982.0 30,696.2 33,451.0 39,185.8 40,428.7
NPL Ratio 4.72% 5.46% 2.88% 3.26% 3.27%Loan Loss Coverage n.a. n.a. 3.28% 4.58% 4.53%
Company Country P/BV NIM ROE ROALoans to
Deposits
Banco de Chile CHILE 3.01x 4.68% 25.5% 2.2% 124.4%
Banco Santander Chile CHILE 2.57x 4.90% 17.9% 1.5% 134.0%
Banco de Credito e Inversiones CHILE 2.23x 3.95% 20.4% 1.6% 120.4%
Bancolombia SA COLOMBIA 1.65x 5.61% 12.9% 1.4% 109.1%
Banco Davivienda SA COLOMBIA 1.73x 7.61% 13.4% 1.6% 114.6%
Credicorp Ltd PERU 2.58x 5.14% 15.2% 1.6% 89.3%BBVA Banco Continental SA PERU 3.42x 6.83% 30.2% 2.5% 101.3%
Average 2.46x 5.53% 19.4% 1.8% 113.3%
Source: Bloomberg L.P.
Pablo Granifo Lavin
Andronico Mariano Luksic Craig
Francisco Aristeguieta Silva
65
75
85
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
S.A.C.I. FALABELLA
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (CLP)
Targe Price (CLP)
Upside Potential
52-Week range (CLP) 4,415.90 - 5,703.37
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
3.45x
4,415.90
Bloomberg Ticker: FALAB CIwww.falabella.cl
Sector:
S.A.C.I. Falabella owns and operates department stores, home improvementstores, hypermarkets and Shopping centers. The company has operations inChile, Peru, Argentina and Colombia through its subsidiaries. The company alsohas a financial branch that includes banks and credit card operations.
CHILE
CLP
IPSA
5.13%
19.65
2,406.37
71.1%
BBB
BBB
5,671.64
67.95%
0.7%
1.04
Price to Book Value
6,000.00
35.9%
-6.30%
-3.28%
-13.71%
Consumer Discretionary
EPS (CLP) 174.50
DPS (CLP) 32.00
Price to Sales 0.00x
Return on Equity 14.07%
Return on Assets 4.85%
Price to Earnings 25.31x
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
0
1,000
2,000
3,000
4,000
5,000
6,000
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
85
95
105
115
125
Relative to Benchmark Performance
FALAB CI IPSA
Management
Chairman
Vice Chairman
Chief Executive Officer
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
Net Sales 2,109.0 2,729.8 2,909.6 3,573.8 3,153.9
EBITDA 891.5 1,380.7 1,591.0 1,381.0 1,544.7
Net Income 439.3 812.2 876.1 764.7 870.0
EBITDA Margin 13.09% 15.98% 14.96% 11.49% 11.93%
Net Margin 6.45% 9.40% 8.24% 6.36% 6.72%Total Assets 11,592.6 14,067.3 14,971.7 18,043.9 18,131.0Net Debt 4,012.5 4,691.7 5,310.3 6,552.6 7,007.3Net Debt to EBITDA 4.1 3.1 3.6 4.7 4.7
Company Country P/BV P/E ROE ROA Div. Yield
SACI Falabella CHILE 3.45x 25.31x 14.1% 4.8% 1.1%
Cencosud SA CHILE 1.19x 24.68x 5.0% 2.1% 0.5%
Empresas La Polar SA CHILE 0.85x 0.16x n.a. 64.7% n.a.
Cia Brasileira de Distribuicao BRAZIL 2.76x 24.86x 11.6% 2.9% 0.6%
Carrefour SA FRANCE 2.53x 44.85x 30.4% 4.9% 2.1%
Wal-Mart de Mexico SAB de CV MEXICO 4.22x 24.39x 17.7% 11.1% 2.3%InRetail Peru Corp PERU 1.57x 17.33x 9.4% 4.1% n.a.
Average 2.37x 23.08x 14.7% 13.5% 1.3%
Source: Bloomberg L.P.
Sandro Solari Donaggio
DPS (CLP) 32.00
Juan Cuneo Solari
Carlo Solari Donaggio
65
75
85
95
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
CENCOSUD SA
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (CLP)
Targe Price (CLP)
Upside Potential
52-Week range (CLP) 1,686.90 - 3,028.51
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
Return on Equity
Return on Assets
DPS (CLP)
EPS (CLP)
1,741.20
Cencosud SA is a multi-brand retailer in South America. The Company operatesthrough a number of formats, including supermarkets, home improvement stores,shopping centers and department stores. Cencosud is headquartered in Chileand has operations in Chile, Argentina, Brazil, Colombia and Peru.
n.a.
n.a.
