Homex - Downgrading vs. Upgrading

Transcription

1 Latin American Equity Research Mexico City, July 22, 2008 Company Update Mexico Homebuilders HOMEX Downgrading to Hold on Worsening Working Capital and Increased Debt Gonzalo Fernandez* Mexico: Banco Santander S.A. (5255) HOLD (7/21/08) CURRENT PRICE: US$60.84/M$ TARGET PRICE: US$74.00/M$ What s Changed Rating: From Buy to Hold Price Target (US$): Introducing US$74.0 for 2009 EBITDA Estimates (US$): 08 from 441 to 443 Mn 09 from 528 to 544 Mn Mn Company Statistics Bloomberg HXM 52-Week Range (US$) E P/E Rel to the Index (x) E P/E Rel to Sector (x) 1.05 Mexico IPC Indexl (US$) Yr EPS / EBITDA CAGR (06-09E) 21.1% Market Capitalization (US$ Mn) 3,405.7 Float (%) 45 3-Mth Avg Daily Vol (US$000) 37.3 Shares Outst Mn (ADR:6:1) Net Debt/Equity (x) 0.27 Book Value per ADR (US$) 18.0 Estimates and Valuation Ratios E 2009E 2010E Net Earn (M$ Mn) 2,194 2,987 3,405 4,195 Current EPS Net Earn (US$ Mn) Current EPADR P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) 6.6% 8.6% 10.9% 12.7% Div per Share (US$) Div Yield (%) Sources: Bloomberg, Company reports, and Santander estimates. Investment Thesis: In this report we are lowering our recommendation on Homex from Buy to Hold and introducing our year-end 2009 target price of US$74.00 per ADR (M$133.0 per share), replacing our target price of US$70.00 for Reasons for Change to Rating/Price Target/Estimates: The main reason for our downgrade is that, despite the fact that the company posted very positive operating growth during the first half of 2008 and is on track to reach its yearly guidance and our estimates; we witnessed a significant increase in working capital requirements and a significantly negative free cash flow, which has resulted in an significant increase in net debt. On its conference call, management confirmed our view that this hike was not a one-time effect and that the company would lower only modestly its collection period from now until the end of the year. As a result, despite maintaining our estimated EBITDA practically unchanged, we have changed our estimated free cash flow for fullyear 2008 from breakeven to a negative US$167 million and our estimated net debt from US$134 million to US$297 million. Although Homex maintains a very conservative level of debt, these changes affect our DCF valuation, increase FV/EBITDA ratios and lower the potential return for equity holders. The company s announcement of an expansion into Egypt and India, even though it represents only a modest initial investment, is another concern as the company will have to prove it can transfer the competitive advantages it has in Mexico to other countries. Valuation and Risks to Investment Thesis: Our year-end 2009 target price is based on a discounted free cash flow analysis with a 10.6% discount rate and a 2.5% terminal growth rate, which results in a target FV/EBITDA multiple of 8.3x for The stock offers potential upside of 21% to our target price, similar to our benchmark for Mexico. As a result, we are downgrading the stock from Buy to Hold. Risks: a slowdown in the Mexican housing sector caused by a lower availability of mortgages from government-related agencies and commercial banks; further deterioration in collection and the risks associated with international expansion. * Employed by a non-us affiliate of Santander Investment Securities Inc. and is not registered/qualified as a research analyst under NASD rules.

