Putting the Brakes on: Lowering 2009 Target Price Reiterating Buy

Transcription

1 Latin American Equity Research Mexico City, October 29, 2008 URBI Company Update Mexico Homebuilders Putting the Brakes on: Lowering 2009 Target Price Reiterating Buy Gonzalo Fernandez* Mexico: Banco Santander S.A. (5255) BUY (10/29/08) CURRENT PRICE: US$1.25/M$16.20 TARGET PRICE: US$2.10/M$25.00 What s Changed Rating: Reiterating Buy Price Target (US$): From M$47.00 to M$25.00 EBITDA Estimates 08 From 402 to 381 (US$ in millions): 09 From 479 to From 537 to 461 Company Statistics Bloomberg URBI*.MM 52-Week Range (US$) E P/E Rel to the IPC (x) E P/E Rel to Homebuilders (x) 0.78 Mexbol Index (US$) 1, Yr EBITDA CAGR (07-10E) 13.1% Market Capitalization (US$ Mn) 1,220.6 Float (%) 39% 3-Mth Avg Daily Vol (US$ Million ) 4.71 Shares Outst - Mn (ADR 10:1) 976 Net Debt/Equity (x) 0.23 Book Value per ADR (US$) 1.37 Estimates and Valuation Ratios E 2009E 2010E Net Earn (M$ Mn) 1,833 2,186 2,327 2,748 Current EPS Net Earn (US$ Mn) Current EPS P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) 16.1% 17.7% 17.3% 21.1% Div per ADR (US$) Div Yield (%) Sources: Bloomberg, Company reports, and Santander estimates. Investment Thesis: After incorporating 3Q08 results, our new foreign exchange rate estimates and the new guidance published by the company in our model, we are lowering our year-end 2009 target price for Urbi from M$47.00 to M$ Despite a much more conservative growth scenario, we are maintaining our Buy rating on the potential upside of 54% in pesos due to the sharp drop in the stock price and current low valuation levels. Reasons for Changes to Price Target/Estimates: Urbi reported positive 3Q08 results that exceeded our expectations on October 27. Nevertheless, the company also announced its decision to take a more conservative stance due to the current uncertain economic environment, by lowering its estimated revenue growth for full-year 2008 from 21% to 17% in nominal pesos, and from a range of 19%- 21% to 10%-12% in This is a consequence of management s decision to change its sales mix from 85% affordable/15% middle income and residential to 94%/6%, in order to reduce working capital needs and future increases in debt. This comes as a surprise, as Urbi reiterated its CAGR of 22% for the period at its Urbi Day on September 25. In our opinion, the new estimates place Urbi in our expected growth range of 8%-12% for Mexican homebuilders in 2009 a more realistic scenario given the current economic conditions. Furthermore, we regard Urbi s strategy of reducing working capital requirements and thus avoiding the need to access the debt markets as prudent. Our estimates in U.S. dollars also reflect changes in our exchange rate forecasts from M$10.80/US$ to M$12.80/US$ in 2008 and from M$11.50/US$ to M$12.50/US$ in Valuation and Risks: In our opinion, lower growth is already priced in and, despite using more conservative estimates, the stock is trading at an estimated 2009 FV/EBITDA of 4.3x and a P/E of 6.2x, still attractive valuation levels in our opinion. Our year-end 2009 target price is based on a DCF valuation with an 11.0% discount rate (up from 9.2% previously) and a 1.5% terminal growth rate, which implies potential upside of 67% in U.S. dollars from current levels, above our 19% return for the local Mexican benchmark. Risks include: changes in the lending activity of mortgage agencies and commercial banks, delays in collections, increases in the cost of building materials, higher-thanexpected increases in debt, and changes in fiscal regulations. Upside risk includes the company s exceeding its current conservative guidance if economic conditions improve. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) / (212) * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under FINRA rules.

