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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA

Signum Perspectives



Expectations. With the exception of Nemak, we forecast decreases in dollar-denominated revenues at all of Alfa’s subsidiaries. Axtel and Sigma’s results should be impacted by peso depreciation against the dollar and we also expect lower sales at Alpek, despite a recovery in the oil price. At the consolidated level, we project a -0.8% decrease in revenues YoY to USD$3.880 billion.

Pressure on margins.Almost all of the subsidiaries should post decreases in operating efficiencies, but especially Sigma and Axtel. We also forecast a lower operating margin (-149.2 bp) and a -357 bp decrease in the EBITDA margin.

Estimates by subsidiary. Alpek should record lower EBITDA due to lower propylene prices and hurricane Mathew. The suspension of the acquisition of the Brazilian companies should have no impact on current valuation, as Petrobras is seeking to get the suspension lifted.

A higher aluminum price should give Nemak’s margins a small boost, although it should be offset by a weaker euro against the dollar. Margins should also improve.

We expect an increase in Sigma’s sales volume driven to some extent by the start-up of the Campofrío facility. However, the exchange rate should cause margin pressure.

Newpek and Axtel should remain under pressure. Although the oil price should underpin revenues, Newpek should continue to post operating losses, but EBITDA should be positive. Axtel should continue to post net losses and lower margins.


AUTLAN B (BUY/ 2017-IV TP MXN$17.17)

Steel prices staged a recovery in the second half of last year, favoring ferroalloy and manganese prices, which are Autlán’s main products, as they are the main inputs in steel manufacturing. NYMEX Hot Rolled Coil Steel Index Futures, which reached $629 USD/ton, or a YoY increase of +50.12%, is a good example of the steel price recovery.

After a complicated start to 2016, due to the temporary closure of its Gómez Palacios facility, dumping in Mexico and a slow price recovery, Autlán’s figures improved in the third quarter, and we expect a similar situation in the fourth.

The share price reflected the market’s confidence in the recovery. After hitting historical lows in September (P$5.72), it closed 2016 at P$15.05, or a rally of +144.32% for the year.Growth was especially

marked following the release of the third quarter report and the US elections, as new infrastructure plans boosted steel prices.

In line with third quarter guidance, we expect the company to report good results, especially in terms of financial margins. Revenues should total USD$63 million (+20.1% YoY),mainly driven by higher prices and antidumping regulations, and we forecast a +51.3% YoY increase in EBITDA to USD$8.91 million.


AXTEL CPO (Not Rated)

We expect Axtel to post weak Q416 results. Revenues should be stable vs. Q316, but EBITDA should be lower and the company should also report large net losses. Nevertheless, we believe these results are mostly priced in, especially in view of the size of the decrease in Axtel’s share price the end of October last year.

Sequentially stable revenues.We forecast Q416 revenues of MXN$3.808 billion, mainly because weak performance from the WiMax business and managed networks should be offset by marginal growth at other business units.

Lower EBITDA.Q416 adjusted EBITDA (excluding Alestra merger costs) should be MXN$1.182 billion, or a decrease of 10% compared to Q316, which should translate into an adjusted EBITDA margin of 31% for the quarter, far below Q316’s 34.5%. Unadjusted EBITDA should be MXN$982 million owing to an MXN$200 million charge related to the merger with Alestra.

Large net loss.We expect Axtel to report an MXN$1 billion loss due to a forex effect, which would be above the previous quarter’s MXN$451 million loss.

CFO to retire. Axtel announced that Felipe Canales, Executive Director of Finance, will retire as of February 15 after 7 years of service. He will be replaced by Adrián de los Santos, Director of Corporate Finance and Investor Relations.


IENOVA* (Not Rated)

Annual results should be favorable, as the company managed to consolidate several projects (the October 2016 follow-on, which was one of the biggest in Mexico in recent years as well as various gas pipeline and renewable infrastructure acquisitions) so fourth quarter numbers should be no different.Given the likelihood of a larger sales volume in the gas segment due to the inclusion of Gasoductos Chihuahua as well as higher prices in this segment, we forecast total revenue growth of 45% YoY.

Despite the company’s diversification plans, gas pipelines continue to account for the bulk of revenue, so variations in the natural gas price are a relevant factor.Henry Hub, the internationalprice reference for gas, closed the year at USD$3.684/MMBtu (+30.27% YoY),which was reflected in a certain amount of correlation with the share price, which closed 2016 at P$93.01 (+24.87% YoY). The share price has since continued to rise, hitting historical highs at the beginning of February 2017 (P$93.01).

