Factoring in a Weaker Outlook and Introducing 2009 Year-End Target Price

Transcription

1 Latin American Equity Research Mexico City, October 30, 2008 Company Update Mexico Conglomerates ALFA BUY Factoring in a Weaker Outlook and Introducing 2009 Year-End Target Price Luis Miranda*, CFA Mexico : Banco Santander, S.A. (52-55) lmiranda@santander.com.mx (10/27/08) CURRENT PRICE: US$1.88/M$25.20 TARGET PRICE: US$3.20/M$38.60 What s Changed Rating: Unchanged at Buy Price Target (US$): Introducing YE EBITDA Estimates (US$): 08 1,106 Mn to 1,021 Mn 09 1,195 Mn to 1,039 Mn 10 1,125 Mn Company Statistics Bloomberg ALFAA MM 52-Week Range (US$) P/E Rel to the IPC (x) NM 2008E P/E Rel to Conglomerates (x) NM IPC (US$) 1,281 3-Yr EBITDA CAGR (07-10E) 5.1% Market Capitalization (US$ Mn) 1,016 Float (%) 45 3-Mth Avg Daily Vol (US$000) 3,397 Shares Outst Mn 560 Net Debt/Equity (x) 0.6 Book Value per Share (US$) 5.94 Estimates and Valuation Ratios E 2009E 2010E Net Earn (M$ Mn) 3,551 (3,608) 1,572 3,239 Current EPS 6.34 (6.44) Net Earn (US$ Mn) 318 (298) Current EPS 0.58 (0.55) P/E (x) 11.2 NM P/Sales (x) P/CE (x) 4.6 (1.8) 4.9 (1.7) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) NM Div per Share (US$) Div Yield (%) NM: not meaningful. Sources: Bloomberg, Company reports, and Santander estimates. Investment Thesis: In this report, we are lowering our estimates for 2008, on the back of the weak 3Q08 results, the impact of FX and derivatives losses in We are also lowering our 2009 estimates, factoring in a weaker economic outlook. We now estimate that Alfa can still post EBITDA growth of 5% in 2008 in U.S. dollar terms and a meager 2% growth in 2009, returning to a more attractive 8% in We must underscore that while the growth in 2008 is likely to be driven by 1H08 results, the expected growth in 2009 should be driven by an expected improvement in results during the second half of the year, as we expect a lackluster first half. Therefore, we would not expect catalysts for the stock in the medium term, making it a story for the second half of 2009 in our view. Although we are lowering our estimates, we are maintaining our Buy rating. We are introducing our YE2009 target price of US$3.20 (M$38.60) implying upside potential of 70%. Our target price implies an appreciation of the FV/EBITDA multiple of 21% from current levels, which are similar to 2001 levels, when the company was facing a critical debt restructuring. The short-term outlook for industrial companies is very challenging, but we believe that Alfa has viable operations and a solid market position in each of them (Alpek, Nemak and Sigma). Therefore in our view, the current low valuation levels are not sustainable in the long term. Reasons for Change to Estimates: We are lowering our estimates to account for weaker-than-expected results in 3Q08, coupled with the negative effects of FX and derivative losses. We are also factoring in lower economic growth expected in Valuation: Our year-end 2009 target price is based on an FV/EBITDA methodology, which implies that the stock would be trading at a trailing 4.3 times 2009 FV/EBITDA multiple and at a 3.8 times forward multiple. We also used a DCF and NAV model as a cross reference. Main risks include: (1) weaker-than-expected economic growth; (2) exposure to the U.S: economy; (3) lower profitability in Alpek, Nemak, and Sigma; (4) strength of the Mexican peso; (5) capacity increases by petrochemical competitors; and (6) higher cost of financing due to current market conditions. * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules.