2 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt Homex is a vertically integrated home-development company specialized in affordable entry-level and middle-income housing in Mexico. In 2007, we estimate the sale of 43,738 homes by Homex, generating revenue of US$1.4 billion and an EBITDA of US$311 million. As of September 30, 2007 Homex operated in 31 cities located in 20 states in Mexico. Homex also reported a total land reserve of approximately 49.4 million square meters, on which the company could build approximately 222,450 affordable entry-level homes and approximately 19,502 middle-income homes. In April 2005, Homex acquired Casas Beta, the sixth-largest homebuilder in Mexico at that time.. WHAT HAS CHANGED? On July 21, Homex reported positive 2Q08 results that were in line with our expectations at the operating level and surpassed our expectations at the bottom line. Homex reported a strong 22% YoY increase in total revenue, fueled by a 9.3% YoY increase in homes sold and a 6.2% increase in the average price. As expected, Homex maintained large exposure to the affordable-housing segment, which represented 91% of total units sold. Furthermore, sales with financing from Infonavit represented 89% of units sold. Nevertheless, because of a better sales mix, prices in the affordable-housing category (financed by Infonavit) increased 10.4%, and prices in the middle-income segment rose 2.8%. While Homex expanded its gross margin by 68 bps YoY due to the implementation of its aluminum mold construction technology, operating expenses increased 37.9%, YoY resulting in a 60-bp contraction in the operating margin. The significant hike in operating expenses was due partially to the launch of Homex s vacation home division. Nevertheless, EBITDA increased a strong 27% YoY, in line with our expectations. Net income jumped 71% YoY, beating our estimates by 19%, explained by higher-than-expected foreign exchange gains on Homex s U.S. dollar-denominated debt, reflecting the 3.5% appreciation of the Mexican peso during the quarter. Nevertheless, in our opinion, the negative in the report was the significant increase in working capital requirements and a significantly negative FCF. The receivables/sales ratio rose from 39.4% in 2Q07 to 47.0% in 1Q08 and 54.8% in 2Q08; while inventory and payables turnover remained stable year on year. This resulted in Homex s working capital cycle (inventory + receivables payables) increasing from 313 days in 2Q07 to 360 days in 2Q08. As a result, Homex generated a negative FCF of M$1.45 billion for the first six months of 2008 compared to a negative M$269 million during the first half of The negative FCF was financed with the issue of debt for US$80 million from a US$200 million credit facility previously announced by the company. In its press release and during its conference call held on July 22, management explained that the increase in the collection period was explained by a longer internal collection process, and a shift from mortgage financing from Sofoloes to commercial banks, as well as increased participation in vertical and middle-income projects. As a result, management expects only modest improvement in collection, reducing turnover from 197 days in 2Q08 to 190 days by the end of the year, while inventory and payables turnover should remain stable. As a result, despite maintaining our estimated EBITDA virtually unchanged, we have changed our estimated free cash flow for full-year 2008 from breakeven to a negative US$167 million and our estimated net debt from US$133 million to US$198 million; this is having a negative impact on our DCF valuation. 2 During its conference call, the company also confirmed that it has started operations on a pilot project in India with an initial investment of US$1.4 million that could reach a maximum of US$10.0 million authorized by the board of directors. Even though it represents only a modest initial investment, the company s announcement that it is expanding into Egypt and India is another concern as the company will have to prove that it can transfer the competitive advantages it has in Mexico to other countries.

3 Figure 1. Homex Receivables and Inventory Turnover (days) Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q Collection period Inventory Turnover Source: Santander Estimates Figure 2. Homex Operating Cash Flow and Net Debt (Million Pesos) Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Operating cash flow Net Debt Source: Santander Estimates Homex Second-Quarter 2008 Results U.S. Dollars in Millions a Mexican Pesos in Millions a 2Q08 S. Est % vs. S. Est 2Q07 %Ch Y/Y 2Q08 S. Est % vs. S. Est 2Q07 %Ch Y/Y Sales % % Sales 4,381 4,390 0% 3, % Op Profit % % Op Profit % % EBITDA % % EBITDA 1,052 1,025 3% % EBITDA Margin 24.0% 23.3% 1% 23.1% 0.9% EBITDA Mgn 24.0% 23.3% 1% 23.1% 0.9% Net Inc % % Net Inc % % EPADR % % EPS % % a Except per share/adr amounts. Sources: Company reports and Santander estimates. YoY growth in nominal pesos and dollars U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt REVISED EARNINGS ESTIMATES Figure 3. Homex Estimates Revisions, 2008E-2010E (U.S. Dollars in Millions*) 2008E 2009E 2010E Previous Current Change Previous Current Change Previous Current Change Revenue 1,880 1, % 2,243 2, % NA 2,565 NA Op. Profit % % NA 568 NA Op. Margin 21.9% 22.0% 0.3% 22.0% 22.1% 0.1% NA 22.1% NA EBITDA % % NA 615 NA Net Income % % NA 366 NA EPS % % NA 0.00 NA Net Debt Nm NM NA 114 NA *Except per share/adr data. NA Not available. NM Not meaningful. Sources: Company reports and Santander estimates. VALUATION Our year-end 2009 target price is based on a discounted free cash flow valuation with a 10.6% discount rate and a 2.5% terminal growth rate, which results in a target FV/EBITDA multiple of 8.3x for The stock offers a potential upside of 21% to our target price, similar to our benchmark for Mexico, as a result we are downgrading the stock from Buy to Hold. Figure 4. Homex Free Cash Flow, 2009E-2018E (U.S. Dollars in Millions) 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Sales 2,261 2,584 2,972 3,418 3,759 4,211 4,716 5,187 5,706 6,277 6,905 EBITDA ,053 1,179 1,297 1,425 1,569 1,726 Cash Taxes Depreciation Capex Changes in Working Capital Free Cash Flow Source: Santander estimates. Figure 5. Homex Discounted FCF, 2009E-2018E (U.S. Dollars in Millions) 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E Residual Present Value ,525 Firm Value 4,406 Net debt 09E 253 Equity Value 4,132 # of ADRs 56 Target Price US$ per ADR 74 Target Price M$/ Share 133 Except target prices, as indicated. Source: Santander estimates. 4

