Itaú Latam Big Book 2012

BIG BOOK
The LatAm Big Book 2012 January 19, 2012
Introduction
Dear client,
This report is written at the most difficult of times imaginable to the author. Like the vast majority of the investors Ive met, I am
torn between favorable local micro valuations and highly uncertain global macro conditions. Long-term strategy outlooks typically base their forecast on the overall economic context impacting corporate cash flows. However, these conditions are highly unpredictable in the short run. The list of mostly negative known unknowns is long: when/how the Euro-Crisis will be resolved, Chinas policy reaction to a slowdown, U.S. growth, geopolitical tensions in the Middle East and these are only the most apparent. They might all be external factors, but looking at global market correlations together with financial links and trade channels, these factors will have a major impact on regional equity markets. The overall market direction (including Latin American markets) remains, in my view, basically a risk-on/risk-off call. This does not suggest, though, that 2012 will be a pure macro year. In order to outperform, investors will have to combine the strong macro views affecting the absolute market direction with equally strong bottom-up stock picking, to generate true alpha. To meet these complicated needs, we have split our book into three parts. The first part of the LatAm Big Book represents some of our best proprietary intelligence, including four interviews with partners from different business areas in our firm. Each partner presents his outlook for 2012, as well as a brief update on the respective business segment. The second part is a strategy report that focuses on the long-term, abstract macro level, puts current events into context independent of the political (dis)solution in Europe, etc. and paints a picture of the overall economic landscape we believe we are in. It also describes what we think the response will be, and how Latin America might be affected. Finally, our strategy section focuses on how we believe investors should position themselves in this context, in Argentina, Brazil, Chile, Colombia, Mexico and Peru. For each country, we provide an overview of the long-term investment story, and outline the political dynamics, macro-economic conditions, recommended sector allocation and, of course, our top picks. The third part of the LatAm Big Book is composed of Ita BBAs micro views on each sector and the companies under coverage. Our sector heads and their teams have spent significant time and effort refining their views on the 2012 sector outlook and their single-stock analyses. They discuss their investment thesis for each company and explain the rationale for each recommendation. As you read through the comprehensive LatAm Big Book, youll understand that it was a challenge pulling together so much wide-ranging, high-value content from so many contributors. This book combines the insightful input of our Macro team, which I would like to thank, with the expertise of our 31 equity research analysts in Argentina, Brazil, Chile and Mexico. Weve tried hard to differentiate our product from the usual "research bibles" published from time to time, and I believe this mission was accomplished. Ita BBAs LatAm Big Book comprises 166 stocks in 6 markets, representing 76% of the MSCI LatAm index plus several off-index names. More importantly, each company page was structured to provide the respective investment thesis and catalysts, staying away from the merely descriptive writing that is typical in reports of this nature. I believe this information will help all sorts of investors from those who are just interested in expanding their knowledge of new stories in the region (which is why we included the succinct company descriptions) to those who are already familiar with the names and want to be updated on particular investment stories. As a team, this is a small way to show our gratitude for the continued support and partnership of our clients. I hope you enjoy it! Best Regards
Carlos Constantini Chief Strategist and Global Head of Research
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TABLE OF CONTENTS
INTRODUCTION ...................................................................................................... 2 INTERVIEWS ........................................................................................................... 6
Christian Egan (Equities & ETD) ............................................................................................... 7 Alexandre Aoude (Fixed Income) .............................................................................................. 8 Fernando Iunes (Investment Banking) .................................................................................... 11 Andr Rodrigues (Corporate Banking) ................................................................................... 13
EQUITY STRATEGY .............................................................................................. 16

LatAm Strategy .......................................................................................................................... 17 Argentina ................................................................................................................................... 27 Brazil .......................................................................................................................................... 31 Chile ........................................................................................................................................... 36 Colombia .................................................................................................................................... 38 Mexico ........................................................................................................................................ 40 Peru ............................................................................................................................................ 43
SECTOR VIEWS .................................................................................................... 45

AGRIBUSINESS ..................................................................................................................46
Adecoagro ................................................................................................................................. 49 Cosan ......................................................................................................................................... 50 Heringer Fertilizantes ............................................................................................................... 51 So Martinho ............................................................................................................................. 52 SLC ............................................................................................................................................. 53 Soquimich .................................................................................................................................. 54
BANKING AND FINANCIAL SERVICES.............................................................................55

ABC Brasil ................................................................................................................................. 58 Banco do Brasil ......................................................................................................................... 59 Bancolombia .............................................................................................................................. 60 Banco de Chile .......................................................................................................................... 61 Banco Macro .............................................................................................................................. 62 Banrisul ...................................................................................................................................... 63 BBVA Banco Frances ............................................................................................................... 64 Bci ............................................................................................................................................... 65 Bradesco .................................................................................................................................... 66 BICBANCO ................................................................................................................................. 67 BM&F Bovespa .......................................................................................................................... 68 Cielo ........................................................................................................................................... 69 Cetip ........................................................................................................................................... 70 Daycoval .................................................................................................................................... 71 Grupo Financeiro Galicia ......................................................................................................... 72 Santander Brasil UNIT .............................................................................................................. 73 Santander Chile ......................................................................................................................... 74 Valid ON ..................................................................................................................................... 75
CONSUMER GOODS & RETAIL .........................................................................................76

Ambev ........................................................................................................................................ 79 Arcos Dorados .......................................................................................................................... 80 Arezzo ........................................................................................................................................ 81 BRF Brasil Foods ...................................................................................................................... 82 B2W Varejo ................................................................................................................................ 83 Cia. Hering ................................................................................................................................. 84 Cencosud ................................................................................................................................... 85 Chedraui ..................................................................................................................................... 86 Falabella ..................................................................................................................................... 87 Guararapes ................................................................................................................................ 88 Hypermarcas ............................................................................................................................. 89 Lojas Americanas ..................................................................................................................... 90 Lojas Renner ............................................................................................................................. 91 Magazine Luiza .......................................................................................................................... 92 Marisa ......................................................................................................................................... 93 Marfrig ........................................................................................................................................ 94 Minerva ....................................................................................................................................... 95 Natura ......................................................................................................................................... 96 P.Acucar-CBD ............................................................................................................................ 97 RaiaDrogasil .............................................................................................................................. 98
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Soriana ....................................................................................................................................... 99 Souza Cruz ............................................................................................................................... 100 Technos .................................................................................................................................... 101 Walmex ...................................................................................................................................... 102
HEALTHCARE & EDUCATION ......................................................................................... 103

Abril Educao ......................................................................................................................... 106 Amil ........................................................................................................................................... 107 Anhanguera .............................................................................................................................. 108 Cremer ....................................................................................................................................... 109 DASA ......................................................................................................................................... 110 Estcio ...................................................................................................................................... 111 Fleury ........................................................................................................................................ 112 Kroton ....................................................................................................................................... 113 OdontoPrev ............................................................................................................................... 114 Profarma ................................................................................................................................... 115
INDUSTRIALS + TRANSPORTATION & LOGISTICS ...................................................... 116

ASUR ......................................................................................................................................... 119 Autometal .................................................................................................................................. 120 CCR ........................................................................................................................................... 121 CICSA ........................................................................................................................................ 122 Duratex ...................................................................................................................................... 123 Ecorodovias .............................................................................................................................. 124 Embraer ..................................................................................................................................... 125 GAP ........................................................................................................................................... 126 GOL ........................................................................................................................................... 127 ICA ............................................................................................................................................. 128 IDEAL ........................................................................................................................................ 129 Iochpe Maxion .......................................................................................................................... 130 Localiza ..................................................................................................................................... 131 Mahle Metal Leve ...................................................................................................................... 132 Marcopolo ................................................................................................................................. 133 Mills ........................................................................................................................................... 134 OHL ............................................................................................................................................ 135 OMA ........................................................................................................................................... 136 Randon ...................................................................................................................................... 137 Romi .......................................................................................................................................... 138 Santos Brasil ............................................................................................................................ 139 Tegma ........................................................................................................................................ 140 WEG ........................................................................................................................................... 141 Wilson Sons .............................................................................................................................. 142
OIL, GAS AND PETROCHEMICALS ................................................................................ 143

Braskem .................................................................................................................................... 146 Comgs ..................................................................................................................................... 147 Ecopetrol ................................................................................................................................... 148 HRT ............................................................................................................................................ 149 Lupatech ................................................................................................................................... 150 OGX ........................................................................................................................................... 151 OSX ............................................................................................................................................ 152 Pacific Rubiales ........................................................................................................................ 153 Petrobras .................................................................................................................................. 154 QGEP ......................................................................................................................................... 155 Tenaris ...................................................................................................................................... 156 Ultrapar ..................................................................................................................................... 157 YPF ............................................................................................................................................ 158
REAL ESTATE .................................................................................................................. 159

Aliansce .................................................................................................................................... 162 BHG ........................................................................................................................................... 163 BR Malls .................................................................................................................................... 164 BR Properties ........................................................................................................................... 165 Brookfield Incorporaes ........................................................................................................ 166 CCDI .......................................................................................................................................... 167 Cementos Argos ...................................................................................................................... 168 Cemex ....................................................................................................................................... 169 Cyrela Brazil Realty .................................................................................................................. 170 Consorcio Ara .......................................................................................................................... 171
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Corporacin GEO ..................................................................................................................... 172 Direcional Engenharia ............................................................................................................. 173 Even ........................................................................................................................................... 174 EZTEC ....................................................................................................................................... 175 Gafisa ........................................................................................................................................ 176 Homex ....................................................................................................................................... 177 Iguatemi .................................................................................................................................... 178 LPS Brasil ................................................................................................................................. 179 MRV Engenharia ....................................................................................................................... 180 Multiplan ................................................................................................................................... 181 PDG Realty ................................................................................................................................ 182 Rossi Residencial .................................................................................................................... 183 Sare ........................................................................................................................................... 184 So Carlos ................................................................................................................................ 185 Sonae Sierra Brasil .................................................................................................................. 186 Tecnisa ...................................................................................................................................... 187 Urbi ............................................................................................................................................ 188
STEEL & MINING + PULP & PAPER ................................................................................ 189

CSN ............................................................................................................................................ 192 Fibria ......................................................................................................................................... 193 Gerdau ....................................................................................................................................... 194 Grupo Mexico ........................................................................................................................... 195 Klabin ........................................................................................................................................ 196 Magnesita .................................................................................................................................. 197 MMX ........................................................................................................................................... 198 Southern Copper ...................................................................................................................... 199 Suzano ...................................................................................................................................... 200 Ternium ..................................................................................................................................... 201 Usiminas ................................................................................................................................... 202 Vale ............................................................................................................................................ 203
TELECOMMUNICATIONS, MEDIA & TECHNOLOGY ..................................................... 204

Amrica Mvil ........................................................................................................................... 207 Brasil Telecom .......................................................................................................................... 208 Entel .......................................................................................................................................... 209 Televisa ..................................................................................................................................... 210 Telefnica Brasil (Vivo) ........................................................................................................... 211 Telecom Argentina ................................................................................................................... 212 Tim Participaes S/A ............................................................................................................. 213 Totvs .......................................................................................................................................... 214
UTILITIES .......................................................................................................................... 215

AES Eletropaulo ....................................................................................................................... 218 AES Gener ................................................................................................................................ 219 AES Tiet .................................................................................................................................. 220 Cesp .......................................................................................................................................... 221 Celesc ........................................................................................................................................ 222 Cemig ........................................................................................................................................ 223 Coelce ....................................................................................................................................... 224 Colbn ....................................................................................................................................... 225 CPFL .......................................................................................................................................... 226 Copel ......................................................................................................................................... 227 E-CL ........................................................................................................................................... 228 Eletrobras ................................................................................................................................. 229 Endesa Chile ............................................................................................................................. 230 Energias do Brasil .................................................................................................................... 231 Equatorial .................................................................................................................................. 232 ISA Cteep .................................................................................................................................. 233 Light .......................................................................................................................................... 234 MPX Energia ............................................................................................................................. 235 Pampa Energa ......................................................................................................................... 236 Renova Energia ........................................................................................................................ 237 Sabesp ...................................................................................................................................... 238 Tractebel ................................................................................................................................... 239
ANALYST AND STOCK DIRECTORY ................................................................ 240
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Interviews
Outlook 2012 Equities

Christian Egan MD, Global Head of Equities & ETD, Partner Ita BBA
we wouldnt be surprised to see a 15%-20% outperformance of EWZ vs. Developed Markets. How do you see the performance of your clients in 2011? Making money in LatAm last year was very challenging. The winning strategy was to be short or underweight on the building blocks of the LatAm investment thesis all the sectors related to the domestic consumption story, commodities and infrastructure. Clients who outperformed their benchmarks did so by running high cash levels combined with a low beta portfolio, with sector allocation favoring Utilities, Telcos and Consumer Staples. Peru was the biggest outperformer in the region. In this scenario, achieving absolute returns in the region was extremely difficult. And do you think the same will be true for 2012? I think this year will be significantly different. First, all these sectors that outperformed last year are now trading at premium valuation levels. Second, in Brazil, interest rates will continue to decrease toward the single-digit range as the government continues to stimulate the economy. Fiscal policy will also be supportive. Domestic drivers will again play a more significant role, thus forcing investors to turn their attention to stock picking. This will lead investors to increase the beta of their portfolios in order to seek higher returns. From an asset allocation perspective, I expect a reversal of the trend that started in late 2009, where asset allocation favored EAFE vs. EEM. Thats why we wouldnt be surprised to see a 15%-20% outperformance of EWZ vs. Developed Markets. Should we expect any good opportunities outside Brazil? Over the past year, Ita BBAs research team has spotted great opportunities outside of Brazil. I believe this will continue to be true this year. In Mexico, Homex was awarded a long-term contract with the Security Ministry to build and operate two separate federal penitentiaries, and this will likely generate additional cash flow starting in 2013. In Chile, Cencosud is expanding its operations into other regions, namely Brazil and Peru, and should progressively become a more defensive name with a geographically diversified revenue base. As for Colombia, Pacific Rubiales has increased production more than eleven times in the past five years, and we expect the trend to continue, with production projected to reach 300 kbpd by year-end. With regard to equity capital markets, how do you see the market locally? In Brazil there is still a big discrepancy between the real economy vs. its representation in the equities market. The Service sector, which represents 67% of domestic output, is still under-represented by the Consumer Goods and Financial sectors, while Commodities, which has a weight of only 20% in the real economy accounts for nearly half of the Bovespa Index. But we think that this will change, as there is still a lot of space for new companies to enter the markets and provide sector diversification. That said, I think the market has matured a lot over the last 3-4 years. Investors are now demanding stories with proven track records, strong management teams and cash flow generation. What is your long-term outlook for the stock markets and our industry? LatAm Equity markets are still at a very early stage of development. In Brazil, total AUM for the domestic asset management industry stands at around USD 1.0 trillion. This is less than 1% of the assets of the global fund management industry. In contrast, Brazils GDP now represents about 3.6% of the worlds GDP. Another important point comes from the fact that only 15% of the domestic AUM is allocated to Equities. There are important secular macro and cultural changes that will be supportive of asset allocation in the region, and Equities will be the winning asset class.
Christian Egan
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Outlook 2012 Fixed Income

Alexandre Aoude MD, Global Head of Fixed Income, Partner Ita BBA
There will be a structural shift in LatAm, too. Regions are competing for money, and Brazil, particularly, has very good cards: high real rates, no recession but stable GDP growth, no forced deleveraging, solid balance sheets and a supportive government with significant headroom for monetary and fiscal policy. All we need to see is three months of stable markets. In retrospect, what do you think about last years fixed-income market? Local debt markets had a very strong first half, all sectors issued, with maturities of 10-30 years. We placed USD 6 billion for Petrobras in a single issue, the largest deal ever for an EM corporate, we reopened the perpetual bond market, with BR Properties, we brought new issuers to the market, such as OGX, and also placed a bond for a single B name, Virgulino de Oliveira. We had a very good bid in LatAm back then, and it was not limited to Brazil. Between May and August, the markets shut down longer maturities are now much more difficult to place. The market continues to be well bid for PBR, VALE, CSN and the like however, these high-quality corporates generally have very cash-rich balance sheets. Smaller companies or lower-rated ones have to pay a significant issue premium. In general, we now see shorter maturities, higher costs of funding, less access to USD funding. Lower-rated names are shut off from international markets, as of now. Does this impact the corporates significantly? Of course, the average maturity is shorter in domestic markets (5 years vs. 10-30 years in USD), which are not as deep. You will have to pay up and accept lower liquidity. So, in short: it does have an impact, but a very limited one. Long term, we anticipate a structural migration of money into Brazil, providing cheaper long-term funding than today. Short term, there are a lot of concerns about trade finance drying up. USD funding has become more scarce than it was before, true. Europe supplies 40% of the total trade-related finance due to strong syndication and cheap rates offered. Borrowing locally and swapping back into USD is much more expensive. Can this pose a problem, as it did in 2008? Investors have to be aware that we are talking about USD 30-40 billion per year, so it would be easy for the government to prevent a credit lock-up. The Brazilian government is sitting on USD 352 billion of FX reserves, enough dry powder to keep trade alive (from a funding perspective). Access to local markets only shuts down when we get a 2008-like event, but on both a sovereign and banking level. We do not expect such a funding squeeze to happen. Do you see any significant changes in the demand for credit due to corporates cutting capex, too much leverage, etc.? If they cut capex, they do so for business reasons. Funding is not the bottleneck, and we do not expect it to become one. There might be some names that face some issues, but this is more an exception. Particularly everything related to consumer finance is still very well-supported, not least due to massive policy support. To answer the question, though, we see a few corporate clients revising their budgets. Have corporates been hurt by the high volatility in the markets? The volatility was high, but the participants activity was quite low. Markets have been much calmer than in 2007-08, when some corporates got seriously hurt. Today, most of the big players have decided to stay out of the markets. The client base has become much more fragmented, and business is highly regulated. Derivatives caused quite some trouble in 2008, as you probably remember, so both regulators as well as corporates have become more cautious.
Alexandre Aoude
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Speaking of derivatives what about this market? The market is still not very developed (notes, swaps, options are the dominant instruments) and exotic structured derivatives are rarely traded. Most instruments were based on FX, seeking hedging, followed by interests rates and commodities, to a lesser extent. Corporates were somehow active in the plain-vanilla instruments the high volatility in the BRL did not hurt there, because there was no leverage/exposure. A few clients built directional exposure to commodities and were exposed to changes in the interest rates. However, only to a very limited extent, and very little leverage was used. We currently see no significant risk in that regard. There were some regulatory changes Right, and they created confusion in the markets. When the IOF measures and the regulatory changes for short positions were announced, it was very hard to calculate the real costs of an instrument, as both taxation and general legal treatment were unclear. Hedging became impossible, therefore liquidity dried up. Some participants actually stopped quoting BRL-denominated bonds for a month or so. It is still not solved yet, but at least volume came back. How will the market for derivatives change in the near future? The introduction of the COE will probably change the face of the whole market, bringing down rates and facilitating access for retail clients and later on for corporates, too, where the impact is currently negligible. The tax treatment is much more favorable, as profits and losses can be netted over different instruments. This may sound mundane, but it brings down costs a lot and therefore increases volume. Coming back to the general outlook for DCM, do you see any diverging trends for different countries in LatAm? Colombia will be quite strong this year, though weak in 2011, as were Peru and Chile. Argentina will continue to be difficult. In the smaller markets like Uruguay, Paraguay etc., activity is limited to sovereign debt. Mexico and Brazil are doing fine. There is significant interest coming from Asia, especially China, in high-quality names. As soon as hedging costs come down, LatAm companies will start to tap Asian markets. What does the pipeline of debt deals look like? We have a very strong pipeline of first-time issuers. We expect this to start with high-quality names that are now not willing to pay the current yields. Money then will migrate to the BB/B-rated corporates. Participants become more cautious in the secondary market. DCM can have a very decent year, if volatility stays at reasonable levels. Just to make my point: the Fed 5year fund rate is around 0.8%, high-grade corporates trade at 4%-6%. This will continue to attract interest. Where do you see interest rates, the BRL, etc. in 2012? Interest rates will reach 9% in the second quarter of 2012. However, we will carefully monitor inflation. If needed, rates will rise, especially given coming elections. The BRL will be around 1.7-1.8, which I believe to be the fair/sustainable level. In a very benign scenario, I could see it significantly stronger.
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What big investment opportunities do you see in 2012? There obviously is a lack of funding in Europe, no matter if you look at the LIBOR/OIS spreads or other indicators. I would not be surprised to see accelerating forced selling of assets, resulting in distorted yield curves and offering very attractive opportunities for investors with deep pockets and the ability to withstand some volatility. There will be a structural shift in LatAm, too. Regions are competing for money, and Brazil, particularly, has very good cards: high real rates, no recession but stable GDP growth, no forced deleveraging, solid balance sheets and a supportive government with significant headroom for monetary and fiscal policy. All we need to see is three months of stable markets. There is a new packet of money coming to the bond markets: LatAm pension funds with significantly growing assets. Whats your call for 2012? Debt over equities. High-quality bonds will do fine. If markets stabilize, we will be going down the ladder, high yield bonds will rally in the U.S., perhaps even in Europe. In Brazil, the local market will be more active, but the international DCM will offer more opportunities. Spreads will tighten, but not too much, due to relative valuation. Asia debt seems to be a bit cheaper than Brazil corporate debt. Asia will tighten, though, due to excess liquidity in the system.
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Outlook 2012 Investment Banking

Fernando Iunes MD, Global Head of Investment Banking, Partner Ita BBA
At the same time, they [Brazilian capital markets] will offer investors alternative investment prospects in difficult times when growth is becoming particularly scarce in other parts of the world. Of course, its never a smooth path as there will be good and bad moments for capital markets, but fundamentals are structurally solid and IPOs and follow-ons should return soon. What do you expect for 2012?
Fernando Iunes
I think 2012 will be once again a very active year for investment banking in LatAm, although different from last year. In 2011, while M&A remained buoyant throughout the year, capital markets had a strong start in the first half, followed by a very weak closing at year-end, right in line with the global macro environment and risk perception. In 2012, I am convinced that M&A will remain active, given the region fundamentals. Capital markets, though, will probably only pick up after the first quarter of the year. Dont you think the global crisis poses a threat to that scenario for Brazilian capital markets? Not necessarily and hopefully not. I believe Brazilian companies, and the country as a whole, need capital markets to continue growing and financing investment. Brazil will not create a sustainable growth cycle without vibrant capital markets. At the same time, they will offer investors alternative investment prospects in difficult times when growth is becoming particularly scarce in other parts of the world. Of course, its never a smooth path, as there will be good and bad moments for capital markets, but fundamentals are structurally solid and IPOs and follow-ons should return soon. Since 2006, there has not been a single cessation of more than 12 months for capital market activities in Brazil. How about other LatAm markets? There are different markets in different stages of development. Some of the early movements that took place in Brazil have yet to happen in many other countries. We see growing interest in Peru and Colombia, still predominantly a market for local players. However, unlike Chile, which could easily be sustained locally, North Andean countries will need to attract external capital. I also hope that Argentina will take part in the global capital markets at some stage. I believe these markets will grow in importance going forward, although Brazil, with its sheer size and economic diversity, will continue to be the most active market for now. Several investors believe that there has been a severe oversupply of equities in Brazil. How would you respond to this argument? I tend to disagree with that view for several reasons. First, I would highlight that annual dividends paid by Brazilian listed companies have largely surpassed the aggregate size of new offerings. Second, one has to consider that Brazilian capital markets are catching up with decades of inactivity. Third, the number of listed companies in Brazil is between one fifth and one tenth the number of listed companies in comparable markets, including emerging ones. Fourth, the Brazilian economy is not yet well represented in the capital markets because many sectors are not there yet. I could continue with a long list of reason and facts. The reality is that our capital markets are still in their infancy. Don't you agree? Does that mean there is a lot more to come? Absolutely. Among Ita BBAs corporate clients, there are approximately 900 companies that are still privately held and could potentially access capital markets in the next few years. Not to mention the number of listed companies that will need additional equity investments at some point in time to implement their investment plans. Is it possible to anticipate the number of IPOs in Brazil in 2012? It is very hard to make projections about future IPO activity. We dont like to target a specific number but rather focus on market necessity. That said, if history is any indication of future activity, we should see over 20 equity offerings, with an aggregate amount north of USD 10 billion per year, just as it has been over the past six years.
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But what happens if investors reject these new stories? There is always going to be room for good stories at the right price. At the end of the day, investors are the ones pricing these deals. In a buyers market, as we saw in 2011, new offerings may turn out to be the best investment alternatives. Just check the performance of 2011 IPOs and follow-ons vs. the benchmark. I guess the vast majority has outperformed the index. [At the time this report was being written, nearly twice as many transactions outperformed their index as underperformed (15 vs. 8)]. But dont you think that, at least in certain sectors, the market is saturated? Again, theres always going to be room for a new story if it is good and comes at the right price. The point is not that specific sectors are saturated, but that there may be no more good stories in that specific sector. The challenge for us is to find the right story, rather than go searching for demand. Looking back, do you think the quality of companies brought to the market since 2006 has been good? I believe we had a surprisingly good outcome, with a right balance between companies that over-delivered and some that disappointed. Its part of a learning cycle for early-stage capital markets. I also believe that in many cases, expectations were exaggerated or companies overpromised, which led to some frustration. Market participants will always remember those companies that under-delivered, but this represents a small portion of the overall offerings. It is not much different from the proportion of underperformers among previously listed companies. In most cases, it is part of their respective businesses cycles. So why, then, are Equity Capital Market activities stalled today? The main reason is because of the uncertainty surrounding global markets, and the risk aversion this creates. Theres been very little appetite for either new or old stories. Just check the flow of funds throughout 2011. Also companies had to reassess their investments in an uncertain global economic scenario. Both should improve in 2012. Another reason, perhaps more important, is that we witness a mismatch in valuation perception between buyers and sellers. Buyers tend to adjust their prices much faster than sellers this is true for M&A, and it is true for ECM. Who is right and who is wrong? Time will tell, but when risk aversion normalizes, I believe this gap between buyers and sellers will narrow again. Based on our equity research analyses, Brazilian companies are undervalued in most sectors. It is also important to highlight that long-term investors continued to trust Brazil's fundamentals, while portfolio investors were pulling money out. FDI numbers proved extremely resilient. When you analyze the evolution of FDI, it is clear that we are talking about two different worlds: one for public and one for private equities and strategic investments. While the market was shut down for ECM during the second half of last year, it remained strong for FDI and private equity flows. Based on what you are saying, there seem to be a lot of mispriced assets in Brazil. Doesnt this make a fertile environment for PIPEs? Definitely. We have seen growing interest from private equities for public companies, both among domestic and international players. I believe this trend will continue because several private equity firms still have a lot of resources to deploy. Going back to the question of M&A, you said that it was very busy in 2011 and will likely continue into 2012. What are the main drivers here? I believe there are several driving forces. The first is sector consolidation. Just think about consumer, retail, malls, financials, education etc. Weve been creating global players, global Latin American firms. Second, we still see a lot of foreign enterprises interested in getting exposure to Brazil's promising market, while at the other end of the spectrum, some troubled parent companies may be pressed to sell their subsidiaries in the region. There have been landmark transactions in the consumer space from malls to beverages as well as the commodities space, from mining and steelmakers to oil and gas, sugar and ethanol. Third, we are seeing Brazilian companies investing abroad, and again, in several different sectors. Lastly, we should see a lot of M&A as a result of the need for infrastructure investment, in conjunction with other funding alternatives, such as project finance. That should pick up further in 2012. So there are definitely going to be busy years ahead. Happy New Year to all!
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Outlook 2012 Corporate Banking