2 Factoring in a Weaker Outlook and Introducing Year-end 2009 Target Price Alfa is a Mexican conglomerate with exposure to the petrochemical sector (via Alpek 42% of sales), aluminum casting (auto parts) via Nemak (32% of sales), consumer products (through Sigma), with 20% of sales and telecommunications, via Alestra (5% of sales). Alfa is the second largest producer of PTA (purified terephthalic acid) in NAFTA, the sole producer of PP (polypropylene) in Mexico and the largest manufacturer of aluminum engine heads and blocks worldwide. In addition, it is a market leader in cold cuts and cheese in Mexico and the second largest player in the domestic yogurt market. 3Q08 DELIVERS NEGATIVE NEWS... On October 21, the company disclosed weaker-than-expected third-quarter results. Due to these poor results, the company will not reach our 2008 estimates; therefore, we are revisiting our outlook. Sales grew 11% YoY in 3Q08 and were in line with our estimate, but operating results were very weak, with EBITDA of US$253 million, basically flat YoY and 7% below our estimate. Highlights by division. Negatives: Alpek-Petrochemical (45% of sales) posted EBITDA of - 6% QoQ (flat YoY), as clients delayed purchases of PET anticipating lower prices, but also lower volume of PTA as a result of a shortage of raw materials due to Hurricane Ike. Nemak- Aluminum Casting (26% of sales), volume of 7.3 million equivalent heads declined 17% YoY and EBITDA declined 7% YoY. Alfa s operating margin of 4.9% in 3Q08 was the weakest in almost 15 years. Postives: Sigma s (23% of sales) EBITDA grew 22% YoY, driven by 9% volume growth and some recovery in prices. Nemak, despite lower volume, synergies allowed the company to post EBITDA/ head of US$9.60 (during the year, the average has been close to US$10 per head, which is similar to 2008 levels despite the economic slowdown). Net income was affected by FX and derivative losses of US$190 million, of which US$60 million was cash. As of September, the company had a net debt of US$1.9 billion and cash of US$910 million. Figure 1. ALFA 3Q08 Operating Results (US$ Mn) Sales Operating Margin EBITDA Division 3Q07 2Q08 3Q08 3Q07 2Q08 3Q08 3Q07 2Q08 3Q08 Alpek 1,047 1,294 1, % 4.2% 3.8% Sigma % 8.0% 8.2% Nemak % 5.7% 3.7% Alestra % 11.9% 11.3% Total* 2,551 2,903 2, % 5.8% 4.9% * Total includes Other Corporate. Sources: Company reports and Santander. Figure 2. ALFA 3Q08 Results (US$ Mn) 3Q08 S. Est % vs S. Est 3Q07 %Ch Y/Y Sales 2,839 2, % 2, % Op Profit % % EBITDA % % EBITDA Margin 8.9% 9.5% NM 9.8% NM Net Inc (172) (114) 51.2% 22 NM EPS (0.31) (0.20) 51.4% 0.04 NM a Except per share/adr amounts. NM not meaningful. Sources: Company reports and Santander estimates. 2

3 CONFERENCE CALL HIGHLIGHTS Alpek. Prices are declining, driven by reductions in oil and raw materials. However, cash margins are being maintained. Short-term demand could experience some weakness. Some of the problems that affected 3Q08 results, such as the disruption of supply and clients delaying purchases, are returning to normal. As a result of the PP (polypropylene) plant s capacity expansion (+180% to 670 ktpy), it is expected to be operating at 66% of its installed capacity by mid Nemak. Nafta volumes declined 10% on a pro forma basis, while volume in South America grew 17% and in Europe it remained flat YoY. We could expect some pressure in profitability in the short term due to decreasing volume. Alfa. Capex as of September was US$369 million and will not reach the US$570 million as planned. The cash impact of derivatives was US$60 million in 3Q08 and is forecast to be close to US$300 million in 4Q08. The company just secured credit lines with banks for US$225 million. LOWERING OUR ESTIMATES The main driver for the adjustment in our operating estimates is the weaker margin and volumes in Alpek and Nemak, coupled with a very challenging outlook for the global economy in We are also factoring in the effect of FX/derivative losses. In our estimates, we are factoring in our