5 With our new estimates, Homex is trading at a 2009E P/E of 9.4 and a FV/EBITDA of 6.1x with premiums of 14% and 13%, respectively, compared to the average of homebuilders in Mexico. In our opinion, the premium was justified by the company s consistent above-sector average growth and superior management of working capital and cash flow generations. In our opinion, although the former is still a valid reason to justify a premium, the lower expectations for cash flow generations could reduce the valuation premium versus its peers. Figure 6. Homex Comparative Valuation Price US$ Target Upside/ Mkt P/E FV/EBITDA Company Rec. 22-Jul Price Down Cap E 2009E E 2009E ARA Hold 0.85 $ % 1, GEO Buy 3.28 $ % 1, HOMEX Buy $ % 3, SARE Buy 1.43 $ % URBI Buy 3.24 $ % 3, Avg Mexico* Homex / Average 25% 10% 14% 28% 21% 13% Source: Company reports and Santnder Estimates. * Average does not include Homex RISKS As is the case with other companies in the housing sector in Mexico, Homex 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 Homex. In the case of loans to the middle-income and residential segments, changes in interest rates or lending policies by commercial banks could affect demand in this segment. Homex has one of the only fully listed ADR on the New York Stock Exchange among the Mexican homebuilders. In our opinion, this was an advantage for Homex until 2005, as this listing provided higher exposure, and the stock benefited from the housing boom in the U.S. However, the current slowdown in the U.S. housing market could lead to a contagious effect on Homex stock prices, as investors are apparently avoiding the sector in general. However, we do not expect a similar slowdown in the Mexican housing market International expansion could bring additional risks as the company might not have the ability to duplicate the competitive advantages it has in Mexico in countries like Egypt and India. Margins, profitability and working capital requirements could be inferior to Mexico. In 2008, Homex launched its tourism housing division in order to build second homes in Mexico in tourism destinations like Los Cabos and Cancun targeted mainly to U.S. buyers. In our opinion, the current difficult situation in the U.S. mortgage markets could negatively affect this business segment over the short term. Upside risk to our Hold recommendation is a faster-than-expected improvement in working capital and or better-than-expected results in the tourism segment and the international expansion. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt FINANCIAL STATEMENTS Figure 7. Homex Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) P. & L. Account 2007 % 2008E % 2009E % 20010E % Sales 1, % 1, % 2, % 2, % Cost of Sales % 1,259 67% 1,523 67% 1,741 67% Gross Profit % % % % Oper. and Adm. Expenses % % % % Operating Profit % % % % Depreciation 27 2% 33 2% 45 2% 47 2% EBITDA % % % % Financing Costs 42 3% 5 0% 43 2% 45 2% Interest Paid 54 4% 39 2% 47 2% 40 2% Interest Earned (13) -1% 13 1% 11 0% 10 0% Monetary Gain/Loss 11 1% - 0% - 0% - 0% FX Gain/Loss (10) -1% (21) -1% 7 0% 15 1% Other Financial Operations 22 1% (7) 0% (8) 0% (8) 0% Profit before Taxes % % % % Tax Provision 91 6% 120 6% 135 6% 156 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 % 20010E % Assets 2, % 2, % 3, % 3, % Short-Term Assets 1,998 90% 2,481 89% 2,857 90% 3,316 90% Cash and Equivalents % 126 5% 116 4% 187 5% Accounts Receivable % 1,033 37% 1,168 37% 1,333 36% Inventories 1,047 47% 1,322 48% 1,573 49% 1,796 49% Other Short-Term Assets 45 2% 31 1% 50 2% 77 2% Long-Term Assets % 263 9% 279 9% 281 8% Fixed Assets 106 5% 131 5% 145 5% 151 4% Deferred Assets 121 5% 132 5% 133 4% 130 4% Other Assets - 0% - 0% - 0% - 0% Liabilities 1,329 60% 1,831 66% 1,917 60% 2,072 56% Short-T. Liabilities % % % 1,093 30% Suppliers % % % % Short-Term Loans 30 1% 108 4% 105 3% 99 3% Other ST Liabilities (17) -1% 9 0% 9 0% 9 0% Long-Term Loans % % 263 8% 206 6% Deferred Liabilities % % % % Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth % % 1,240 39% 1,567 43% Net Worth % % 1,268 40% 1,602 44% Minority Interest 18 1% 21 1% 28 1% 35 1% Cash Flow E 2009E 20010E Net Majority Earnings Non-Cash Items Changes in Working Capital (283) (488) (271) (243) Capital Increases/Dividends Capital Expenditures (62) (51) (58) (54) Net Cash Flow (5) (98) (6) 78 Beginning Treasury Ending Treasury Sources: Company reports and Santander estimates. 6