Andr Rodrigues Executive Director of CIB, Partner Ita BBA
The onshore world is quite normal and is doing well despite the international crisis. Markets are operating normally, banks are playing their role, providing credit for clients, and BNDES and other local development channels remain available. in a medium- to long-term perspective, Brazil continues to offer excellent investment opportunities, with a solid regulatory framework, institutional stability, growth potential and appropriate returns.
Andr Rodrigues
How was 2011 for your business? It turned out to be a difficult year for some of our corporate clients, who had prepared to resume investment cycles and grow after the 2008-09 crisis. The companies to some extent were caught off guard in 2011with the rapid worsening of the European situation. Quite a few had to put expansion projects on hold and reconsider capex alternatives, or they were hurt by delayed investment plans in major industries, mainly related to the infrastructure sector. But the local fundamentals were still strong and the business overall had a positive outcome. Did they stop investing because they became negative on the structural growth outlook? In my view, this was not due to any structural change but a consequence of short-term circumstances. First, some investments made in 2010 have not yielded the expected rates of return. Second, market sentiment soured with the global crisis, particularly during the second half of the year. Smaller-scale suppliers typically anticipate their clients investment cycle and rely on projects being realized on schedule. Cash flow constraints can also become an issue if a client decides to postpone investments. We have seen this in some sectors this year, mainly infrastructure. But in a medium- to long-term perspective, Brazil continues to offer excellent investment opportunities, with a solid regulatory framework, institutional stability, growth potential and appropriate returns. How serious are these cash flow constraints? Over the last few years, we have been working closely with companies in order to help them to strengthen their capital structure, improve the debt profile (duration, costs, collaterals, etc.) and increase the cash position, even when it is not strictly necessary. Our goal is a win-win situation: an opportunity to make new transactions, improving the risk profile of our credit portfolio and, at the same time, creating value for the companies (for example, preventing a company from having to refinance during a time of stressed markets). This and a much more conservative stance on the part of senior management should help our clients a lot. However, you can never rule out credit events in times of stress. How do you expect 2012 to play out? The first half of the year is likely to be slow, as companies are still struggling and sentiment is pretty bad. However, if our macro assessment is right, there should be a clear recovery during 2H12. Companies will continue to invest, but probably more cautiously. Recovery in 2H12 would that be a consequence of the lower Selic rate only? Not only that. In fact, many projects that the large companies are planning remain viable even in a higher-rate environment. Of course, there is a significant impact in some sectors, particularly for those that are linked to the consumer, but that is not the only reason we expect a recovery in 2H12. We expect to see an improvement in current mood (a sense that the Euro crisis is under control is key), a recovery in confidence to invest, schedule of delayed projects in 2011 being normalized and more reasonable funding conditions in the international markets Reasonable funding conditions? The onshore world is quite normal and is doing well despite the international crisis. Markets are operating normally, banks are playing their role providing credit for clients, and BNDES and other local development channels remain available. However, the offshore world is different, it has faced major difficulties trying to operate under normal conditions. The regions most affected by the international crisis have a significant number of their banks almost out of the market, liquidity has dried up and cost of debt is notably higher.
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Have European banks played a role in the deterioration of funding conditions? European banks were major players in important transactions, such as syndicated loans and project finance. And the fact that Europe is the epicenter of the current international crisis certainly doesnt help them. Risk aversion somehow is amplified by that situation. And who is going to replace them in these markets? Nordic banks are already starting to play a more important role, particularly in those industries where they feel more comfortable, such as Oil & Gas. Asian banks are players too. We are also seeing some U.S. banks coming back, selectively participating in transactions, but usually with smaller tickets. And Brazilian banks will be gradually more active in those transactions. How much do your clients need short-term funding? What about the quality of corporate balance sheets? That is a very important question. A lot has been learned since 2008 and previous crises. Companies are far more diligent in controlling working capital needs, avoiding foreign exchange exposure and having discipline in capex policy. The latest FX volatility has hardly hurt anybody, unlike in 2008. Most companies are maintaining high cash levels and have extended debt maturities. A few sectors have high inventory levels. But overall, Id say that balance sheets are very healthy. Does that mean that demand for sophisticated, structured products has softened? In general, the bigger the company, the simpler its risk appetite. Large corporations with strong corporate governance have been following strict rules in terms of derivative exposure, for example. Smaller companies, with the decision maker (including the shareholder) more closely involved in the discussions, sometimes have a greater appetite for selected products and risks. But in general, products are mostly plain vanilla and used for hedging purposes. Lets assume that the recovery doesnt materialize and the crisis drags on through 2012. What will this mean for companies? Cash is King: they would probably reconsider investments and even headcount, cutting costs, reducing inventory levels and looking for a Plan B. If needed, the government would most likely step in, for example aggressively reducing interest rates and easing access to trade finance lines. We have seen that before. Do you see any regional differences in the way the current slowdown will affect the Brazilian economy? Yes, we can see clearly that three main regions are sustaining impressive growth: the North, Northeast and Center-West. Domestic demand, the emerging middle-class theme, is particularly relevant in those regions. And it is not only growth, it is also profitability. Some companies that have operations in the entire country are obtaining the best results and margins in those regions too. What about the different industries? Which have been affected the most? Each sector has a different dynamics. A few companies that were exposed to the supply chain of Oil & Gas, Energy and the Steel & Mining sectors, for example, saw expectations frustrated because certain investments were postponed. Meanwhile, we still see some of our clients in the retail segment growing at double-digit rates this year. We would need to go on a case-by-case basis. Sugar and ethanol companies were hit hard by the crisis in 2008. Is this sector in the cross-hairs again? When we look more deeply, there is some good news and transformational changes to analyze. A lot of M&A took place in this sector, consolidation is underway, a few giant players were formed, investments made in the past are maturing and companies have adopted serious risk-management policies. Cash levels are higher than 3-4 years ago, debt maturities have been extended. Risk management and the use of hedging instruments have been adopted, and in many cases management has become extremely professional. Local banks continue to support the sector and are pretty much comfortable with their current exposure. Would the same hold true for beef producers, who were also slammed the last time? I would say that they have some challenges ahead, but the major players are extremely significant globally and clearly are trying to do their homework in order to strengthen their operations.
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Lastly, what is your view on homebuilders? Theres been a natural selection among developers, with the survival of the strongest companies and an important consolidation process. It is pretty much easy to see winners and losers now. The most common mistake we saw in this sector was the use of the wrong funding. For example, companies were raising money through short-term, working-capital lines in order to buy land. Other issues were the excess diversification, both in regional and segment terms, and growth speed. The players realized how complex it is to manage and control many sites with distinct characteristics at the same time. A qualified workforce is not available everywhere, and the same is true for equipment and supply goods. At least it costs more to get those things. Mistakes aside, we think that Homebuilders will continue to be a growth sector. We have major, consolidated players doing a great job, and the banks are still interested in financing the entire industry chain.
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Equity Strategy
EQUITY STRATEGY
Preamble
Strategists need visibility. Without some visibility into future monetary conditions, growth, etc., any longterm strategy outlook is subject to great uncertainty. Unfortunately, we operate now in an economic environment with zero (short-term) visibility. We are acutely aware of this. The strategy outlined below is what I humbly perceive to be a good approach to the Latin American stock markets for now, and given the information available. Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com Florian Tanzer +55-11-3073-3025 florian.tanzer@itaubba.com
Summary
Long Brazil vs. Mexico, cyclicals vs. defensive. Go long optionality, either by buying cyclical stocks (e.g. Vale) or under-owned/shorted names (e.g. PDG). We believe in a strong start for Latin American markets in 2012, with cyclical stocks outperforming defensive ones and the laggards of last year becoming the performance leaders, both on a stock and country level. Chances are that this performance will continue through the first one or two quarters of 2012, driven by high-frequency data and better-than-expected news from Europe and the U.S. We believe, time will come, when portfolios will have to rotate into lower beta (most probably at the end of 1Q12 or in 2Q12). We would therefore maintain a defensive portfolio for the rest of the year. After some weeks of strong market performance, market participants could get lulled into a false sense of safety. We think it improbable, however, that the structural headwinds (deleveraging, sluggish growth in Developed Markets, etc.) can be avoided. Therefore, in the second half of the year, macro concerns will again become the overwhelming force, dragging down markets for the rest of the year. Focus on domestic growth, strong cash flow generation and stable earnings (Vivo, America Movil, Cielo). The long-term outlook is difficult. In Emerging Markets (EM), inflationary pressures will rise. In Developed Markets (DM), deleveraging will be the predominant theme, as unsustainably high debt levels are cut back to normal. Despite already low growth, fiscal austerity will be imposed on already weak economies. This will weigh further, structurally, on DM demand and will have a significant impact on economic activity, asset prices and financial markets worldwide. Avoid DM exporters (Mexico) and look for carry in interest-ratesensitive, bond-like equities, if possible with inflation protection. Go long high-quality consumer discretionary names (Renner, Hering) and large-cap financials (Bradesco). Authorities in Latin America will continue to fight decelerating global growth with a combination of expansive monetary and fiscal policies. The domestic consumer will be one of the main beneficiaries. Financials will be another. Do not take any liquidity risk. Focus on liquid, high-quality names with good balance sheets. The situation is in flux and can change dramatically and fast. Consequently we suggest that investors step carefully until the ground stops shaking. Do not get fixated on any one holding or view but prepare to change any directional stance rapidly. Take a long-term view only after a game changer has come on the scene.
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Decoupling?
We see growth decelerating in nearly all of the countries in Latin America, dragged down by dwindling global growth. We expect World GDP growth to slow down from 3.7% in 2011 to 2.7% in 2012 which is nearly half the growth rate of 2010 (5%). China will likely lose momentum, growing 7.8% in 2012E after an expansion of 9.2% in 2011E. The U.S. GDP expansion will accelerate slightly, to 1.8% in 2012E, marginally better than its 1.7% in 2011E. Europe will be slipping into outright recession, we believe, with GDP contracting by -1.1% in 2012. Nevertheless, we expect Latin America as a region still to maintain its regional GDP growth around 3.3% in 2012, decelerating by only 60 bps from 3.9% in 2011E. When stripping out Argentina, where growth will decelerate from 5.8% in 2011E to 2.5% in 2012E, and Mexico, where economic expansion is expected to cool down from 4.0% in 2011E to 2.5% in 2012E, regional growth would remain unchanged due to the pickup in growth in Brazil.
Real Interest Rates

6% 5% 4% 3% 2% 1% 0% -1% -2% 1Q11 2Q11 Brazil
Source: Ita BBA and Bloomberg
3Q11 Chile
4Q11
1Q12
2Q12 Peru
3Q12 Mexico
4Q12
Colombia
The primary reason for this is to be found in cutting interest rates. In order to stem the external drag on domestic growth, governments and central banks will cut monetary policy rates and increase fiscal spending. By doing so, they will try to counter the weak external demand and protect domestic growth. High real interest rates and a low debt burden on the sovereign level give Latin America as a region much more ammunition to react to any slowdown in Developed Markets. We expect the most aggressive rate cuts to occur in Brazil, where the Selic rate will likely stand at 9% at the end of 1H12. As a direct consequence, we believe that the GDP of Latin Americas biggest economy will pick up by 80 bps, to 3.5%, in 2012, with a rapidly accelerating second half. In 2013, Brazilian GDP could even expand by 5.4% during the year. Over the next two years, domestic consumption will very likely be one of the main growth drivers. But Brazil does offer more than just GDP growth and attractive valuations for investors. The country is equipped with a sound banking system steeled by past crises, it is highly capitalized, and according to Regina Sanchez, Ita BBAs Banking & Financial Services analyst, it has very little dependence on foreign funding. The currency will remain strong, most probably closing the next two years at 1.75 BRL/USD, according to our macro teams forecasts. In contrast to Brazil, Mexico will lose economic momentum, despite interest rates being cut from 4.5% to 3.75% in 2012E. We expect real GDP growth to stand at 2.5% in 2012, significantly decelerating from 4.0% in 2011E and 5.4% in 2010. For 2013, we expect a further slowdown, to 2.0%. The main reason for this is the dependence of the Mexican economy on the U.S. as its biggest export partner, where it exports roughly 24% of its yearly GDP. We expect the U.S. to grow below 2% for at least the next two years (1.8% in 2012E, 1.5% in 2013E), which will directly hurt Mexican economic growth expectations. However, on the positive side, inflationary pressures will probably be contained. For 2012, we expect the CPI to increase by 3.7%, 10 bps less than in 2011. In the following year, inflation will probably slow down even more, to 3.5% year over year. The unemployment rate will stand at 5.3% in 2012E and. continue to deteriorate to 5.5% in 2013E. This will leave some headroom for both stimulative fiscal and monetary policy, especially in the context of Mexican presidential elections in 2012. While we do see more limited room for upside at the stock level than for Brazilian peers, we expect the currency to strengthen, from 13.99 MXN/USD to 12.8 MXN/USD at the end of 2013.
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Chile will profit significantly from lowering interest rates we expect the monetary policy rate to be cut by 150 bps, to 3.75% in 2012. Inflation will be contained, ending 2012E at 2.7%. Real GDP growth will slow down significantly from 6.1% in 2011E to 4.2% in 2012E, while unemployment will only slightly deteriorate, to 7.5% in 2012E. Foreign direct investment will continue to be strong but decrease from 5.8% in 2011E to 5.5% in the following year.
Positive Environment for Regional Stock Markets

The bottomup picture for Latin American stocks, and especially Brazilian stocks, looks rather favorable. On a P/E basis, the MSCI Brazil trades at 9.4x P/E 2012E, Mexico at 14.0x P/E 2012E and Chile at 14.2x P/E 2012E. The smaller countries in Latin America stand at 10.5x (Peru) and 17.4x (Colombia). As of January 2012, EPS growth forecasts called for 3.1% 2012E for the MSCI Brazil (compared with 22.6% in July 2011, when the index was trading at 9.3x P/E), 21.1% for Mexico (July 2011: 17.5% vs. 17 x P/E), 13.2% for Chile, 16.3% for Peru and 4.0% for Colombia. Given the low valuations (and even lower expectations) that some markets are trading on, we do see some significant upside based on micro-valuations. Brazilian markets (IBOV, in BRL), for example, trade 28% below what our analysts deem to be the right price. Still, markets are literally not buying it. For the MSCI Mexico, fair valuations (+13.6% upside for 2012) seem to be already reached.
MSCI 12m Forward P/E

16.0 14.0 12.0 10.0 8.0 6.0 4.0
MSCI Trailing P/B

4.0 3.5 3.0 2.5 2.0 1.5 1.0
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Oct-07
Oct-08
Oct-09
Oct-10
Jul-11
Oct-11
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
MSCI World MSCI Brazil

MSCI EM MSCI Mexico
MSCI LatAm
Brazil currently trades at attractive valuations, compared with both its own historical average as well as its regional peers. We see the stock market trading at a P/E of 9.4x and expect EPS to grow 3.1% (MSCI), respectively 4.8% (IBOV) in 2012. While this does not seem overly attractive, we do believe that room for further downward revision in Brazil is limited, while multiple expansions (or upward earnings revisions) are possible. Our bottom-up target for the Bovespa is 77,000 points, offering 28% upside to current levels. Brazils loose monetary policy and a pickup in public spending will support the market, which is currently seen by most investors weve met as fundamentally attractive but too early to invest in, given the current global market conditions and growth expectations. The overall defensive stance on the (cyclical) benchmark heavyweights offers significant upside when markets bounce. We do like consumer-related names, as rate cuts will only translate into a more supportive valuation level and boost earnings its most direct impact will be on consumption. What concerns us, though, is that most growth drivers are either based on monetary or fiscal policies, and therefore are not sustainable in most cases. As inflation picks up, so will interest rates, and authorities will have to rein in their expansive (and expensive) policies at some point. A possibly imprudent (fiscal and monetary) policy framework, however, is a more long-term theme. For 2012, we expect Brazil to outperform both DM and regional peers for the whole year. Overweight. Mexico was the strong outperformer in 2011, resulting in a P/E 2012E of 14.0x. This is supported by EPS growth of 21.1% in 2012E but represents a significant premium (+33%) to the region, especially Brazil (+50%). We understand the attractiveness of the Mexican stock market, which offers both high earnings growth and visibility, but we think that these factors have been mostly priced in. Its dependence on the U.S. economy, this years elections and the likely reform tie-ups that will result, reinforce our stance. One risk to our view is that the local pension fund industry, AFORES, could provide a strong support for the
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Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
MSCI World MSCI Brazil
MSCI EM MSCI Mexico
MSCI LatAm
stock market if the pension funds start re-allocating capital to the domestic stock market. Our top picks in Mexico are America Mvil and ICA, both of which we view as attractive. We recommend that investors stay underweight the overall market. Chile is trading at 18.25x 12-month trailing P/E, which is in line with its five-year average. In the case of global growth acceleration, Ita BBAs Barbara Angerstein sees a potential multiple expansion of around 10%. On a 12-month forward P/E, the IPSA is trading at a 3% discount to its historical average of 14.6x. Our stock selection in Chile has a strong bias towards high earnings and cash generators. Within our coverage universe, we favor SQM, Cencosud and Falabella. We believe that 2012 for Chile will start slowly but that the market can offer a relative outperformance in the second half. Corporate governance issues (irregular credit practices), as well as fears of a Chinese slowdown (copper dependency) weigh on the market and economy. The overall defensive index composition, favorable valuation and strong monetary backdrop (150-bp rate cuts in 2012E) compensate for this, in our view. Neutral for the first quarter, then overweight. The stocks with significant exposure to Argentina trade on a market-cap-weighted average P/E 2012E of 10.5x. Excluding Adecoagro and Tenaris, this ratio comes down to below 6x P/E 2012E, and dividend yields of 8% are not a rarity. These may be highly attractive, but in the end the market is highly correlated with the sovereign CDS. Given the choppy environment in 2012, we only assume a modest CDS spread compression of 200 bps. In the view of Ita BBAs Ricardo Cavanagh, this would cap equity upside at 20% from current levels. The Argentine stocks in our coverage universe trade between 4-8.5 P/E 2012E, excluding Adecoagro and Tenaris. Our top equity picks are YPF and Telecom Argentina, both trading around 7x P/E 2012E and offering 9%-10% dividend yields. However, as the economy slows down, the risk of intervention to prevent companies from transferring dividends abroad increases, which deeply concerns Ricardo. While we see the potential for a strong start, we maintain an overall cautious stance, as sentiment, policy risk and flows weigh on the market. In Colombia, equity investments are restricted to a handful of companies, which in some cases can offer significant upside based on our models (Bancolombia: 44.8%; Pacific Rubiales: 96.4%). The market in general, though, is neither cheap nor liquid. We estimate 17.4x P/E 2012 and 3.5x P/B 2012. Although Colombia will not loosen its monetary policy like its regional peers, it will likely perform well in liquiditydriven markets and a risk-on environment. Valuations and more attractive upside in other markets, however, should act as a cap on stock performance. Our top pick is Pacific Rubiales, which Paula Kovarsky, our sector head for Oil, Gas & Petrochemicals, recommends due to its optionality characteristics. We maintain an underweight on the overall Colombian market. Peru is a very attractive macro story, though it suffers from political uncertainties (which we believe to be overrated) and a very small investment universe of liquid stocks. One of the more liquid stocks and heavyweights in the index (73% in the IGBVL and 25% in the MSCI Peru) is Southern Copper, which is more of a play on a rebound on global growth and higher industrial metal prices than a country-specific call only. A valuation of 5.5x EV/EBITDA 2012E, coupled with strong dividend yield and a strong production profile, implies decent upside in a more benign risk environment. We agree with Ita BBAs Marcos Assumpo, who rates it outperform, especially because the company announced a buyback program, which could provide further support for the stock. Given the combined benchmark weight of BVN and Southern Copper, however, the view of the Peruvian market is basically reduced to a call on copper, gold and silver, as well as a general risk-on/risk-off call. We do see a strong start to the year for Peru, but we expect the market to slow down in the course of 2012. Underweight. In general, we are comfortable with both the bottom-up picture for the region as a whole. But what will have to happen for stocks to get closer to their fair level and/or for a sustainable re-rating to take place? Investors have to find new confidence in the markets, along with earnings growth. This will prove to be difficult. It is less about the micro fundamentals in Latin America, and much more about external factors.
Ita BBA 20
Cadence
Unfortunately, it is exactly these external concerns that continue to weigh on stock markets in Emerging Market economies. We do understand the dislike that most dedicated Latin American investors feel regarding the events in Europe and their impact on local markets. However, whether we like it or not, the fact is those correlations speak for themselves
Correlations
WORLD 1.00 0.87 0.91 0.91 0.89 0.81 0.70 0.79 0.98 0.97 EM 0.87 1.00 0.96 0.96 0.94 0.88 0.73 0.78 0.86 0.79 LATAM 0.91 0.96 1.00 1.00 0.98 0.92 0.78 0.85 0.91 0.85 BRAZIL 0.91 0.96 1.00 1.00 0.97 0.90 0.77 0.84 0.91 0.85 MEXICO 0.89 0.94 0.98 0.97 1.00 0.90 0.72 0.80 0.89 0.82 CHILE 0.81 0.88 0.92 0.90 0.90 1.00 0.75 0.79 0.82 0.73 PERU 0.70 0.73 0.78 0.77 0.72 0.75 1.00 0.60 0.66 0.68 COLOMBIA 0.79 0.78 0.85 0.84 0.80 0.79 0.60 1.00 0.76 0.75 EUROPE 0.98 0.86 0.91 0.91 0.89 0.82 0.66 0.76 1.00 0.91 USA 0.97 0.79 0.85 0.85 0.82 0.73 0.68 0.75 0.91 1.00
WORLD EM LATAM BRAZIL MEXICO CHILE PERU COLOMBIA EUROPE USA
Bloomberg, weekly correlations 06/01/2011 - 01/01/2012, MSCI (USD)
Unfortunately, it is exactly these external concerns that continue to weigh on stock markets in Emerging Market economies. We do understand the dislike that most dedicated Latin American investors feel regarding the events in Europe and their impact on local markets. However, whether we like it or not, the fact is those correlations speak for themselves
Short-Term Relief
Sovereign yields in Europe have come down recently, and the funding situation has eased. This does not mean that the underlying structural problems have been solved, but the improvement in funding alone will be highly supportive for the markets as long as it lasts. In times of elevated volatility, low trading volume and weak conviction, high-frequency data can be buoy equity markets. We believe that the conditions for a rally in the first one or two quarters of 2012 are quite favorable, especially for underowned risk assets, i.e., Emerging Market equities and cyclicals, such as materials, energy, financials and homebuilders. In the U.S., data continues to surprise on the upside, even if only slightly so. Over the last four weeks, unemployment, confidence, inflation, housing and durable goods orders all came in better than expected. That, at least, is how it was perceived. The same is the case for China, where inflation came down, outpaced by the PPI. Industrial production held up better than expected, as did retail sales. Due to the massive liquidity injection, short-dated sovereign yields in Italy (4.15%, 2-year bonds) and Spain (2.87%, 2-year) have improved. Long-term yields, however, remain a major concern, even though they have come down too (6.6% for Italy, 5.16% for Spain, both 10-year bonds). The funding situation of European banks has been eased significantly after the introduction of the LTRO, so at least the short-term debt rollover seems to be secured.
EUR FRA/OIS SPRD 3M

120 100 80 60 40 20 0
1-May-11 1-Jun-11 1-Jul-11 1-Aug-11 1-Sep-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Oct-11 1-Apr-11
Source: Bloomberg
Ita BBA 21
Italian Sovereign Bond Yield (2y)

8.0 7.0 6.0 5.0
Italian Sovereign Bond Yield (10y)

7.5 7.0 6.5 6.0 5.5
4.0 3.0 2.0

Jul-11 May-11 Oct-11 Mar-11 Apr-11 Jun-11 Aug-11 Sep-11 Nov-11 Dec-11
5.0 4.5 4.0
Jun-11
Jul-11
Mar-11
Oct-11
Nov-11
Source:Bloomberg
Source:Bloomberg
Because fixed income markets are generally perceived to be the one risk indicator in the current market environment, any improvement there will likely spread to equity markets. If generally positive, highfrequency data combine with falling sovereign yields, investors will take this as a sign to significantly increase their equity allocation. In the currently tight, volatile market conditions, the impact could be more pronounced than under normal circumstances.
Long-Term (External) Headwinds

Markets and investors will continue to be torn between favorable domestic economic conditions and external factors. In 2008 markets started trading in lock-step and continue to do so. Currently, correlations are near all-time highs, generally above 0.9. The overall market direction (including Latin American markets) therefore is in my humble view basically a risk-on/risk-off call, at least for now. Investors seem to agree. In our meetings with mutual fund managers, hedge funds and pension fund managers alike, the focus of the discussion very often shifted away from Latin American specifics to global events and structural dynamics. Below, you can find a compilation of the most important (or frequent) questions that have been raised. The range of these questions is as wide as the expectations of what can/will happen are broad. We unfortunately cannot give conclusive answers to most of them. We are not sure that anybody can. The point we want to make is that we are facing a multitude of eventdriven risks that continue to be externally driven. 1) Will China have a hard landing, or continue to ease its monetary and fiscal policy? What about the bubble (or not) in domestic real estate, the health of the (shadow) banking system and the forthcoming handover of political power? 2) Will Greece default and/or finally exit the euro area? What will the systemic impact be on the already fragile European banking system? What about private sector involvement (PSI)? What implication does the downgrade of France (or other European countries) have and how will it impact the functioning of the EFSF? Will Nicolas Sarkozy win the election in France (on April 22 and May 6, 2012)? What happens if not? 4) Will European politicians really give up significant sovereign power without a fight and join a (strict) fiscal union? Will the electorate vote in referendums in favor of severe fiscal austerity imposed upon them despite being already in a difficult economic situation? How will this impact debt/growth dynamics? 5) Will Germany finally agree to an unsterilized monetization by the ECB, which is (together with a fiscal union) vital to a European solution? Can Europe (banks and sovereigns) roll its debt over or will banks and sovereigns roll over? What impact will the United States presidential election have (November 2012)? Is the economic data really as good and sustainable as it seems?
3)
6) 7)
Ita BBA 22
May-11
Dec-11
Apr-11
Aug-11
Sep-11
8) 9)
Can central banks lever up their balance sheets ad infinitum? Will they continue to cooperate? Are sovereign bonds safe? Will investors (and foreign central banks) be willing to finance foreign debt at these yields? Where is the limit of indebtedness to sovereigns?
10) Will tensions in the Middle East escalate? What will happen in the Strait of Hormuz and how will it affect oil prices? This list is not complete. Unfortunately there are many more concerns and risks. Nearly all of them pertain to specific event risks that are subject to much uncertainty. We just do not know how things will play out. We can only know for sure after they happen. As the character Brutus aptly notes in Shakespeares Julius Caesar: O that a man might know the end of this days business ere it come! But it sufficeth that the day will end, and then the end is known. However, there is one question not in the list above, as it is more of a systemic problem and seems not to be the focus of investors right now: What will the impact be of the European banking system deleveraging? It could turn out that this will be one of the more important questions.
Talking About Tides

Any weakness we expect is not necessarily due to bad micro fundamentals in Latin America but to global headwinds buffeting all equity markets. Figuratively speaking, a rising tide lifts all boats. At ebb tide, however, even powerboats (read: Brazil) get stuck in the sand. What happened in 2008 or 2009, for that matter? Brazil, Mexico, Chile, etc., all of Latin Americas market performance was dependent on system-wide issues. Markets collapsed in 2008, eradicating half of their value amid fears of a breakdown in the global financial system. In 2009, markets doubled due to massive policy interventions, mostly in the U.S. and China, as well as a global risk-on sentiment. If there is a contraction of economic activity (demand) or a structural headwind to equity markets in the U.S. (representing 32.8% of global market cap) or Europe (19.3% of global market cap), this will also have an impact on Latin American markets (4.3% of global market cap) due to the sheer size of those economies. In short, we expect that events in developed economies will continue to overshadow Latin American stock markets. In this context, we are most concerned about the impact that the deleveraging of the European (and to a lesser extent the American) banking system can have on global asset prices. Generally, economic expansion results in an increase in leverage, and therefore rising asset prices. On the other side of the equation, deleveraging almost inevitably results in economic contraction and falling asset prices. As Richard Koo described in The Holy Grail of Macroeconomics, a collapse in asset prices can cause a recession, which cannot be fought with traditional monetary policy and therefore can prove to be very long-lasting. The workings of such a crisis are relatively simple: the private sector has to repair its balance sheet when asset prices collapse, but liabilities remain the same. In order to come back to sustainable debt levels, the private sector will sell assets, repay debt and therefore deleverage. The more debt is in the system/on the balance sheets, the more pronounced this process will be, and the higher the pressure on asset prices. Repairing ones balance sheet and credit rating (= survival) becomes the main objective, not profit maximization. An unwanted side effect of deleveraging to that extent is that the private sector becomes a large net saver, independent of interest rate levels. This in turn reduces aggregate demand and therefore slows down economic growth further. The latter triggers a vicious cycle, as the ability to generate profits is hampered, while the pressure to deleverage/save increases. The result is a slowdown in lending and economic activity and a continued drop in asset prices. Koo stated that only a massive fiscal stimulus by the government can interrupt this chain of events by directly impacting economic activity, though at the price of becoming cripplingly indebted. However, re-inflating asset prices is very hard to achieve, as the chart below shows.
Ita BBA 23
Asset Prices in Japan Nikkei

45000 40000 35000 30000 25000 20000 15000 10000 5000 0
1-Dec-80 1-Dec-83 1-Dec-86 1-Dec-89 1-Dec-92 1-Dec-95 1-Dec-98 1-Dec-01 1-Dec-04 1-Dec-07 1-Dec-10
Source: Bloomberg
Can todays governments counteract these deflationary trends and support growth? If so, then most probably only by a significant increase in public spending. Proposing any stimulative measure of that size will be difficult, especially when the current discussion is focused on fiscal austerity. In addition, all public spending has to be funded, which will not be easy, as the European sovereign debt crisis shows. Increasing taxation for that matter can choke off growth, given already weak domestic activity. In the end, only time will tell how things play out.
Credit Crunch Time Also for Brazilian FDI and Funding?

Of all Brazilian FDI, 57% comes from Europe and is of the utmost importance to Brazil, its currency and investments. Will Brazil suffer due to Europes expected deleveraging? Historic precedents can give some indication of things to come. What did the Japanese do to survive their time of economic hardship? They exported savings: they started investing overseas in currencies and countries that offered decent returns in order to offset the low-growth, low-return environment at home. The Japanese were, and still are, one of the worlds biggest foreign investors. So this could in fact be good news for Brazilian FDI and inflows to the stock market. Why did FDI in Brazil stay relatively stable in the first place, despite growth slowing down? Investors are looking for growth, which has become a scarcity. And, in this context, Brazil scores very well. Brazil is the only major EM economy where our Macro team sees growth picking up next year. In fact, the market share of Brazilian FDI to total FDI has significantly increased since the 2008 crisis.
Inflows Bovespa (YTD)

2500.0 2000.0 1500.0
BRL million
1000.0 500.0 (500.0)
(1000.0) (1500.0) Foreign Investors

Source: Ita BBA and BM&F Bovespa
Individuals
Institutional
Corporates
Financial institutions
We will see whether this becomes a sustainable trend. We strongly believe so and think that it will apply not only to FDIs but also to stock markets and fixed income and therefore be good news for most Latin American markets and their relative performance.This, in our view, will be one more factor helping LatAm economies and stock markets outperform their developed counterparts, turning relative performance in 2012 upside down.
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Positioning
How to prepare for things to come? Assuming we are right, investors will face two totally different environments in the next twelve months. In the very beginning, risk-on will prevail. Shortly thereafter, we expect it to be risk-off as structural growth fears emanate again from Europe and the U.S. Over the course of the year, political risk in form of the Euro crisis will linger, and China and the Middle East will keep investors worried. Elections all over the world will bring uncertainty into financial markets, which are dominated by political headline news. Liquidity injections and high-frequency economic data will cause short-term blips in the markets and create alarming volatility. In the beginning of 2012, we believe that increasing directional exposure to the markets via an overweight in Brazil vs. underweight Mexico and cyclicals (overweight) vs. defensive names (underweight) will be profitable. Interest-rate-sensitive stocks will be in the spotlight, as will be growthsensitive sectors like Energy, Materials and Consumer Discretionary, most probably including Homebuilders. Financials should do well. Anecdotally, quite a few of these sectors are either outright shorted or underweight in most investor portfolios. Brazil will outperform Mexico, though both will perform well. The former will benefit from attractive valuation levels, its cyclical benchmark and flows. Mexico will profit from its strong ties to the U.S., though this will likely be reflected more in the FX rate than in equity performance, given the MEXBOLs composition and limited room for upside on a DCF basis. Colombia, Peru and Argentina could perform even better in this environment. However, we would be careful, even in this context, due to valuations, political risk and liquidity risk. Especially the latter we believe to be of highest importance, as we expect markets to change directions rapidly and in a violent manner. Chile will probably underperform its regional peers in the first quarter but then pick up. We are much more cautious for the following quarters. We expect a (global) low-growth, low-rate environment, coupled with low earnings visibility. This makes a very strong case for stocks with high dividend yields. We maintain a defensive bias for high-quality, high-yielding securities with proven track records and high cash flow generation. Portfolios should always reflect current market conditions. However, current conditions are bipolar and we expect this to continue. Therefore, we think it would be out of place to recommend a single positioning in this environment. Expected volatility in the markets will be high, and directional changes will be pronounced and swift, driven by the enormous degree of uncertainty and radical changes in the economic outlook. Therefore we have two lists of Top-10 stocks not in order to hedge ourselves, but to mirror the volatile moves we expect. In the first quarter, we recommend focusing on the growth-biased portfolio, then subsequently switching to the stability-orientated list. We will keep our readers posted on any updates or changes as they happen.
Growth
1) 2) 3) 4) 5) 6) 7) 8) 9) Arcos Dorados Banco Do Brasil Bradesco Cemig Cia Hering Lojas Renner Pacific Rubiales PDG Southern Copper
Stability
1) Amrica Mvil 2) BR Malls 3) Brasil Foods 4) CCR 5) Cielo 6) CPFL 7) Petrobras 8) Raia Drogasil 9) SQM 10) Telefnica Brasil (Vivo)
10) Vale
It is quite challenging to recommend stocks for market conditions that we expect to exist in a few months time. We do like Ambev and Brasil Foods, but see limited upside at current prices; however, would buy into weakness. For investors who prefer not to trade in bipolar markets, we recommend maintaining a focus on the stability portfolio throughout the year. In this case, though, we suggest carefully buying optionality in times of stock market weakness. Depending on the position, size and risk appetite, this could include any of the stocks from the growth portfolio.
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Conclusion
Nothing has changed in Developed Markets too much debt and too little growth for the situation to be self-sustaining. The DM weakness has started to feed into EM growth expectations and will continue to do so. It is easy to resort to very pessimistic scenarios. The outcome of the European crisis is highly uncertain but has the potential to be a Lehman Moment, or worse. Even if a disorderly breakup can be avoided, Europe is heading into a recession and most likely is already in one. The banking sector has to deleverage within the next years by at least EUR 1.0 1.5 trillion. This is more than the combined market cap of the IBOV, MEXBOL and IPSA. Countries like Italy, which owes more than EUR 1.6 trillion and is one of the biggest bond issuers worldwide, face problems rolling over their debt. Still, there seems to be no political consensus within Europe that translates into concrete measures. China, is growing strongly on absolute levels, but slowing down, and some market participants fear, it could suffer a hard landing. In this case, the world could lose one of its most important growth engines and Latin America one of its most important commodity consumers. The U.S. is in the midst of a pre-election impasse. Geopolitical tensions in the Middle East could send oil prices to astronomic levels and suffocate what is left of the fragile world GDP growth. A considerable amount of bearishness has been already priced in, though by far not the worst case. In this kind of environment, only a very few things are sure. One of them is that investors will look for growth and search for opportunities to get some return on their investment at times when TIPS yield negative 80 bps and their domestic economies slow down more and more. Latin America, and especially Brazil, offers both growth and return opportunities. Latin America in most cases also offers what very few other regions worldwide can: better growth visibility (because governments there are ready to protect growth via monetary and fiscal policies), solid sovereign balance sheets and a strong consumer base. We whole-heartedly believe that investors will realize this and start allocating accordingly. We are convinced that Latin America will outperform Developed Markets and Brazil will outperform Latin America. In conclusion, we want to return to the metaphor we used earlier, when looking at overall market conditions and individual stock markets: A rising tide lifts all boats. At ebb tide, however, even powerboats get stuck in the sand. This is true. But tides can turn again. So far, they always have.
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Argentina Country View