updated economic estimates (Figure 8). We present our estimate revisions in the table below, underscoring that we are also introducing our 2010 estimates. Figure 3. Alfa Estimate Revisions, 2008E-20010E (U.S. Dollars in Millions*) 2008E 2009E 2010E Previous Current Change Previous Current Change Introducing Revenue 10,541 10, % 11,431 11, % 12,483 Op. Profit % % 690 Op. Margin 6.70% 5.4% -19.1% 6.90% 5.2% -24.3% 5.5% EBITDA 1,106 1, % 1,195 1, % 1,125 Net Income 351 (298) % % 265 EPS 0.63 (0.55) % % 0.47 * Except per share data. Sources: Company reports and Santander estimates. In Figure 4 we summarize our estimates by division. Overall, we expect a very tough 2009, with most of the expected meager growth coming from volume improvement in Alpek in 2H09, driven by the higher utilization rate of the PP plant s capacity expansion. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 Factoring in a Weaker Outlook and Introducing Year-end 2009 Target Price Figure 4. Alfa Consolidated Estimates by Division, E (U.S. Dollars in Millions*) Total* E 2009E 2010E 07/06 08E/07 09E/08E 10E/09E Sales 9,618 10,963 11,566 12,483 40% 14% 6% 8% Operating Margin 6.0% 5.4% 5.2% 5.5% EBITDA 968 1,021 1,039 1,125 26% 5% 2% 8% EBITDA Margin 10.1% 9.3% 9.0% 9.0% Net Income 318 (298) % -194% -144% 100% EPS 0.58 (0.55) % -194% -143% 100% Alpek/Chemicals Sales 4,027 4,877 5,465 6,156 18% 21% 12% 13% Operating Margin 4.4% 4.0% 4.3% 4.8% EBITDA % 10% 15% 17% EBITDA Margin 6.9% 6.3% 6.4% 6.7% Sigma/Food Sales 2,078 2,327 2,253 2,305 16% 12% -3% 2% Operating Margin 8.5% 7.9% 8.2% 8.4% EBITDA % 9% 0% 4% EBITDA Margin 11.6% 11.2% 11.6% 11.8% Nemak/Auto Parts Sales 2,913 3,221 3,301 3, % 11% 3% 5% Operating Margin 5.8% 5.0% 4.6% 4.8% EBITDA % 6% -3% 5% EBITDA Margin 10.4% 9.9% 9.4% 9.3% Alestra/Telecom Sales % -3% 3% 1% Operating Margin 9.0% 11.2% 11.2% 11.4% EBITDA % -1% 1% 1% EBITDA Margin 26.0% 27.0% 26.7% 26.6% *Total includes corporate and other businesses. Sources: Company reports and Santander estimates * Except EPS. VALUATION We are setting our YE2009 target price for Alfa at M$38.60 or US$3.20 per share, replacing our year-end 2008 target price of US$8.20. This is based on an FV/EBITDA methodology, implying that the stock would be trading at 4.3 times trailing 2009 FV/EBITDA and at a 3.8 times forward multiple. As discussed below, these valuation levels are similar to those in the 1999 to 2001 period, when the company was handling a critical debt-restructuring program, triggered by the distressed operating results in Hylsamex. In our view, Alfa s operations and balance sheet structure are by no means comparable to that period. However, given the current economic conditions and limited growth perspectives, we believe it is fair to assume that these valuations will be reached. We are also updating our DCF model, but given the uncertain economic outlook, we only used it as a cross reference, which yields a higher price than our FV/EBITDA-multiple-driven prices. FORWARD FV/EBITDA Alfa currently trades at 3.5 times our 2009 FV/EBITDA estimates and 3.1 times our 2010 estimate. In the current economic environment, we believe that the last five-year valuation average is meaningless. Therefore, we reviewed the company s average valuation level from 1999 to 2001, when the company was trading at distressed levels due to its leveraged financial structure and Hylsamex s very poor results (a steel division that represented 30% of sales). During that period, Alfa s stock traded at an average forward FV/EBITDA multiple of 5.4 times, at a low of 3.6 times and at a peak of 6.8 times. Considering the very difficult economic environment, but recognizing that the company has a relatively solid financial structure (with net debt/ebitda below 2.0 times) and, in our opinion, a solid business long-term position, we believe it is feasible and conservative that by YE2009, the stock could be trading between the first and second negative standard deviations relative to the aforementioned period. 4