7 Figure 8. Homex Income Statement, Balance Sheet, and CF Statement, E (Millions of Mexican Pesos) P. & L. Account 2007 % 2008E % 2009E % 2009E % Sales 16, % 19, % 24, % 29, % Cost of Sales 10,897 67% 13,331 67% 16,321 67% 19,793 67% Gross Profit 5,270 33% 6,461 33% 7,910 33% 9,592 33% Oper. and Adm. Expenses 1,756 11% 2,108 11% 2,563 11% 3,086 11% Operating Profit 3,513 22% 4,353 22% 5,347 22% 6,506 22% Depreciation 297 2% 355 2% 481 2% 538 2% EBITDA 3,810 24% 4,784 24% 5,828 24% 7,044 24% Financing Costs 454 3% 51 0% 464 2% 511 2% Interest Paid 588 4% 414 2% 506 2% 452 2% Interest Earned 140 1% 136 1% 117 0% 109 0% Monetary Gain/Loss (115) -1% - 0% - 0% - 0% FX Gain/Loss (109) -1% (227) -1% 75 0% 168 1% Other Financial Operations 240 1% (73) 0% (87) 0% (90) 0% Profit before Taxes 3,300 20% 4,375 22% 4,970 21% 6,085 21% Tax Provision 993 6% 1,272 6% 1,449 6% 1,775 6% Profit after Taxes 2,307 14% 3,103 16% 3,521 15% 4,311 15% Subsidiaries - 0% - 0% - 0% - 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest 114 1% 116 1% 116 0% 116 0% Net Profit 2,194 14% 2,987 15% 3,405 14% 4,195 14% Balance Sheet 2007 % 2008E % 2009E % 2009E % Assets 24, % 29, % 34, % 42, % Short-Term Assets 21,811 90% 26,052 89% 30,854 90% 38,043 90% Cash and Equivalents 2,363 10% 1,328 5% 1,248 4% 2,141 5% Accounts Receivable 7,524 31% 10,845 37% 12,613 37% 15,296 36% Inventories 11,432 47% 13,879 48% 16,992 49% 20,606 49% Other Short-Term Assets 492 2% 330 1% 541 2% 881 2% Long-Term Assets 2,479 10% 2,762 9% 3,008 9% 3,221 8% Fixed Assets 1,153 5% 1,380 5% 1,567 5% 1,729 4% Deferred Assets 1,326 5% 1,382 5% 1,441 4% 1,492 4% Other Assets - 0% - 0% - 0% - 0% Liabilities 14,503 60% 19,228 66% 20,706 60% 23,763 56% Short-T. Liabilities 7,946 33% 8,852 30% 10,559 31% 12,540 30% Suppliers 7,125 29% 7,592 26% 9,294 27% 11,271 27% Short-Term Loans 330 1% 1,135 4% 1,135 3% 1,135 3% Other ST Liabilities 337 1% 17 0% 17 0% 17 0% Long-Term Loans 3,466 14% 3,327 11% 2,845 8% 2,368 6% Deferred Liabilities 6,183 25% 7,049 24% 7,303 21% 8,856 21% Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth 9,591 39% 9,697 33% 13,394 39% 17,976 43% Net Worth 9,787 40% 9,916 34% 13,697 40% 18,382 44% Minority Interest 196 1% 219 1% 303 1% 406 1% Cash Flow E 2009E 2009E Net Majority Earnings 2,307 3,103 3,521 4,311 Non-Cash Items 1, Changes in Working Capital (3,087) (5,189) (2,926) (2,767) Capital Increases/Dividends Capital Expenditures Net Cash Flow (56) (1,035) (79) 892 Beginning Treasury 2,419 2,363 1,328 1,248 Ending Treasury 2,363 1,328 1,248 2,141 Sources: Company reports and Santander estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt IMPORTANT DISCLOSURES HOMEX 12-Month Relative Performance (U.S. Dollars) IPC HOMEX J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 Sources: Bloomberg and Santander. HOMEX Three-Year Stock Performance (U.S. Dollars) *Initiation of Coverage H $ /21/06* H$ /2/07 B$ /4/06 H$ /23/07 H$ /17/07 B$ /24/07 3,500 3,000 2,500 2,000 1,500 1,000 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review 1.5 J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J HOMEX (L Axis) IPC (R Axis) Source: Santander. 8