Macro View *
In October 2011, Cristina Kirchner was reelected president with a comfortable margin, securing the majority in both houses of congress. Her victory was the product of years of strong growth, helped by a divided opposition and solidarity toward her deceased husband and predecessor. Argentinas government has, for years, kept fiscal and monetary policies in full throttle, using a stable nominal exchange rate to control inflation. While inflation is not rising, it remains high at 23%, according to private sector estimates. Given the relatively stable peso, inflation has been causing rapid real exchange rate appreciation. This situation was easier to manage in the days of rising soy prices and solid demand from Brazil, where the currency was also strengthening. For a while, Argentina had current account surpluses and reserves increased, even as the peso strengthened. However, the current account surplus is yielding under the pressure of strong domestic demand and real exchange-rate appreciation. In anticipation of a weaker peso, residents have taken to buying dollars, causing reserves to fall. Now Cristina has to deal with the macro imbalances created over the last years. The nominal exchange rate has to depreciate at a faster pace and, at the same time, tighter macro policies must be adopted so inflation doesn't climb. Reducing subsidies on utilities and allowing higher tariffs will also be important to improve the fiscal outlook and bring back much-needed investment. Some progress has already been made. Interest rates are higher than they were months ago and cuts in subsidies were announced. However much is yet to be done. Nominal exchange-rate is depreciating at a slow pace, Real interest rates remain negative and the subsidies bill paid by the government is much larger than the cuts announced at this point. Instead of an orthodox response, the government has relied on tight controls on FX purchases. Argentinas economy continued to slow in the second half of 2011, reflecting the deceleration of its main trade partners, lower commodity prices, the approaching reduction in subsidies, higher interest rates, and stronger FX controls. The IGA index, a private-sector monthly GDP proxy, grew at an annualized pace of 3.5% qoq in November (vs. 5.7% in September and 7.7% in June). The Impact of FX Restrictions The restrictions on FX purchases and other controls have dampened imports. As a result, trade balance has improved considerably despite lower export prices, an appreciated real exchange-rate, and still reasonable domestic demand growth. A higher trade surplus and lower capital outflows enabled the central bank to buy USD 2.5 billion in December, enough to cover a USD 2.0 billion payment on foreign-currency debt and leave reserves slightly higher than in November at USD 46.4 billion. The monetary expansion resulting from the CBs dollar purchases (a consequence of the suppression of private dollar demand) is lowering interest rates. The Badlar rate is now hovering at around 16%, from 20% a few weeks ago. We continue to expect the government to step up the devaluation of the peso to an annual pace of around 15% from 8% in 2011, which is still considerably below inflation and leads the real exchange rate to continue to appreciate. However, controls have been tighter than we thought, and we now expect Argentina to temporarily register higher trade balances and international reserves. Higher reserves will come at the expense of lower growth. Some supply chains will be hit by restrictions on intermediate goods imports. In the real estate sector, where it is still common practice to settle payments in dollars, FX restrictions have caused a standstill. Controls also create uncertainty and tend to reduce investments. We see 2012 growth at 2.5%, and now expect 2.8% in 2013. Ricardo Cavanagh, CFA +54-11-5273-3593 ricardo.cavanagh@itau.com.ar
Population: 36.1 million Market Cap: USD 28 bn FX reserves: USD 46 bn
GDP: USD 464 bn GDP growth 2.5% 2012E Inflation 26.5% 2012E
Ita BBA 27
Inflation Because import restrictions mean lower supply, those controls also pressure prices. This is why, despite a slightly worse growth outlook, we expect inflation to pick-up: to 26.5% in 2012 and to 28% in 2013. Inflation will be rising as the peso falls and subsidies are cut. The city of Buenos Aires recently announced a 127% hike in subway ticket prices, shortly after being granted the management of the subway network by the federal government. This will have a much greater impact on Argentine pockets than the shy cuts in utility subsidies announced so far. In addition to curbing the nominal exchange-rate depreciation, the government will try to fight inflation by pressing unions to keep wage hikes below 20%. It doesn't look very promising; wage negotiations in provincial banks resulted in a 24% increase. Since labor unions do not expect inflation to give in, they are demanding more from employers. The fight against inflation is not helped by the fact that the central banks target for M2 growth in 2012 is 26.4% (a range of 22.4%-30.4%), only slightly below that of 2011. Again, growth takes priority over inflation. * From Ita BBAs Macro Team
Equity Allocation/Strategy
The year 2012 looks to be challenging for Argentina. Investment decisions will likely be affected by politics, given the power Cristina Fernandez de Kirchner (CFK) wields since her re-election with 54% of the vote. Her coalition, Frente para la Victoria (FPV), controls the congressional houses and faces weak opposition. Stronger FX controls and new cabinet appointments suggest a move towards more intervention. In the past three years, Argentine equities have shown a 94% correlation with the 5-year sovereign CDS, which is now close to 1,000 bps. We expect debt to be honored; however, we anticipate only modest CDS spread compression in 2012. We recently raised our sovereign-risk assumption to 800 bps (from 600 bps), as the government is signaling its willingness to finance the needs of the Treasury internally, implying that re-accessing the market is not likely a priority. A 200-bp sovereign spread compression would cap equities upside at 20%. The sovereign risk premium could also become rangebound, in which case equities would do so as well. Our equity strategy relies on the sovereign fixed-income market as a waypoint. USD-denominated sovereign bonds at the middle of the curve offer around 11.0%. On a risk/reward basis, we prefer USDdenominated sovereign bonds over equities. Our top equity picks are YPF and Telecom Argentina, offering 9% to 10% dividend yields. We believe that the recent tightening of FX controls increases the risk of intervention to dissuade companies from transferring dividends abroad if the economy deteriorates, which is a growing concern. Bank valuations imply an earnings yield above 18%, higher than the 17% equity risk calculated for banks. In the short term, however, performance is likely to track the sovereignspread trajectory, and our preferred bank stock is Grupo Financiero Galicia. Pampa Energa will require higher tariffs to generate significant free cash flow, which is currently challenged by inflation. We believe that CDS spreads could drop to 500-600 bps if Argentina were to access the market, which could potentially drive equity prices more than 50% higher (unlikely). A slowdown in fiscal and monetary expansion and a more flexible management of the currency would alleviate demand for U.S. dollars and reduce the need for capital controls (unlikely). Slashing subsidies and raising tariffs would represent a highly positive turn. Detailed Views: Argentine Equities A Play on CDS Trajectory In the past three years, the MAR Index, including the main Argentine stocks, showed a 94% R with the evolution of CDS spreads. Therefore, in Argentina, overall equity performance appears to be more strongly related to a top-down perception than to bottom-up fundamentals. The MAR Index is currently at 456 points when measured in USD, barely 4% above the three-year regression mean, assuming a CDS spread of 963 basis points. We have recently decided to raise the sovereign risk assumption to 800 bps from 600 bps, to discount equities projected cash flows, implying modest upside for equities, which assumes either some reduction of global risk aversion or an improvement in mood towards Argentina. However, it might well be the case
Ita BBA 28
that spreads stay unchanged and equities become range-bound in reaction to global volatility. If sovereign spreads compress to 800 bps, there is a modest potential 18.6% upside to the MAR index under the base projection. A more positive domestically-driven scenario would likely be associated with Argentina reaccessing the markets. Our 2012 equity outlook is also factoring in the potential impact on returns related to governmental efforts to maximize the trade balance via tight controls on FX flows and to minimize inflation through capping price increases. Our top picks are YPF and Telecom Argentina, while we have a cautious view on Argentine banks, where our option is Grupo Financiero Galicia. Energy Stocks YPF as a Play on Rising Fuel Prices and Unconventional Growth YPF is benefiting from price increases and favorable prospects for unconventional development. Revenues are 40% directly dollar-linked, with the other 60% linked to domestic gasoline and diesel prices. Gasoline and diesel prices have increased 42% in USD in the past three years, while natural-gas prices for residential consumers have gone nowhere. Domestic crude prices averaged USD 60.9 per barrel in 3Q11 for YPF, implying a 46% discount to Brent, and natural gas prices were USD 1.77 per mmbtu compared with import prices ranging between USD 10 and USD 13 per mmbtu. YPF has 12,000 km2 of unconventional acreage, and first development works have been highly encouraging. The main investment risk would be an interruption of the trend of rising fuel prices or of YPFs ability to transfer dividends abroad. Our base case is that dividends will be paid. We expect Argentine fuel prices to rise 14% in USD next year and 5% annually through 2015 as prices converge to international standards so to reduce ballooning subsidies. Energy-related subsidies hover around USD 10 billion per year, more than 2.0% of GDP. Argentina generated an estimated fuel-trade deficit exceeding USD 3.0 billion in 2011, reversing a consecutive surplus existing from 1990 to 2010. In Argentina, oil and natural gas make up 83% of the energy matrix. The country is a net importer of diesel, gasoline, and natural-gas, where imports represent roughly 15% of consumption. Unconventional resource development has the potential to allow Argentina to recover self-sufficiency in terms of fuel supply that is another element for the government to improve investment incentives. According to the U.S. Energy Information Administration (EIA), Argentina holds the third-largest shale gas resource base after the U.S. and China. The government has announced subsidy cuts, equivalent to 5% of the total, for water, electricity and natural gas without implying higher tariffs for utility companies. Pampa Energa is the main play on normalization in the electricity sector. However, there has been no momentum on tariffs. Telecommunications Telecom Argentina Is a Strong Franchise and High Dividend Yield The mobile business has grown to represent 80% of Telecom Argentinas EBITDA, and the fixed-line unit, with tariffs unchanged for a decade, has ceased to be a concern because it has drastically reduced its overall contribution to earnings. High free-cash-flow generation, high dividend yield and low valuation multiples are some of the companys main attributes. The sector faces the risk of preserving margins in a context of high inflation, affecting the salary base. Bank Stocks Cautious View Given Limited Scope for Sovereign Spread Compression Our 2012 strategy for bank stocks is a cautious one, given that we see limited scope for sovereign-spread compression. Our top pick is Grupo Financiero Galicia. Argentine bank stocks will be a play par excellence on the 5-year CDS. Earnings yields in 2012 for the banks we cover (BMA 20%, GGAL 26%, BFR 18%) are above the 16.8% cost of equity that we are using to value the banks. The main risks to our call are: i) approval of bills that increase intervention, i.e. determining credit allocation or controlling interest rates; and ii) a potential requirement for financing from the federal government. These are factors that could reduce banks valuations by up to another 25%. We believe that Argentine banks are robust enough to weather financial distress. For private banks, capitalization is 17.1%, and Tier I capital as of October 2011 was 13.3% of risk-weighted assets. Internal liquidity represents close to 36.0% of deposits. We expect deposits to grow close to 25% in 2012 and loan growth to gradually converge to slightly higher levels from current yearly growth rates above 50% as banks seek to preserve internal liquidity. We expect an adjusted ROAE of between 23.0% and 26.0% for the main listed private banks. Near-term prospects for real financial intermediation growth are poor, as we believe that the strength of the Argentine peso as a store of value is unstable. However, private loans stand at 15% of GDP, suggesting little room for contraction.
Ita BBA 29
Terms of Trade Fundamentally Important for Argentina A long-term view of the past to try to gauge the future. The weight of exports plus imports in Argentina has averaged 41% of GDP for the past eight years, mainly driven by a growing harvest and soaring commodity prices. During the sixty-year period from 1940-2000, exports plus imports averaged 18% of GDP, growth was necessarily financed mostly through external lending, and fiscal and monetary crises were recurrent. Looking forward to 2012, the harvest is expected to be robust soy volumes, which account for slightly more than 50% of the total crop and 30% of aggregated exports, could perhaps come in north of 50 million tons. The evolution of soft-commodity prices, particularly soy, will determine the level of U.S. dollar inflows; financial flows could be zero or slim, as Argentina is out of the markets, industrial exports are receding and FDI is negligible. Soy prices of USD 427 per ton are in line with the average since the beginning of CFKs first term at the end 2007. We estimate exports to total USD 88.3 billion in 2012. Every 10% variation in soy prices means an impact of USD 2.6 billion on exports. Imports, which we estimate at USD 81.3 billion next year, are typically more than 70% related to capital or intermediate goods.
Ratio of Reserves to Months of Imports

20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2.5 8.0 26.5
Source: Ita BBA
Argentina will need to pay an estimated USD 8.0 billion of debt service next year and plans to use reserves. Ita BBA estimates a balanced current account in 2011 and a negative one, of 0.3% of GDP, in 2012. From 2003-2011, the current account attained a 2.8% surplus relative to GDP, on average. We are recommending Adeco Agro in the agricultural sector. With taxes on soy exports running as high as 35.0%, there will be little room to increase taxes. There are two main risks: the first being the eventual reduction of commodity prices, particularly soy, and the second, the eventuality that the government unfolds the exchange-rate market, instituting a lower USD/ARS ratio for farming relative to other sectors.
Macro Overview and Valuation

2008 Real GDP Growth (Private Estimates) - % Unemployment Rate - Year Avg CPI (Private Estimates) - % BADLAR - eop - % ARS / USD - eop Trade Balance - USD bn Current Account - % GDP Foreign Direct Investment - % GDP International Reserves - USD bn Gross Public Debt - % GDP
Source: IMF, Bloomberg, BCRA, Haver and Ita BBA
2009 -4.2 8.7 14.9 10.00 3.8 16.9 3.6 1.3 48.0 48.2
2010 8.2 7.8 26.4 11.25 4.0 11.6 0.7 1.9 52.2 44.7
2011F 5.8 7.3 22.8 17.19 4.3 10.0 0.1 1.5 46.4 38.6
2012F
2010
2013F 2.8 8.0 28.0 24.00 5.7 4.0 -0.9 1.5 30.0 33.1
3.4 7.9 20.3 19.75 3.5 12.6 2.1 3.0 46.4 44.9
22.00 4.9 7.0 -0.3 1.5 38.0 35.7
Ita BBA 30
Brazil Country View

Macro View *
The economy remained weak in 2011 and we lowered our fourth-quarter GDP growth forecast to 0.2% (from 0.4%), even after incorporating better data from November and December. We expect 2011 GDP growth at 2.7%. In 2012, we expect GDP growth of 3.5%, IPCA inflation at 5.2%, and the year-end foreign exchange rate at 1.75 reais to the dollar. But getting there will depend on policy boosters expected to be in place over the coming months. The new minimum wage and a set of tax breaks will help in the first quarter. Lower interest rates and faster public spending will build strength gradually, causing the economy to peak in the second quarter. Our monetary policy outlook remains unchanged: we expect the central bank to continue to lower rates toward 9.0%, with additional cuts along the first half of the year. However, we acknowledge that the CBs more cautious tone, and the possible use of other growthpromoting tools, may result in a shorter cycle. Growth Pick Up in 2012 We continue to assume global weakness, not disruption, in 2012 (see our world outlook). In this scenario, Brazils GDP picks up the slack and grows towards a peak in the second half of the year. Initial Stimuli: Minimum Wage and Tax Breaks The new minimum wage of BRL 622 became effective in January, and the tax breaks on durables is scheduled to last until March. Both will be essential to growth in the first quarter. After that, the minimum wage will only have a residual impact, while the tax breaks will actually become negative (they raise sales now, and lower them after the benefit expires). We estimate that the increase in the minimum wage (more precisely, the increase above last years increase) will add 0.4pp to the first quarter growth, and 0.6pp for the whole of 2012. Part of this will come directly from higher pensions and part will come from the minimum wage as a wage-setting benchmark. Around 25% of Brazilians including workers and pensioners earn a minimum wage, while the wages of many others are somehow linked to it. We expect the tax breaks to add around 0.3pp to the first quarter growth. However, it will likely imply lower consumption after the benefit expires, having a final impact of slightly less than 0.1pp on growth in 2012. On the other hand, the global slowdown has yet to be fully felt. Although it shows up in the form of lower confidence survey readings and a rise in unwanted inventories; it still hasnt been felt in exports (volumes have, in fact, continued to rise). All told, we expect a quarterly growth of 0.8% in the first quarter of 2012. Later Boosters: Monetary and Fiscal Policy All along, low interest rates and higher public spending will also help boost growth. Both operate in longer cycles, gradually building strength over a few quarters, and both are also more powerful. The central bank has been lowering the Selic rate since October, and will likely continue to do so in coming months. Public spending will likely pick up starting in the first quarter. The impact of these factors on growth will likely peak in the second half of the year; by then, the economy could easily be expanding at an annual rate of above 5%. A loosening in fiscal policy is an important part of our 2012 growth outlook. Will it happen? The government has been signaling a recovery in investment, and the new minimum wage will certainly push pensions and transfers. On the other hand, the government has been adamant about the full achievement of the 2012 primary target, which suggests that belts will be kept very tight elsewhere. No doubt, the government will work in this direction. Pay raises for civil servants, for example, will probably be small this year. Still, the higher minimum wage will increase spending and transfers, leading to a rise in total spending that will be hard to avoid. We assume that federal spending will grow at a rate
Population: 194 million Market Cap: USD 880 bn FX reserves: USD 414 bn GDP: USD 2,558 bn GDP growth: 3.5% 2012E Inflation: 5.2% 2012E
Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com Florian Tanzer +55-11-3073-3025 florian.tanzer@itaubba.com
Ita BBA 31
similar to the average for recent years of around 8.5%, instead of the 3.5% in 2011 (inflation-adjusted numbers). In short, Brazil came to a halt in the second half of 2011. Barring a global disruption, the country will likely rev up throughout 2012 and grow at a decent pace toward the end of the year. Our 2012 growth forecast remains at 3.5%. Inflation Inflation will continue to ease as growth rises, partly due to the reweighting of the IPCA basket. Our inflation forecast remains at 5.2%. Because of the changes in ethanol supply, fuel prices may actually result in lower inflation and change its seasonal pattern this year. Until now, producers typically carried small ethanol inventories between harvests, and imports were immaterial. As a result, ethanol prices would normally rise from January on, peak around April and fall sharply thereafter. This pattern was particularly strong in 2011. Later in 2011, favorable market conditions enabled bulk imports for the first time. According to our calculations based on official trade data, imports reached a total of 1.4 billion liters, or 7% of domestic production. The government also offered a subsidy to producers willing to carry inventories between harvests. There are two effects here: Ethanol inventories will offer a smooth supply throughout the year and last years ethanol imports will improve supply conditions, possibly reducing fuel inflation in 2012. Monetary Policy Outlook We continue to expect the central bank to lower the Selic rate to 9%. The local yield curve, however, now expects the CB to only cut the Selic rate to around 10%, reflecting a view that the central bank will be more alert to inflation risks. The central banks December inflation report echoed its last policy statement: By promptly mitigating the effects of a restrictive global environment, a moderate adjustment in the basic rate is consistent with inflation converging to the target in 2012. The CBs market scenario assumes the market consensus Selic rate, which was then 9.5% for 2012 and 10.5% for 2013. In this scenario, the IPCA reaches 4.8% this year, but picks up to 5.3% in 2013. In the face of it, the CB could cut less than consensus in 2012, raise more in 2013, or live with higher inflation for a while and seek the target in 2014. In a hawkish tone, the report emphasizes that the current monetary easing will be at its most stimulative later on and that these lags have been taken into consideration. The central bank estimates a GDP growth of 3.0% in 2011 and 3.5% in 2012. If there was a bias in that report, it was a hawkish one. However, we believe that the global outlook may be more adverse than expected, with still weak growth in 2012. We therefore maintain our expectation of a Selic rate drop to 9% by mid-2012, ensuring a growth pick-up throughout the year and causing GDP to grow 3.5%. In its January decision, the central bank lowered the Selic by 50 bps, as expected, using exactly the same statement as in the previous meeting a sign that more 50-bp cuts will likely come. Trade Balance and the Currency Slightly higher commodity prices in 2012 will not help the trade balance much. We lowered our 2012 trade surplus forecast to USD 11 billion (from USD 15 billion), down from USD 29.7 billion in 2011. Foreign direct investment probably reached a sizable USD 65 billion in 2011, and we expect a similar volume this year, leading to adequate financing for a current account deficit of around 3.2% of GDP. We kept our currency forecast at 1.75 reais to the dollar by year-end 2012, and expect the euro to lose some ground against both the dollar and the real.. * From Ita BBAs Macro Team
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Reduced to its essence, our equity strategy in Brazil is a call on a combination of lower interest rates (growth and earnings), upward earnings revision and improving sentiment (re-rating) in the beginning of 2012. Compared with its regional peers and with its own history, Brazil is cheap at 9.4x P/E 2012E, 1.3x P/B 2012E, 6.0x EV/EBITDA 2012E and a dividend yield of 3.9% 2012E. But it is not outrageously cheap. Consensus EPS growth expectations below 5% offer upside for future earnings revisions, especially given our expectations for strong(er) GDP growth, accelerating in 2H12. On a bottom-up valuation, we see an upside of 28% for the IBOV. We are preparing for a difficult year and expect the market to perform better in the first half than the second, as interest rate cuts of 200 bps and public spending feed into domestic GDP growth and spark upside revisions for EPS expectations. An improving global sentiment caused by a temporary relaxation in Europe could provide further support to the markets. For 1Q12, we are neutral on telcos, underweight utilities and overweight consumption (including high-quality homebuilders), materials and energy. Our view on the second half of 2012 is much more cautious. We therefore suggest switching to a defensive portfolio later in the year. In a low-growth, high-risk environment, we believe that stocks with high dividend yields, quality balance sheets and stable earnings will outperform their equity benchmark over the long term. In 2H12, we expect to overweight telcos and utilities and decrease our exposure to the more cyclical sectors.
Brazil's Estimated CDI vs. Actual DI Futures

11.4% 11.1% 10.8% 10.5% 10.2% 9.9% Jan12 Jul12 Jan13 Jul13 17/jan
Source: Bloomberg
Jan14 4/jan
Jul14 10/jan
Jan15
Jul15
Risks to our call are twofold: first, less than a 200-bp cut in rates. The local yield curve currently prices in cuts of 100-125 bps. Second, overall market sentiment could deteriorate if high-frequency data does not hold up well. While we remain convinced that rate cuts will come through as growth continues to be fragile, the second factor poses a significant risk. Sector Allocation Telcos offer a favorable mixture of stable earnings growth, high dividends and attractive valuation. Our first top pick in the sector, TIM, is trading at 4.1x EV/EVITDA and has estimated free cash flow yields of 7% in 2012 and 9.3% in 2013. Potential synergies resulting from TIM Fiber could provide further support in the second half of the year. Dividends are low (2.1% 2012E), though its strong marketing positioning and presence in mobile voice, mobile/fixed broadband are expected to deliver stable growth. In more challenging environments, Susana Salaru prefers Telefnica Brasil, though. This is due to its defensive characteristics, including high dividend yield (9.2% for 2012) and strong and predictable cash flow generation (7.0% free cash flow yield). At 4.8x EV/EBITDA it offers 25.2% upside to fair value. As we expect volatile markets, we include Telefnica Brasil in our Top 10 list. Neutral in 1H12, then overweight. According to Marcos Severine, Utilities is not only one of the most underrated but also best performing sectors in the long run. We agree. The combination of high dividends, earnings visibility and double-digit EBITDA growth is very attractive. Historical peak earnings make us cautious in the first quarter. Top picks: Cemig, CPFL. We underweight the sector in the first quarter, but expect to increase exposure in the latter part of the year.
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Marcos Assumpo prefers Mining over Steel and Pulp & Paper within the Natural Resources sector, due to better supply/demand dynamics. Vales healthy balance sheet, low leverage (0.6x net debt/EBITDA 2012E), sustainable FCF yield (3.8% in 2012E and 8% in 2013E) and its competitive advantage resulting from its low-cost asset base make it the top pick in the sector in the first half of 2012. We are overweight both the sector as well as the stock, but become more cautious for the second half of the year. In contrast, Financials will be highly dependent on domestic factors (such as rate cuts, inflation, job market) and less so on global growth and international funding. Regina Sanchez believes that a potential reversal of macro-prudential measures and lower reserve requirements can provide further support to the sector. Risks: inflation and deterioration of asset quality. Investors will have to keep a close eye on the BIS III implementation. Top pick: Bradesco. For the sector, we maintain an overweight for 2012. Paula Kovarsky has a very convincing approach to assessing the stocks in the Energy sector. Given the wide range of different risk profiles, Paula prefers Petrobras in a more volatile scenario, as she believes that the stock will prove to be more defensive than is generally assumed for an oil stock. As soon as growth fears abate, she expects OGX to perform well. For liquidity and company-specific reasons we stay underweight most of the smaller oil companies in Brazil. For the sector, we remain overweight but shift our exposure to more defensive names in 2H12. Investors opinions differ on Consumer Goods & Retail. On the one hand, the economy is slowing down, year-end sales (4% year over year) disappoint and valuations are high (16x P/E 2012E). On the other hand, as Juliana Rozenbaum points out, in this sector, high EBITDA growth (EBITDA growth of 20% in 2011-2013) meets high returns (average 2012 ROIC of 30%). Both rate cuts as well as minimum wage hikes will translate into structural support for the consumer, further buttressed by lower taxes on more accessible loans. We subscribe to Julianas view and overweight the sector. Top picks: Lojas Renner in the first half, Raia Drogasil in the second half. David Lawants Real Estate sector is even more controversial. Negative cash-flow generation, underwhelming ROEs (13%) barely covering cost of capital and execution risk weigh on the massively under-owned sector. Current valuations do offer significant upside when sentiment (as well as cash flow generation and profitability) turns for the better. It may not be the time to buy this sector for fundamental reasons now, but technical reasons, and sentiment, are favorable. Trading overweight in 1Q12. His top picks: MRV and PDG. In the Healthcare and Education sector, Kroton is Marcio Osakos top pick after the Unopar acquisition. Execution risk has diminished as cash flow has increased. Valuations are attractive with very high FCFE yields. We like the very strong long-term fundamentals, but remain for now underweight on the sector. Thematically Industrials, Transportation and Logistics offers the broadest range to invest in: infrastructure projects amounting to BRL 560 billion in the next years, falling interest rates, inflation hedges, rising air traffic etc. Renata Faber recommends focusing on names most exposed to infrastructural projects, while avoiding GOL (fuel cost, USD exposure). Though we do like the structural backdrop as well as single names, we remain underweight the sector due to liquidity, stock-specific reasons and valuations. Top pick: CCR. Long-term growth drivers benefit the Agribusiness sector, which results in DCF-based fair value upsides of 30%-60%. Giovana Arajo prefers Cosan due to its defensive characteristics and less-volatile growth. The increasing share of non-cyclical business, such as fuel distribution and logistics, will be responsible for 54% of our estimated 10 year EBITDA growth. Moreover, for the cyclical part of the company (sugar and ethanol), we see an upside of crop productivity (20% crop renewal versus 10% sector average for the 2012 harvest year). Overall, we are positive on the Brazilian stock market. True, commodity prices are of major concern, given the benchmark composition and our cautious outlook for commodity prices: The ICI (Ita Commodity Index) is expected to decrease 9.8% in 2012, mostly driven by metals (-11.0%) and agricultural goods (-10.2%), while energy prices will be nearly flat (-0.4%) in 2012E. Given that 20.8% of the MSCI Brazil is materials (25.1% for the Bovespa) and 21.8% energy (Bovespa: 17.4%), this does not bode well. However, even in this environment, Marcos Assumpo, the sector head responsible for Steel & Mining + Pulp & Paper, sees a market-cap-weighted upside of 38.3% of the sector to fair value. Paula Kovarsky, the sector head of Oil, Gas & Petrochemicals, sees upside of 41% for her sector. How much growth fear is therefore priced in?
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Separately from that, we believe that, on a micro-level as well as on a macro level, there will be several triggers for better performance than in 2011. Lower interest rates and rising (minimum) wages in Brazil will support the consumer, even in more difficult times, especially given that the labor market will likely remain strong on absolute levels. Macroprudential measures, which had significant impact on both the financial industry and the stock market could be reversed. Will the decrease in the high real-interest rates not only support domestic consumption, but also push investors towards a switch into equities? For this to sustainably happen, market participants will have to be convinced that the rates will be permanently cut, and that they are low enough to compensate for the risk they are taking. Uncertainty will matter not only to investors the global outlook for growth, earnings stability, economic policies, etc., continues to be very nebulous. Brazil will not be able to decouple completely from global events far from it. But it has positioned itself in a favorable way by sealing off its domestic economy from a global economic slowdown as much as possible. At the same time, it will continue to profit from a global rebound (when and if this should happen), not least due to its strong position in the commodity sector. This does not necessarily mean that everything will be great. It does mean that Brazil will probably be far better off than most other countries.