5 Figure 5. Alfa Forward FV/EBITDA with Five-Year Average +/- 2 Std. Deviations, J-01 O-01 J-02 A-03 F-04 N-04 A-05 M-06 F-07 D-07 S-08 Sources: Company reports and Santander estimates. DISCOUNTED CASH FLOW MODEL We are updating our DCF model as a cross reference for our FV/EBITDA-driven target price. Our model considers a risk-free rate of 8.1% and a market premium of 5.5%. We used a beta of 0.90 versus the IPC index and maintained the debt-to-total-capitalization ratio at 46%. With these figures, we calculated a cost of equity of 13.05% and an after-tax cost of debt of 5.8%, arriving at a WACC of 9.71%. We are using a growth rate in perpetuity of 1.5% per year. Figure 6 includes highlights of our DCF model, which yields a fair value price of US$3.88 or M$46.59 per share. This target price is higher than our FV/EBITDA-multiple-driven price, but given the low visibility of results in the coming quarter, we prefer not to use this methodology as our main valuation tool. We point out that we are reducing the capex estimate in our model from US$450 million to US$400 million, assuming the company will make lower investments in the current economic environment. Figure 6. Alfa DCF Model, 2009E-2019E (U.S. Dollars in Millions) 09E 10E 11E 12E 13E 14E 15E 16E 17E 18E 19E Perp. EBIT Tax Tax Rate 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% 28% NOPLAT D&A Working Capital (121) (84) (123) (130) (130) (130) (130) (130) (130) (130) (130) (121) Capex (400) (400) (400) (400) (400) (400) (400) (400) (400) (400) (400) (400) FCF to Firm Perpetuity Growth Perpetuity Value FCF (to Firm) + Perp Net Present Value 5,044 - (Net Debt+Min.) 2,870 Estimated Market Cap. 2,175 Premium/Discount -52% Fair Value (US$): 3.88 Fair Value (M$) Sources: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 Factoring in a Weaker Outlook and Introducing Year-end 2009 Target Price NET ASSET VALUE We estimate that Alfa s stock is currently trading at a 59% discount to its estimated NAV. Our estimated discount compares with the company s estimated discount of 30% for the last three years. Our current NAV reflects the industries valuation for 2009, which, in our view, should show a recovery by the end of 2009, on an improved outlook for Therefore, in our opinion, the current discount to NAV looks very attractive, as it is compared with very depressed valuations. Figure 7. Alfa Net Asset Value, 2009E (U.S. Dollars in Millions a ) 2009E FV/EBITDA Firm Net % % of Subsidiary EBITDA Multiple Value Debt Ownership NAV NAV Alpek , % 1,031 40% Onexa % 110 4% Sigma , % 1,037 40% Nemak ,112 1,031 95% 77 3% Others & Corp % (4) 0% Total 1,039 4,761 2,251 87% - Net Debt/Holding* (326) 13% = Net Asset Value 2, % Number of Shares (Mn) M$ US$ NAV per Share Current Price Prem/(Disc) to NAV -59% a Except per share amounts. Sources: Santander and Thomson Analytics estimates. *Estimated increase for NET DEBT MATURITIES Currently, the company has a debt of US$2.8 billion, with a cash position of US$910 million. The company faces maturity of US$239 million in 2009 and US$504 million in We also estimate that the company could generate FCF in 2009 of US$122 million in 2009 and US$251 million (after capex, interest expenses, and taxes). Therefore, in our view, the company s refinancing risk is limited. We also believe that the company could lower its capex requirements in the coming years, if there are no signs of an economic recovery in the medium term, which would also free up resources to pay down debt. RISKS Weaker-than-expected economic growth and exposure to the U.S. economy. Alfa is now an international company, with more than 50% of it sales generated outside of Mexico. In the past, approximately 90% of the exports and foreign operations were in the U.S. or NAFTA region. However, this figure is still close to 50% of the total exports and foreign operations. Furthermore, in the automotive division, the U.S. OEM s still represent close to 50% of its sales. Therefore, if there were weaker-than-expected economic growth in the U.S., Alfa s results would be negatively affected. Figure 8 summarizes our economics team s current macroeconomic estimates. 6