IENOVA continues to search for new energy infrastructure projects.Last month the company announced it was participating in an electricity tender requiring aUSD$1 billion investment. IENOVA has an USD$800 million budget to invest over the course of this year.

We expect favorable fourth quarter results with revenues surpassing USD$230 million, or YoY growth of 45%. We also expect the company to sustain financial margins, especially the Q416 EBITDA margin, which should be 56.4% due to projects it has invested in, such as renewable energy.



We forecast revenues of USD$1.274 billion, or a YoY decrease of 2.0% due to two factors: i) the Fluent and Vinyl segments operate in a number of currencies which depreciated overall against the dollar in Q416, so dollar-denominated revenues in those segments should decrease with the subsequent negative impact on total revenues, and ii) despite the quarterly recovery in VCM and PVC prices, they continue to trend lower year on year.

Although revenues should be lower, we expect a higher EBITDA margin due togreater efficiency in the Fluoride segment and a better Fluent and Vinyl segment mix. We estimate EBITDA of USD$909 million (slightly above guidance)with a 16.6% margin (+64 bp).

A one-time expense in the Fluoride segment in Q415, which was entered in the books under Discontinued Operations, gave rise to a low net profit comparison base, so that item could register aggressive or extraordinarily high growth.

The company’s prospects are favorable. According to management, the Ethylene cracker at Ingleside, Texas, will come on line at the end of this month, and we expect this project to boost margins. Given the increase in infrastructure projects and Datacom in South America, India, and the US, we envisage expansion opportunities in those regions.

Management does not see any major obstacles to its operation in the event of NAFTA being renegotiated.


NEMAK A (Buy/ 2017-IV Target Price MXN$25.0)

The second half of the year is the weakest in terms of revenues. However, higher aluminum price levels should boost Q416 sales to USD$1.056 billion (+0.8% YoY),although we forecast a 2.4% reduction in equivalent unit volume. Sales should total USD$4.316 billion for the year, below management guidance of USD$4.5 billion. Fourth quarter results in dollars should also be negatively impacted by a weaker euro against the dollar.

Furthermore, higher aluminum prices along with a reduction in manufacturing outsourcing and a better sales mix,should drive EBITDA to USD$170 E million (+2.9% YoY), with a 16.1% margin (+33.3 bp YoY), implying higher EBITDA per equivalent unit of +5.3% YoY, to USD$14. EBITDA for the year should therefore be USD$781 million (vs. guidance of USD$777 million).

We are awaiting information about the start-up of the plant in Poland, which was originally scheduled for the last quarter of 2016. If operations began as planned, revenue and EBITDA estimates are slightly conservative. The inclusion of those estimates in our model yielded a revenue forecast of USD$1.1 billion, reflecting part of the new contracts won in 2015 and structural components. It should be recalled that in 2015, Nemak was awarded contracts worth USD$1.2 billion a year, which should be reflected over the next three years.



We expect a good report. Despite the marginal lag in Brazil, Q416 results should be positive. We estimate MXN$4.019 billion in sales (+26.6% YoY)driven by the following factors:

1. A +26.8% YoY increase in sales in North America.

2. Higher sales prices derived from a 33.3% YoY increase in steel prices.

3. Peso depreciation against the dollar, which favors RASSINI’s results, as its operations are in dollars.

We expect a significant increase in EBITDA, operating, and net margins. A favorable forex effect along with higher sales prices and cost control could translate into MXN$730 E in EBITDA (+56.9% YoY), with an 18.2% margin (+350bp YoY). Likewise, the debt refinancing that took place in the second quarter of 2016 could increase the net margin by lowering interest expense.

2017 Expectations.We would stress the fact that there is still little certainty with regard to US manufacturing exports, and Rassini will have to take steps to come out unscathed. While the Q116 one-time benefit from a contract will continue to underpin operations until 2017-II, double-digit growth rates in different operating headings should cease in the second half of 2017 due to the high comparison base.

During our last visit to the company, we were told that expectations for Brazil remain discouraging; they do not expect to recover 2013 sales levels, not even in 2020, so growth will largely depend on growth in North America, which as mentioned,is a source of great uncertainty, as it will depend on whether NAFTA is renegotiated or not.