Price to Book Value
Price to Earnings
4.98%
2.14%
70.56
8.00
67.95%
0.5%
1.09
1.19x
24.68x
0.00xPrice to Sales
3,050.00
75.2%
-7.99%
-25.23%
-38.33%
4,113.54
0.00
2,828.72
50.5%
Bloomberg Ticker: CENCOSUD CIwww.cencosud.com
Sector:
CHILE
CLP
IPSA
5.06%
Consumer Staples
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
75
85
95
105
115
Relative to Benchmark Performance
CENCOSUD CI IPSA
Management
Chairman
Chief Executive Officer
Chief Financial Officer
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
Net Sales 2,931.5 3,786.8 4,289.5 5,401.6 4,802.6
EBITDA 789.5 1,042.0 1,376.1 1,505.1 1,524.6
Net Income 437.8 582.2 581.5 555.4 380.8
EBITDA Margin 7.97% 8.56% 8.77% 8.06% 7.40%
Net Margin 4.42% 4.78% 3.71% 2.97% 1.85%Total Assets 11,018.0 13,573.8 14,714.3 20,205.1 18,937.0Net Debt 2,049.8 3,070.9 4,041.3 6,751.9 4,344.7Net Debt to EBITDA 2.4 2.7 3.2 4.4 3.0
Company Country P/BV P/E ROE ROA Div. Yield
Cencosud SA CHILE 1.19x 24.68x 5.0% 2.1% 0.5%
SACI Falabella CHILE 3.45x 25.31x 14.1% 4.8% 1.1%
Empresas La Polar SA CHILE 0.85x 0.16x n.a. 64.7% n.a.
Cia Brasileira de Distribuicao BRAZIL 2.76x 24.86x 11.6% 2.9% 0.6%
Carrefour SA FRANCE 2.53x 44.85x 30.4% 4.9% 2.1%
Wal-Mart de Mexico SAB de CV MEXICO 4.22x 24.39x 17.7% 11.1% 2.3%InRetail Peru Corp PERU 1.57x 17.33x 9.4% 4.1% n.a.
Average 2.37x 23.08x 14.7% 13.5% 1.3%
Source: Bloomberg L.P.
DPS (CLP)
Juan Manuel Parada
8.00
Horst Paulmann Kemma
Daniel Alberto Rodriguez Cofre
55
65
75
85
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
GRUPO ARGOS SA
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (COP)
Targe Price (COP)
Upside Potential
52-Week range (COP) 18,300.00 - 23,735.33
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
1.13x
103.90x
Price to Sales n.a.
Return on Equity 1.03%
Price to Earnings
3,155.89
66.85%
0.3%
0.87
Price to Book Value
n.a.
19,120.00
25,000.00
30.8%
-1.35%
-6.44%
-10.41%
Return on Assets 0.48%
EPS (COP) 184.02
DPS (COP) 57.50
Bloomberg Ticker: GRUPOARG CBwww.argos.com.co
Sector: Materials
Grupo Argos SA is a Colombian-based investment holding company with focusesmainly on the Cement and Energy sectors through Colombian subsidiaries. TheCompany also has stakes in food, financial services, and insurance companies.
COLOMBIA
COP
IGBC
3.38%
7.60
645.40
44.7%
n.a.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
0
5,000
10,000
15,000
20,000
25,000
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
85
95
105
115
125
Relative to Benchmark Performance
GRUPOARG CB IGBC
Management
Chief Executive Officer
Chief Financial Officer
VP: Corporate Affairs
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
Net Sales n.a. 617.3 861.2 942.8 1,038.4
EBITDA n.a. n.a. 932.9 900.0 980.0
Net Income n.a. 204.9 83.2 191.4 68.3
EBITDA Margin n.a. n.a. 29.76% 24.21% 24.55%
Net Margin n.a. 7.18% 2.66% 5.15% 1.71%Total Assets n.a. 12,663.6 13,099.9 15,165.5 14,853.6Net Debt n.a. 2,166.9 2,878.7 2,939.2 2,027.7Net Debt to EBITDA n.a. n.a. 3.2 3.2 2.1
Company Country P/BV P/E ROE ROA Div. Yield
Grupo Argos SA/Colombia COLOMBIA 1.13x 103.90x 1.0% 0.5% 1.2%
Cemex SAB de CV MEXICO 1.35x n.a. -9.6% -2.8% n.a.