7 Figure 8. Mexico Select Economic Projections, E E 2009E 2010E Real GDP (%) 3.2% 2.5% 1.5% 3.2% CPI Inflation (%) 3.8% 5.5% 4.3% 3.9% US$ Exchange Rate (Year-End) US$ Exchange Rate (Average) Interest Rate (Year-End) 7.4% 8.3% 7.8% 7.8% Source: Santander historicals and forecasts. Profitability pressure at Alfa s petrochemical (Alpek) and auto parts divisions (Nemak). The economic slowdown and pressure in cash margins of profitability per unit in both divisions could deteriorate if volume declines more than expected. This would lead to a lower absorption of fixed cost and lower margins in the two most important divisions for the company. Weaker operating margins at Sigma. The company has been increasing prices, but this has not been enough to offset higher prices of raw materials in the past. The combination of higher prices and an economic slowdown could lead to a trade-down in the different categories in which the company operates and, thus, to lower-than-expected margins. Strength of the Mexican peso. Alfa is a predominantly dollarized company, with approximately 80% of total consolidated sales denominated in U.S. dollars, with dollar-denominated costs representing approximately 70%-75% of the total. As a result, a weak peso has a direct and positive impact on the company s operating margin or vice versa. In terms of Alfa s operating divisions, this is particularly true for Nemak, as 100% of its sales are dollar denominated, and it has a significant amount of operating costs in pesos. Other risks include: (1) capacity increases by petrochemical competitors that could alter the supply/demand balance and execution risk related to the integration of acquired assets in the auto parts division (Nemak); and (2) higher cost of financing due to current market conditions. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 Factoring in a Weaker Outlook and Introducing Year-end 2009 Target Price FINANCIAL STATEMENTS 8 Figure 9. Alfa Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) Income Statement E 2009E 2010E % Sales 9, % 10, % 11, % 12, % Cost of Sales 7, % 9, % 9, % 10, % Gross Profit 1, % 1, % 1, % 1, % Oper. and Adm. Expenses 1, % 1, % 1, % 1, % Operating Profit % % % % Depreciation % % % % EBITDA % 1, % 1, % 1, % Financing Costs (121) -1.3% (1,003) -9.2% (388) -3.4% (257) -2.1% Interest Paid % % % % Interest Earned % % % % Monetary Gain/Loss % (540) -4.9% - 0.0% - 0.0% FX Gain/Loss (1) 0.0% (263) -2.4% (161) -1.4% (60) -0.5% Other Financial Operations % % - 0.0% - 0.0% Profit before Taxes % (464) -4.2% % % Tax Provision % (149) -1.4% % % Profit after Taxes % (315) -2.9% % % Subsidiaries 3 0.0% 1 0.0% - 0.0% - 0.0% Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0% Minority Interest % (17) -0.2% % % Net Profit % (298) -2.7% % % Balance Sheet E 2009E 2010E Assets 9, % 8, % 8, % 9, % Short-Term Assets 3, % 3, % 3, % 3, % Cash and Equivalents % % % % Accounts Receivable 1, % 1, % 1, % 1, % Inventories 1, % 1, % 1, % 1, % Other Short-Term Assets % % % % Long-Term Assets 8, % 7, % 7, % 7, % Fixed Assets 4, % 4, % 4, % 4, % Other Assets % 1, % 1, % 1, % Liabilities 5, % 5, % 5, % 5, % Short-T. Liabilities 2, % 2, % 2, % 2, % Suppliers 1, % 1, % 1, % 1, % Short-Term Loans % % % % Other ST Liabilities % % % % Long-Term Loans 2, % 2, % 2, % 2, % Deferred Liabilities % - 0.0% - 0.0% - 0.0% Other Liabilities 2 0.0% % % % Majority Net Worth 3, % 2, % 2, % 2, % Net Worth 3, % 3, % 3, % 3, % Minority Interest % % % % Cash Flow E 2009E 2010E Net Majority Earnings 318 (298) Non-Cash Items 442 (377) Changes in Working Capital (76) 246 (121) (84) Capital Increases/Dividends (56) (62) (62) (62) Change in Debt Capital Expenditures (560) (560) (560) (560) Others (916) (1,809) (654) (608) Net Cash Flow 87 (2,638) (960) (609) Beginning Treasury 1, Ending Treasury Sources: Company reports and Santander estimates.