2 Urbi: Putting on the Brakes: Lowering 2009 Target Price - Reiterating Buy Urbi was founded in 1981 and is the second-largest housing developer in the affordable and middle-income segments in Mexico in terms of units sold. The company sold 37,231 units in full-year 2007 and generated revenues and EBITDA of US$1,171 million and US$319 million, respectively. Urbi is the leading housing developer in the northern region of Mexico, particularly in the States of Baja California, Sonora, Chihuahua, and Sinaloa. In addition, the company has recently expanded into the metropolitan areas of Mexico City, Guadalajara, and Monterrey WHAT HAS CHANGED? 3Q08 RESULTS Urbi reported strong 3Q08 results that surpassed our optimistic expectations for higher growth in the housing sector in Mexico on October 27 after the market closed. In addition, the company made a significant advance in switching its sales mix toward the affordablehousing segment (94% of total) as a defensive measure, due to the tighter conditions of the mortgage market in the middle-income and residential segments. Total revenues increased 25.5% in real pesos, fueled by a 25.7% increase in units sold and a 4.9% contraction in the average price due to the above-mentioned change in the sales mix. Units sold in the affordable-housing segment jumped 66.9% and rose 22.6% in the low middle-income category, while sales in highmiddle income and residential segment decreased 74.5%. During the quarter, 91.7% of revenues were generated in the affordable-housing segment (prices below M$560,000), 4.9% in the middle-income and residential segment and 3.4% from sales of land and commercial spaces. This is in line with the target mix for full-year 2008 and surpasses Urbi s initial target of a 85%/15% mix, and, in our opinion, a very defensive sales mix as the affordable-housing segment depends on more secure mortgage financing from Infonavit, Fovissste, and SHF compared to financing by banks and Sofoles in the higher-priced segments. The average price increased in the low single-digits in all segments; however, the drop in the total average price is explained by the change in the sales mix. Despite the change in the sales mix, the EBITDA margin expanded 250 basis points year on year, fueling impressive 37.7% YoY growth in EBITDA, which was 14% above our forecast. Net income jumped 22.8% YoY, in line with the operating growth. In our opinion, the only negative in the 3Q08 report was the increase in net debt from M$2.8 billion in 2Q08 to M$3.3 billion in 3Q08. According to Urbi s 3Q press release, this is due to the strong growth in the affordable-housing segment and an additional investment of M$307 million in the Alternativa Urbi rent-to-own program with resources from SHF. Nevertheless, the company maintains a very healthy financial structure, with cash resources equivalent to 60% of short-term debt and with all of financing requirements already covered. Urbi Third-Quarter 2008 Results U.S. Dollars in Millions a Mexican Pesos in Millions a 3Q08E S. Est vs. S. 3Q07 YoY 3Q08E S.Est vs.s. 3Q07 YoY Sales % % Sales 4,218 4, % 3, % Op Profit % % Op Profit % % EBITDA % % EBITDA 1,199 1, % % EBITDA Margin 28.4% 26.1% 2.3% 25.9% 2.5% EBITDA Mgn 28.4% 26.1% 2.3% 25.9% 2.5% Net Inc % % Net Inc % % EPS % % EPS % % a Except per share amounts. Sources: Company reports and Santander estimates. 2 U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) / (212)