2008 Real GDP Growth - % Unemployment Rate - Year Avg IPCA - % Selic - eop - % BRL / USD - eop Trade Balance - USD bn Current Account - % GDP Foreign Direct Investment - % GDP Primary Balance - % GDP Nominal Balance - % GDP Net Public Debt - % GDP
Source: IMF, Bloomberg, IBGE, BCB, Haver and Ita BBA
2009 -0.3 8.1 4.3 8.75 1.74 25 -1.5 1.6 2.1 -3.3 42.8
2010 7.5 6.6 5.9 10.75 1.69 20 -2.2 2.3 2.8 -2.6 40.4
2011F 2.7 6.1 6.5 11.00 1.84 29.8 -2.0 2.4 3.2 -2.7 37.8
2012F 3.5 6.5 5.2 9.00 1.75 11.0 -3.0 2.5 2.5 -3.1 36.9
2013F 5.4 6.2 5.6 11.50 1.75 -3.2 -3.8 2.5 2.5 -3.0 35.1
5.2 7.9 5.9 13.75 2.34 25 -1.7 2.7 3.4 -1.9 38.4
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Chile Country View

Macro View *
Chile's education system was paralyzed for months in 2011 as students demanded reforms to bridge a wide gap between rich and poor in access to education. The protests attracted other discontent, and a number of strikes hit during the year. Although Chile's economy did very well in 2011, the popularity of the government reached the lowest levels seen since the return to democracy in 1990. Public support for the protests eventually waned. However as only minor concessions were made by the government, the probability of new strikes next year is high. The proposals already presented by the government will mean more spending and the discussion on funding will also continue next year. A tax reform is likely, but details are yet to be released. As a result of the protests, strikes and other temporary factors, Chile's economy slowed down substantially since the third quarter of 2011. However domestic demand was unaffected and both private consumption and gross fixed investment remained robust, amid a tight labor market. Beyond temporary factors, an open economy like Chile is not immune to a global slowdown. We expect a below trend 4.2% GDP growth in 2012, from 6.1% this year. Inflation is currently above the center of the target (3%), driven by non-core items. Although the output gap has closed, core inflation measures remain below 3%. As food and energy prices ease and the economy decelerates inflation should finish 2012 at 2.7%, from 3.6% this year. Lower copper prices and still-solid domestic demand turned the current-account slightly negative this year. Financing is not a problem. In spite of the global turmoil direct investment remained very strong until October. Also, Chile has a very large stock of assets abroad. In times of high risk aversion, pension funds tend to repatriate funds, smoothing exchange rate volatility. Another factor supporting the peso was the end of a USD 12 billion reserve accumulation program. As tail risks for the global economy decline, we expect the Chilean peso to appreciate to 490 to the dollar by the end of 2012. Chiles central bank started an easing cycle in January with a 25-bp rate cut. Because we expect the world economy to grow by 2.7% in 2012, whereas the central bank expects 3.5%, we expect more room for rate cuts than the current consensus of 100 bp. We expect a deeper cutting cycle - 150 bps. The monetary policy rate would reach 3.75% in the first half of the year. * From Ita BBAs Macro Team
Population: 17.3 million Market Cap: 369.5 bn FX reserves: USD 41 bn GDP: USD 244 bn GDP growth: 4.2% 2012E Inflation: 2.7% 2012E
Barbara Angerstein +56-2-834-6297 barbara.angerstein@itau.cl
Equity Allocation / Strategy

The IPSA, Chiles main equity index with the 40 most important stocks, has a total capitalization of USD 369.5 billion. The index is not representative of the Chilean economy, however, as no copper mining companies are included (as they are not traded in Chile). The electricity sector accounts for 19% of the index, followed by forestry (18%), financial services (15%) and retail (12%). Pension funds (AFPs) have been a key driver of Chiles development, currently holding USD 140 billion in AuM and adding an estimated USD 470 million in savings to the system monthly (of which roughly USD 80 million currently flows into the domestic equity market). The AFPs have long been believed to support high valuations in the equities market. However, the funds have lost share in terms of daily transactions, as the monthly net allocation to the domestic equities market represents less than 3% of average monthly traded volume. Furthermore, since 2002, workers have had the option to choose between five funds with different exposures to the equity market and, thus, different risk levels. The turmoil in the international financial markets has led workers to move out of riskier equities funds into fixed-income funds on a massive scale, reducing AFPs exposure to domestic equity The AFPs allocations therefore depend not only on the investment decisions of fund managers but also, to a large extent, on the perceptions and outlook of their affiliates. Equally, contrary to the myth of the AFPs being buyers in the domestic market in turbulent times, in the recent past repatriated funds formerly invested in foreign equities have flowed into the local fixedincome market, not the equities market. Mutual funds have also seen strong growth over the last 10 years, increasing their AuM in local equity by 41% per year since 2002, to USD 2.6 billion, though with substantial volatility. As of November 2011, domestic equity investment in mutual funds had declined by 38% for the year to date (along with a 16% decrease in the IPSA), after climbing by 118% in local currency in 2010, helped by a 38% increase in the
Ita BBA 36
IPSA. Therefore, only a stabilizing and improving international outlook is likely to drag local pension fund affiliates and investors back into the equities market and drive valuations upwards. The IPSA is trading at 18.25x 12-month trailing P/E, in line with its five-year average though still well above the 10.25x seen in October 2008. We believe that re-rating will only take place once global growth accelerates, which could drag the markets valuation multiples back up to the 20x level. On a 12-month forward P/E based on consensus estimates, the IPSA is trading at 13.2x, below its historical average of 14.6x and historical peaks of 17.5x in buoyant economic environments. We are neutral on Chile. The main discussion during this year in Chile will revolve around tax reforms. A general consensus seems to have formed around the necessity of revising Chiles current tax structure. The main change is likely to be an increase in corporate taxes, to 20% from 17% (with transitional rates of 20% in 2011 and 18.5% in 2012, to fund the reconstruction after the 2010 earthquake). Other changes to the tax structure may include: i) lower taxes for individuals; ii) the elimination of certain tax exemptions, especially for investment societies; and iii) lower taxes on fuels. Municipal elections in October 2012 are likely to kick off debates around candidates for the November 2013 presidential and congressional elections. Allocation in Chile should be geared towards high earnings and cash generators. Within our coverage universe, we favor SQM, based on its strong expected earnings growth, unmatched cost competitiveness and pricing power. Negative price movement for fertilizers and grains seems to be priced in. Retailers Cencosud and Falabella, which have a diversified earnings matrix including exposure to Peru and Colombia and an outlook of only slightly higher risk levels at their credit operations, could also post attractive returns. Strong capex programs are fully funded by internal cash generation. Most of deceleration seems to have already been factored into share prices. By contrast, a tight water situation makes the coming rainy season in June-September 2012 highly significant for the Chilean economy. An absence of rainfall likely in light of the current La Nia conditions could lead to even higher costs and spot prices. In this sector we favor E-CL, which has exposure to the mining segment and no hydrogeneration. We are neutral on banks, as lower inflation, marginally higher funding costs and slightly higher NPLs will likely erode some of the profitability stemming from the expected expansion in loans.

2008 Real GDP Growth - % Unemployment Rate - Year Avg CPI - % Monetary Policy Rate - eop - % COP / USD - eop Current Account - % GDP Foreign Direct Investment - % GDP Gross Public Debt - % GDP 3.2 7.8 7.1 8.25 629 -2.4 8.9 -23.8 2009 -1.5 11.0 -1.5 0.50 506 1.6 8.0 -12.9 2010 5.1 8.3 3.0 3.25 468 1.9 7.4 -8.3 2011F 6.1 7.4 4.4 5.25 521 -0.5 5.8 -8.5 2012F 4.2 7.5 2.7 3.75 490 -1.7 5.5 -8.6 2013F 4.0 7.7 2.5 4.50 495 -1.8 5.3 -8.9
Source: IMF, Bloomberg, BCCh, INE, Haver and Ita BBA
Ita BBA 37
Colombia Country View

Macro View *
Colombia's economy grew at a robust pace in 2011, and we estimate a 5.5% GDP expansion. Strong domestic demand growth was lifted by a combination of credit growth and high export prices, amid a sound regulatory framework. Inflation is currently hovering around the upper limit of the target band. Thus, in spite of the global turmoil, the central bank decided to hike the monetary policy rate by 25-bps in November. The decision was hawkish, but the tone became softer. There isn't a tightening bias for the upcoming decisions anymore. In 2012, the global economy will drag Colombia's growth down. We expect a 4.3% growth rate. Inflation is likely to decelerate to 3.2%, slightly above the center of the target set for the year. We don't expect additional rate hikes, but - unlike in Mexico, Chile, Peru and Brazil - we also don't see rate cuts next year. The real monetary policy rate will thus remain below neutral, supporting growth. In 2011, an important fiscal reform created a counter-cyclical framework: when commodity prices are high and growth is above potential, the fiscal deficit must be narrower. In bad times, there will be room for a larger deficit. As part of the new framework, the government now pursues a structural deficit, which in 2010 was estimated at slightly higher than 3%. The goal is to push it down to 2.3% by 2014 and to less than 1% from 2022 onwards. The new rule will improve public debt dynamics substantially, though some pieces are still missing, such as the rules for setting potential GDP growth and long-term commodity prices. Progress is paying off. S&P, Moodys and Fitch raised the country to investment-grade status this year. Its CDS spread hovers at levels similar to Mexicos and Brazils both countries with better sovereign ratings. However a key risk for the fiscal outlook remains. Colombia has been prey to unexpected fiscal costs springing out of Supreme Court rulings. That risk was reduced after fiscal sustainability became a constitutional duty this year. However it was not eliminated. Recently the constitutional court ruled that the rights of victims of armed conflicts need to be restored. According to government estimates, this would cause an increase of USD 28.6 billion in spending over the next 10 years. In spite of the approved reforms, fiscal issues will remain a hot topic in 2012. * From Ita BBAs Macro Team
Population: 46.6 million Market Cap: USD 163.5 bn FX reserves: USD 34.5 bn GDP: USD 343 bn GDP growth: 4.4% 2012E Inflation: 3.4% 2012E
Florian Tanzer +55-11-3073-3025 florian.tanzer@itaubba.com
The Colombian economy has undergone a significant transformation in the last decade. Increased political and economic stability and diminished criminality have promoted growth, which has averaged 4% over the last 10 years. The country has implemented significant structural reforms, it is underleveraged (loan-to-GDP ratio: 34%) and the overall economy is well diversified. Domestic consumption is strong and sustained, benefitting from healthy demographics (55% of its population is under 30 years old, according to Comunidad Andina) and good educational standards (literacy rate: 92%). Economic growth and the significant improvement in domestic security have made Colombia one of the poster children for reform in Latin America. Unfortunately, together with Mexico, Colombia is one of the most expensive markets in Latin America, trading at 17.4x P/E 2012E, 3.5x P/B 2012E, 8.2x EV/EBITDA 2012E, with market-wide EPS growth in the mid-single-digit range (5.0%), though this is heavily influenced by single-stock names. Low liquidity complicates matters further. As in Peru, any allocation to the stock market is reduced to a handful of companies. The five biggest companies in the MSCI Colombia (which is composed of nine stocks) amount to 80% of its market cap. Although we like the macro story and believe that the currency has structural support due to the interestrate carry, strong GDP dynamics, and healthy debt profile, we see only limited upside for most of the Colombian stocks we cover relative to other countries, where the liquidity risk is lower. If risk aversion abates, however, and strong flows start to come back into Colombia, both the currency and stock market would advance.
Ita BBA 38
To invest in Colombias strong macro story, Bancolombia would be an obvious proxy, despite our marketperform recommendation on the stock. Regina Sanchez and Thiago Batista like the company and its high 19.7% ROAE, but believe that the premium at which Bancolombia trades (12.1x P/E 2012E vs. Brazilian banks at 7.0x) limits CIBs relative upside. The announced capital increase will weigh on the stock. While foreign funding (15% of total assets) is low on an absolute basis, it is still the highest in Latin America. Ecopetrol, Colombias national oil company with a 28% share in the MSCI Colombia, is the most important stock in the index. Paula Kovarsky, Ita BBAs sector head for Oil, Gas and Petrochemicals, has a marketperform rating on the stock after a very strong performance in 2011. This is based on its relative valuation (12.6x P/E12 vs. an average 7.7x for IOC Majors) as well as the upcoming share offering, which is weighing on the stock. If Ecopetrol carries out the successive offers within the remaining 8.3% of the already-approved primary offering and the governments 10% secondary float, the overhang could be high and long-lasting (four tranches, the last in 2015). Paula prefers Pacific Rubiales, which offers an attractive option for gaining exposure to currently high oil prices as well as to fully-funded exploration campaigns, which she hopes will be successful. We acknowledge that the stock was very weak over the last year, not least due to macro and micro issues and the negative momentum of other companies owned by PREs founders, which has affected the stock. However, we believe that these concerns are exaggerated. The stock offers a 96% upside on a DCF basis. In the short term, both the stock and the sector will only perform well in a risk-on environment. For the market in general, we remain cautious due to valuation levels and liquidity concerns.

2008 Real GDP Growth - % Unemployment Rate - Year Avg CPI - % Monetary Policy Rate - eop - % COP / USD - eop Current Account - % GDP Foreign Direct Investment - % GDP Gross Public Debt - % GDP 3.5 11.3 7.7 9.50 2244 -2.8 4.3 33.2 2009 1.5 12.0 2.0 3.50 2044 -2.2 3.0 34.7 2010 4.3 11.8 3.2 3.00 1914 -3.1 2.4 34.7 2011F 5.8 10.8 3.7 4.75 1943 -3.0 2.8 34.8 2012F 4.4 10.5 3.4 4.75 1850 -2.8 2.6 35.3 2013F 4.2 9.0 3.1 6.00 1870 -2.6 2.8 35.8
Source: IMF, Bloomberg, Dane, Banrep, Haver and Ita BBA
Ita BBA 39
Mexico Country View

Macro View *
Mexico continues to recover from the deep 2008-9 crisis. We estimate a 4.0% GDP expansion in 2011, from 5.4% in 2010. Both are well above Mexico's low potential growth rate. The role that exports to the U.S. played in the recovery is remarkable. Led by manufacturing, sales across the Northern border increased 29% in 2010 while in the first three quarters of this year, there was a 17.6% gain over one year before. This was in spite of weak U.S. demand since the bankruptcy of Lehman Brothers, meaning that Mexico gained market-share in the U.S. One element of the export boom was the restructuring in U.S. manufacturing sector and the relocation of plants to cheaper countries, like Mexico. In 2008, Mexico sent 1.6 million cars across the border. Since then, the annual total has risen to around two million, which means a 23% increase in a market that is smaller than it was in 2008. The broad gain by Mexican exports suggests that the output relocation went beyond autos. Much of Mexicos advantage over other suppliers of manufactured goods to the U.S. lies in proximity: lower freight costs are an obvious lead over China and developing a supply-chain connection between neighbors is easier. Another factor are the lower trade tariffs enjoyed because of NAFTA. Finally, the Mexican peso weakened against the currencies of its competitors. Exports are now waning. Since the third quarter of this year, manufacturing exports have performed poorly, suggesting that the expanding market share gains in the U.S. have run their course. Mexico's economy should now re-couple with the trends in the U.S. economy. We expect a 2.5% GDP expansion in 2012, a significant deceleration. In spite of slower growth, we expect inflation to climb from 3.3% this year to 3.7% in 2012. Next year's pickup reflects this year's fast growth. The main risk for inflation is the exchange rate. Global uncertainty has taken a toll on the currency. To help stabilize the peso, the central bank announced that it will conduct daily auctions of up to USD 400 million whenever the exchange rate weakens by more than 2% from the previous day. A program of reserve buildup through the sale of USD put options was suspended. If volatility increases further, we believe this mechanism will be boosted by discretionary intervention, as in 2008. The countrys external position is now much better than in the 2008 crisis, enhancing the CBs FX firepower. Reserves are USD 60 billion higher, and a USD 72 billion standby line remains on hand from the IMF. This robust footing will help support the peso should a more difficult external scenario materialize. We expect the peso to rise when global risks return to normality ahead. We see the peso at 12.8 to the dollar by year-end 2012. In this scenario, Mexico's central bank finds room for another round of rate cuts. We look for three 25-bp cuts starting this year, with the Fondeo rate ending 2012 at 3.75%. Although the monetary policy committee acknowledges that the exchange rate is the main threat to inflation, we don't think the concern with the peso path is high enough to stand in the way of rate cuts. In fact, the board has emphasized that inflation expectations weren't affected by the weakening of the exchange rate. On the political front, in 2012 all eyes in Mexico turn to the presidential election in July. Enrique Pena Nieto, from Mexico's Institutional Revolutionary Party (PRI), holds a comfortable lead in polls and is likely to become the country's next president. The former Mexico State governor would bring PRI back to power. Facing rising violence and not very successful reform attempts, PAN which has been in charge of the federal government since 2000 has been discredited and none of its possible candidates has met much enthusiasm from voters. Changes promised by PAN did not materialize (in large part due to PRI opposition in the Congress). PRI's 71-year rule may be fading from voters' memories. Reforms are always a significant debate in emerging economies, but it is particularly urgent in Mexico. Potential growth in Mexico is much lower than in its peers. Mexican GDP grew on average only 1.7% a year in the past decade. Besides reforms to improve productivity, it is necessary to lower budget reliance on the oil sector, the output of which is 25% below the peak reached in the past 10 years. In order to do that, tax revenues from other sectors must increase (a reform that the government attempted in 2009, but
Population: 110.8 million Market Cap: USD 291.6 bn FX reserves: USD 152 bn 2012E GDP: USD 1,120 bn GDP growth: 2.5% 2012E Inflation: 3.7% 2012E
Ita BBA 40
failed in part due to PRI opposition). Another alternative is to attract foreign investment to the sector. Enrique Pena Nieto is presenting himself as a modern candidate, distant from the PRI of the old days. He has raised the prospect of opening up Pemex, the state-run oil company, to private investment, lamenting that Mexico has been hostage to ideology. Even if Mr. Pena Nieto's intentions are true, hopes for a reform in the oil sector remains low as he is likely to meet resistance within his own party. After all, it was the PRI that nationalized the oil sector in 1935 and that has always tried to associate itself with the idea of a national oil industry. The prospects for other reforms are also poor, as the party's behavior during the PAN administration does not suggest any significant change from what it once was.. * From Ita BBAs Macro Team
Despite Mexicos open economy (with 30% of GDP exported, 24% to the U.S.), the Mexican stock market outperformed its regional peers in 2011 by around 6.5% (in USD), in a world dominated by growth concerns. The MEXBOL lost only 2% (14% in USD), outperforming Brazils IBOV by around 16% (13% in USD) and the Chilean IPSA by 13% (10% in USD). Only Colombias COLCAP could keep up with the performance of the MEXBOL in USD, thanks to the strong Colombian peso. While most of this performance can probably be attributed to Mexicos strong economic fundamentals on both the micro and macro levels, some of it seems to be driven by liquidity effects and individual stock names. For example, Elektra, with a 5% weight in the MEXBOL, rose by 168% year over year and added 867.4 points to the index. To put this into perspective, the largest company by far in the MEXBOL, Amrica Mvil, despite its 23% weight in the MEXBOL, dragged the index down by 924.7 points while losing around 10% in 2011. The MEXBOL offered what most investors were looking for: high-quality blue-chip names, in some cases operating as quasi-monopolies. Lower earnings volatility and strong earnings growth at the index level made it even more attractive. On the macro level, Mexico was able to strengthen its position as a leading exporter to the U.S. in 2011. This re-coupling with the U.S. became an additional support for Mexico as the U.S. economy began to stabilize. Finally, the Mexican peso weakened by 13% against the USD, further supporting Mexicos price-competitiveness. Although our Consumer Goods & Retail team likes the overall sector, Juliana Rozenbaum and Renato Salomone do not see exciting, but decent upside on the level of stocks (expected fair value upsides range from 10%-20%). For example, they believe that the price for Walmex, the second-biggest stock in the MEXBOL (13.3% of the index by valuation levels), already incorporates the companys very positive growth prospects, good execution quality and extraordinarily high returns (23.0% ROIC 2012E, compared with around 10% for the average of peers covered by Ita BBA). Meanwhile, lower-thanexpected growth and lower new-store capacity, as well as lower-than-hoped-for synergies, could weigh on sales and margins. Given that the stock is currently trading at a 55.4% premium to the LatAm Retail sector and at a 12.8% premium to its own historical average, Renato and Juliana have only a marketperform rating on the stock. Falling interest rates and strong domestic consumption could also favor Homebuilders. However, Vivian Salomn, who covers this sector in Mexico for Ita BBA, is maintaining a cautious stance despite the sectors cheap valuation (4.5x EV/EBITDA for 2012 and revenue growth of 9.5%), given her concern over cash flow generation, execution quality and the generally cautious sentiment regarding the sector. Vivian likes GEO, which is currently trading at 5.6x P/E and 4.1x EV/EBITDA 2012E, representing discounts of 48% and 36%, respectively, to its historical average. GEOs moderate growth strategy (7% for 2012E), continued debt reduction (1.8x net debt/EBITDA) and positive FCFE generation make it our top pick in the sector, with a 29% upside. In the Telecom sector, one of Susana Salarus top picks is Amrica Mvil, based on the stocks decent dividend yield and good free cash flow generation. However, a lack of potential triggers and the stocks nearly +30% premium over regional peers on EV/EBITDA 2012E are concerns. Nonetheless, AMX is one of the Mexican stocks we like most, because of its defensive profile and still-decent growth.
Ita BBA 41
Our Infrastructure analysts, Renata Faber (sector head for Transportation & Logistics + Industrials) and Vivian Salomon (our local specialist), are very confident about ICA, one of the largest engineering, procurement and construction companies in Mexico. The company has a MXN 39.4 billion construction backlog and is likely to reduce its debt by around MXN 12 billion by the end of 2012, thereby addressing one of the major concerns among investors. Concessions will turn operational in both 2012 and 2013, providing higher visibility on profitability and further supporting debt levels. In addition, ICA has underperformed the IPC index by 44% in 2011. This has created an attractive entry point, in the view of our sector team. ICA is a high-risk pick, but it also offers significant upside of 44.6% to our fair value. Administradoras de Fondos para el Retiro (Afores) What about the structural support that the pension fund industry can provide for the Mexican stock market? The Administradoras de Fondos para el Retiro (Afores) are continuing their strong participation in Mexican equity markets, with around USD 116 billion of AUM, 19% of which is invested in equities. Compared with the MEXBOLs market cap of USD 290 billion, the Afores are major players, especially given their ownership of roughly 8.5% of local equities and 10.1% of international equities. The limit of the Afores equity exposure is 35%, so there is still significant upside room for the funds to increase their allocations in equity markets, both internationally and domestically. This could be expected to provide strong structural support for the Mexican stock market, as long as flows continue to be allocated to equities. One of the more important triggers for this to happen would be improving sentiment, which in turn implies better stock markets in general. This environment would be more favorable for countries such as Brazil, and for other international, cyclical markets, than for Mexico. In conclusion, Mexico offers some very attractive characteristics for investors: stable earnings, high profitability, strong cash-flow generation and supportive flow dynamics (Afores). However, we believe that these advantages have already been priced in and are reflected in the 33% premium of the Mexican stock market to its regional peers. Strong (external) macro headwinds, uncertainties regarding the election and an expensive valuation at the stock level warrant a cautious stance on Mexican stocks. Given limited absolute upside in comparison with other stock markets in the region, we recommend that investors underweight Mexico while focusing on neglected names like ICA. For risk-averse investors with a focus on USD returns, Amrica Mvil could prove to be a very interesting investment, given its defensive characteristics and high yield.

2008 Real GDP Growth - % Unemployment Rate - Year Avg CPI - % Monetary Policy Rate - eop - % MXN / USD - eop Current Account - % GDP Foreign Direct Investment - % GDP Net Public Debt - % GDP 1.2 4.0 6.5 8.25 13.54 -1.5 2.4 18.2 2009 -6.1 5.5 3.6 4.50 13.06 -0.7 1.7 29.1 2010 5.4 5.4 4.4 4.50 12.36 -0.6 1.7 30.7 2011F 4.0 5.1 3.8 4.50 13.99 -0.8 1.8 30.4 2012F 2.5 5.3 3.7 3.75 12.80 -1.2 2.0 31.1 2013F 2.0 5.5 3.5 4.25 13.00 -1.3 2.0 32.0
Source: IMF, Bloomberg, INEGI, Banxico, Haver and Ita BBA
Ita BBA 42
Peru Country View

Macro View *
Peru's economy grew strongly in 2011. We estimate a 7.0% GDP expansion, driven by very fast growth in private domestic demand. As a result, the output gap tightened and price pressures emerged. Headline inflation should finish 2011 at 4.6%, much above the upper limit of the central bank's target (1% - 3%). Although food items accounted for a large part of the CPI increase this year, core measures are also above the center of the target band. Global weakness will have an impact in 2012. We expect 5.0% GDP growth, below the 7.0% average of the last 5 years. Inflation will fall to 2.6%: within the target range, but above the center of the target. In this scenario the central bank will have room to cut the monetary policy rate. We expect a 100-bp easing cycle, starting in the first quarter of the year, bringing the interest rate to 3.25%. A key event this year was the election of Ollanta Humala for president. A former army official, Humala once led an unsuccessful uprising against then-president Alberto Fujimori and until recently had close links with Venezuelan president Hugo Chavez. During the campaign, he adopted a softer tone. Once elected, he kept the central bank governor, Julio Velarde, on the job - a sign of commitment to monetary stability. A new mining tax framework was agreed, in friendly terms, with mining companies. The nationalization of mines, to which Humala was once endeared, is now completely off the table. The risk is no longer a turn to the left. The return of democracy in 2000 coincided with rising pressure for sustainable growth. The communities around mining sites demanded more from mining companies and protests against projects sometimes turn violent. In November, a USD 4.8 billion gold project was suspended following fierce protests. Humala didn't stand by the protesters and declared state of emergency in the region. A few days later, he replaced a large part of his cabinet, including the prime minister, most likely because of the failure of the negotiating process. Oscar Valdes, a retired army colonel, was named prime minister. Concerns of a militarization of the government were raised, and former President Alejandro Toledo withdrew his support. Those worries are, in our view, exaggerated. With an investment pipeline estimated at almost USD 50 billion, Peru's future looks bright. Most of these projects are in mining and mining-related sectors. Macro and micro stability and a good medium-term outlook for mineral prices will help to see these and other projects through. But, if the government fails to end protests peacefully, a serious threat for the economy is posed. Like this year, in 2012 politics will take the spot light in Peru. * From Ita BBAs Macro Team
Population: 28.2 million Market Cap: USD 38.5 bn FX reserves: USD 53 bn 2012E GDP 2012E: USD 193 bn GDP growth: 5.0% 2012E Inflation: 2.6% 2012E
Along with Colombia, it has been the big outperformer over the last five years. Although the country index has performed very well in the last five years, gaining 140% (the MSCI LatAm returned 39% in the same period), one should be aware that the MSCI Peru currently consists of only four companies (BVN, BAP, SCCO and Volcan Cia Minera). This highly concentrated composition translates into a sector breakdown of 33.7% financials and 66.3% materials. While mining is important to the country (mining exports account for 14% of GDP), this index composition does not necessarily reflect the countrys macroeconomic reality. Furthermore, this narrow investment universe makes it very difficult for investors to find liquid equity investments that reflect the underlying fundamentals of the Peruvian macro story. The political concerns that flared up after Ollanta Humala was elected are in our view overrated. While we understand that protests over a mining project in northern Peru and the ensuing cabinet reshuffle troubled investors, it also demonstrated that despite his leftist reputation, Humala was willing and able to deal with the issue and keep mining investments on track. In the end, despite the political considerations, investing in Peru boils down to single-stock exposure, and in this context, weaker commodity prices pose an obvious risk. Basically, any investment in Peru is subject to domestic politics, commodities and (to a limited extent) financials. High commodity prices and even greater investments in the Peruvian Mining sector have been major growth drivers for the market over the last few years. However, based on our global macro
Ita BBA 43
scenario, we believe that these supportive tailwinds could slowly subside over the next few years. The most obvious play as a proxy for the domestic macro story would be CrediCorp, which is not covered by Ita BBA and does not seem to be cheap based on consensus earnings. Southern Copper, another index heavyweight, is more of a play on a rebound of global growth and higher industrial metal prices, and it offers a strong DCF-derived upside. We join Marcos Assumpo in his positive take on Southern Copper (24% weighting in the MSCI Peru) due to its attractive valuation of 5.5x EV/EBITDA 2012E, strong dividend yield (8.6% in 2012E), good cash flow generation (9.5% in 2012E) and very strong production profile. The company has announced a buyback program that could provide strong support for the stock. Marcos and his team see a 48.4% upside to the stock based on their fair value. We believe that the biggest risk to investments in Peru is either political or a drop in commodity prices, both of which could hurt corporate and government revenue. Global growth and a potential economic slowdown in China are obvious concerns in this context. Technically, the market is susceptible to inflows to the country due to the markets narrow scope and low liquidity. We remain underweight the market, but we do like Southern Coppers investment story in a more benign market environment.

2008 Real GDP Growth - % Unemployment Rate - Year Avg CPI - % Monetary Policy Rate - eop - % PEN / USD - eop Current Account - % GDP Foreign Direct Investment - % GDP Gross Central Govt. Debt - % GDP
Source: Ita BBA
2009 0.9 8.4 0.2 1.25 2.88 0.1 4.4 27.1
2010 8.8 7.9 2.1 3.00 2.82 -1.5 4.8 23.5
2011F 7.0 8.0 4.7 4.25 2.70 -1.8 4.5 19.9
2012F 5.0 8.2 2.6 3.25 2.75 -2.5 4.5 18.0
2013F 5.2 8.3 2.0 3.75 2.75 -2.8 4.7 16.6
9.8 8.4 6.7 6.50 3.11 -4.1 5.5 24.2
Ita BBA 44
Sector Views*
* All company templates priced as of Jan 06 2012
Agribusiness
Giovana Arajo, CNPI +55-11-3073-3036 giovana.araujo@itaubba.com Antonio Barreto, CNPI +55-11-3073-3060 antonio.barreto@itaubba.com
AGRIBUSINESS
About the Sector
We continue to watch the long-term bull trend in grain prices, along with the steady increase in land values worldwide (U.S. 6%, Brazil 7% and Argentina 15% CAGR) and the increasing usage of fertilizers, all driven by growing consumption per capita (+1%/year) and by the diminishing availability of cheap farmland (-1.5%/year). Urbanization in emerging economies (40% in 2000, 50% 2020 estimate) and biofuel consumption worldwide growth drive these trends, incentivizing a more rational use of land with investments in productivity and calling for a rise in fertilizer usage, particularly premium fertilizers. The Sugar and Ethanol segment which grew at an outstanding 9.7% rate over the last five years, with close to 100 projects has experienced a sharp slowdown: lower cogeneration prices (BRL 100/MWh), among other greenfield difficulties, are responsible for the tight returns. Low crop renewal rates (10%, vs. the historical average of 14%) have contributed to significantly reduced productivity: crop recovery to 2010 levels will be slow (2-3 years) and will sustain prices (USD 24/lb and BRL 1.15/liter hydrous). These long-term trends point to positive earnings prospects for farming, sugar and ethanol players such as Cosan, So Martinho, Adecoagro and SLC, whose EBTDA exposure to commodity markets are 50%, 100%, 100% and 100%, respectively, as well as for fertilizer producers and distributors such as SQM and Heringer, whose EBITDA exposure to commodity markets is 55% and 100%, respectively. Antonio Barreto, CNPI +55-11-3073-3060 antonio.barreto@itaubba.com Giovana Arajo, CNPI +55-11-3073-3036 giovana.araujo@itaubba.com
Sector Dynamics & Outlook

Slowing global economic growth in 2012 is likely to affect commodity and agribusiness companies in different ways. Food-linked commodities driven by biofuels and emerging market consumption like corn, soybeans and sugar are likely to be the least affected, which we see as a positive for Cosan, So Martinho, Adecoagro and SLC. Consumer-oriented commodities more linked to global growth like cotton are the most vulnerable to economic contractions and are likely to continue to experience volatility in a scenario of global macroeconomic uncertainty, which we see as a negative for SLC. Agricultural commodities have undergone downward corrections from last years record prices and are in line with our still-above-historical-average estimates for 2012: corn USD 6.4/bushel; soybeans USD 12.5/bushel; sugar USD c 24/lb; and cotton USD c 95/lb, with possible downside risk in cotton prices.
Catalysts
A further devaluation of the U.S. dollar versus other currencies and higher global oil prices throughout 2012 would be supportive factors for agricultural commodity prices and triggers for most of the listed names under our coverage, as a weaker dollar would increase the purchasing power of emergingmarket importers like China and stimulate inventory restocking. Higher global oil prices open room for higher gasoline and ethanol prices in the U.S. and, ultimately, for higher global corn prices. The current oil price of USD 100/barrel and ethanol price of USD 2.2/gallon together indicate a breakeven of around USD 6.5/bushel for U.S. corn prices (accounting for DDG credits and the cost of capital). Government policy can be a double-edged sword in agribusiness. We see a possibility for lessrestrictive-than-expected land-market legislation in Brazil and Argentina as a positive for SLC and Adecoagro, while the increasing concern among investors about the regulation of the ethanol market in Brazil is a negative for So Martinho, the only pure player in the sector.
Names to Buy / Avoid

Risk aversion will likely drive investors capital allocations in 2012. SQM and Cosan are our preferred names in this scenario, based on their high respective base-value weight of 54% and 46% and their growth sources. In the case of SQM, roughly 70% of gross-profit growth is linked to niche markets in which SQM enjoys pricing power. Roughly 55% of Cosans EBITDA growth is likely to come from noncyclical businesses. Should investor attitudes shift from risk aversion to appetite, we see attractive riskreward opportunities in So Martinhos and Adecoagros growth stories. SLC is our least-preferred name, due its high growth-value weight and high EBITDA-growth exposure to cotton (roughly 70%).
Ita BBA 47
Food Consumption Is Rising Steadily in an Environment of Low Land Availability

0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00
1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
and a Growing Urban Population
120 110 100 90 80 70 60 50 40
Million persons 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Developed (Urban) Developing (Urban)
Arable Land / capita (ha/capita) Food Consumption per Capita (100 basis 2005)
Source: FAO, Ita BBA
Putting Upward Pressure on Land Prices