Corp Moctezuma SAB de CV MEXICO 3.89x 20.26x 18.1% 14.7% 2.6%
Cimpor Cimentos de Portugal SG PORTUGAL 1.66x n.a. -19.2% -4.6% 0.6%
Ultratech Cement Ltd INDIA 3.06x 17.41x 19.1% 9.8% 0.5%
Indocement Tunggal Prakarsa Tb INDONESIA 3.69x 15.88x 25.3% 22.1% 2.1%Union Andina de Cementos SAA PERU 1.82x 17.47x 11.9% 4.7% 1.4%
Average 2.37x 34.98x 6.7% 6.3% 1.4%
Source: Bloomberg L.P.
José Alberto Velez
Ricardo Andrés Sierra
Camilo José Abello
DPS (COP) 57.50
65
75
85
95
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
GRUPO DE INV SURAMERICANA-PF
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (COP)
Targe Price (COP)
Upside Potential
52-Week range (COP) 32,740.00 - 39,313.85
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
Price to Book Value
Price to Earnings
Price to Sales
Return on Equity
Return on Assets
EPS (COP)
DPS (COP)
Bloomberg Ticker: PFGRUPSU CBwww.gruposuramericana.com
Sector: Financials
6,746.97
0.00
106.34
n.a.
BBB
BBB
32,740.00
54,000.00
64.9%
-6.40%
-7.94%
-11.85%
COLOMBIA
COP
IGBC
4.91%
Grupo de Inversiones Suramericana holds investments in leading Colombiancompanies as well as other important stakes in other countries of the Americas.This portfolio is mainly concentrated in strategic investments in the financial,insurance and social security sectors and is complemented by other investmentsin services, food, and cement sectors amongst others.
66.85%
0.7%
0.78
n.a.
n.a.
n.a.
243.75
2.52%
n.a.
2.75%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
85
95
105
115
125
Relative to Benchmark Performance
PFGRUPSU CB IGBC
DPS (COP)
Management
Chairman
President
Vice Chairman
Chief Financial Officer
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
Net Sales 82.3 118.9 187.8 258.4 258.4
EBITDA 60.4 111.9 163.6 190.0 190.0
Net Income 208.9 367.3 180.2 303.9 303.9
EBITDA Margin 73.41% 94.15% 87.10% 73.55% 73.55%
Net Margin 253.71% 308.91% 95.97% 117.63% 117.63%Total Assets 7,193.0 9,469.0 11,137.7 12,268.4 12,268.4Net Debt 145.5 294.7 1,207.1 408.2 408.2Net Debt to EBITDA 2.3 2.7 7.7 2.1 2.1
Company Country P/BV NIM ROE ROA Div. Yield
Grupo de Inversiones Surameric COLOMBIA n.a. n.a. 2.8% 2.5% 3.0%
Bancolombia SA COLOMBIA 1.65x 5.6% 12.9% 1.4% 3.2%
Banco de Chile CHILE 3.01x 4.7% 25.5% 2.2% 4.7%
Banco Santander Chile CHILE 2.57x 4.9% 17.9% 1.5% 4.1%
Banco de Credito e Inversiones CHILE 2.23x 4.0% 20.4% 1.6% 2.7%
Credicorp Ltd PERU 2.58x 5.1% 15.2% 1.6% 2.0%BBVA Banco Continental SA PERU 3.42x 6.8% 30.2% 2.5% 4.0%
Average 2.58x 5.2% 17.8% 1.9% 3.4%
Source: Bloomberg L.P.
Hernando Yepes Arcila
243.75
Ignacio Calle Cuartas
Armando Montenegro Trujillo
David Emilio Bojanini Gargia
65
75
85
95
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
BANCO DAVIVIENDA SA
Company Description Shares Information
Country
Currency
Relative Index
Index Weight
Market Cap (US$ bln)
Shares Outstanding (million)
Inst. Owner % Shares Out.
S&P LT LC Rating
S&P LT FC Rating
Market Indicators
Current Price (COP)
Targe Price (COP)
Upside Potential
52-Week range (COP) 21,856.38 - 26,010.08
Yield YTD
Yield 2013
Yield LTM
90-day Av. Vol. (US$ 000)
Market Presence
Dividend Yield
Beta
Ratios
Price to Book Value
Price to Earnings
Return on Equity
Return on Assets
EPS (COP)
DPS (COP)
22,680.00
1.60%
1,619.56
280.00
Bloomberg Ticker: PFDAVVND CBwww.davivienda.com
Sector: Financials
COLOMBIA
COP
IGBC
2.88%
Banco Davivienda S.A. provides banking services to individuals, families,small and medium-sized enterprises, and builders in Colombia. TheCompany's products and services include savings and investment products,corporate money market accounts, debit and credit cards, transactionservices, insurance products, guarantees, investment products, treasuryservices, and various lines of credit.
0.00
100.54
n.a.