9 Figure 10. Alfa Income Statement, Balance Sheet, and CF Statement, E (Millions of Mexican Pesos) Income Statement E 2009E 2010E % Sales 106, % 120, % 137, % 152, % Cost of Sales 87, % 100, % 115, % 128, % Gross Profit 19, % 19, % 22, % 24, % Oper. and Adm. Expenses 12, % 13, % 14, % 15, % Operating Profit 6, % 6, % 7, % 8, % Depreciation 4, % 4, % 4, % 4, % EBITDA 10, % 11, % 12, % 13, % Financing Costs (1,338) -1.3% (11,498) -9.6% (4,615) -3.4% (3,148) -2.1% Interest Paid 2, % 2, % 2, % 2, % Interest Earned % % % % Monetary Gain/Loss % (6,163) -5.1% - 0.0% - 0.0% FX Gain/Loss (5) 0.0% (3,132) -2.6% (1,911) -1.4% (735) -0.5% Other Financial Operations (694) -0.6% (604) -0.5% - 0.0% - 0.0% Profit before Taxes 4, % (5,585) -4.6% 2, % 5, % Tax Provision % (1,753) -1.5% % 1, % Profit after Taxes 4, % (3,833) -3.2% 1, % 3, % Subsidiaries % 8 0.0% - 0.0% - 0.0% Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0% Minority Interest % (225) -0.2% % % Net Profit 3, % (3,608) -3.0% 1, % 3, % Balance Sheet 2007E 2008E 2009E 2010E Assets 99, % 103, % 107, % 113, % Short-Term Assets 38, % 35, % 39, % 44, % Cash and Equivalents 8, % 2, % 2, % 4, % Accounts Receivable 15, % 17, % 19, % 21, % Inventories 13, % 13, % 15, % 17, % Other Short-Term Assets % 2, % 2, % 2, % Long-Term Assets 89, % 87, % 91, % 97, % Fixed Assets 50, % 51, % 51, % 52, % Other Assets 10, % 15, % 15, % 15, % Liabilities 56, % 64, % 68, % 71, % Short-T. Liabilities 24, % 30, % 33, % 35, % Suppliers 14, % 15, % 18, % 20, % Short-Term Loans 3, % 4, % 4, % 4, % Other ST Liabilities 5, % 9, % 9, % 9, % Long-Term Loans 24, % 26, % 27, % 28, % Deferred Liabilities 7, % - 0.0% - 0.0% - 0.0% Other Liabilities % 7, % 7, % 8, % Majority Net Worth 38, % 34, % 34, % 36, % Net Worth 43, % 38, % 39, % 41, % Minority Interest 5, % 4, % 4, % 4, % Cash Flow Net Majority Earnings 3,551 (3,608) 1,572 3,239 Non-Cash Items 4,904 (4,672) 2,869 4,087 Changes in Working Capital 833 (2,905) 1,446 1,035 Capital Increases/Dividends (622) (677) (733) (753) Change in Debt 10,196 3, ,086 Capital Expenditures (6,222) (6,151) (6,662) (6,848) Others 7,276 21,350 7,851 7,521 Net Cash Flow 12,640 (14,802) (998) 1,847 Beginning Treasury 11,267 8,535 2,645 2,485 Ending Treasury 8,535 2,645 2,485 4,588 Sources: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

10 Factoring in a Weaker Outlook and Introducing Year-end 2009 Target Price IMPORTANT DISCLOSURES Alfa 12-Month Relative Performance (U.S. Dollars) IPC ALFA O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 Sources: Bloomberg and Santander. Alfa Three-Year Stock Performance (U.S. Dollars) B $ /6/05 B $6.35 3/27/06 B $ /20/06 H $7.25 3/27/07 B $ /12/07 35,500 30,500 25,500 20,500 15,500 10,500 5,500 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review 0.0 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 S Alfa (L Axis) IPC (R Axis) Source: Santander. 10

11 Key to Investment Codes IMPORTANT DISCLOSURES (CONTINUED) Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Buy Expected to outperform the local market benchmark by more than 5.0% % 68.18% Hold Expected to perform within a range of 5.0% above or below the local market benchmark % 31.82% Underperform/Sell Expected to underperform the local market benchmark by more than 5.0%. 4.12% The numbers above reflect our Latin American universe as of Friday, October 10, For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2008 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for local market performance is the country risk of each country plus the 1-year U.S. Treasury yield plus 5.5% of equity risk premium, unless otherwise specified. The benchmark plus or minus the 5.0% differential used to determine the rating is time adjusted to make it comparable with the total return of the stock over the same period. For additional information about our rating methodology, please call (212) This report has been prepared by Santander Investment Securities Inc. ( SIS ) (a subsidiary of Santander Investment I S.A which is wholly owned by Banco Santander, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SIS, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Luis Miranda*. *Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules. Grupo Santander receives non-investment banking revenue from the subject company. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2008