6,000 5,000 4,000 3,000 2,000
and Stimulating Fertilizer Usage

Potash Use (lb/acre) Indiana Georgia Mississipi Arkansas Missour Kansas 20 Montana 2,000 Nebraska 4,000
Corn Belt
140 120 100
Illinois Ohio
80 60 40
Iowa
1,000 2005 2006 Brazil* 2007 2008 Argentina** 2009 U.S. 2010
6,000 8,000 10,000

Wheat Belt
12,000
14,000
Cotton Belt
Source: Bloomberg, Ita BBA
Source: Bloomberg, Ita BBA
Spot Prices Were Lower Than Expected Last Year

200 180 160 140 120 100 80 60 40 20 0 Sugar Soybean Cotton Corn Spot Commodities Prices (100 Basis) 1 year forward Commodities Prices from December 2010 (100 Basis) 23 1163 33 1252 87
but Still Above Historical Levels

200 180 160 140 120 100
554
c/lb
c/bushel
c/lb
c/bushel
159
usd/mt
c/lb
c/bushel
c/lb
c/bushel
usd/mt
617
80 60 40 20 0
23 17
24
1163 1104
1250
87 71
95 617 443
640
Sugar
Soybean
Cotton
Corn
Spot Commodities Prices (100 Basis) 3-Year Average (100 Basis)
Source: Ita BBA
YE12 Fair Value Breakdown: Base Value vs. Growth Value
28.0% 46.4% 54.1% 60.7% 65.7%
78.4%
72.0% 53.6% 45.9% 39.3% 34.3%
21.6% AGRO
FHER3
Source: Ita BBA
SQM
CSAN3 Base Value
SLCE3 SMTO3 Growth Value
Ita BBA 48
Land Prices (US'D/ha)'
Adecoagro Market Perform

Company Description
Adecoagro is a whole agricultural portfolio in itself, producing at least 11 commodities in three different countries. Sugar & ethanol are expected to represent 62% of 2011 EBITDA and the farming business the remaining 38%, mostly through soybean, rice and corn crops in that order. The sugar & ethanol gross profits are entirely concentrated in Brazil, while the geographical farming breakdown is 81% Argentina, 10% Brazil and 9% Uruguay. Adecoagro has a differentiated approach to the land transformation business compared with other farming names, which we see as a solid source of income for the company. Over the last six years, Adecoagro has been able to capitalize gains of over USD 103.6 million by strategically selling at least one of its fully mature farms per year. Adecoagros land portfolio is currently valued at USD 900 million and has appreciated 15% over the last year alone.
Ticker (local) Fair Value (12)
AGRO USD 14.9
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute USD % USD th USD m USD m 1m 2.75 8.2 82.0 13.91/7.16 120,069 980 155 12m n.a.
Investment Thesis
A strong ramp-up for the sugar, ethanol and energy project in the MS cluster will boost earnings over the coming years (28% CAGR 2012-2015). The ramp-up of the Angelica project, from its current 2.9 million tons of crushing capacity to 4.1 million tons in 2013, and the Invinhema project, to be started in 2013 and concluded in 2017, at 6.2 million tons, will create a large 10.3-million-ton cluster. In spite of being a new-frontier project in the state of Mato Grosso do Sul, sugar cane varieties are well adapted, generating 90 tons/ha, higher than the 80 tons/ha achieved in other new-frontier projects in the state of Gois. Adecoagros project differs from competitors in two ways: i) it has a high energy intensity (96 MWh/ton of sugarcane), and ii) it is not pure ethanol the company will be able to sell sugar through the Paranagua port facilities. Positive earnings prospects for food grains and land transformation. Although the likely improvement in farm economics is expected to benefit all farming players, we believe that Adecoagro is best positioned to capture land-appreciation gains. It has a track record and a reasonable expectation to turn over its land portfolio by 3%-5% per year, and we expect this strategy to guarantee a higher return on invested capital (ROIC) than other players, in two ways: i) as an additional income source with EBITDA around USD 20 million/year, and ii) by freeing up invested capital from appreciated land holdings.
Company Performance
103 93 83 73 63 53
Dec-10 Dec-11 Jun-11 Feb-11 Aug-11 Oct-11 Apr-11
AGRO
Value Drivers & Catalysts

We believe that sustainable strong results in the sugar and ethanol business segment will help dispel investor doubts about the cluster operations and growth risks. The Angelica project is already generating EBITDA margins well beyond competitors 57% for 9M11 due to cogeneration sales. Droughts in Argentina caused by La Nia could lead to a 15%-20% drop in corn productivity and at least a 10%-15% drop in soybean productivity, which could hurt 4Q11 and 1Q12 results. Sustainable track record of high EBITDA margins from the Angelica project. La Nia negatively impacting productivity of corn and soybean for 2012 harvest. Farm sales could generate significant capital gains, such as La Alegria, which sold in December for USD 13.7 million after four years of development, with a 23% IRR.
Source: Ita BBA
Our Take on the Company

We view Adecoagro as a growth stock and assign it a market-perform rating with a YE12 fair value of USD 14.9/AGRO. In a risk-averse market, shares are likely to encounter short-term volatility due to negative near-term earnings and news flow and the fact that 80% of the stocks fair value resides in the current value of growth opportunities. Also, the company pays no dividends and has a high cash burn rate as it finances project expansions (-22% FCFE yield). Although we believe in the companys good long-term growth prospects and capacity to deliver planned projects, better buy opportunities will arise once the La Nia negative news flow ceases after two quarters or so.
Estimates and Valuation

Years Net Revenues (USD m) EBITDA (USD m) Net Income (USD m) EV/EBITDA P/E FCFE (Yield %) Dividend Yield (%)
Source: Ita BBA
2010A 426 95 -21 11..9 N/A N/A 0.0%
2011E 583 158 41 7.2 23.4 -22.9% 0.0%
2012E 658 180 57 6.8 16.7 0.1% 0.0%
2013E 835 249 81 5.2 11.9 4.9% 0.0%
2014E 935 246 86 5.5 11.2 4.6% 0.0%
2015E 1.099 363 145 3.8 6.6 6.7% 0.0%
Ita BBA 49
Cosan ON Outperform
Company Description
Cosan is a vertically integrated group, consolidating five companies in its portfolio: i) 50% of Razen (80% of Cosans EBITDA), the largest company in the Brazilian sugar & ethanol sector, with a 65million-ton crushing capacity (~10% of Brazils total capacity) and the third in fuel distribution with 4,500 stations and 22 billion liters commercialized; ii) 69% of Rumo Logstica (10% of EBITDA), a transportation and logistics company with 5 million tons of sugar transported and 8 million tons loaded in 2011; iii) Cosan Lubricants (7% of EBITDA), distributors for Mobil in Brazil, with 15% market share and 1.0 million bbl commercialized in 2011; iv) Cosan Alimentos, mainly a refined-sugar producer and distributor with 35% Brazilian market share; and v) Radar, a land company with a portfolio of 106 K ha.
CSAN3 BRL 36.3
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -1.2 -0.5 27.1 33.9 28.65/18.84 406,279 11,010 29.1 12m 0.3 21.8
Investment Thesis
We like Cosans increasing exposure to less-cyclical businesses. We expect roughly 55% of Cosans EBITDA growth to come from fuel distribution and logistics, which in our view will enhance Cosans earnings predictability. In the fuel distribution business, there are still synergies to be captured from the JV with Shell, which could increase consolidated EBITDA by BRL 400 million (21% over 2011 EBITDA) by 2015. Rumo will likely ramp up vigorously in the coming four years with a 21% CAGR in elevation volume and 30% CAGR in transportation volume, increasing its EBITDA contribution from the current BRL 198 million (2012H) to BRL 420 million(2015H). We foresee significant upsides for Cosans sugar & ethanol business. Cosans sugar and ethanol EBITDA margin, around 30%, is considerably lower than peers like So Martinho with 40%+ margins. Aside from differences in land ownership and cogeneration, the biggest difference lies in Cosans growth model, which was based on the acquisition of smaller, less productive mills. We believe that Cosans 20% crop renewal rate this year, well above the markets 14% historical average and current 10% rate, will increase agricultural productivity by roughly 20% by 2015 and, ultimately, push margins to at least a 33% level in the long term, even with more conservative prices (sugar USD 0.22/lb in 2015 versus current USD 0.24/lb). We expect greenfield and inorganic growth to be close to non-existent due to the current scenario, but Cosan will be the best positioned player to capture eventual smaller acquisition opportunities due to its critical mass in So Paulos interior.
Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
CSAN3
Source: Ita BBA

The rebranding of fuel distribution stations sustains Razens 2012 guidance of EBITDA BRL 60/m , up from the current BRL 56/m . Better agricultural yields and weather conditions might raise Razens cane crushing from the YE12H estimate of 53 million tons to 57 million tons, diluting fixed costs/ton by 10% and helping to keep 2013 EBITDA margins at a 29% level, even in a slightly lower price scenario. Ethanol prices are expected to remain well above historical levels (hydrous BRL 0.92/liter 3-year average versus 2013H estimate of BRL 1.15/liter) in the short term. V-Power premium fuel penetration of 40% in rebranded stations is an expected synergy to be completed in 24 months. We see USD 0.20/lb as a floor value for sugar prices, considering marginal expansion costs. Rumo could enhance it results with grainloading to offset a slower ramp-up of sugar volumes and also with fertilizers as returntransportation freight. Lubricants will distribute basic oils: expected to account for 10% of its sales in 1H12.
3 3

Cosan is one of our preferred names in the sector, with a YE12 fair value of BRL 36.3/CSAN3 and an outperform recommendation. We view Cosan as a safe bet in the current equity market environment, considering its high base-value weight (46% of fair value) combined with increasing defensive characteristics such as less-volatile growth based on fuel distribution and logistics (50% of EBITDA growth versus current 30% share of EBITDA).

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFE (Yield %) Dividend Yield (%) 2010A 18,063 2,672 772 6.0 14.1 8.1% 5.3% 2011E 21,254 1,908 538 7.7 20.2 -12.9% 1.2% 2012E 24,876 2,027 836 6.9 13.0 0.0% 3.8% 2013E 28,110 2,260 1,010 6.2 10.8 0.6% 9.3% 2014E 29,425 2,399 1,098 5.8 9.9 6.4% 7.6% 2015E 31,673 2,629 1,240 5.3 8.8 6.6% 8.5% Giovana Arajo, CNPI +55-11-3073-3036 giovana.araujo@itaubba.com Antonio Barreto, CNPI +55-11-3073-3060 antonio.barreto@itaubba.com
Source: Ita BBA Note: 2011 = Harvest year 2011/2012; 2012= Harvest year 2012/2013. The same rationale applies for other years.
Ita BBA 50
Dec-11
Heringer Fertilizantes ON Outperform

Company Description
Heringer is the leading fertilizer distributor in Brazil, with an 18.5% market share in 2010. We estimate 39% of Heringers 2011 EBITDA to come from specialty fertilizers (blends developed for specific crops or land), while the remaining 61% EBITDA share will come from commoditized blends of N, P and K. Sugarcane is the main crop destination for Heringer, with a 20% share, followed by soybeans, with 18% and corn with 17%. We believe that Heringers main differentiation from smaller distributors is its brand and its established distribution network. It has 19 mixing units in Brazil, reaching close to 45 thousand clients in 2010. Heringer faces severe competition from other fertilizer distributors with commodity trading as a core business, especially in soybean use, where fertilizers are used to enhance trading activities.
FHER3 BRL 16.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 4.8 5.4 11.1 51.7 11.25/7.5 48,471 536 0.6 12m 20.0 45.7
Investment Thesis
Heringer will benefit from expansion in Brazilian agricultural production and increased fertilizer use. Brazil is expected to be the worlds marginal agricultural producer, with an extra 17 million hectares planted by 2020 (25% increase). Pressures for a more rational use of land, considering lower land availability worldwide and rising food consumption, will drive investments in productivity and consequently fertilizers. We estimate average fertilizer use to be 1.1 ton/hectare in Brazil, three times lower than China and India and 9 times lower than in the U.S. We estimate conservatively that Heringers sales will grow with the Brazilian market (50% growth from 2011 to 2020), while in a bull scenario, if the Brazilian market could reach at least current Chinese fertilizer penetration, growth would be 2 times higher. Fertilizer use for sugarcane will likely grow, reducing Heringers earnings volatility. Heringers EBITDA volatility see-sawed from 4% in 2007 to 0% in 2008 to 7% in 2011. We predict more stable margins in the future, given the companys increasing exposure to sugarcane clients, where fertilizer bartering by trading companies does not occur. The sugarcane crop area is expected to double by 2020, versus a 30% increase estimated for soybeans. Moreover, we estimate that specialty fertilizers, a more stable and higher-margin product (15% premium), will represent 80% of Heringers EBITDA growth in 10 years, increasing its share in sales from the current 35% to 45%.
3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
FHER3
Source: Ita BBA

All-time record results for YE11 are apt to be a trigger for the stock, with EBITDA likely reaching BRL 350 million and EBITDA margin at 7.4%. The large discount applied to Heringer by investors, in our view due to an exaggerated perception of company risk after its difficulties in 2008, tends to be offset because of the strong cash position (BRL 480 million vs. BRL 250 million in 2008) and leverage reduction (net debt/EBITDA 1.0x vs. 4.5x in 2008). Record results, improving cash position and reduced leverage. Cash inflow of BRL 80 million due to tax reversal is expected soon. Food commodity prices remain above historical averages, sustaining strong farming economics and favorable exchange ratios for sugarcane (19.7 tons sugarcane/ton fertilizer vs. three-year average of 28.6), corn (42.3 vs. 49.1) and soybeans (23.6 vs. 23.7).

Heringer is a re-pricing case in our view, which supports our outperform recommendation, with a YE12 fair value of BRL 16.8/FHER3. We believe it is a buy opportunity at current 3.5x EV/EBITDA, and with an 8% discount to BRL 12.0/FHER3, which we see as a floor value based on a perpetuity of conservatively normalized earnings (with a 3.0% EBITDA margin, versus 2011s 7.4%).

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFE (Yield %) Dividend Yield (%)
Source: Ita BBA
2010A 3,521 212 62 5.3 8.5 0.2% 2.9%
2011E 4,461 331 77 3.1 6.8 16.1% 3.7%
2012E 4,876 254 160 3.5 3.3 -13.8% 7.6%
2013E 5,080 229 143 3.8 3.7 19.9% 13.5%
2014E 5,349 209 127 4.1 4.2 15.7% 12.0%
2015E 5,666 207 122 4.2 4.3 12.7% 11.6%
Ita BBA 51
Dec-11
So Martinho ON Outperform
Company Description
So Martinho is the benchmark player in the sugar and ethanol industry in terms of operational efficiency, which ultimately translates into higher EBITDA margins of around 42%. Its current crushing capacity is 14.5 million tons, considering 12.8 million tons in the traditional frontier (So Paulo countryside) and 1.7 million tons proportional to its 51% stake in Boa Vista, a new-frontier (Gois state) joint venture with Petrobras. So Martinhos business model is heavily concentrated in its own sugarcane (70% vs. 55% for Cosan), and, more specifically utilizing its own land: 42 K hectares or 36% of the total land usage. While traditional-frontier mills have 60%/40% flexibility for ethanol and sugar production, Boa Vista is a pure ethanol project, mainly due to logistics issues.
SMTO3 BRL 31.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -4.6 -4.0 17.0 82.5 26.5/16.45 112,861 1,918 1.1 12m -28.7 -13.4
Investment Thesis
So Martinhos earnings and expansion-project returns are ultimately dependent on sugar and ethanol prices, as it is the only listed pure player in the sector. While this increases its earnings volatility, we foresee a changing environment for the sector, with the already-high (50%) and increasing penetration of the flex-fuel fleet expected to reach 90% of light vehicles by 2020. A strong capacity ramp-up of 3.8 million tons, or 26% growth, is expected by 2016. The expansion of the Boa Vista project (15% IRR) will increase So Martinhos crushing capacity by 2.3 million tons, while brownfields in traditional frontiers will add an additional 1.5 million tons. We believe there is additional upside deriving from a potential exchanges of So Martinhos shares in Agropecuria Boa Vista (the land portfolio it recently acquired in the Santa Cruz deal), for 55% of Santa Cruz (belonging to Luiz Ometto). The exchange would bring So Martinhos crushing capacity to 20.5 million tons, or 41% growth by 2016. In our view, So Martinhos growth would come for free for an investor, considering its current low EV/EBITDA of 3.8x (12mFw).
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Weather-related productivity recovery combined with a better utilization of Boa Vistas ramp-up is expected for the next 12 months, which is likely to dilute fixed costs. If achieved, the crushing guidance for 2013H could decrease cash costs/ton from the current USD 0/163/lb to USD 0.150/lb, closer to 2011H costs and more than offsetting downward sugar price pressures. So Martinho hedged at USD 0.255/lb 30% of 2013H, reducing short-term price risks. Global sugar inventories are still at historical low levels (17.6% in 2011-12 versus 5-year average of 22%) and uncertainties in Brazilian and Indian supply are likely to support prices. Slow recovery of the Brazilian harvest (YE13H estimated at 515 million tons) supports ethanol prices (BRL 1.15/liter vs. BRL 0.92 historical). Separate biomass auctions are being
Source: Ita BBA
Ibovespa
SMTO3
discussed by the government and would represent a positive surprise, raising expected energy prices from the current BRL 100/MWh to BRL 130/MWh.

We maintain our outperform recommendation on So Martinho, with a YE12 fair value of BRL 31.0/SMTO3. Current trading EV/EBITDA of 3.8x is inconsistent, in our view, with decent earnings growth estimates (12% CAGR) and multiples of international peers, at around 7.0x. We believe that So Martinho can be expected to trade at a premium to international competitors, considering its low cost position worldwide (USD 0.16/lb cash cost) and the optionality value of Brazilian sugarcane, a source not only of sugar but of ethanol and cogeneration fuel.

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFE (Yield %) Dividend Yield (%) 2010A 1,295 566 142 4.2 13.7 6% 1.8% 2011E 1,299 542 106 4.2 18.3 1.7% 1.4% 2012E 1,533 687 246 3.4 7.9 2.3% 6.3% 2013E 1,624 710 245 3.5 7.9 9.8% 9.5% 2014E 1,782 816 309 3.1 6.3 12% 11.9% 2015E 1,904 879 345 2.8 5.6 14% 13.3% Giovana Arajo, CNPI +55-11-3073-3036 giovana.araujo@itaubba.com Antonio Barreto, CNPI +55-11-3073-3060 antonio.barreto@itaubba.com
Source: Ita BBA Note: 2011 = Harvest year 2011/2012; 2012= Harvest year 2012/2013. The same rationale applies for other years.
Ita BBA 52
Dec-11
SLC ON Market Perform

Company Description
SLC is one of the largest farming players in Brazil, with a land portfolio of 306 K hectares, 41% in the Brazilian center-west region (MS, MT and GO states) and the remaining in the northeast region (BA, MA and PI states). SLCs 2011 EBITDA is heavily concentrated in cotton and is expected to remain so (60%), followed by soybean (17%) and corn (12%). SLC is currently structuring its land transformation business under its subsidiary LandCo and plans to generate income from capital gains from land transactions; however, LandCos private placement has been delayed due the uncertainties related to the regulation of farmland acquisition by foreigners in Brazil.
SLCE3 BRL 24.1
Stock Data
Investment Thesis
SLC will benefit from an environment of long-term increasing agricultural commodity prices, driven by the combined effect of lower land availability (-1.5%/year), higher food consumption per capita (+1%/year) and urban population growth in emerging markets. We conservatively estimate a 2% CAGR for soybean and corn prices in line with inflation, although based on above-average historical prices. However, SLCs high exposure to cotton is a point of concern in our view. Cotton prices are at USD 0.95/lb, well above the USD 0.71/lb historical average, and in our view cotton will experience higher volatility due to its higher correlation with consumer markets. Since 2008 it has presented by far the highest coefficient of variation (47%) when compared to food-linked commodities (soybean 17%, corn 28%), which ultimately brings volatility to SLCs earnings. While it is true that SLC can always change crops in the future, the company valuation and margins would be sharply lower in that case, since we estimate cotton to generate a USD 2,900/ha margin while soybeans generate USD 730/ha. We estimate that SLC will continue to generate the lowest ROIC (5.3% for 2012-17) among the land owners we cover. Compared with Adecoagro (6.8% 2012-17), it does not have the track record nor a solid guidance (3%-5%/year) for the land transformation business, which generates an additional source of income and frees up invested capital from appreciated lands. Compared with So Martinho (7.2% 2012-17), it misses the optionality value provided by sugar, ethanol and cogeneration sales.
Company Performance
130 110 90 70 50
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
SLCE3
Source: Ita BBA

Cotton prices are suffering downward pressure, and delays in the regulation of Brazilian land-acquisition by foreigners has been an obstacle for the land-transformation business. Cottons global stock/consumption ratio is currently at 52% (2011/12e), 7% above the historical average, while soybeans ratio is only 1% above the historical average and corn is 3% below. Cotton is the only one of the three to present a surplus (12 million tons) in production/consumption analysis. A resolution for the regulation of foreigners land acquisition will probably come only in late 2012, in our opinion, which will affect land-market liquidity and slow down the land-transformation business. Cotton: We expect a 32% year-over-year decrease in average prices for 2012, from USD 1.40/lb to USD 0.95/lb. Soybeans/corn: smoother decrease (6% YoY). Congressional uncertainties resolution over land to dispel by
acquisition
foreigners expected only at the end of 2012.

We maintain our market-perform rating on SLC (YE12 fair value of BRL 24.1/SLCE2). While SLC is currently trading at a 42% discount to NAV, we believe that the companys extremely low ROIC (5.3%), considerably below its cost of capital (12.6%), justifies some discount. Moreover, we do not have a reference point to compare with Deloittes land valuation of BRL 1.8 billion, which is the most important source of value in the NAV calculation, since the company does not turn over its land portfolio.

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFE (Yield %) Dividend Yield (%)
Source: Ita BBA
2010A 889 204 59 8.9 25.3 -4.3% 1.0%
2011E 1,106 287 121 6.8 12.3 -3.5% 2.0%
2012E 1,222 365 174 5.3 8.5 4.7% 2.9%
2013E 1,231 313 133 6.3 11.1 2.8% 2.2%
2014E 1,343 326 137 6.2 10.8 2.5% 2.3%
2015E 1,466 393 182 5.1 8.2 3.9% 3.1%
Ita BBA 53
Dec-11
Soquimich Outperform
Company Description
SQM is a Chilean fertilizer and mineral company active in production and distribution through five business lines: i) commodity fertilizers potash (25% of 2010 G.M.), ii) specialty fertilizers potassium nitrate (30%), iii) iodine (27%), iv) lithium (9%) and v) industrial chemicals (9%). It is not only commodity-diversified, since fertilizers are used for all crops, but also geographically diversified, with internationally diversified revenues: Europe 33%, N. America 23%, Asia 18% and L. America 14%. We believe SQM to be the lowest-cost producer and world market leader in lithium, iodine and potassium nitrate, which combined with long-term Chilean pension-fund holders (12% stake) are the reasons for the structural premium it trades at over pure fertilizer peers (2.2x over P/E fertilizer peer average), even while larger potash producers are more competitive than SQM for this specific business line (25% lower cash cost).
Ticker (ADR) Fair Value (12)
SQM USD 65.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute USD % USD th USD m USD m 1m -1.8 55.3 18.0 67.75/43 263,197 14,542 33.8 12m -3.8
Investment Thesis
The company has a unique asset base in Chile, with high-quality mineral deposits (e.g. lithium, 2.2 ppm in deposits versus 1.0 ppm for the best non-Chilean competitor), and market penetration in several niche segments (premium fertilizers, 55% world market share; iodine, 36%; lithium, 26%), which translates into unmatched cost competitiveness (e.g. lithium USD 2.0 K/ton vs. the second-best USD 2.4 K/ton), pricing power and ultimately earnings predictability: SQMs 40% ROIC coefficient of variation is the lowest among its fertilizer peers (Mosaic: 56%, Potash: 72% and K+S: 120%, 2006-10). The company is the best-in-class vehicle to play the positive long-term fundamentals of global agribusiness such as increasing use of premium fertilizers, which are driven by higher per-capita food demand (1.5% CAGR) and ultimately by higher land values (7% CAGR over the last 8 years). On top of that, SQM is an attractive vehicle for playing the global trend towards more rational energy use, with cost competitiveness in the raw materials essential for lithium-ion batteries used in electric cars (6% CAGR in our conservative scenario and 10% in a bullish scenario) and solar salt nitrates for solar power panels (60% year over year for 2012 and 4% CAGR afterwards, conservatively estimated).
Company Performance
119 109 99 89 79 69
Dec-10 Jun-11 Oct-11 Apr-11 Dec-11 Feb-11 Aug-11
SQM

We believe that the negative price momentum of grains and fertilizers is already priced in, since current prices of agricultural commodities and fertilizers (on average 30% higher) as well as expectations are far better now (range 10%-20%) than they were the last time SQM traded at its current multiples (P/E 19.5 and EV/EBITDA 12.8). We see SQM reducing its exposure to developed markets with its increasing production of granulated potash (30% of the mix to 60%), which is more accepted in Brazil. We do not expect sharp decreases in potash prices: currently at USD 470/ton, close to USD 450/ton, which we see as a floor. Company investments to raise the share of granulated potash vs. standard from the current 30% to 60% are expected to increase margins and open up the Brazilian market. Growth in lithium demand, estimated at 6% per year, will be driven by electric-car batteries and could reach 10% in a bull scenario. Industrial chemical revenues will increase 60% in 2012 due to a large solar salt contract. Iodine prices are expected to return to USD 38/kg levels after reaching USD 80/kg.
Source: Ita BBA

SQM is our top pick in the sector, with aYE12 fair value of USD 65.2/SQM and an outperform recommendation. It does not seem expensive on either an historical (26% discount to average) or relative basis when properly compared with peers (SOTP indicates range EV/EBITDA 10.2-14.7). We foresee a good entry point at current price levels. SQMs relatively defensive characteristics, such as healthy cash generation (5%, temporarily at 2% FCFE yield due to all-time high capex), low return volatility and leverage (net debt/EBITDA of 1.0x), make it the sectors safer bet in uncertain times.

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) EV/EBITDA P/E FCFE yield (%) Dividend yield (%)
Source: Ita BBA
2010a 1,830 691 382 22.2 38.1 0.0 1.3
2011e 2,187 942 577 16.4 25.2 1.6 2.0
2012e 2,518 1,180 692 13.1 21.0 2.6 2.4
2013e 2,610 1,183 723 12.9 20.1 5.1 3.7
2014e 2,638 1,186 718 12.8 20.2 5.3 3.7
2015e 2,786 1,255 777 11.9 18.7 5.4 4.0
Ita BBA 54
Banking & Financial Services
Regina Longo Sanchez, CNPI +55-11-3073-3042 regina.sanchez@itaubba.com Thiago Bovolenta Batista, CFA +55-11-3073-3043 thiago.batista@itaubba.com Alexandre Spada, CFA +55-11-3073-3004 alexandre.spada@itaubba.com Nicolas Chialva, CFA (Argentina & Chile) +54-11-5273-3503 nicolas.chialva@itau.com.ar
BANKING AND FINANCIAL SERVICES

About the Sector
Banking and Financial Service companies are mainly dependent on economic expansion. Even in a scenario of global economic deceleration, Latin America stands out as an EM region with better growth prospects than developed-world economies and healthier financial systems. In this scenario, efficiency improvement can be a major catalyst for some stocks in the sector. In Latin America, there is still considerable credit penetration to be made. Chilean and Colombian banks deserve a premium over Brazil, mainly because of their countries lower inflation prospects in the medium to long term. However, given relative valuations, we prefer Brazilian large-cap banks followed by Colombia and Chile (for the banks we cover, Chilean banks are trading at 12.2x P/E 2012 and Bancolombia at 12.1x vs. Brazilian banks, at 7.0x, implying a premium above the historical average). Argentine banks will continue to be a play on the discount rate, as they are dependent on sovereign risk perception. Among financial service companies, we favor defensive stories such as Cielo, Cetip and Valid. Overall, we like the sectors prospects for 2012, given that most LatAm countries have instruments to ease monetary policy and ensure better economic growth than developed markets. Alexandre Spada, CFA +55-11-3073-3004 alexandre.spada@itaubba.com Nicolas Chialva, CFA (Argentina & Chile) +54-11-5273-3503 nicolas.chialva@itau.com.ar Thiago Bovolenta Batista, CFA +55-11-3073-3043 thiago.batista@itaubba.com Regina Longo Sanchez, CNPI +55-11-3073-3042 regina.sanchez@itaubba.com

In all countries, regulatory issues are important for this sector. Particularly in Brazil, we expect government announcements to be important drivers in 2012. These announcements may include: i) a lower Selic rate, reversal of macroprudential measures and lower reserve requirements to create economic stimulus through credit growth; and ii) capital requirements with details of BIS III implementation. Moreover, deceleration risk versus inflation risk will be important to track. Assuming the economy recovers, inflationary pressure could be a source of concern. On the other hand, if deceleration prevails, asset quality could deteriorate (for the Brazilian banks we cover, we expect an average NPL ratio overdue by 60 days of 2.8% in 2012 versus 2.7% at the end of 2011e). Asset quality is always one of the sectors big themes, but the tight labor market and increasing real wages in most LatAm countries will likely keep NPL ratios under control. We continue to have a more positive view on the sector, given that most LatAm banks are not so dependent on global growth and international funding but on domestic economic stimulus. For instance, foreign funding as a percentage of total assets is ~7% for Brazilian banks, ~10% for Chilean banks, ~15% for Bancolombia and ~1% for Argentine banks.
Catalysts
Chilean banks: subsiding inflation and the resolution of proposals to lower interest rate caps could lead to a compression of spreads. Argentine banks: more government Brazilian banks: loan growth around 15% in 2012. Easing in monetary policy should help, but inflation risk could increase. Asset-quality slippage is a risk if economic growth is weaker than expected. Cielo: likely upward earnings revision based on lower costs and resilient MDRs. Regulatory issues may surprise positively versus current market expectations. BM&F Bovespa: News flow about
interventionism is a risk, but trading as they are at around 1.25x BV, the bottom could be close. Bancolombia benefits from Colombias
positive momentum, but the bank has just announced a capital increase. Cetip: tends to benefit from the regulatory environment. Competition with BM&F Bovespa and performance of GRV segments are risks.
competition and the outcome of the study on market efficiency requested by CVM are major risks.

