Introduction Dear client, We are proud to present the first edition of our Andean Equities Guide, which covers 71 companies across Chile, Colombia and Peru and includes our 2014 investment strategy for each market as well as for the region as a whole. While we expect to expand our coverage in upcoming releases, we are hopeful that this guide can be a good reflection of our goal to become the go to financial institution providing the best service in detecting investment opportunities in the region, through independent, timely, and value added research. Constituted early this year, Credicorp Capital is a regional financial services group combining the wealth of experience, market position and expertise of three leading institutions: BCP Capital in Peru, Correval in Colombia, and IM Trust in Chile. We are confident that the combination of these institutions has and will continue to deliver substantial value to our clients, investors and issuers alike, as we expand our scope and capabilities to a region that is increasingly becoming the new extended home turf of many Chilean, Colombian and Peruvian companies. In this guide you will find plenty of examples of companies that operate in two or three of these markets. Our substantial local presence in each of them provides us with an edge to better understanding their business models and expansion plans. We also recognize that in the asset management community, these countries are considered to be one big market, which combines a total market capitalization in excess of USD650 billion. We believe that matching our clients scope of analysis will more closely align our capabilities with their needs. We hope that you will find this report useful. It is the result of the work of a team of 23 equity analysts and economists located in Bogota, Lima and Santiago. As locals, we truly aim at becoming your eyes and ears across the Andes, a region which we can confidently say is known by no one better than by ourselves. Best regards,
Christian Laub CEO Credicorp Capital
3 Andean Equities Guide, October 25th 2013
Andean Equities Guide
The Andrean Region: a mixed bag 5Andean Top Picks 6A word on correlations and diversification 8Changes in Recommendations 9
Chile: Chile Equity Strategy - Summary 10Economy driven by domestic consumption 11Corporate Earnings to grow, at last! 13Market Valuations and Upside Estimation 14Politics: Bachelet, vintage 2014 16The Regulatory Agenda 17Investment Flows 18ECM activity charging a toll 19Stocks we like in Chile 20
Colombia: Colombia Equity Strategy - Summary 21Macro 22Elections 2014: increasing risks? 24Peace talks have a difficult path ahead 26Infrastructure: waiting for the start of the economys long term engine 27Market Valuations and Upside Estimation 28Investment Flows 30Upcoming ECM Activity 31Volume reduction: Colombia losing some stamina? 32Strategy and Top Picks 33
Peru: Peru Equity Strategy - Summary 34Macro: waiting for the infrastructure boost 35Rebound in corporate earnings / Market valuations and IGBVL upside 36Administrative bottlenecks and regional elections in 2014 38Investment Flows and ETF volatility 39Our stock selection in Peru 40
Quantitative Summary 41
Aceros Arequipa Peru 50 El Brocal Peru 122AES Gener Chile 52 Embonor-B Chile 124Aguas-A Chile 54 Endesa Chile 126AIH Peru 56 Enersis Chile 128Alicorp Peru 58 Enersur Peru 130Andina-B Chile 60 Entel Chile 132Atacocha Peru 62 Falabella Chile 134Austral Peru 64 Ferreycorp Peru 136Bancolombia Colombia 66 Forus Chile 138Banco de Chile Chile 68 Graa y Montero Peru 140Banmedica Chile 70 Grupo Argos Colombia 142BCI Chile 72 Grupo Aval Colombia 144Besalco Chile 74 Grupo Sura Colombia 146Buenaventura Peru 76 Habitat Chile 148CAP Chile 78 ILC Chile 150Casa Grande Peru 80 ISA Colombia 152CCU Chile 82 Isagen Colombia 154Celsia Colombia 84 Latam Chile 156Cemargos Colombia 86 Luz del Sur Peru 158C. Pacasmayo Peru 88 Masisa Chile 160Cemex Latam Holdings Colombia 90 Milpo Peru 162Cencosud Chile 92 Minsur Peru 164Cerro Verde Peru 94 Nutresa Colombia 166CMPC Chile 96 Pacific Rubiales Colombia 168Colbun Chile 98 Parauco Chile 170Concha y Toro Chile 100 Ripley Corp. Chile 172Copec Chile 102 Salfacorp Chile 174Corficolombiana Colombia 104 Santander Chile 176Corpbanca Chile 106 Siderperu Peru 178Cruz Blanca Chile 108 SK Chile 180Davivienda Colombia 110 SM Chile B Chile 182E-CL Chile 112 Sonda Chile 184Ecopetrol Colombia 114 SQM-B Chile 186Edegel Peru 116 Unacem Peru 188Edelnor Peru 118 Volcan Peru 190EEB Colombia 120
The Andean Region: a mixed bag
Heinrich Lessau #56-2-2446 1704
[email protected] After some time looking at our markets, meeting with the companies mentioned in this report, contacting regulators and talking to many investors, big and small, we finally think this report is ready to be published. This is far from saying it is finished and we expect to improve in future releases. We hope you enjoy it and we thank you for your feedback! These are some of our findings:
The global economic turmoil hurt Chile, Colombia and Peru, with lower commodity prices being the main contagion vehicle. Economic growth, however has remained resilient in the three countries. High global liquidity levels, flexible exchange rates and sound fiscal and private balance sheets have allowed domestic demand to remain solid.