3 CHANGES IN 2008 AND 2009 GUIDANCE Despite posting strong 3Q08 results, in a press release issued on October 27, Urbi announced that within a context of the current macroeconomic environment, for the remainder of 2008 and 2009, the company has decided to focus on the most defensive segments of the markets. This is the affordable and low-middle-income segments of the market that are financed by Infonavit, Fovissste and Sociedad Hipotecaria Federal with homes priced at a maximum of M$559,557. The company targets generating 94% of its revenues in these segments and only 6% in the middle income and residential segments. As a result, the company reduced its revenue growth guidance for full-year 2008 from 21% to 17% in nominal pesos and from a range of 19%- 21% to 10%-12% in This comes as a surprise as the company reiterated its CAGR of 22% for the period as recently as September 25 at its Urbi Day. According to the press release, the benefits of this strategy are the following: (1) An improvement in liquidity; (2) an improvement in accounts receivables turnover, as collection from Infonavit and Fovissste is faster compared to commercial banks and Sofoles; and (3) the reduction in working capital needs in order to eliminate the need to access the debt markets for financing. According to CFO Selene Avalos, this strategy should allow Urbi to generate positive free cash flow in Despite the sharp reduction in growth guidance, in its press release and on the conference call held on October 28, management highlighted the strength of Infonavit, Fovissste and SHF to continue providing a flow of mortgages in Mexico and also highlighted the significant shortage of housing. Management added that so far, they have not witnessed a significant slowdown in demand in its main markets. Thus, in our view, the sharp revision in growth prospects is more a defensive measure as opposed to a sign of a significant slowdown in the Mexican housing market. In our opinion, the adjustment is due to the fact that the company s previous guidance was far above our estimated revenue growth for Mexican homebuilders of 8% to 12% in 2009 and the fact that the company was not able to stop the increase in net debt due to its high revenue growth and the investment in the Alternativa Urbi rent-to-own program. We are adjusting our estimates according to the new guidance provided by the company. Our new estimates in U.S. dollars reflect the change in our exchange rate forecasts from M$10.80/US$ to M$12.80/US$ in 2008 and from M$11.50/US$ to M$12.50/US$ in REVISED EARNINGS ESTIMATES Figure 1. Urbi Estimates Revisions, 2008E-2010E (U.S. Dollars in Millions*) 2008E 2009E 2010E Previous Current Change Previous Current Change Introducing Revenue 1,504 1, % 1,780 1, % 1,995 1, % Op. Profit % % % Op. Margin 21.20% 21.5% 1.5% 21.70% 21.4% -1.4% 21.70% 21.4% -1.3% EBITDA % % % Net Income % % % EPS % % % *Except per share data. Sources: Company reports and Santander estimates. The reduction in operating margin and operating profit is because of mandatory capitalization of financial costs required by Mexican Accounting Standards as of U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 Urbi: Putting on the Brakes: Lowering 2009 Target Price - Reiterating Buy VALUATION Our year-end 2009 target price is based on a discounted free cash flow valuation with an 11.0% discount rate (up from 9.2% previously) and a 1.5% terminal growth rate, which implies a potential upside of 67% in U.S. dollars from current levels, above our 19% return for the local Mexican benchmark. Thus, we are reiterating our Buy rating on the stock despite the adjustment in the company guidance and our estimates. Figure 2. Urbi Free Cash Flow, 2010E-2019E (U.S. Dollars in Millions) 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Sales 1,705 1,961 2,255 2,368 2,652 2,970 3,267 3,594 3,954 4,270 EBITDA ,070 1,155 Cash Taxes Depreciation Capex