Our favorite names include Bradesco, Banrisul, Cielo and Cetip. The four companies benefit from good growth prospects while also being defensive because of strong balance sheets, loan mix, lower delinquency risk and inflation protection. We have a cautious view on BICBANCO because of its higher provisions for loan loss and its conservative increase in liquidity, which hurts its ROE.
Ita BBA 56
Banking and Financial Services

Historical P/E Excessive Discount of Brazilian Banks vs. LatAm Peers
25.0 20.0 15.0 10.0
10% 30% 25% 20% 15% 24% 23% 22% 20% 18% 17% 17% 15% 14% 25% 26% 25%
Reasonable ROAEs Even in Crisis Periods
26% 26% 22% 22% 23% 19% 19% 19%
5.0 0.0
5% 0% Brazilian Large- Brazilian Midsize Argentina Banks Chilean Banks Bancolombia Cap Banks* Banks (adjusted figures) 2008 2009 2010 2011e
Chilean
Source: Bloomberg and Ita BBA
Brazilian Large-Cap
Bancolombia
* It does not include Santander Brasil data due to the lack of information in 2008 Source: Banks and Ita BBA
Loan-to-GDP High Potential for Credit Penetration in LatAm Countries

180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 15% 24% 31% 34% 47% 76% 101% 103% 110% 163% 167%
Dividend Yield (2012e)

9% 9% 6% 7% 7%
3% 2% 1%
4% 4%
5% 5% 5% 5% 5% 5% 5%
6%
Cetip
GF Galcia
BCI
Banco Macro
BICBANCO
Santander
Bradesco
Banrisul
Banco de Chile
Source: Central Banks
Source: Ita BBA
Coverage Universe - Multiples and Valuation

LatAm Banks Brazilian Banks Banco do Brasil Bradesco Santander Brasil* Banrisul ABC Brasil Daycoval BICBANCO Colom bian Banks Bancolombia (ADR) Chilean Banks Bci Santander Chile Banco de Chile Argentina Banks GF Galcia (ADR) Banco Macro (ADR) Banco Francs (ADR) Financial Services Cielo Cetip* Valid BM&F Bovespa* Rating Outperform Outperform Market Perform Outperform Outperform Market Perform Market Perform Market Perform Market Perform Undeperform Undeperform Outperform Outperform Market Perform Rating Outperform Outperform Outperform Market Perform Target Price BRL 42.2 BRL 43.3 BRL 21.1 BRL 25.5 BRL 16.0 BRL 12.2 BRL 12.0 USD 83.3 CLP 33,684 CLP 44.5 CLP 72.5 USD 9.7 USD 26.4 USD 6.7 Target Price BRL 59.0 BRL 34.5 BRL 27.0 BRL 11.5 Upside 82% 37% 40% 35% 28% 30% 46% 45% 15% 19% -1% 28% 13% 6% Upside 24% 33% 23% 13% P/E 11e 5.6x 10.5x 8.8x 8.7x 7.1x 7.1x 7.3x 13.9x 11.3x 13.2x 14.0x 4.7x 4.9x 5.4x P/E 11e 15.1x 26.2x 11.2x 16.7x P/E 12e 5.3x 9.2x 8.1x 7.6x 6.4x 6.3x 6.3x 12.1x 11.9x 11.6x 13.2x 4.3x 5.1x 5.7x P/E 12e 14.2x 18.8x 10.0x 15.9x P/BV 11e 1.1x 2.1x 1.0x 1.8x 1.1x 1.0x 1.0x 2.5x 2.4x 3.2x 3.4x 1.1x 1.3x 1.3x EV/EBITDA 11e 9.1x 14.2x 7.0x 13.3x P/BV 12e 1.0x 1.9x 1.0x 1.5x 1.0x 1.0x 0.9x 2.3x 2.1x 2.9x 3.1x 1.0x 1.3x 1.3x EV/EBITDA 12e 8.2x 11.3x 5.9x 11.8x
* Market Capitalization Adjusted for Tax Shield Benefit. Source: Ita BBA
Ita BBA 57
Santander Chile
Banco do Brasil
Banco Francs
Valid
Bancolombia
BVMF
Cielo
ABC Brasil
Argentina
Daycoval
Germany
Peru
Brazil
Chile
Colombia
USA
Italy
Mexico
France
UK
ABC Brasil PN Outperform

Company Description
ABC Brasil was founded in 1989 through a partnership between Arab Banking and Grupo Roberto Marinho. In 1997, Arab Banking and ABC Brasils management acquired Grupo Roberto Marinhos stake in the bank, and this configuration remained almost stable until the bank went public in 2007. The bank is indirectly controlled by Libyan Central Bank and Kuwait Investment Authority. ABC Brasils main focuses are corporations (annual revenues between BRL 250 million and BRL 2.0 billion) and the middle market (annual revenues between BRL 30 million and BRL 250 million), and its business is mostly concentrated in the Southeastern region of Brazil.
ABCB4 BRL 16.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 8.2 8.9 12.5 28.0 15.53/8.41 134,501 1,681 1.6 12m -13.5 5.1
Investment Thesis
ABC Brasil has operated in a very specific niche since its incorporation, focusing on the corporate segment and midsize companies, which represent ~77% and ~23% of total loans, respectively. Consequently, the bank benefits from extensive expertise in those segments. Although it competes with large-cap institutions, upper midsize and large companies usually work with an average of five banks, which gives ABC Brasil room to be one of the marginal lenders to these corporate clients. The sustainability of its business model, supported by Brazils economic growth and the historical consistency of the banks performance, make us confident that ABC Brasil will continue to deliver healthy results and maintain a sustainable ROAE of ~16%.

ABC Brasil experienced a strong deceleration in loan growth during 2011 (to ~6% in 2011e from 35% in 2010) as a consequence of the Libyan crisis and global macro uncertainties. Following some improvement in the Libyan situation, the bank is expected to re-accelerate its loan portfolio expansion in 2012 (we estimate loan growth of 17% in 2012). The bank has a somewhat comfortable capital level (BIS ratio of ~16% in 3Q11) with which to meet our loan growth expectation. We highlight below some positive and negative short- to medium-term catalysts. ABC Brasil is expanding faster in the middlemarket segment, which reached 23% of total loans in 3Q11. This might help to support NIM in coming periods (we estimate a flat NIM in the medium term). The NPL ratio is not expected to deteriorate materially, even considering the increase in the share of middle-market companies (according our figures, the NPL ratio will increase to 0.4% in 2012 from 0.3% in 2011). ABC Brasils NIM is expected to be relatively flat in coming years, at around 6%. Although the large-cap banks aggressiveness has tempered, the competition with those banks is a source of risk for ABC Brasil. An increase in the cost of funding in the system will likely compress the NIM (remember that ABC Brasils funding is based on institutional investors, while individual investors represents less than 10% of the banks total funding). A strong deceleration in the Brazilian economy could negatively impact the SME segment.
Company Performance
120 100 80 60 40
Jul-11 Nov-11 Jan-11 May-11 Sep-11 Mar-11 Jan-12
Ibovespa
ABCB4
Source: Ita BBA

We have an outperform recommendation on ABC Brasil with a YE12 fair value of BRL 16.0 per share. We believe the bank will continue to benefit from Brazilian GDP growth and the development of the SME segment. ABC Brasil is trading at compelling levels (1.0x P/BV), and the historical consistency of results indicates that the bank deserves to trade at a premium to its P/BV value (only during the 200809 financial crises did the bank trade below its reported P/BV). We expect the bank to achieve a sustainable ROAE of ~16% (above its cost of capital of 14.6%).

Years Loan Portfolio (BRL m) Equity (BRL m) Recurring Net Income (BRL m) Net Interest Margin (%) ROAE (%) P/E P/BV EPS (BRL) Dividend yield (%)
Source: Ita BBA
2010a 7,629 1,348 202 6.0 15.8 8.3 1.2 1.5 4.3
2011e 7,901 1,501 236 6.3 16.6 7.1 1.1 1.8 4.8
2012e 9,283 1,673 264 6.2 16.6 6.4 1.0 2.0 5.5
2013e 10,832 1,870 291 5.9 16.4 5.8 0.9 2.2 5.6
2014e 12,502 2,095 320 5.6 16.2 5.3 0.8 2.4 5.7
2015e 14,357 2,342 354 5.4 16.0 4.8 0.7 2.6 6.4
Regina Longo Sanchez, CNPI +55-11-3073-3042 regina.sanchez@itaubba.com Thiago Bovolenta Batista, CFA +55-11-3073-3043 thiago.batista@itaubba.com Alexandre Spada, CFA +55-11-3073-3004 alexandre.spada@itaubba.com
Ita BBA 58
Banco do Brasil ON Outperform

Company Description
Banco do Brasil, the largest financial institution in Brazil in terms of total assets, is controlled by the Brazilian government and was founded over 200 years ago. Its distribution network in Brazil, with more than 5,000 branches, serves not only the regions with a higher GDP concentration but also the countrys fastest growing regions like the Northeast and Midwest. Following the 2008 crisis, Banco do Brasil acquired Banco Nossa Caixa from the state government of So Paulo; it also acquired 49.99% of Banco Votorantim, focused mainly on vehicle financing, payroll loans and corporate banking. In 2012, it will start to operate the Postal Bank, paying BRL 2.8 billion for the five-year operating rights.
BBAS3 BRL 42.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -0.3 0.3 23.2 81.8 32.14/21.1 2,860,729 66,398 156.6 12m -20.0 -2.9
Investment Thesis
Banco do Brasil has a massive client base for the cross-selling of products and positive prospects for the insurance and pension segments (we expected an increase of ~23% in these segments in 2012). It also has a lower-risk loan mix than its peers, particularly due to payroll and agricultural loans (representing 12% and 21% of the banks loan portfolio in 3Q11, respectively), which have been performing well. The NPL ratio (overdue by more than 90 days) for agricultural loans was below 1.0% in 3Q11. However, political influence has always been considered a source of risk for state-owned banks, particularly when economic stimulus is required from the government. Another concern in coming periods relates to Banco do Brasils capital position, especially with the adoption of the Basel III rules, given that the bank has the lowest tangible equity ratio among Brazilian large-cap institutions. We see a lot of value in Banco do Brasil from an absolute perspective, but there are lingering uncertainties regarding the Previ Benefit Plan I surplus gains (an employee pension plan with a surplus that is not fully booked in Banco do Brasils balance sheet) and Banco Votorantims results in 2012.
Company Performance
120 100 80 60 40
Jan-11 Jul-11 May-11 Nov-11 Mar-11 Sep-11 Jan-12

Banco do Brasil is expected to post loan growth of between 15% and 17% in 2012. We believe that it might gain market share in the payroll and mortgage segments, which are safer loans. However, we see uncertainties regarding Banco Votorantims results in coming quarters, following the losses in 3Q11. In addition, the market fears an eventual increase in government willingness to use state-owned banks to stimulate the economy through reckless credit expansion. Our base-case scenario for 2012 includes a pre-tax Previ surplus gain of BRL 2.6 billion, which implies an upside of around 15% for equity investments relative to December 2011. Below are some positive and negative catalysts. Above-market growth in payroll and mortgage loans, benefiting from the macroprudential measures. Cross-selling opportunities reversal and of No Previ surplus gain in a stress scenario (note that almost 65% of Previs Pension Plan I assets are equity investments). Likely capital increase in coming years as a result of Basel III rules. Banco Votorantims ROAE is likely to be in the single-digit range in 2012. Risk of asset-quality deterioration from Banco do Brasils pro-economy strategy, in the event of a more aggressive credit expansion.
Ibovespa
BBAS3
Source: Ita BBA
positive
prospects for the insurance and pension segments. New clients originated at the Postal Bank (the bank expects ~six new accounts per week per Postal Bank branch) and higher product penetration among existing clients.

We have an outperform recommendation on Banco do Brasil, with a YE12 fair value of BRL 42.2 per share. We see a lot of value in Banco do Brasil from a valuation perspective, but there are lingering short-term uncertainties regarding the Previ surplus gains and Banco Votorantims results in 2012. While we believe that a capital increase is more likely over the next two years as a result of the implementation of the Basel III rules, it seems already partially priced in.

Source: Ita BBA
2010a 358,366 50,440 10,637 7.6 24.6 6.2 1.3 3.7 7.1
2011e 418,738 58,092 11,754 7.5 21.7 5.6 1.1 4.1 7.0
2012e 484,552 65,899 12,592 7.5 20.3 5.3 1.0 4.4 7.2
2013e 556,990 74,781 14,327 7.3 20.4 4.6 0.9 5.0 8.2
2014e 638,302 84,365 15,458 7.2 19.4 4.3 0.8 5.4 8.8
2015e 730,260 94,847 16,907 7.0 18.9 3.9 0.7 5.9 9.7
Ita BBA 59
Bancolombia Market Perform

Company Description
Bancolombia is the largest full-service retail bank in Colombia and operates in Central America mainly through Banco Agrcola, the largest bank in El Salvador. The bank not only has a significant presence in the corporate segment but also has leading positions in some consumer segments, including the credit card business, with a market share of more than 20%. It has 945 branches throughout the country and abroad, with approximately 7.0 million clients. Bancolombia is the result of a series of mergers and acquisitions of banks since 1945. Among the most important mergers were those with Conavi and Corfinsura in 2005; the first was the leader in mortgages at the time, and the second was a strong player in the large and mid-size corporate and investment banking business. In 2007, Bancolombia acquired Banagrcola, which controls Banco Agrcola, the largest bank in El Salvador. Bancolombia is controlled by Grupo Inversiones Suramericana.
Ticker (local) Fair Value (12) Ticker (ADR) Fair Value (12)
PFBCOLOM COP 38,510.0 CIB USD 83.3
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IGBC USD % USD Th USD m USD m 1m 0.8 -3.2 57.5 44.8 68.7/52.3 197.0 11,329 19.2 12m -3.4 22.1
Investment Thesis
The bank has benefited from Colombias positive economic momentum and has delivered consistent results in the last few years. The bank generated an average ROAE of 19% in the last two years, which we believe could increase slightly in the years ahead. We see further increases in the countrys bancarization and credit penetration. The loan-to-GDP ratio in Colombia is around 34%, below the level of other LatAm countries like Brazil (~47%) and Chile (~76%). With around 80% of its credit portfolio composed of floating-interest-rate loans and slightly longer liability terms, the banks NIM could benefit from an increase in repo rates (we estimate an improvement in NIM of ~10 bps in 2012 and another 20 bps in 2013). Although the global scenario seems to call for an easing cycle of monetary policies around the world, Colombias central bank hiked rates as inflation picked up towards the targets upper bound and demand remained strong. We believe that there is room for additional interest-rate hikes in the medium to long term, given that the current interest-rate level still creates stimulus for the economy.
Company Performance
109 99 89 79 69
May-11
Jul-11
Sep-11
Mar-11
Jan-11
Despite the good current and future opportunities, we see the banks valuation (P/E12 of 12.1x) as the main risk that prevents us from assigning an outperform recommendation to Bancolombias ADR. However, we acknowledge that Bancolombias ADR is one of the best decent-liquidity vehicles to capture the countrys economic momentum. We highlight below some positive and negative catalysts. We expect the loan portfolio to grow over 15% per annum for at least the next five years. Efficiency ratio will likely peak in 2011 (~60%) and then improve from 2012 onward, mainly as a result of the INNOVA program, a development platforms. and improvement of IT Possible M&A transaction, either related to an international expansion or as an acquisition target (last banking transactions in Colombia were priced above 3.0x P/BV). Bancolombias capital position could be an issue with the implementation of Basel III and the prospects for loan growth in coming years. The bank has approved a capital increase of 64 million shares (8% of total capital and around USD 950 million).
Source: Ita BBA
IGBC
PFBCOLOM
Fiercer competition from foreign players and regulatory changes are sources of risk. Higher interest rates benefit its NIM.

We have a market-perform recommendation on Bancolombia and a YE12 fair value of USD 83.3 per ADR. Although we believe that Bancolombia deserves to trade at a premium to other LatAm banks due to the positive Colombian economic momentum and the banks good profitability (ROAE of ~20% in the next four years), with expected average earnings growth in the low teens in coming years, the current premium seems excessive.

Years 2010a Loan Portfolio (COP m) 48,601,090 Equity (COP m) 7,947,140 Recurring Net Income (COP m) 1,436,494 Net Interest Margin (%) 7.0 ROAE (%) 19.2 P/E 14.9 P/BV 2.7 EPS (COP) 1,823.4 Dividend Yield (%) 2.3
Source: Ita BBA
2011e 58,153,028 8,471,730 1,545,860 6.8 18.8 13.9 2.5 1,962.2 2.5
2012e 68,182,457 9,498,494 1,772,046 6.9 19.7 12.1 2.3 2,249.3 2.9
2013e 79,471,518 10,753,384 2,123,011 7.1 21.0 10.1 2.0 2,694.8 3.5
2014e 2015e 92,088,398 106,294,588 12,201,501 13,911,222 2,420,283 2,630,340 7.1 6.8 21.1 20.1 8.8 8.1 1.8 1.5 3,072.1 3,338.7 3.9 4.3
Ita BBA 60
Nov-11
Jan-12
Banco de Chile Underperform

Company Description
Banco de Chile (BCH) is the second-largest Chilean bank, with USD 43 billion in assets and a 17.2% market share. BCH has a total loan portfolio of USD 34 billion, giving it an overall share of 19.9% of the Chilean loan market. USD 5 billion of BCHs loan portfolio is consumer credit, and the bank has a stable 22.4% share of this profitable market. BCH has been increasing its share of the mortgage market, aiming to attract new clients to which it can cross-sell more profitable products, but its 16.3% share of mortgages still falls short of its overall market position, leaving room for upside. In the commercial credit market, BCH is the leader, with a stable market share of 20.8%. BCH has one of the best-quality loan portfolios in the Chilean banking industry, with NPLs accounting for only 1.0% of loans and a loan-loss allowance covering 232.6% of NPLs.
CHILE CLP 72.5 BCH USD 92.6
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization CLP % CLP th CLP m CLP m 1m 9.5 7.2 73.2 (0.9) 74.85/56.5 86,418,857 6,325,860 5,542.4 12m 4.0 25.2
Investment Thesis
We believe that BCHs outstanding asset quality is a plus in the current volatile markets, and its loan portfolio is growing faster than those of its peers (22.9% for BCH vs. 17.0% for its peers, year-over-year as of November). We expect BCHs loan portfolio to grow in line with its peers, but we believe that the risk to our estimates is on the upside, on a relative basis. In an uncertain period, we believe that BCHs ability to generate a relatively larger share of revenues than its peers through net fees (30%, vs. 27% for SAN and 26% for BCI) gives it more predictable earnings. Finally, BCH is permitted to deduct any dividend payments made to SAOS, which holds 33.6% of shareholder capital, from its taxable income; consequently, BCHs effective tax rate is significantly lower than the statutory corporate income tax rate. We expect this tax benefit to last until 2018. We think that this strength is already priced into BCHs shares, however.
3-mth avg daily vol. Performance (%) Absolute Vs. IPSA
Company Performance
113 103 93 83 73 63

We expect BCHs resilient asset quality and potentially stronger growth to translate into a sustained valuation gap relative to SAN. Inflation is the most important single driver of bank returns. We expect inflation to subside by 90 bps in 2012, which could drag down BCHs net interest income by close to USD 19 million relative to 2011. The consensus expectation is that Chiles corporate income tax rate will be increased on permanent basis to 20% from 17% (with transitional rates of 20% in 2011 and 18.5% in 2012). Such an increase would reduce ROAE by close to 100 bps.
Mar-11
Sep-11
Jan-11
Jul-11
May-11
IPSA
CHILE
Source: Ita BBA

We have an underperform rating on BCH, with a YE12 fair value of CLP 72.5/share. We estimate BCHs sustainable ROE at close to 26% (assuming an income tax rate of 17%). The stock is currently trading at 14.0x P/E 2011 and 3.4x P/BV 2011; both multiples are above their averages since 2004 and represent premiums relative to the Chilean market and the banks LatAm peers that are above historical levels. We believe that Chilean banks, as a play on local economic dynamics, are in a position to perform relatively well in a 2012 scenario of muddling through. We think that this strength is already priced into BCHs shares, however.

Years Loan Portfolio (CLP m) Equity (CLP m) Net Income (CLP m) Net Interest Margin (%) ROAE (%) EPS (CPL) P/E P/BV Dividend Yield (%)
Source: Ita BBA
2010a 14,359,290 1,404,127 378,529 4.7 27.8 4.4 16.7 4.5 3.8
2011e 16,448,118 1,854,928 450,759 4.8 28.0 5.2 14.0 3.4 4.4
2012e 18,073,983 2,016,630 478,962 4.6 25.1 5.5 13.2 3.1 4.7
2013e 20,113,283 2,175,003 500,854 4.4 24.2 5.8 12.6 2.9 4.9
2014e 22,405,000 2,387,774 563,132 4.4 25.0 6.5 11.2 2.6 5.5
2015e 24,688,324 2,626,182 633,527 4.4 25.6 7.3 10.0 2.4 6.3
Nicolas Chialva, CFA +54 11 5273 3503 nicolas.chialva@itau.com.ar Regina Longo Sanchez, CNPI +55-11-3073-3042 regina.sanchez@itaubba.com Thiago Bovolenta Batista, CFA +55-11-3073-3043 thiago.batista@itaubba.com
Ita BBA 61
Nov-11
Jan-12
Banco Macro Outperform

Company Description
BMA was constituted as a bank in 1988 and functioned as a wholesale bank until in 1995 it converted itself into a retail bank. In 1996 it embarked on a series of mergers and acquisitions that turned it into one of the largest private banks in Argentina. BMA is focused in SMEs and medium- to low-income individuals; it has the largest personal loans portfolio in Argentina in absolute and relative terms (38.5% of total loans) but provides relatively fewer credit card loans (9.5% of total loans). BMA is the financial agent for four provinces, which gives it access to stable and relatively cheap funding sources (24% of deposits are from the public sector, vs. 7% for GGAL and 6% for BFR) while concentrating its business in the non-central zone of Argentina, where it has 80% of its branches (vs. 30% for GGAL and 32% for BFR).
BMA ARS 17.5 BMA USD 26.4
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization ARS % ARS th ARS m ARS m 1m 6.5 3.6 11.0 60.1 20.25/8.5 594,485 6,510 5.2 12m -44.0 -25.7
Investment Thesis
Banco Macro has a sounder balance sheet than most of its peers. With a capitalization ratio of 20.0% and liquid assets accounting for 37.9% of deposits, it has delivered consistent profitability since the convertibility crisis (ROAE averaged 21.3% between 2003 and 2010) and has a reliable track record of mergers and acquisitions. Further, we think that Banco Macro could weather any eventual macroeconomic turbulence better than other Argentine private banks, thanks to its relatively stable and cheap funding sources and its high-quality loan portfolio (84% of its personal loans are related to payroll accounts) and helped by its positive net exposure to USD, which accounts for more than 30% of equity. We expect Banco Macro to grow slightly faster than Argentine private banks as a whole and to deliver sound profitability, with an ROE of close to 25.5% in 2012. We believe that NPLs should not be a source of concern in 2012.
3-mth avg daily vol. Performance (%) Absolute Vs. Merval
Company x Ibovespa
120 100 80 60 40
Mar-11
May-11
Jan-11
Jul-11
Sep-11
Regulatory changes for financial institutions. Further governmental intervention would be negatively perceived. Compulsory increases in sovereign debt exposure balance. would worsen the risk-reward
Wage negotiations, which are expected to be concluded in April, could lead to wages that are higher than those of other unions, exerting pressure on the banks efficiency. Potential acquisitions in the local market, should there be compelling opportunities, would improve the banks growth prospects.
Source: Ita BBA
MERVAL
BMA72

We have an outperform rating on BMA, with a YE12 fair value of USD 26.4/ADR. BMA has a strong and flexible balance sheet, strong income-generation capacity with a sustainable ROE of close to 26% and a large dividend yield (we expect 8.8% in 2012), and we believe that profitability will accommodate inflation. But in our view, the stock will continue to be a play on the discount rate, significantly dependent on the risk perception regarding the sovereign and on the potential of the public sector crowding out the private sector, which many expect. Currently the stock is trading at 5.1x P/E 2012 (the earnings yield is above the discount rate, implying a decrease in the banks earnings generation capacity in USD) and 1.3x P/BV 2012. Nevertheless, we acknowledge that BMAs stock has behaved defensively relative to GGAL and BFR and may outperform other Argentine bank stocks in a bearish scenario.

Years Loan Portfolio (USD m) Equity (USD m) Net Income (USD m) Net Interest Margin (%) ROAE (%) EPADR (USD) P/E P/BV Dividend Yield (%)
Source: Ita BBA
2010a 3,999 1,030 260 8.3 27.2 4.4 5.3 1.3 3.8
2011e 5,026 1,086 270 7.7 25.7 4.5 5.1 1.3 8.9
2012e 5,628 1,087 273 7.7 25.5 4.6 5.1 1.3 8.8
2013e 6,626 1,087 282 7.3 26.3 4.7 4.9 1.3 8.7
2014e 8,100 1,131 289 6.6 26.6 4.9 4.8 1.2 9.1
2015e 10,224 1,210 302 6.3 26.2 5.1 4.6 1.1 9.6
Ita BBA 62
Nov-11
Jan-12
20
Banrisul PNB Outperform

Company Description
Banrisul is a full-service regional retail bank. Its main operations are located in the state of Rio Grande do Sul (RS), but the bank is expanding to other states in the southern region (mainly Santa Catarina). Despite Banrisuls similarity with other midsize banks, its operations are more comparable to the Brazilian large-cap banks due to its retail branch network and its funding structure. The bank has been controlled by the RS state government since its inception. The bank has two main differences in its loan portfolio breakdown relative to other large-cap retail banks. The first is the smaller share of corporates, and the second is the above-average share of payroll loans.
BRSR6 BRL 25.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 4.2 4.8 18.8 35.5 21.1/12.97 408,974 7,697 6.5 12m 15.4 40.1
Investment Thesis
Banrisul has generated a robust NIM (~12%) in the last few years based on its very low cost of funding, which reached 73% of the interbank rate in 3Q11 (one of the lowest among the Brazilian banks) and its better-than-average loan portfolio mix. The banks portfolio is mostly composed of payroll loans and loans to the SME segment (each segment represents around 30% of Banrisuls loan portfolio). The bank also has a strong capital base (15.9% BIS ratio, composed exclusively of tier-I capital, as of September 2011), which could support above-average loan portfolio growth. We expected loan growth of around 17% over the next four years). We also believe that Banricompras (the banks acquiring business) is a hidden value.
Company Performance
120

Banrisul is expected to maintain its healthy ROAE (~22%) in the medium term. In 2012, the likely decrease in the Selic rate, combined with the possible replacement of at least part of its acquired portfolio with its own originated payroll loans, is expected to sustain strong margins. The bank also plans to expand its operations to the other states in Brazils southern region, particularly Santa Catarina, where it expects to almost double the number of branches (to 50 in 2014) and take advantage of the cultural similarity between the states in this region. We highlight below some positive and negative catalysts. Banrisul is liability-sensitive; a decrease in the Selic rate could improve its NIM temporarily. The acquiring business, Banricompras, is expected to be fully implemented during 1Q12 (capturing MasterCard and Visa transactions). We estimated Banricompras market share at around 34% in the debit-card market in RS. Banrisul plans to increase the share of service fees in its revenues for 2012 (with crossselling of products). We estimate that service fees could increase by 10% in 2012. The significant geographic concentration is a risk for Banrisul (about 91% of the banks branches are located in the state of RS). Corporate governance and political influence have always been considered sources of risk for state-owned banks. Despite its defensive loan portfolio, a material deceleration in the Brazilian economy could negatively affect SME operations, which represent about 30% of the banks loan portfolio.
100 80 60 40
Jan-11 Jul-11 May-11 Mar-11 Sep-11 Nov-11 Jan-12
Ibovespa
BRSR6
Source: Ita BBA

We have an outperform recommendation on Banrisul with a YE12 fair value of BRL 25.5 per share. We believe that the bank will be able to maintain its above-average level of NIM due to its loan portfolio mix and lower cost of funding. The bank also has positive prospects for 2012, with reasonable loan growth (around 16%) and fee income that could surprise on the upside, thanks to the insurance and acquiring businesses. The stock is trading at 7.6x P/E 2012 and 1.5x P/BV 2012.

Source: Ita BBA
2010a 17,033 3,855 741 12.7 20.4 10.4 2.0 1.8 3.8
2011e 20,444 4,396 887 12.5 21.5 8.7 1.8 2.2 4.5
2012e 23,791 5,028 1,018 12.7 21.6 7.6 1.5 2.5 5.0
2013e 27,568 5,746 1,159 12.3 21.5 6.6 1.3 2.8 5.7
2014e 31,754 6,546 1,290 12.0 21.0 6.0 1.2 3.2 6.4
2015e 36,367 7,435 1,433 11.7 20.5 5.4 1.0 3.5 7.1
Ita BBA 63
BBVA Banco Frances Market Perform

Company Description
BFR, founded in 1886, is recognized as a leading financial services provider to corporate clients. BFR currently takes a client-centric approach aimed at differentiating itself from its competitors but with a less aggressive commercial policy. To achieve efficiency using this strategy, the bank is focusing its efforts on the consumer segment (retail premium clients) and the middle-market segment (emphasizing cross-selling and personal relationships). BFRs deep knowledge of its clients allows it to have the lowest delinquency ratios in the Argentine financial system, with NPLs accounting for only 0.4% of total loans, while the conservative approach translates into a coverage ratio with allowances for bad debt of 456.9%. The bank has, on the other hand, an exposure to Treasury debt that accounts for 6.3% of unconsolidated assets (by far the largest among the Argentine banks we cover).
FRAN ARS 16.3 BFR USD 6.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization ARS % ARS th ARS m ARS m 1m 9.3 6.3 9.9 64.7 16.95/7.6 536,878 5,315 1.4 12m -33.5 -11.7
Investment Thesis
We have a cautious view on BBVA Banco Francs shares due to the volatility its results have been experiencing because of its exposure to sovereign debt, its sale of non-core assets and changes in its provisioning policy. We expect the last two issues to be non-recurrent, but the volatility of Argentine sovereign assets is embedded in BFRs balance sheet. In the nine months to 3Q11, sovereign bonds reduced net income by ARS 317 million, or 38.5%, making net income miss our estimate by 35.2% and taking the annualized ROAE to 19%, compared with an adjusted ROAE of 29.6%. NPLs should not be a source of concern: we expect them to increase by 15 bps, and we expect the coverage ratio to fall to close to 435% by year-end. Without considering the potential effect of sovereign bonds valuation, we believe that BFR will achieve an ROAE of 23.1% in 2012 and a sustainable ROAE of close to 25.0%.
3-mth avg daily vol. Performance (%) Absolute Vs. Merval
Company x Ibovespa
120 110 100 90 80 70 60 50 40
Jul-11 Jan-11 Mar-11 Sep-11 May-11 Nov-11 Jan-12

Regulatory changes for financial institutions. Further governmental intervention would be negatively perceived. Compulsory exposure balance. increases in sovereign the debt Wage negotiations, which are expected to be concluded in April, could lead to wages that are higher than those of other unions, exerting pressure on the banks efficiency. Asset exposure to sovereign debt makes BFRs net income much more volatile than that of its peers.
MERVAL
FRAN72
Source: Ita BBA
would
worsen
risk-reward

We have a market-perform rating on BFR, with a YE12 fair value of USD 6.7/ADR. We forecast a dividend yield of 9.1% in 2012, but because of the negative impact of sovereign bonds on the banks results, the 2012 dividend could fall by close to 60%, compared with 2011, and the dividend yield could drop to closer to 7%. We believe that the stock will continue to be a play on the discount rate, significantly dependent on the risk perception regarding the sovereign amplified by its exposure to sovereign debt and on the potential of the public sector crowding the private sector, which many expect. The stocks relatively lower liquidity compared with GGAL and BMA brings additional risk. The stock is trading at 5.7x P/E 2012 (implying a decrease in the banks earnings generation capacity in USD) and 1.3x P/BV 2012.