Colombia and Peru are mildly accelerating, on the back of strong consumption and mostly reflecting much-needed catch-ups in infrastructure. Chile is in a slight decelerating path in which private consumption (fueled by record-low unemployment) is compensating the slowdown in investments and fiscal spending.
Consistently, inflationary pressures are lowest in Chile, whose Central Bank is entering a loosening phase, while CBs in Colombia and Peru are more hawkish.
A recovering global economy may fuel exports. We believe higher commodity prices and stabilized Chinese demand for raw materials are already priced in in most commodity plays in the region. Some Peruvian mining companies, Copec in Chile and Pacific Rubiales in Colombia are the main exceptions.
Unlike what has happened in recent history in the region, politics are causing the most noise in Chile, with presidential elections taking place next November and with the upcoming government expected to make a shift to the left. In Peru, the government is dealing with low approval rates, but with no major election in sight, it is focusing on unleashing investments through cutting red tape and dealing with bureaucracy. Most Colombians are skeptical on the peace talks which seem to be the straw at which the government is clutching at, in order to gain popularity.
Recovering from weak commodity prices, cost pressures, and also on the back of the maturation of investments, corporate earnings will grow across the three countries in 2014, with companies in Peru posting the strongest recovery (25%) as it is mostly exposed to commodities through its mining components. Profits in Chile and Colombia will grow at 19% and 13%, respectively.
Valuations in the three markets are mostly in line with their historic averages. We do not have a strong preference for any of the three, with bottom-up analysis really driving our suggested allocations. We highlight, however, that we see the biggest downside risk to our forecasts in Chile, coming from a potential hike in corporate taxes next year. We see upsides of 13% in Chile and Peru, and 12% in Colombia.
YTD flows from foreign investors have been negative in Chile and in Peru, while Colombia has enjoyed continuous inflows.
5 Andean Equities Guide, October 25th 2013
Performance of Andean Markets (Oct- 2009, to date) . Sources: Bloomberg and Credicorp Capital
Andean top picks Our stock selection process is favoring companies exposed to the domestic cycle, taking advantage of strong consumption patters in the three markets. At a sector level, in Chile we like retailers, banks and utilities. Colombian banks are among our favorite sectors. In Peru we see opportunities in some mining companies which are delivering margin improvements but we still prefer to put our main bets on companies exposed to the expected infrastructure boom. Our favorite names are:
Cementos Pacasmayo (Buy; TP: PEN 7.9) We like the companys medium-term strategy of expanding its capacity to cope with higher cement demand in a fast-growing market. Pacasmayo is poised to remain the unchallenged leader in the cement and related-products industry in the Northern Peruvian market and it falls within our strategy of favoring names with exposure to the local economy.
Davivienda (Buy; TP: COP 30,560). We are overweighting the Colombian banking
sector, based on attractive valuations, estimates on loans growth for 2014 and improving NIMs. Davivienda is our high conviction play in the industry as we expect it to deliver the highest earnings growth in the next 5 years with the lowest dilution risk.
Enersis (Buy; TP: CLP 200). We like the companys extremely low valuations,
compared to its history and its peers, combined with a diversified business model and stable cash generation. In addition, we expect potential M&A activity to provide medium term catalysts.
Falabella (Buy; TP: CLP 6,000): is amongst our preferred retail stocks across the Andean as we see it as the quality asset in the sector. We expect the company to post the highest average EPS growth over the medium term, boosted by growth in consumption, increased sales space and margin improvements. We like the companys recent
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