We were also informed that given the adverse environment, Rassini has some flexibility to lower costs in terms of both manufacturing and production.

Although energy costs represent 5-8% of total costs, we think that percentage could increase in 2017 and put pressure on operating margins. The delay in US environmental regulations will also overshadow potential margin growth.


VESTA* (HOLD/ 2017-IV TP MXN$26.15)

We expect Corporación Inmobiliaria Vesta to post solid Q416 operating results driven by growth in the Gross Leasable Area (GLA) and peso depreciation.

The GLA should increase 12.2% YoY in Q416 to close the year at around 22.5 million ft², mainly due to growth in the Midwest region followed by the Center and North. As a result, we estimate a vacancy rate of ≈11.75% (-155 bp YoY) in Q416, due to greater absorption of industrial spaces in the North and Midwest regions.

Revenues for the quarter should total USD$23.93 million (+15.07% YoY), underpinned by strong GLA growth. 2016 revenues should amount to USD$89.98 million, or growth of +12.92% vs. 2015, below 2016 guidance which envisages annual revenue growth of between 13 and 14%.

Net Operating Income(NOI) should be up +14.99% YoY for the quarter, to close at USD$23.14 million; however, the NOI margin should be 96.66%, or a marginal decrease of -7 bp.2016 NOI should be USD$86.99 million (+12.85% YoY), with a 96.68% margin.

Q416 EBITDA should be USD$20.16 million (+11.89% YoY), with an 84.24% margin (-239 bp YoY), due to the adjustment in the senior management compensation plan. EBITDA for the year should total USD$75.93 million with an 84.39% margin, or +139 bp above guidance.

Finally, it is important to mention that 51% of the GLA is occupied by US export companies. Based on the market update the company released on November 28, 2016, 28.2% is leased by auto sector companies, which means that Vesta’s growth could be compromised by significant exposure to the US export sector resulting in a downward revision to its “Vision 20/20” growth plan, which contemplates an annual growth target of around three million ft².

Given the uncertainty surrounding NAFTA and the company’s exposure to the auto export sector, especially the US market, we maintain our HOLD rating on the stock with a 2017-IV target price of MXN$26.15.


VOLAR A (BUY/ 2017-IV TP MXN$42.4)

We expect Volaris (VOLAR) to post positive Q416 and 2016 results derived from an exceptionally good operation all year along with low fuel prices (jet fuel) in the first half of the year, which enabled VOLAR to maintain margins despite average tariff reductions.

Passenger traffic rose 22% YoY in Q416 driven by double-digit growth in domestic and international passengers. However, an 80/20 passenger mix in favor of domestic passengers means that total passenger growth depends on domestic market growth. Total passenger traffic for the year rose +25%, to 15,005 passengers underpinned by +25% growth in domestic passengers and +27% growth in international passengers.

Two factors explain this:

1. The expansion in flight routes and frequencies that has increased the company’s commercial offer. We think that VOLAR’s domestic market expansion is linked to its strategy of penetrating the land travelers market while its international expansion is related to the proximity of areas with a high Latin population density. By contrast, its main rival (based on market share), Aeroméxico, has been focusing on expanding its long-haul, high-cost international destinations (like Seoul, Korea). We expect VOLAR to continue to expand its operations in 2017, driven by the Bilateral Air Agreement, which will open unlimited flight routes and frequencies between Mexico and the US. Furthermore, the global economic and political environment suggests that the dollar will become stronger against other currencies, so both domestic and international demand could increase as domestic destinations, mainly tourism ones, become relatively cheaper.

2. Low 2016 fuel prices. The price of jet fuel began to decrease in May 2015 and hit a low in January 2016 with the future price falling to USD$0.89 per gallon. This resulted in a large decrease in the average cost of fuel per gallon, and despite being widely used, the total cost of fuel fell enabling the carrier to lower tariffs to increase market share without squeezing margins. The price of jet fuel has staged a slow recovery in line with the recovery in the oil price, and we expect at similar situation in 2017 (post-2015 dip levels).

Based on the foregoing, we estimate a +28% YoY increase in Q416 revenues and EBITDA growth of 19%. For 2016, we forecast revenue growth of +30% and EBITDA growth of +23%. We maintain our BUY rating with a 2017-IV target price of MXN$42.4 per share, which is upside of +40.2% from the current level (MXN$29.7).

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