Source: Ita BBA
2010a 4,197 942 308 10.6 37.8 1.7 3.6 1.2 10.9
2011e 5,198 885 227 8.9 25.3 1.3 5.0 1.3 17.5
2012e 5,758 861 198 8.0 23.1 1.1 5.7 1.3 9.1
2013e 6,498 850 204 7.8 24.3 1.1 5.5 1.3 7.8
2014e 7,803 878 212 7.0 25.0 1.2 5.3 1.3 8.1
2015e 9,788 933 222 6.5% 25.0 1.2 5.1 1.2 8.7
Ita BBA 64
Bci Market Perform

Company Description
Bci is the fourth-largest bank and third-largest private bank (behind SAN, BCH and Banco Estado) in Chile. With USD 32 billion, it has a 12.8% market share (almost double that of its closest competitor). It holds a total of USD 22 billion in loans, giving it an overall share of 12.7% of the Chilean loan market. USD 3 billion of Bcis loan portfolio is consumer credit, and the bank has a stable 12.1% share of this profitable market. Bci enjoys a stable market share in all loan markets. What differentiates Bci is its relatively larger share (26%) of stable demand deposits from individuals; it has achieved this position through commercial alliances that have granted it access to a large number of payrolls. Bci was affected by specific bad loans in 3Q11, but we remain confident in the overall quality of its loan portfolio, with NPLs accounting for 2.68% of total loans.
BCI CLP 33,684.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization CLP % CLP th CLP m CLP m 1m 8.1 5.8 29,480.0 14.3 35083.07/22100 104,331 3,075,692 1,658.1 12m -12.5 5.3
Investment Thesis
We expect Bcis loan growth (9.3%) to be in line with that of the overall industry in 2012. We like Bcis 26% share of the retail demand deposit market, which provides the bank with stable, no-cost funding; its track record of technological innovation, which has allowed it to grow organically and has made it the first-call alternative for those who are not already its clients; and the transparency of its releases. We see a lot of value in Bci relative to SAN and BCH, but we acknowledge that the lack of an ADR program and the stocks lower liquidity subtract value from the story. The recent increases in the banks NPL ratio (+48 bps in the last three months, to 2.68%) have raised concerns about its risk management policies, although we believe Bcis asset quality to be solid and expect no further deterioration.
Company x Ibovespa
120 100 80

A sustainable resolution to recently provisioned commercial loans would improve Bcis perceived asset quality, potentially lowering the NPL-to-loans ratio by close to 40 bps. Further deterioration in NPLs could widen Bcis trading discount relative to SAN and BCH. Bci has experienced relatively high volatility in net other income, with unpredictable effects on its results. The monthly median is -2.3% of earning assets since January 2009, while the average is -1.5%. Inflation is the most important single driver of bank returns. We expect inflation to subside by 90 bps in 2012, which could drag down Bcis net interest income by close to USD 14 million relative to 2011. The consensus expectation is that Chile's corporate income tax rate will be increased on permanent basis to 20% from 17% (with transitional rates of 20% in 2011 and 18.5% in 2012). Such an increase would reduce ROAE by close to 70 bps.
60
Mar-11
May-11
Sep-11
Jan-11
Jul-11
IPSA
BCI
Source: Ita BBA

We have a market-perform rating on Bci, with a YE12 fair value of CLP 33,684/share. We believe Bcis sustainable ROE to be close to 21% (assuming an income tax rate of 17%). The stock is currently trading at 11.3x P/E 2011, and 2.4x P/BV 2011. Both multiples are slightly above their averages since 2004, both represent premiums relative to the Chilean market and the banks LatAm peers that are above historical levels, and both are well below the multiples of SAN and BCH. We believe that Chilean banks, as a play on local economic dynamics, are in a position to perform relatively well in a 2012 scenario of muddling through. We think, however, that this strength is already priced into Bcis shares.

Years Loan Portfolio (CLP m) Equity (CLP m) Net Income (CLP m) Net Interest Margin (%) ROAE (%) EPS (CLP th) P/E P/BV Dividend Yield (%)
Source: Ita BBA
2010a 9,392,176 1,039,166 222,080 4.4 23.1 2.2 13.6 2.9 1.7
2011e 10,688,479 1,268,771 270,306 4.4 23.5 2.6 11.3 2.4 2.4
2012e 11,682,824 1,427,599 257,582 4.3 19.1 2.5 11.9 2.1 3.0
2013e 12,985,682 1,589,374 278,971 4.2 18.6 2.7 11.0 1.9 3.6
2014e 14,448,283 1,776,240 334,172 4.2 20.0 3.2 9.2 1.7 4.6
2015e 15,902,081 1,963,598 379,609 4.2 20.5 3.6 8.1 1.6 6.0
Ita BBA 65
Nov-11
Jan-12
Bradesco PN Outperform
Company Description
Bradesco is the second-largest private-sector bank in Brazil in terms of total assets. The bank is positioned as a full-service bank and insurance company serving individuals and companies through its extensive network of over 3.9 thousand branches in Brazil (with a market share of ~20%). Bradesco has over 40 million clients and is the leading player in the insurance and pension segments. Another key characteristic, in our opinion, is Bradescos strong organizational culture and closed-career approach.
BBDC4 BRL 43.3 BBD USD 26.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 2.6 3.2 31.6 37.0 33.94/25.12 3,822,308 120,785 173.4 12m -4.8 15.6
Investment Thesis
Bradesco is well positioned to benefit from Brazils economic growth and the shift of C-, D- and E-class individuals to higher income levels, particularly in fast-growing regions like the Northeast and Midwest, given the banks well-distributed branch network. We also see positive prospects for an increasing penetration of insurance and pension products (Bradesco has a market share of ~25%) in the local market. Bradescos ROAE is expected to stay above 20% in coming years. The bank also benefits from relatively good earnings predictability based on a defensive portfolio and strong balance sheet. In our view, Bradesco is the best pick among large-cap banks in a more volatile, higher-risk environment.

We estimate loan growth of around 15% in 2012, with a slight deterioration in asset quality (10-bp increase in NPL ratio). The lower Selic rate in 2012 will likely benefit net interest income, because the bank is liability-sensitive and did not fully hedge its fixed-interest-rate positions. Administrative expenses are expected to grow above the main peer figures, but Bradesco is expanding its branch network to offset the loss of the Postal Bank to Banco do Brasil and to better serve government employees in Rio de Janeiro; payroll accounts are expected to add revenue and the bank will no longer pay Post Office fees of around BRL 350 million per year. Below are some positive and negative catalysts. Strong balance sheet with a high level of provisions after recognizing a non-recurring gain of BRL ~3 billion related to fiscal credits. Room to improve efficiency after 2013, Although Bradesco is investing a lot in opening new branches (it opened more than 1,000 branches in 2011), an eventual loss of Postal Bank clients could hurt top-line growth in the coming year. Regulatory intervention, particularly related to further capital requirements under the Basel III rules and the insurance business, is a risk. However, the bank has BRL 4 billion in excess loan-loss reserves, which is a cushion that can be used to increase the capital ratio if needed. A material deceleration in the Brazilian
120 100 80 60 40
Company Performance
Jul-11
Nov-11
Sep-11
Mar-11
May-11
Jan-11
Ibovespa
BBDC4
Source: Ita BBA
especially after the bank concludes its TI Melhorias project. We expect further penetration of insurance and pension products in the local market and within Bradescos current client base (we expect an increase of ~19% in the insurance results for 2012). Monetary policy easing in 2012, mainly through a lower Selic rate, is expected to positively affect NIMs.
economy could negatively affect the banks asset quality. We estimate an increase of 10 bps in the banks NPL ratio in 2012.

We have an outperform recommendation on Bradesco and a YE12 fair value of BRL 43.3 per share. It is our top pick among large-cap Brazilian banks, especially in a volatile and higher-risk scenario. We expect the bank to continue to deliver good, predictable profitability, with ROAEs at above 20%.

Source: Ita BBA
2010a 230,614 48,043 9,804 8.3 21.8 12.3 2.5 2.6 2.8
2011e 272,911 56,541 11,528 8.0 22.0 10.5 2.1 3.0 3.4
2012e 313,333 64,955 13,167 7.9 21.7 9.2 1.9 3.4 3.9
2013e 361,118 74,353 14,708 7.5 21.1 8.2 1.6 3.8 4.4
2014e 415,736 84,783 16,321 7.3 20.5 7.4 1.4 4.3 4.9
2015e 478,116 96,701 18,651 7.1 20.6 6.5 1.2 4.9 5.6
Ita BBA 66
Jan-12
BICBANCO PN Market Perform

Company Description
BICBANCO was founded in 1938 and for many decades acted as a regional bank. During the 1990s, the bank started to expand its operations to other states and moved its headquarters to So Paulo. Historically, the bank has focused mainly on the financing of midsize companies (annual revenues between BRL 50 million to BRL 500 million) and maintained a small footprint in the individual loan segment (5% of the banks loan portfolio in 3Q11).
BICB4 BRL 12.0
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m 6.7 7.4 8.2 45.8 14/6.75 252,903 2,081 1.3 12m -39.6 -26.7
Investment Thesis
We have a more cautious view on BICBANCOs shares due to the weak results posted in the last two quarters (10.6% of ROAE in 3Q11, for instance). The weak results came from a high level of loan loss provisions caused by deterioration in the financial performance of some clients (we estimate an increase of 60% in the banks loan loss provision in 2011). The bank has also adopted a more conservative strategy, reducing its geographic expansion and increasing liquidity (maintaining a high level of liquid assets of around BRL 3.7 billion in 3Q11), which compressed its NIM to 9% in 2011E from 10% in 2010.
Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa

We believe that the bank will continue to exhibit weak results in the short term, not only because of the high level of loan loss provisions, but also because of the lower NIM (8.5% in 2012E). We estimate that the ROAE will be around 15% in 2012E (down from 19% in 2010). BICBANCO is also expected to post a limited portfolio expansion (6.6% in 2011E, compared with 45% in 2010) because of its more conservative strategy. We highlight below some positive and negative catalysts. Among the Brazilian midsize banks, Asset quality deterioration is a risk to
120 100 80 60 40
Jul-11 Jan-11 May-11 Mar-11 Sep-11 Nov-11 Jan-12
Company Performance
BICBANCO has one of the widest branch networks (with around 50 branches). Diversified funding structure, but mainly based on institutional investors, which increases the banks funding costs. BICBANCOs fee income is relatively smaller than the average of its peers, and over time BICBANCO could try to reduce this gap (we believe that this line will increase by 9% in 2012, reaching ~BRL 81 million).
BICBANCOs
performance.
Further
deterioration in the Brazilian economy could negatively affect the SME segment. We estimate an increase of 40 bps in the banks NPL ratio in 2011 and another 10 bps in 2012 (reaching 2.5%). The competition with large-cap banks could compress BICBANCOs spreads. An increase in the cost of funding in the system will likely compress the banks margin.
Ibovespa
BICB4
Source: Ita BBA

We have a cautious view on BICBANCOs shares, with a market-perform rating and YE12 fair value of BRL 12.0 per share. The bank posted above-average growth in its delinquency ratio, even compared with other niche players (around 80 bps in the first nine months of 2011 versus 5 bps for other midsize banks in our coverage universe), which has increased market concerns about further deterioration of its asset quality. We have a preference for the other midsize banks we cover (Banrisul, ABC Brasil and Daycoval). There is downside to our BICBANCO estimates. The stock is trading at 6.3x P/E 2012 and 0.9x P/BV 2012.

Source: Ita BBA
2010a 13,235 1,955 349 9.8 18.7 6.0 1.1 1.4 8.8
2011e 14,104 2,121 286 8.8 14.0 7.3 1.0 1.1 4.7
2012e 16,038 2,340 328 8.5 14.7 6.3 0.9 1.3 5.2
2013e 18,459 2,609 403 8.3 16.3 5.2 0.8 1.6 6.4
2014e 21,210 2,910 451 8.0 16.3 4.6 0.7 1.8 7.2
2015e 24,303 3,244 501 7.7 16.3 4.2 0.6 2.0 8.0
Ita BBA 67
BM&F Bovespa ON Market Perform

Company Description
BM&F Bovespa operates in Brazil and is the largest securities and derivatives exchange in Latin America. It is characterized by a fully integrated model that comprises trading, clearing, settlement and asset custody services. The cash equities business account for ~50% of revenues, while derivatives are responsible for another 35% and other businesses, such as listing and securities lending, make up the remaining ~15%. In conjunction with CME, BM&F Bovespa is currently developing four new trading platforms and one integrated clearing system. Together, these systems are expected to significantly increase the companys processing capacity and reduce latency to world-class levels.
BVMF3 BRL 11.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m -5.8 -5.3 10.1 13.4 13.34/7.5 1,955,131 19,825 120.3 12m -19.7 -2.5
Investment Thesis
We expect top-line growth to reach ~10% per year from 2011 until 2013 due to increasing volumes and contracting prices. The 2012 expenses guidance of BRL 580-590 million (excluding stock option expenses and depreciation) is good news, as it equals the guidance provided for 2011 and translates into an upside of ~BRL 75 million to our 2012 bottom-line forecast. The main short-term concern is news flow about competition in the cash equities business after BATS and Direct EDGE announced plans to establish exchanges in Brazil. Cash equities trading represents ~13% of revenues. Changes in regulations governing competition are likely to be discussed throughout 2012 and weigh on the stock. In a scenario analysis assuming competition in cash equities trading, we arrived at a 10% discount to our BVMF3 fair value. Finally, FX regulations could hurt the stocks performance: the more the BRL appreciates, the higher the risk of negative regulatory outcomes for the company and vice versa.
Company Performance
120 100

Competition-related news flow is likely to be a main theme throughout 2012 and tends to weigh on BVMF3 The rate-per-contract for derivatives tends to decline as volumes improve. Rule of thumb: an additional 3% in volume translates into a reduction of 1% in average RPC. Recently announced cost guidance expected to improve bottom-line forecasts. is A new pricing policy for large volumes is currently under discussion and could lead to price reductions when implemented. Changing regulations could bring volatility to the stock, but eventual measures depend on how the FX rate evolves. Increasing high-frequency trading volume is expected to continue to compress cash equity margins. Current HFT share is 10%.
80 60 40
Jan-11 Jul-11 Mar-11 May-11 Sep-11 Nov-11 Jan-12
Ibovespa
BVMF3
Source: Ita BBA

We have a market-perform rating on BVMF3, with a YE12 fair value of BRL 11.5 per share, which is partially justified by competition-related news flow and the higher upside we see for other financial companies we cover. Nevertheless, we acknowledge that there is some upside to our current estimates. BM&F Bovespa benefits from a comfortable net cash position and is expected to maintain its payout ratio at high levels (80%-100%) and continue its active share-buyback programs. The stock is currently trading at 15.9x P/E 2012e, and we expect this multiple to detach from average market multiples. This would be a buy opportunity but would require immediate trading action.

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) Adj. EV/EBITDA Adj. P/E FCFF Yield (%) Dividend Yield (%)
Source: Ita BBA
2010a 1,886 1,308 1,139 12.6 15.7 5.7 3.7
2011e 1,906 1,225 1,067 13.3 16.7 5.3 4.1
2012e 2,039 1,332 1,125 11.8 15.9 6.2 4.5
2013e 2,279 1,528 1,433 9.8 12.5 7.5 5.8
2014e 2,563 1,763 1,746 8.0 10.2 8.9 7.0
2015e 2,859 2,006 2,077 6.6 8.6 10.0 8.4
Regina Longo Sanchez, CNPI +55-11-3073-3042 regina.sanchez@itaubba.com Alexandre Spada, CFA +55-11-3073-3004 alexandre.spada@itaubba.com Thiago Bovolenta Batista, CFA +55-11-3073-3043 thiago.batista@itaubba.com
Ita BBA 68
Cielo ON Outperform
Company Description
Cielo is the largest card acquirer in Brazil. It derives ~70% of its revenues from capturing transactions through Visa, MasterCard, Amex and other card brands. The companys other key revenue sources are POS terminal rental fees (~20% of revenues) and the pre-payment of credit card receivables (10% of revenues). The acquiring sector in Brazil has undergone a profound transformation due to increased competition after the expiration of Cielos exclusivity agreement with Visa in mid-2010. Cielos main competitor is Redecard, but other firms like Santander Brasil and Banrisul have already entered this market. Some international companies are also making a move, the first of which is Elavon.
CIEL3 BRL 59.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 2.9 3.5 47.7 23.7 50/27.53 545,914 26,040 69.0 12m 55.6 88.9
Investment Thesis
Despite a likely deceleration, market volume growth is apt to be about 20% yearly in the medium term. For investors afraid of a sharper volume-growth deceleration, we note that transaction volumes have evolved consistently over the last few years (~20% per year), regardless of macroeconomic conditions. Some investors are overly concerned that competition renders important market-share losses for incumbents, but we believe that this is already incorporated into forecasts (we assume Cielos share will fall by 160 bps in 2012 and 180 bps in 2013). Some fear that MDRs and POS rental prices may contract sharply for the same reason. Cielo, however, has consistently beaten market expectations in 2011, mostly because of better-than-expected prices and volumes. We think further upward revisions are likely for the same reasons, particularly prices (we expect blended MDR to fall by 4 bps in 2012, but it could be less than that). Also positive are the improving (but not fully accounted for) cost dynamics throughout 2012. We believe that a big chunk of the price compressions could be offset by lowering transaction costs, so that Cielo maintains its EBITDA and net income margins above 60% and 35% respectively, which is our call for the following years. Cielo is a decent dividend player (70% payout in 2011) and is fully unleveraged, leaving room to improve its capital structure through financing. Finally, the company is subject to regulatory risk.
Company Performance
160 140 120 100 80 60 40
Jul-11 Jan-11 Mar-11 May-11 Sep-11 Nov-11 Jan-12
Ibovespa
CIEL3

An industry report to be released by the Brazilian Central Bank may prove to be a positive surprise if regulators are satisfied with the current effects of tighter competition. Above-expectation earnings may important catalyst for the stock. be an News flow related to competition may weigh on the stock, as many investors are concerned about market share and MDR sustainability. Competition from banks could limit or delay further penetration of pre-payment volume over credit-card transactions.
Source: Ita BBA

We have an outperform recommendation on CIEL3, with a YE12 fair value of BRL 59.0 per share. In our opinion, competition is already properly accounted for in estimates and current multiples (YE12 P/E is 14.2x), as investors assume that Cielo will lose some market share and that prices will fall over time. We see room for upward adjustments in market consensus, based on the relatively resilient MDRs, lower-than-expected market share losses and positive cost dynamics. We also believe that regulations will prove to be a less material source of risk in the near future than average market expectation.

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFF Yield (%) Dividend Yield (%)
Source: Ita BBA
2010a 4,354 2,924 1,832 8.8 14.2 5.1 5.8
2011e 4,608 2,841 1,724 9.1 15.1 5.4 4.6
2012e 5,074 3,119 1,839 8.2 14.2 6.2 5.3
2013e 5,532 3,394 1,984 7.6 13.1 6.6 6.1
2014e 6,044 3,736 2,175 6.9 12.0 7.0 6.7
2015e 6,568 4,107 2,385 6.3 10.9 8.0 7.3
Ita BBA 69
Cetip ON Outperform
Company Description
Cetip has a vertically integrated business model that includes registration, custody and trading of a wide range of private fixed-income securities and OTC derivatives. By the end of 2010, the company had acquired GRV, which accounts for ~45% of consolidated top-line (the remaining 55% comes from Cetips traditional products). GRV is responsible for the custody of all vehicle liens issued in Brazil. Its unique, centralized database enhances the protection of the local financial system against certain types of fraud and has very low competition risk. ICE became a strategic partner in 2011. BM&F Bovespa competes with Cetip and has announced plans to further develop its systems for the registration and custody of private fixed-income securities and OTC derivatives.
CTIP3 BRL 34.5
Stock Data
Investment Thesis
We like Cetips unique investment story and relatively predictable earnings. Contrary to other financial companies, it tends to be favored by changing regulations like the creation of Letras Financeiras and tax incentives for the development of the debentures market. Moreover, the company passes through inflation on most of its products every January. We note that that growth in 2012 is unlikely to reproduce the 2011 figures (we forecast top-line growth of ~16% per year between 2011-13 vs. more than 30% in 2011) as recent revenue expansion was partially attributable to certain one-off upward price adjustments. Current margins are supposed to expand as Cetip benefits from operating leverage and is currently deleveraging its balance sheet (the company recently pre-paid BRL 100 million of its outstanding debentures). We call for an EBITDA margin of 71% in 2012 from 69% in 2011 and recurring net income margin of 39% in 2012 from 33% in 2011. The main short-term risk for the company includes BM&F Bovespas strategy in segments in which the companies overlap. We note, however, that Cetip has a dominant position in all of these segments (97% in debentures and 71% in OTC swaps), given its good track record an overall client satisfaction. Another concern is a slower-thanexpected recovery in GRV-product volume growth. However, we think it will not disappoint and may even surprise investors on the upside if year-over-year volume growth approaches overall GDP expansion.
Company Performance
120 100 80 60 40
Ibovespa
CTIP3
Source: Ita BBA

Regulatory changes to foster the private fixedincome securities market could benefit the company in the medium and long term. News flow related to the product targeting registration of house liens (GRV Imobilirio) could be a price trigger for CTIP3. News flow related to competition with BM&F Bovespa could weigh on the stock. A faster-than-expected recovery in GRV volume could be positive news, but it depends on the overall macroeconomic environment and on banks willingness to grant loans.

We have an outperform rating on CTIP3, with a YE12 fair value of BRL 34.5 per share. Cetip is likely to sustain strong bottom-line growth over the next few years (we call for a net income CAGR of 30% until 2014), aided by its deleveraging strategy and operating leverage capability, which justifies relatively stretched multiples (YE12 P/E of 18.8x). Other factors that support our call are inflation protection and the eventual benefits triggered by regulatory changes.

Years Net Revenues (BRL m) EBITDA (BRL m) Rec. Net Income (BRL m) Adj. EV/EBITDA Adj. P/E FCFF Yield (%) Dividend Yield (%)
Source: Ita BBA
2010a 558 357 133 21.3 48.4 5.3 0.8
2011e 752 519 246 14.2 26.2 7.2 0.8
2012e 876 624 343 11.3 18.8 8.2 1.2
2013e 1,009 736 433 9.1 14.8 9.2 1.5
2014e 1,138 844 532 7.6 12.1 9.8 3.8
2015e 1,271 954 629 6.2 10.2 10.7 9.0
Ita BBA 70
Daycoval PN Market Perform

Company Description
Daycoval is the most diversified midsize bank we cover in terms of products and geographic reach. The three main products of the bank are SME loans (representing about 67% of its total loans), payroll loans (about 24%) and vehicle financing (approximately 8%). Since its establishment, the bank has been controlled by the Dayan family, which currently owns 74% of the total capital.
DAYC4 BRL 12.2
Stock Data
Current price BRL % BRL th BRL m BRL m 1m 3.4 4.1 9.4 29.8 12.95/7.51 215,499 2,026 1.1 12m -23.9 -7.6 Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa
Investment Thesis
Unlike the other niche players, Daycoval continued to show strong loan growth in 2011 (25% in 2011E). The focus of this expansion was in the SME segment (annual revenues between BRL 8 million and BRL 300 million). The bank has a very comfortable capital position (BIS ratio of 17% in 3Q11), with decent room for credit expansion. During the financial crisis, Daycoval issued BRL 410 million in convertible bonds, which could be converted into stock with a strike price of BRL 7.75 per share. The bonds are likely to be converted by March 2013, when their yield will fall below the market rate down to 55% of DI (interbank rate) from 110% of DI. The possible capital increase related to the convertible bonds may stretch its capital position, but this represents a dilution risk for current shareholders (a potential dilution of 24%).

Although we think that Daycovals ROAE will see some expansion (to 16% in 2012E from 15% in 2011e) due to above-average loan growth in 2012, we do not see any significant trigger for its shares in the short term. We believe that the asset quality of pre-owned vehicle financing (the focus of Daycoval in the vehicle segment) is a source of risk, given the slowdown in the Brazilian economy. We highlight below some positive and negative catalysts. Strong capital position, which could support fast loan growth (we estimate loan growth of around 25% in 2011 vs. 10% for the other midsize banks in our coverage universe). Daycoval operates in all Brazilian regions but with a lower-than-average concentration in the southeast region compared with other midsize banks. The bank ended 3Q11 with 31 branches and 52 stores (where bank representatives will be responsible for the origination of individual loans, primarily payroll loans). Due to its hedge policy of FX-denominated funding, the bank has short-term earnings volatility. Daycovals convertible bonds represent a 24% dilution risk, which could be marginally offset by the 5% of share-swap position currently outstanding. The bank has already signed an agreement for another share swap of ~ 3% of total capital.
Company Performance
120 100 80 60 40
Ibovespa
DAYC4
Source: Ita BBA

Despite the positive expansion expected for the banks operations and the prospect of ROAE improvement, we have a market-perform rating on Daycoval with a YE12 fair value of BRL 12.2 per share. The significant exposure to vehicle financing and the possible dilution from the convertible bonds are our main concerns. The stock is trading at 6.3x P/E 2012 and 1.0x P/BV 2012.

Source: Ita BBA
2010a 5,567 1,778 260 13.2 15.0 7.8 1.1 1.2 10.7
2011e 6,966 1,930 287 11.2 15.5 7.1 1.0 1.3 5.5
2012e 8,122 2,122 319 10.8 15.7 6.3 1.0 1.5 6.3
2013e 9,390 2,294 361 10.5 16.3 5.6 0.9 1.7 7.1
2014e 10,795 2,530 392 10.1 16.3 5.2 0.8 1.8 7.7
2015e 12,345 2,787 429 9.7 16.1 4.7 0.7 2.0 8.5
Ita BBA 71
Grupo Financeiro Galicia Outperform

Company Description
Grupo Financiero Galicia SA (GGAL) is a financial services holding company that owns a 94.8% stake in Banco de Galicia y Buenos Aires SA, its main asset. Banco Galicia is a universal bank and one of the largest private-sector banks in the Argentine financial system, with a leading position in the mediumand high-income segments. Banco Galicia also has an undisputed leading position in the low-income segment through its 100% stakes in Tarjetas Regionales (the leading credit-card provider in Argentina), which accounted for 35.6% of the banks results up to 3Q11, and in CFA (the Argentine leading nonbanking financial institution), which contributed 21.3% of the banks net income. On a consolidated basis, the bank has the largest exposure to the consumer segment among the Argentine banks we cover; personal and credit card loans combined account for 57.5% of total loans, vs. 48.0% for BMA and 29.9% for BFR.
GGAL ARS 8.0 GGAL USD 9.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) ARS % ARS th ARS m ARS m 1m 4.5 1.7 3.6 122.1 6.78/2.7 1,241,407 4,457 11.0 12m -45.0 -26.9
Investment Thesis
We expect GF Galicia to grow slightly faster than Argentine private banks as a whole and to deliver sound profitability, with an ROE of close to 29.4% in 2012 but an adjusted ROE of close to 24.8%. We believe that GF Galicia will be able to deliver a sustainable ROAE close to 25%, taking advantage of its strong position in the medium- and high-income segments and undisputed leading position in the profitable low-income segment, based on a corporate structure and distribution network that are well suited to competing in these segments without losing focus. But GF Galicias larger exposure to lowincome segments makes its business more sensitive to the economic cycle (we believe that its balance sheet is strong enough, with a capitalization ratio of 13.2% and liquid assets accounting for 38.3% of deposits). We believe that NPLs should not be a major source of concern in 2012.
Absolute Vs. Merval
Company Performance
110 90 70 50

In our view the stock trades at an unjustified discount to 2012 earnings (3.9x) vs. BMA (5.1x) and BFR (5.7x), making it our top pick among Argentine banks. Regulatory changes for financial institutions. Further governmental intervention would be negatively perceived. Compulsory increases exposure balance. would in sovereign the debt worsen risk-reward
30
Mar-11
May-11
Jan-11
Jul-11
Sep-11
MERVAL
GGAL72
Source: Ita BBA
Wage negotiations, which are expected to be concluded in April, could lead to wages that are higher than those of other unions, exerting pressure on the banks efficiency.

We have an outperform rating on GGAL, with a YE12 fair value of USD 9.7/ADR. GF Galicia has outstanding growth potential and the corporate structure to deliver on this potential while remaining profitable, but the prospects for sustainable and real financial intermediation growth in Argentina remain uncertain, as the strength of the Argentine peso as a store of value is unstable and the stock has a lower dividend yield than its peers (we expect 2.2% in 2012). Therefore, we believe that the stock will continue to be a play on the discount rate, significantly dependent on the risk perception regarding the sovereign and on the potential of the public sector crowding out the private sector, which many expect. The stock is trading at 3.9x P/E 2012 (implying a decrease in the bank earnings generation capacity in USD) and 1.1x P/BV 2012.

Source: Ita BBA
2010a 5,367 621 105 7.8 18.5 0.8 9.0 1.5 0.0
2011e 7,115 772 227 8.3 32.4 1.8 4.2 1.2 0.6
2012e 8,401 877 241 7.7 29.4 1.9 3.9 1.1 2.2
2013e 9,922 964 268 7.6% 29.2 2.2 3.5 1.0 4.5
2014e 11,756 1,103 299 6.9% 29.0 2.4 3.2 0.9 5.1
2015e 14,399 1,282 326 6.4% 27.4 2.6 2.9 0.7 5.8
Ita BBA 72
Nov-11
Jan-12
Santander Brasil UNIT Market Perform

Company Description
Santander Brasil is the third-largest private-sector bank in Brazil, with a market share of 12% in terms of number of branches. It is a full-service bank controlled by Santander Group in Spain. Its presence in Brazil dates to 1957, but its first significant acquisitions occurred in the 1990s (Banco Geral do Comrcio, Banco Noroeste and Banco Meridional). It became a large financial institution in Brazil through the acquisition of Banespa (the bank of the State of So Paulo) in 2000. In 2008, after the acquisition of Banco ABN Real, Santander Brasil became one of the largest banks in Brazil. A major capital increase was made in 2009, aiming to support the banks growth in coming years.
SANB11 BRL 21.1 BSBR USD 12.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 3.9 4.5 15.1 40.0 22.82/12.51 3,800,419 57,386 39.3 12m -29.5 -14.4
Investment Thesis
Santander Brasil can benefit from Brazils economic growth and take advantage of its global platform to support the internationalization of the Brazilian economy. The bank might gain some market share in total loans in the next few years as a consequence of its excess capital, but it has grown less than the market in the last two years (the bank lost ~30 bps in market share since the end of 2009). Since its 2009 capital increase, Santander Brasil is running lower than its peers recurring ROAEs (11% in 2010, and we estimate 11.5% for 2011), mainly as a result of its lower leverage, but also, in our view, because of integration-related issues and its smaller scale. We believe that it is hard for Santander Brasil to reach ROAE levels close to its main private peers (above 20%), given its smaller franchise in Brazil and the challenge of gaining market share from high-quality competitors. Moreover, in our view, investors are subject to certain risks related to the controlling shareholder, whose strategic moves may not always be perceived by the market as beneficial to minority shareholders (the 2011 prospectus filing for the sale of ADRs held by Santander Spain and the sale of its insurance and pension businesses are examples of transactions that did not necessarily favor Santander Brasils minority shareholders.)
Company Performance
120 100 80 60 40

We estimate loan growth of around 15% in 2012, with some market-share gain in segments where other players growth is decelerating, such as vehicle financing and unsecured personal loans. The lower Selic rate will likely benefit its net interest income in coming quarters. The other operating expenses line increased materially in 2011 versus 2010 (we expected an increase of ~42% in 2011), which is mainly attributable to integration-related charges and operating expenses in the credit card business. We expect this to continue to come in high in 2012 (around BRL 7.0 billion). We highlight below some positive and negative short- to medium-term catalysts. Fast growth through internal cross-selling and market-share gain in vehicle financing, a segment in which the main players growth is decelerating. Monetary policy easing in 2012, mainly through a lower Selic rate, is expected to positively affect NIMs. Comfortable capitalization ratio will support credit growth (BIS ratio of 19% in 3Q11). Further sale of part of controlling shareholders stake might maintain an overhang on its stock. Aggressive market-share gain and further deceleration of the Brazilian economy can deteriorate the banks asset quality. Amortization of integration-related capitalized investments is likely to keep other operating expenses at a high level, given that intangible assets ex-goodwill increased by 20% in the last twelve months.
Jul-11
Nov-11
Sep-11
Mar-11
Jan-11
May-11
Ibovespa
SANB11
Source: Ita BBA

We have a market-perform rating on Santander Brasil and YE12 fair value of BRL 21.1 per share. We continue to prefer Bradesco and Banco do Brasil among the Brazilian large-cap banks (both rated outperform), given their relative valuation. Moreover, we see some downside to our Santander Brasil 2011 figures, which makes our 2012 estimates slightly optimistic.