Changes in Working Capital Free Cash Flow Source: Santander estimates. Figure 3. Urbi Discounted FCF, 2010E-2019E (U.S. Dollars in Millions) 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Residual Present Value ,336 Firm Value 2,448 Net debt 09E 413 Equity Value 2,035 # of Shares (Mn) 976 Target Price US$ 2.10 Target Price M$ Except target prices, as indicated. Source: Santander estimates. RISKS In our opinion, the alternative Urbi schemes have contributed to revenue growth, but have also resulted in a fast-growing off-balance-sheet debt, which has raised some concerns among investors. Furthermore, when delivering the home before payment under the rent-to-own program, Urbi incurred credit risks that other homebuilders did not, even though the risk is shared with the financial institution providing the mortgage. Like other companies in the sector, Urbi is highly dependent on mortgages from government-related agencies for low-income housing, such as Infonavit and Sociedad Hipotecaria Federal. Changes in the lending policies by these agencies or changes in the payment period to homebuilders could affect Urbi. In the case of loans to the middle-income and residential segments, changes in interest rates or lending policies by commercial banks could also affect demand in this segment. Because Urbi s main markets are located in the northern region of Mexico, the company also is more sensitive to changes in the U.S. economy and the export-oriented industry than its peers. Changes in U.S. economic activity could have a more significant impact on Urbi, but the company s geographical expansion should reduce this risk in the future, in our view. 4 U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) / (212)

5 FINANCIAL STATEMENTS Figure 4. Urbi Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) P. & L. Account 2007 % 2008E % 2009E % 2010E % Sales 1, % 1, % 1, % 1, % Cost of Sales % % % 1,162 68% Gross Profit % % % % Oper. and Adm. Expenses % % % % Operating Profit % % % % Depreciation 13 1% 19 1% 17 1% 18 1% EBITDA % % % % Financing Costs 22 2% 13 1% 24 2% 29 2% Interest Paid 27 2% 36 3% 39 3% 42 2% Interest Earned (10) -1% 21 2% 14 1% 12 1% Monetary Gain/Loss 5 0% (0) 0% - 0% - 0% FX Gain/Loss 1 0% (2) 0% (0) 0% (1) 0% Other Financial Operations 2 0% 2 0% 2 0% 2 0% Profit before Taxes % % % % Tax Provision 73 6% 84 6% 81 6% 95 6% Profit after Taxes % % % % Subsidiaries - 0% - 0% - 0% - 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest - 0% - 0% - 0% - 0% Net Profit % % % % Balance Sheet 2007 % 2008E % 2009E % 2010E % Assets 2, % 2, % 2, % 2, % Short-Term Assets 2,278 97% 2,113 86% 2,365 88% 2,584 89% Cash and Equivalents % 177 7% 129 5% 128 4% Accounts Receivable % % % 1,150 39% Inventories 1,117 48% 1,151 47% 1,245 46% 1,305 45% Other Short-Term Assets % % % 266 9% Long-Term Assets 63 3% 70 3% 71 3% 70 2% Fixed Assets 39 2% 38 2% 38 1% 37 1% Deferred Assets 24 1% 33 1% 33 1% 33 1% Other Assets - 0% - 0% - 0% - 0% Liabilities 1,117 48% 1,517 62% 1,663 62% 1,817 62% Short-T. Liabilities % % % % Suppliers % % % % Short-Term Loans 58 2% 63 3% 99 4% 120 4% Other ST Liabilities 18 1% 169 7% 183 7% 203 7% Long-Term Loans % % % 267 9% Deferred Liabilities % % % % Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth 1,224 52% % 1,039 38% 1,102 38% Net Worth 1,224 52% % 1,039 38% 1,102 38% Minority Interest - 0% - 0% - 0% - 0% Cash Flow E 2009E 2010E Net Majority Earnings Non-Cash Items Changes in Working Capital (456) (386) (295) (294) Capital Increases/Dividends Capital Expenditures 3 (13) (16) (17) Net Cash Flow 85 (109) (45) 5 Beginning Treasury Ending Treasury Sources: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 