9 ARA 12-Month Relative Performance (U.S. Dollars) IPC ARA J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 Sources: Bloomberg and Santander. ARA Three-Year Stock Performance (U.S. Dollars) B $ /17/05 B $ /27/05 H $4.65 2/2/06 B $4.90 3/16/06 B $ /20/06 B $7.55 2/01/07 B $1.85 9/17/07 H $ /4/ J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 3,400 2,900 2,400 1,900 1, Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review Ara (L Axis) IPC (R Axis) Source: Santander. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

10 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt GEO 12-Month Relative Performance (U.S. Dollars) IPC GEO J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 Sources: Bloomberg and Santander. GEO Three-Year Stock Performance (U.S. Dollars) SB $3.00 7/29/05 SB $ /27/05 H $4.30 8/3/06 B $6.00 2/1/07 B $7.00 9/17/07 3,500 3,000 2,500 2,000 1, SB $3.90 B $4.00 2/6/06 H $5.20 B $5.80 H $5.00 SB $3.40 1/24/08 10/25/06 9/27/07 10/26/07 10/19/05 1, J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 Geo (L Axis) IPC (R Axis) Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review Source: Santander. 10

11 SARE 12-Month Relative Performance (U.S. Dollars) 100 IPC SARE J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 Sources: Bloomberg and Santander. SARE Three-Year Stock Performance (U.S. Dollars) SB $ /27/05 B $ /1/06 *Initiation of Coverage H $ /30/06 B $1.90 4/27/07 B $2.20 9/17/07 B $1.60 3/31/08 3,500 3,000 2,500 2,000 1,500 1,000 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review 0.0 J-05 S-05 D-05 M-06 J-06 S-06 D-06 M-07 J-07 S-07 D-07 M-08 J-08 Sare (L Axis) IPC (R Axis) 500 Source: Santander. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

12 Homex: Downgrading to Hold on Worsening Working Capital and Increased Debt URBI 12-Month Relative Performance (U.S. Dollars) IPC URBI J-07 A-07 S-07 O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 Sources: Bloomberg and Santander. URBI Three-Year Stock Performance (U.S. Dollars) B $2.13 7/27/05 B $2.27 9/1/05 B $2.73 4/26/06 H $4.40 3/1/07 B $4.10 2/1/07 B $4.85 9/17/07 3,500 3,000 2,500 2,000 1,500 Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review 1.0 B $ /27/05 B $2.57 2/2/ J-05 A-05 N-05 F-06 M-06 A-06 O-06 J-07 A-07 J-07 O-07 D-07 M-08 J-08 Source: Santander. URBI (L Axis) B $ /13/06 IPC (R Axis) 1,000 12

13 Key to Investment Codes IMPORTANT DISCLOSURES 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% % 66.67% Hold Expected to perform within a range of 5.0% above or below the local market benchmark % 33.33% Underperform/Sell Expected to underperform the local market benchmark by more than 5.0%. 6.03% The numbers above reflect our Latin American universe as of Monday, July 7, 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. Grupo Santander receives non-investment banking revenue from the subject companies, with the exception of Sare, Ara. Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Ara. Sare. Urbi. Within the past 12 months, Grupo Santander has received compensation for investment banking services from Sare, Urbi. In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from Sare. 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