BBB-
BBB-
13.42%
32,929.00
45.2%
-4.14%
2.99%
-1.77%
4,335.84
66.85%
1.2%
0.54
1.73x
14.00x
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
19,000
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Vo
lum
e (L
C m
)
Pri
ce
(L
C)
LTM Performance
Volume Price
85
95
105
115
125
Relative to Benchmark Performance
PFDAVVND CB IGBC
Management
Chairman
First Vice Chairman
Chief Executive Officer
Exec VP: Corporate Banking
Main Financial Figures (US$m) 2009 2010 2011 2012 2013
LTM Net Interest Income (NII) n.a. n.a. n.a. 1,526.7 1,666.7
LTM Net Interest Margin (NIM) n.a. n.a. n.a. n.a. 7.61%
LTM Operating Income n.a. n.a. n.a. 425.1 434.8
LTM Net Income n.a. n.a. 341.7 380.6 400.3
Total Loans 9,049.0 11,431.9 13,369.5 19,489.0 20,305.2
NPL Ratio n.a. n.a. n.a. 1.06% n.a.Loan Loss Coverage -2.12% n.a. n.a. n.a. n.a.
Company Country P/BV NIM ROE ROALoans to
Deposits
Banco Davivienda SA COLOMBIA 1.73x 7.6% 13.4% 1.6% 114.6%
Banco Santander Chile CHILE 2.57x 4.9% 17.9% 1.5% 134.0%
Banco de Chile CHILE 3.01x 4.7% 25.5% 2.2% 124.4%
Banco Santander Chile CHILE 2.57x 4.9% 17.9% 1.5% 134.0%
Banco de Credito e Inversiones CHILE 2.23x 4.0% 20.4% 1.6% 120.4%
Credicorp Ltd PERU 2.58x 5.1% 15.2% 1.6% 89.3%BBVA Banco Continental SA PERU 3.42x 6.8% 30.2% 2.5% 101.3%
Average 2.59x 5.4% 20.1% 1.8% 116.9%
Source: Bloomberg L.P.
Alvaro Alberto Carrillo Buitrago
Carlos Guillermo Arango Uribe
Gabriel Humberto Zarate Sanchez
Efrain Enrique Forero Fonseca
65
75
85
95
Ja
n-1
3
Fe
b-1
3
Ma
r-1
3
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
INTELIGO SAB
Analyst Certification
The Research Analyst that prepared this report hereby certifies that the views expressed in it accurately reflect his/her views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific view in this report. General
The information in this report has been obtained from sources believed to be reliable; however, Inteligo SAB does not warrant its completeness or accuracy except with respect to any disclosures relative to Inteligo SAB and the analyst’s involvement with the issuer. Inteligo SAB accepts no liability, of any type, for any direct or indirect losses arising from the use of the document or its contents. Opinions and estimates constitute our judgment as of the date of this material release and are subject to changes without further notice. Past performance is not indicative of future results. The market prices of securities or instruments or the results of investments could fluctuate against the interests of investors. Investors should be aware that they could even face a loss on their investment. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and the ratings herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Therefore, investors should make their own investment decisions considering the said circumstances and obtain such specialized advice as may be necessary. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. The recipient of this report must take its own independent decisions regarding any securities or financial instruments mentioned herein. Inteligo SAB, as well as their executives and employees may have a position in any of the securities or instruments referred to, directly or indirectly, in this document, or in any other related thereto. They may trade for their own account or for third-party accounts in those securities, provide consulting or other services to the issuer of the aforementioned securities or instruments or to companies related thereto or to their shareholders, executives or employees. They also may have interests or perform transactions in those securities or instruments or related investments before or after the publication of this report, to the extent permitted by the applicable law. Methodology & Rating System
Inteligo SAB’s stock ratings are set on a twelve-month basis against relevant benchmarks. There are four stock ratings: BUY +: Upside potential above the “normal” risk-adjusted return of the ISBVL; BUY: Upside potential above the “normal” risk free rate for Peru; HOLD: Stock is expected to maintain investors capital relatively unchanged; SELL: Stock is expected to cause a capital loss for investors.
Expected ReturnStockX<0% SELL
0%<Expected ReturnStockX<11% HOLD
11%<Expected ReturnStockX<21%
BUY
21%<Expected ReturnStockX BUY+
Inteligo SAB’s calculation of price targets is based on a combination of one or more methodologies generally accepted among financial analysts, including, but not limited to, comparable valuations, discounted cash flows, whether in whole or by parts, or any other method which may be applied. The determination of a price target does not imply any warrant that it will be attained, since this depends on other intrinsic and extrinsic factors that affect both the performance of the company and trends in the stock market on which it is based. Security Restrictions
No part of this document may be (I) copied, photocopied or duplicated by any other form or means (ii) redistributed or (iii) quoted without the consent of Inteligo SAB.
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