Urbi: Putting on the Brakes: Lowering 2009 Target Price - Reiterating Buy Figure 5. Urbi Income Statement, Balance Sheet, and CF Statement, E (Millions of Mexican Pesos) P. & L. Account 2007 % 2008E % 2009E % 2009E % Sales 12, % 15, % 16, % 19, % Cost of Sales 8,668 68% 10,327 69% 11,364 68% 13,235 68% Gross Profit 4,111 32% 4,716 31% 5,317 32% 6,193 32% Oper. and Adm. Expenses 1,259 10% 1,477 10% 1,745 10% 2,031 10% Operating Profit 2,873 22% 3,257 22% 3,572 21% 4,161 21% Depreciation 146 1% 213 1% 199 1% 201 1% EBITDA 3,483 27% 4,194 28% 4,550 27% 5,256 27% Financing Costs 244 2% 147 1% 287 2% 333 2% Interest Paid 294 2% 397 3% 460 3% 475 2% Interest Earned (108) -1% (229) -2% (169) -1% (132) -1% Monetary Gain/Loss 50 0% (1) 0% - 0% - 0% FX Gain/Loss 8 0% (22) 0% (4) 0% (10) 0% Other Financial Operations 21 0% 23 0% 19 0% 17 0% Profit before Taxes 2,629 21% 3,167 21% 3,286 20% 3,828 20% Tax Provision 796 6% 928 6% 959 6% 1,080 6% Profit after Taxes 1,833 14% 2,239 15% 2,327 14% 2,748 14% Subsidiaries - 0% - 0% - 0% - 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest - 0% - 0% - 0% - 0% Net Profit 1,833 14% 2,186 15% 2,327 14% 2,748 14% Balance Sheet 2007 % 2008E % 2009E % 2010E % Assets 25, % 28, % 32, % 36, % Short-Term Assets 24,868 97% 24,938 86% 28,374 88% 32,295 89% Cash and Equivalents 3,381 13% 2,083 7% 1,547 5% 1,606 4% Accounts Receivable 6,477 25% 9,274 32% 11,882 37% 14,371 39% Inventories 12,190 48% 13,581 47% 14,945 46% 16,317 45% Other Short-Term Assets 2,820 11% 3,063 11% 3,195 10% 3,320 9% Long-Term Assets 685 3% 831 3% 851 3% 873 2% Fixed Assets 422 2% 447 2% 450 1% 458 1% Deferred Assets 263 1% 384 1% 400 1% 416 1% Other Assets - 0% - 0% - 0% - 0% Liabilities 12,197 48% 17,904 62% 19,951 62% 22,712 62% Short-T. Liabilities 5,826 23% 6,437 22% 7,555 23% 8,732 24% Suppliers 2,762 11% 3,297 11% 3,748 12% 4,258 12% Short-Term Loans 634 2% 741 3% 1,189 4% 1,500 4% Other ST Liabilities 193 1% 1,992 7% 2,194 7% 2,533 7% Long-Term Loans 2,925 11% 3,224 11% 3,255 10% 3,334 9% Deferred Liabilities 6,892 27% 8,243 29% 9,140 28% 10,645 29% Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth 13,356 52% 10,927 38% 12,469 38% 13,776 38% Net Worth 13,356 52% 10,927 38% 12,469 38% 13,776 38% Minority Interest - 0% - 0% - 0% - 0% Cash Flow E 2009E 2010E Net Majority Earnings 1,833 2,186 2,327 2,748 Non-Cash Items Changes in Working Capital (4,982) (4,223) (3,522) (3,351) Capital Increases/Dividends Capital Expenditures 36 (142) (190) (190) Net Cash Flow 931 (1,308) (536) 59 Beginning Treasury 2,450 3,399 2,083 1,547 Ending Treasury 3,381 2,083 1,547 1,606 Sources: Company reports and Santander estimates. 6 U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) / (212)

7 IMPORTANT DISCLOSURES URBI 12-Month Relative Performance (U.S. Dollars) IPC URBI 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. URBI Three-Year Stock Performance (U.S. Dollars) B $2.27 9/1/05 B $2.57 2/2/06 URBI (L Axis) H $4.40 3/1/07 B $4.10 2/1/07 B $3.80 5/1/08 IPC (R Axis) 3,500 3,000 2,500 2,000 1, B $4.85 B $2.73 B $3.50 B $2.43 9/17/07 4/26/06 B $ /13/06 12/27/05 7/30/08 1, S-05 D-05 M-06 J-06 O-06 J-07 M-07 A-07 N-07 M-08 J-08 S-08 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Revew Source: Santander. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 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: Gonzalo Fernandez*. *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. Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Urbi. Within the past 12 months, Grupo Santander has received compensation for investment banking services from Urbi. 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