Source: Ita BBA
2010a 165,379 52,605 5,808 9.5 11.3 8.9 1.1 1.5 6.2
2011e 193,439 54,711 5,875 9.7 10.9 8.8 1.0 1.5 6.1
2012e 222,891 57,170 6,430 9.3 11.5 8.1 1.0 1.7 6.9
2013e 258,764 59,855 7,019 9.0 12.0 7.4 1.0 1.8 7.6
2014e 300,028 62,876 7,897 8.7 12.9 6.6 0.9 2.1 8.5
2015e 346,160 66,300 8,953 8.4 13.9 5.8 0.9 2.4 9.6
Ita BBA 73
Jan-12
Santander Chile Underperform

Company Description
Santander Chile (SAN) is the largest Chilean bank, with USD 50 billion in assets. The bank has a 20.1% market share in Chile, with a strong focus on the retail segment. It holds a total of USD 34 billion in loans, giving it an overall share of 19.9% of the Chilean banking loan market. USD 6 billion of SANs loan portfolio is consumer credit, and the bank has a 25.9% market share of this profitable market. A migration to more conservative provisioning policies affected SANs results in 2010 and 3Q11 and will likely continue to affect results, as management has announced that it will make changes in its provisioning model for its SME portfolio in the near future; preliminary estimates point to these changes having an impact of USD 38-58 million. SANs guidance is for loan loss expenses to converge to historical levels of 1.4%-1.6% of total loans in the medium term.
BSAN CLP 44.5 SAN USD 98.4
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IPSA CLP % CLP th CLP m CLP m 1m 15.3 12.8 37.3 19.4 44.2/31.6 188,446,127 7,029,041 12,056.9 12m -11.4 6.6
Investment Thesis
SANs stock is the most liquid in the Chilean market a plus, considering the current global financial volatility. We expect SAN to post loan growth of 9.7% in 2012, in line with its peers, but we believe that the risk is biased to the downside on a relative basis, since management has announced a more conservative stance in response to international financial-market volatility. We like SANs foothold in the consumer financing segment and its unique strategic alliances with retailers, which give it access to 7 million potential clients and, we believe, could translate into an 11% increase in individual clients in the next two to three years. But in the short term, SANs exposure to consumer financing implies more risk and will likely put pressure on net income.
Company Performance
120 100 80

Inflation is the most important single driver of bank returns, and SANs exposure is relatively high, at 10% of assets. We expect inflation to subside by 90 bps in 2012, which could drag down SANs net interest income by close to USD 48 million relative to 2011. We expect to see regulatory changes lowering interest-rate caps on small consumer loans. SANs exposure to interest rates through credit-card financing (3.6% of assets) is higher than for the industry as a whole (1.9%). The consensus expectation is that Chiles corporate income tax rate will be increased on permanent basis to 20% from 17% (with transitional rates of 20% in 2011 and 18.5% in 2012). Such an increase would reduce ROAE by close to 100 bps. The extent of changes in internal provisioning models (yet to be known) and the future evolution of loan write-offs, which have been on an upward trend this year, will be key drivers of the stocks performance.
60
Mar-11
May-11
Jan-11
Jul-11
Sep-11
IPSA
BSAN
Source: Ita BBA

We have an underperform rating on SAN, with a YE12 fair value of CLP 44.5/share. Our recommendation is justified by the negative bias we expect in news flow over the next few months, as well as the fact that the stock is trading in line with its historical premium to BCH on a P/E basis, a gap we believe will close in the near future on more positive news flow for BCH. The stock is currently trading at 13.2x P/E 2011 and 3.2x P/BV 2011; both multiples are above their averages since 2004 and represent premiums relative to the Chilean market and the banks LatAm peers that are above their historical levels. We believe that Chilean banks, as a play on local economic dynamics, are in a position to perform relatively well in a 2012 scenario of muddling through. We think that this strength is already priced into SANs shares, however.

Years Loan Portfolio (CLP m) Equity (CLP m) Net Income (CLP m) Net Interest Margin (%) ROAE (%) EPS (CLP) P/E P/BV Dividend Yield (%)
Source: Ita BBA
2010a 15,284,990 1,863,607 477,155 4.7 27.3 2.5 14.7 3.8 3.7
2011e 17,884,457 2,169,612 534,141 4.4 27.0 2.8 13.2 3.2 3.4
2012e 19,622,272 2,415,002 605,446 4.4 26.7 3.2 11.6 2.9 5.0
2013e 21,890,635 2,681,734 685,209 4.3 27.2 3.6 10.3 2.6 5.8
2014e 24,444,866 2,965,315 750,959 4.2 27.0 4.0 9.4 2.4 6.5
2015e 27,001,578 3,269,796 816,278 4.2 26.5 4.3 8.6 2.1 7.1
Ita BBA 74
Nov-11
Jan-12
Valid ON Outperform
Company Description
Valid (formerly American Banknote, ABNB3) is positioned in three business segments: Payment Means, Identification Systems, and Telecommunications. These segments account for 30%, 45% and 25% of the companys EBITDA, respectively. The main products in each segment are plastic cards, drivers licenses and SIM cards. Historically, the company has also relied on acquisitions to broaden its product offering and has successfully integrated its targets. One notable acquisition was M4U in 2010, a joint acquisition between Valid and Cielo to explore the promising mobile payment business.
VLID3 BRL 27.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 3.7 4.4 22.0 22.7 23.18/15.88 56,650 1,246 2.3 12m 24.1 50.7
Investment Thesis
Valid relies on efficiency, flexibility and long-lasting client relationships as differentials to expand its operations in a competitive environment. It has been able to expand revenues and net income even in unfavorable economic periods, and we forecast bottom-line growth in the low- to mid-teen level in coming years (~11% CAGR from 2011 until 2014). We believe Valids EBITDA and net income margins will start to slowly contract in the following periods (~40 bps per year on EBITDA and 10 bps per year on net income), given a relatively high client concentration in the payment and telecom segments. Alongside its core businesses, the company has been investing in four other areas: i) the new Brazilian ID system (RIC); ii) digital certification; iii) Radio Frequency Identification; and iv) mobile payment. Our model assumes no additional revenue from Valids new endeavors, leaving considerable room for upside to our estimates and valuation if these other undertakings are successful. Of the four initiatives, digital certification will be the first to contribute to revenue (by 2012), but we believe that the new Brazilian ID is the initiative with the highest revenue potential, as the government intends to have some 20 million RICs issued per year. In addition to the risk of obsolescence for some of Valids products in the future due to new technologies or changing consumer habits, we note the following negative points: i) a relatively high client concentration in each segment; ii) an eventual failure to roll out new projects; and iii) overpaying for future acquisitions or failing to integrate targets.
Company Performance
120 100 80 60 40
Ibovespa
VLID3

Acquisitions, which are included in the News flow regarding the RIC implementation could benefit VLID3 by 2H12, given the companys unique position as a key player in this segment. Regulatory issues have not been traditional sources of volatility for VLID3, and we do not expect this to change in the near term. companys plans, could be a trigger for the stock, depending on market perception. Increasing market share in the Telecom business (company targets 30% from ~25%) could lead to upward revisions in estimates.
Source: Ita BBA

We have an outperform recommendation on VLID3, with a YE12 fair value of BRL 27.0/share. While we expect Valids top and bottom line to expand at a rate in the low-teens in the coming years, there is some upside to our forecasts based on the companys new endeavors, as mentioned above. In addition to the synergies to be captured mostly through the RIC and digital certification, Valid trades at a relatively attractive valuation, particularly against its main global peer, Gemalto (GTO), whose P/E multiple is ~50% above Valids YE12 P/E of 10.0x. Growth prospects for both companies are similar.

Years Net Revenues (BRL m) EBITDA (BRL m) Net Income (BRL m) EV/EBITDA P/E FCFF Yield (%) Dividend Yield (%)
Source: Ita BBA
2010a 757 172 97 7.5 12.9 7.9 2.3
2011e 855 185 111 7.0 11.2 5.0 3.6
2012e 947 211 124 5.9 10.0 9.5 5.0
2013e 1,053 227 137 5.4 9.1 9.3 6.6
2014e 1,163 245 152 4.8 8.2 9.9 7.3
2015e 1,285 264 166 4.4 7.5 10.5 10.6
Ita BBA 75
Consumer Goods, Food & Beverage

Juliana Rozenbaum, CFA +55-11-3073-3035 juliana.rozenbaum@itaubba.com
Francine Martins, CNPI +55-11-3073-3039 francine.martins@itaubba.com

Alexandre Ruiz Miguel, CFA +55-11-3073-3020 Alexandre.miguel@itaubba.com Renato Salomone, CNPI (Mexico) +52-55-5262-0674 renato.salomone@itaubba.com Barbara Angerstein (Chile) +56-2-834-6297 barbara.angerstein@itau.cl
CONSUMER GOODS & RETAIL

About the Sector
While the world flirts with recession, some of the few consumers of last resort live in LatAm. We continue to expect solid growth in Brazilian domestic demand in 2012 (GDP growth of 3.5%), and especially in 2013 (+5.4%), making the Brazilian Consumer Goods and Retail sector one of the most attractive spaces in LatAm. Valuations are not bargains at an average P/E 2012 of 17x (the MSCI LatAm trades at 10.4x), but given the scarcity value of the powerful combination of high growth rates (average EBITDA growth of 21% in 2011-13) and high returns (average 2012 ROIC of 28%), we continue optimistic on the sector. However, external shocks are still possible, and (especially in Brazil) inflation is not dead, so it is an unstable equilibrium a shorter easing period and thus less growth could spoil the party even before it warms up. Juliana Rozenbaum, CFA +55-11-3073-3035 juliana.rozenbaum@itaubba.com Francine Martins, CNPI +55-11-3073-3039 francine.martins@itaubba.com Alexandre Ruiz Miguel, CFA +55-11-3073-3020 Alexandre.miguel@itaubba.com Renato Salomone, CNPI (Mexico) +52-55-5262-0674 renato.salomone@itaubba.com Barbara Angerstein (Chile) +56-2-834-6297 barbara.angerstein@itau.cl

We forecast an accelerating growth rate into the latter part of 2012 and 2013 (pace of growth annualizing at 6% in the end of 2012 and 1H13), which could bode well for earnings momentum. Although 2011 ended on a low note (a somewhat weak Holiday Season, with retail associations reporting growth rates around 4% YoY), only a few companies (so far) have changed their organic growth plans. Most are still building out their footprint and their structure to meet the long-term potential in Brazilian demand we project area growth of 8.5% in 2012. The same is true for Peru and Colombia, where Chilean retailers have significant exposure (total area growth of 16.5% in 2012). In Chile, stable employment levels are likely to sustain consumption, although at a slower growth pace than in 2011. Income growth, distribution (Gini Coefficient from 0.63 to 0.52) and social mobility (46 million Brazilians moved from the D and E income classes to A-B-C from 2003 to 2011; another 19 million are expected to move by 2014), credit availability and a healthy consumer balance sheet (22% of income committed to debt payments) are all behind the long-term appeal and high growth profile of the Brazilian consumer sector. Barring a global meltdown, we see relatively limited impact from abroad to prevent this growth opportunity. Retailers are still in growth mode, as more and more cities become attractive enough for them or neighborhoods become large enough for another store. In most cases, we still see room for per-capita consumption expansion (especially in the lower income groups) and increased penetration for example, we see room for significant Brazilian per-capita beer consumption growth (up 17.6% in 5 years to 76.9 liters), along with prospects for increased volumes because of the major sports events in 2013-14 (+4.3% additional volume). All in, we believe these arguments make the sector a structural long-term buy especially when we can find room in what is usually a sector with stretched valuations.
Catalysts
Whether retailers have the best combination of formats that adapt to different income classes, malls vs. street, big vs. small cities, etc., which in the long term reflects on store productivity. Retailers ability to properly control their credit exposure for apparel retailers, consumer finance makes up some 30% of EBITDA. The short-term slowdown in demand and the uptick in risk aversion could mean downward revision in estimates, including store opening plans. Area growth makes up about half of total sales growth for the average retailer. More competitive market environment,
especially from foreign players and new entrants.

We remain enthusiastic about Apparel Retailers, as they show the best combination of growth (22% 2year EBITDA CAGR) and returns (average ROIC of 30% in 2012). We rate both Renner and Hering as outperform. We are also very keen on the Drugstore retail sector. RaiaDrogasil has the upside of synergies on top of favorable sector dynamics (defensive growth in a sector under consolidation). Lukewarm growth in Mexico (+2.5% GDP growth in 2012) does not get us excited about retailers there. We would still avoid B2W and Lojas Americanas, given limited visibility on the future of B2W. Wed also shy away from AmBev and Souza Cruz due to their premium valuation (20.4x and 20.9x P/E 2012, respectively, compared to the Brazilian Consumers average of 17x), and from Chedraui because of poor execution. In Chile, we currently prefer Cencosud over Falabella due to its exposure to Brazil, lower exposure to credit operations, and AFPs position in Falabella being close to legal limits.
Ita BBA 77
GDP Growth Forecast

6.1% 5.4% 4.2%
Retail Sales
140 135 130 Jan 08=100, s.a 131.7 130.7
4.0% 3.5% 2.7% 2.5% 2.0%
4.0%
125 120 115 110 105 100 95 100.4
Brazil 2011E
Source: Ita BBA Macro Department
Mexico 2012E 2013
Chile
90 Jan-08
Jun-08
Nov-08
Apr-09 Brazil
Sep-09
Feb-10 Mexico
Jul-10
Dec-10
May-11
Oct-11
Chile
Source: IBGE, INEGI and INE
Brazilian Consumer Debt Commitment

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Jan-11 May-05 May-06 May-07 May-08 May-09 May-10 May-11 Sep-11
P/E vs. ROIC LatAm Retailers

42.2%
25.0
Lojas Americanas Falabella Cencosud
Walmex Raia Drogasil Arezzo Arcos Dorados Renner Marisa Guararapes Hering
20.0
22.2%
B2W Chedraui CBD Soriana
P/E 2012
15.0
Magazine Luiza
14.3%
10.0
7.9%
5.0 5% 10% 15% 20% 25% ROIC 2012 30% 35% 40% 45% 50%
Total Debt-to-Income Ratio
Monthly Debt Commitment
Principal
Interest
Source: IBGE, BACEN and Ita BBA Estimates
Source: Companies and Ita BBA
LatAm Consumer Valuation Matrix

Brazil Com pany Retail Brazil CBD Magazine Luiza Lojas Americanas B2W Lojas Renner Guararapes Hering Arezzo Marisa Raia Drogasil Arcos Dorados Food & Beverage Brazil Ambev BRF Marfrig Minerva Consumer Brazil Natura Hypermarcas Technos Souza Cruz Mexico Com pany Retail M exico Walmex Soriana Chedraui Chile Com pany Retail Chile Cencosud Falabella Rating OP OP YE12 FV 3,680 5,340 Price 3,000 4,150 Upside 23% 29% Market Cap (CLP M) 6,792,074 9,980,510 EV/EBITDA 2012E 2013E 13.0 11.7 11.8 10.8 14.1 12.5 P/E 2012E 19.9 20.0 19.8 2013E 17.3 17.1 17.4 ROIC 2012 11.8% 12.4% 11.1% CAGR 11-13 EBITDA 11.6% 12.7% 10.6% CAGR 11-13 Earnings 13.6% 16.2% 11.0% Rating MP MP UP YE12 FV 41.6 37.9 39.7 Price 36.8 32.3 34.1 Upside 13% 17% 16% Market Cap (MXN M) 666,126 58,140 32,870 EV/EBITDA 2012E 2013E 10.3 8.9 14.8 12.5 7.5 6.7 8.6 7.7 P/E 2012E 19.8 26.1 15.4 18.0 2013E 17.0 22.1 13.4 15.6 ROIC 2012 14.3% 23.0% 9.4% 10.6% CAGR 11-13 EBITDA 14.7% 17.7% 10.3% 16.0% CAGR 11-13 Earnings 17.1% 18.9% 15.0% 17.3% Rating MP OP MP MP OP OP OP OP OP OP OP MP MP UR MP MP MP OP UP YE12 FV 86.0 22.7 18.5 12.7 78.9 119.2 44.0 30.2 32.3 18.5 31.8 67.0 40.0 UR 8.5 45.0 13.3 22.0 16.7 Price 66.6 9.3 14.9 9.1 52.7 77.6 35.8 24.4 16.9 13.3 19.6 64.0 36.6 8.9 5.0 36.9 10.3 15.1 22.7 Upside 29% 144% 24% 39% 50% 54% 23% 24% 91% 40% 62% 5% 9% UR 70% 22% 29% 46% -27% Market Cap (BRL M) 17,458 1,734 11,774 1,454 6,753 4,842 5,905 2,268 3,133 4,378 4,163 (USD) 198,635 32,099 3,096 679 16,182 6,637 1,188 34,696 EV/EBITDA 2012E 2013E 9.0 7.3 7.5 6.3 6.4 5.1 9.1 7.5 6.4 5.5 9.7 7.8 6.4 5.3 11.2 9.3 13.6 10.9 6.1 5.0 11.2 8.8 10.9 8.5 9.3 8.2 13.7 12.3 10.2 8.9 UR UR 4.0 3.5 11.6 10.0 10.8 9.5 8.9 7.0 12.4 9.7 14.2 13.6 P/E 2012E 16.7 15.2 11.9 24.6 17.7 16.5 9.9 16.1 18.5 11.3 22.0 20.5 14.1 20.4 16.4 UR 5.4 17.0 17.5 16.7 12.8 20.9 2013E 12.9 11.5 9.1 18.2 12.3 13.3 8.1 13.3 15.2 8.9 16.7 15.4 12.8 18.3 15.5 UR 4.7 14.4 15.4 11.4 10.3 20.4 ROIC 2012 22.3% 10.6% 12.7% 17.7% 9.2% 29.5% 17.8% 48.0% 37.1% 24.8% 18.2% 20.3% 19.8% 36.3% 10.6% UR 12.6% 59.8% 67.5% 7.1% 28.7% 135.8% CAGR 11-13 EBITDA 24.7% 18.9% 29.1% 23.2% 24.9% 22.2% 21.2% 24.2% 27.8% 21.2% 33.7% 25.8% 12.1% 11.7% 13.3% UR 11.2% 13.5% 12.4% 19.9% 19.8% 1.8% CAGR 11-13 Earnings 35.8% 30.9% 81.1% 51.7% nm 19.9% 19.0% 25.0% 27.4% 20.2% 32.1% 50.2% 14.1% 10.4% 8.2% UR 23.8% 15.3% 12.7% nm 30.3% 3.0%
Source: Ita BBA
Ita BBA 78
Ambev PN Market Perform

Company Description
Ambev is a subsidiary of Anheuser-Busch InBev, the worlds largest brewery. Individually, the company is the fourth-largest brewery in the world, with operations in 14 countries. Its main operations consist of: i) a beer business, where it holds a significant market share in key countries (including Brazil, contributing 73% of EBITDA in 2010; South Latin America, 13%; and Canada, 13%) through its powerful local and international brands (Skol, Quilmes, Budweiser and Stella Artois); and ii) a soft-drink business in South America. Ambev is the largest Pepsi bottler outside of the United States. In 2010 Ambev sold a total of 165 million hectoliters of beverages, generating net revenues of BRL 25 billion.
AMBV4 BRL 67.0 ABV USD 38.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 3.5 4.1 64.0 4.7 68.01/42.1 3,104,161 198,635 83.4 12m 31.5 59.7
Investment Thesis
Beer consumption is likely to continue growing in line with real wage increases in most of the regions Ambev serves (for Brazil, we anticipate growth of between 4%-5% per year). Higher income and social mobility will also likely boost Brazilian premium beer consumption (we expect this segment to gain 1 pp per year for the next four years). Ambev owns strong local brands (such as Skol, the third most consumed brand in the world, and Quilmes, the Argentine market leader) and has licenses to sell prominent global brands (including Budweiser and Stella Artois) that are owned by its parent company AB InBev. The strong position Ambev enjoys in most of its markets, with a high market share (69% in Brazil and 79% in Argentina), strong brand preference and own distribution network, makes it possible for the company to adjust its prices in line with local inflation and create barriers to new competitors. Ambev has a good track record of always finding ways to streamline its business (the EBITDA margin for its beer business in Brazil rose to 50% in 2010 from 26% in 1999), cutting spending to the bare minimum without compromising the strength of its brands. Finally, the company has a net cash position and has been distributing all of its free cash flow to shareholders.
Company Performance
140 120 100 80 60 40
Jun-11 Feb-11 Aug-11 Dec-10 Oct-11 Apr-11 Dec-11

Most of the expected growth drivers seem to be priced into Ambevs stock, including: i) a positive growth outlook for the Brazilian beer market, with modest market-share gains (+1 pp by 2014, from a 69% estimated share in 2011); ii) the impact of the premium segment on overall growth (we estimate 1.2% real price growth and a 60-bp margin gain in four years); and iii) operational efficiency improving margins (we expect an additional ~180-bp expansion in margins by 2015). Tougher competitive environment in Brazil: repositioning of brands, aggressive growth targets by competitors in 2012 and higher marketing investments. Positive/negative efficiency gains. surprises on expected Available income and employment evolution. Industry taxation and stricter regulations. Small M&A moves.
Ibovespa
AMBV4
Source: Ita BBA

We currently have a market-perform recommendation on Ambev, with a YE12 fair value of BRL 67.0/share (USD 38.0/ADR), based on: i) its rich valuation (14x EV/EBITDA and 21x P/E 2012E), which offers a high premium to its peers, the historical average and similarly defensive sectors in Brazil; ii) its limited total return, based on our YE12 fair value and 2012E dividend yield (4.5%); and iii) the fact that most of its growth drivers seem to be factored into our estimates. Fierce competition and Ambevs already-benchmark cost and SG&A structure could limit the room for upward earnings revisions.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS FCFE (BRL m) EV/EBITDA P/E FCFE yield (%) DPS (BRL) Dividend yield (%) P/BV
Source: Ita BBA
2010a 25,233 11,697 7,560 -207 2.44 7,200 17.0 26.3 3.6 1.9 3.0 8.1
2011e 26,807 12,920 8,903 -208 2.87 6,742 15.4 22.3 3.4 2.1 3.3 7.4
2012e 29,821 14,528 9,724 -208 3.13 9,253 13.7 20.4 4.7 3.0 4.7 7.2
2013e 32,645 16,120 10,878 -208 3.50 10,165 12.3 18.3 5.1 3.3 5.1 7.0
2014e 36,439 18,311 12,401 -208 3.99 11,120 10.9 16.0 5.6 3.6 5.6 6.7
2015e 38,250 19,280 13,070 -208 4.21 13,354 10.3 15.2 6.7 4.3 6.7 6.8
Alexandre Ruiz Miguel, CFA +55-11-3073-3020 Alexandre.miguel@itaubba.com
Ita BBA 79
Arcos Dorados Outperform

Company Description
Arcos Dorados is the worlds largest McDonalds franchisee in terms of both system-wide sales (5.1%) and number of restaurants (6.7%). Arcos Dorados territory encompasses a large consumer base of approximately 576 million people, of whom roughly one-third are between the ages of 15 and 34 (McDonalds target consumer group), and a fast food market of USD 26 billion. As of September 2011, Arcos Dorados had 1,311 company-operated restaurants and 466 franchised restaurants, in addition to 1,306 Dessert Centers and 267 McCafs. The companys stronghold is South America, particularly Brazil, where it originates 52% of sales and 68% of EBITDA.
ARCO USD 31.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute USD % USD th USD m USD m 1m -4.55 19.6 62.2 29.43/17 215,805 4,223 2,205 12m n.a.
Investment Thesis
Arcos uniquely connects one of the worlds best-known consumer brands with a dynamic segment of the LatAm consumer market. Our positive view on the company is supported by six pillars: i) a superior global brand; ii) the aspirational appeal of the McDonalds brand in most of LatAm; iii) an attractive market with strong penetration potential (GDP per McDonalds restaurant in LatAm is 3.2x higher than in the U.S.); iv) a management team that is flexible and in tune with local taste (top management has an average of 17 years of experience with McDonalds in LatAm); v) a dominant market share of 10.4% in LatAms QSR industry, compared with a combined share of 9.7% for its five main competitors; and vi) accelerating growth (restaurant-opening 2011-15 CAGR of 7.6%, compared with 2007-10 CAGR of 3.3%). A key risk to the investment case is FX volatility, as Arcos Dorados reporting currency (USD) differs from the functional currencies of its subsidiaries. An average of 30% of the companys food and paper inputs are imported, and there are intercompany loans which affect the companys P&L; for every five-cent upward shift in the BRL for a given year, earnings fall by 2.8% (non-cash in the case of intercompany loans).
Company Performance
180 160 140 120 100 80 60 40 20 0

Lower FX volatility is likely to turn investors attention back to ARCOs fundamentals. Made for You (MFY): Over 500 restaurants have been updated with MFY (a just-in-time system aimed at delivering fresher food through a leaner and more automated production process), and the rollout should be concluded by YE12. We expect savings of 6% in total labor expenditures due to a decrease of 10% in total man-hours. G&A dilution efforts are likely to show their first results in 2H12 (we expect a 30-bp dilution in G&A as a percentage of revenues in 2012). The turnaround in Mexico is on track, with a pick-up in transactions per restaurant translating into faster margin expansion (we expect NOLADs EBITDA margin to expand by 130 bps, to 7.1%, in 2012).
Jun-11
ARCO
Source: Ita BBA

We have an outperform rating on Arcos Dorados, with a YE12 fair value of USD 31.8 per share. We currently see ARCO trading at 20.5x P/E 2012, with a ROIC of 21.5% for 2012 and a 2011-13 earnings CAGR of 39%; moreover, with a PEG ratio of 0.41x, ARCO is trading at discounts of 70.3% and 59.0% to other fast casual and QSR restaurants, respectively. ARCO has suffered recently due to increased FX volatility, which we believe is presenting interesting entry points for the stock. Most importantly, we remain confident in managements ability to leverage on the aspirational appeal of the McDonalds brand and to develop local flavor innovations for consumers from a wide range of income levels.

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) Net debt (USD m) EPS FCFE (USD m) EV/EBITDA P/E FCFE yield (%) DPS (USD) Dividend yield (%) P/BV
Source: Ita BBA
2010a 3,018 299 106 356 0.49 150 15.3 39.8 3.6 0.1 0.6 7.7
2011e 3,671 339 121 303 0.56 -50 13.4 34.8 -1.2 0.2 0.9 5.3
2012e 4,248 417 206 335 0.96 3 10.9 20.5 0.1 0.3 1.5 4.4
2013e 4,958 537 274 343 1.27 59 8.5 15.4 1.4 0.4 1.9 3.6
2014e 5,675 651 345 306 1.60 124 7.0 12.3 2.9 0.5 2.4 2.9
2015e 6,428 774 417 213 1.93 199 5.7 10.1 4.7 0.6 3.0 2.4
Juliana Rozenbaum, CFA +55-11-3073-3035 juliana.rozenbaum@itaubba.com Renato Salomone, CNPI +52-55-5262-0674 renato.salomone@itaubba.com
Ita BBA 80
Dec-11
Aug-11
Oct-11
Apr-11
Arezzo ON Outperform
Company Description
Arezzo&Co is one of Brazils leading branded womens shoe designers, producers and retailers. With over 38 years of history, the company currently sells approximately 6 million pair of shoes per year, in addition to handbags and accessories. The companys portfolio of renowned brands -- Arezzo (67% of sales), Schutz (25% of sales), Ana Capri and Alexandre Birman -- stands out in the market for its prime quality, design and comfortable and innovative products. As of the end of 2011, Arezzo&Co operated 291 franchised and 43 owned stores and sold its products through more than 1,600 multi-brand stores.
ARZZ3 BRL 30.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -2.8 -2.2 24.4 23.8 26.25/17.01 92,970 2,268 1.5 12m n.a. n.a.
Investment Thesis
Arezzo is the exclusive designer of all of the products it sells, relying on the most recognized brand in the womens shoe space in Brazil. It operates according to a very flexible business model, in which it determines the most profitable combinations in both production either internal (over 70% of total) or outsourced and go-to-market either owned (18% of sales), franchise (51%) or multi-brand (31%) without losing absolute control over the brand, product design or store experience (the most important aspects of brand desirability). The right balance of control and flexibility allows for high returns on invested capital (39% ROIC in 2011), in a model similar to that of Hering (44% ROIC). Moreover, Arezzo benefits from a dynamic market, in which branded apparel has taken on greater importance as consumers move up the income ladder, allowing for a disproportionate growth of discretionary consumption. While the widespread, common-sense view is that Brazils biggest growth opportunity is in the emerging C-income class (which we agree with, to some extent), the bulk of discretionary income lies in the A- and B-income class groups (40% of total), which are Arezzos core target market.
Company Performance
140 120 100 80

Upside to estimates with the full roll-out of the Schutz franchise chain; the start was announced in 3Q11 and is not yet factored into our valuation. Higher-than-expected results from the strategy of using more working capital to improve stores service levels and boost sales. M&A: an acquisition would make sense in light of Arezzos comfortable balance sheet, as well as its organized and scalable supply chain. Nonetheless, we do not believe that M&A will be a major part of the companys strategy, and we praise the companys financial discipline in that regard.
60 40
Jun-11 Feb-11 Aug-11 Oct-11 Apr-11 Dec-11
Ibovespa
ARZZ3
Source: Ita BBA

We have an outperform recommendation on Arezzo, with a YE12 fair value of BRL 30.2/share. Arezzos slightly higher-end exposure and non-credit-dependent sales provide us an extra degree of confidence in our estimates in turbulent times. Moreover, we believe that the companys alreadyattractive growth potential through its core brands (19% 5-year sales CAGR) could be enhanced by the still-underdeveloped Schutz and Ana Capri brands. Our current valuation model does not include the Schutz franchise roll-out, which naturally implies some upside to our area estimates (though it might require a more conservative growth assumption for multi-brands).

Source: Ita BBA
2010a 572 95 65 34 0.69 3 24.1 35.1 0.1 0.4 1.5 15.5
2011e 693 119 92 -128 0.99 4 17.9 24.7 0.2 0.2 1.0 5.7
2012e 844 157 122 -135 1.32 39 13.6 18.5 1.7 0.3 1.3 4.6
2013e 1,006 195 149 -142 1.60 89 10.9 15.2 3.9 0.9 3.6 4.1
2014e 1,185 238 178 -138 1.91 113 8.9 12.8 5.0 1.2 5.1 3.7
2015e 1,363 279 204 -127 2.19 142 7.7 11.1 6.3 1.6 6.7 3.4
Juliana Rozenbaum, CFA +55-11-3073-3035 juliana.rozenbaum@itaubba.com Francine Martins, CNPI +55-11-3073-3039 francine.martins@itaubba.com
Ita BBA 81
BRF Brasil Foods ON Market Perform

Company Description
Brasil Foods, created as a result of the Sadia-Perdigo merger in 2009, is the worlds largest poultry meat exporter and the global leader in protein production, with a 9% share of the international trade. The company also has a solid structure in the Brazilian market (which accounts for 60% of sales), where it is the leading brand of processed products, with a chilled and frozen distribution network that covers the entire country. Brasil Foods generates BRL 23 billion through the sale of over 3,000 products in segments such as poultry, pork, beef, processed meats, milk, dairy products, margarine, pasta, frozen dishes and vegetables. The company operates 60 plants throughout Brazil and three plants overseas in Argentina, the U.K. and Netherlands through its subsidiary Plusfood.
BRFS3 BRL 40.0 BRFS USD 23.0
Stock Data
Investment Thesis
BRF owns the strongest Brazilian brands in each of the segments in which it operates (frozen products has a 40% average market share). The company enjoys high brand awareness (Sadia and Perdigo are both Top of Mind), national presence and quality perception, allowing for a price premium to the market average of ~15%. BRF plans to decrease its dependence on the commoditized in-natura business, which currently accounts for 40% of its sales, by increasing the importance of the valueadded products in both the local and international market (mainly through M&As) and the food-service business (which could improve margins by 0.5 pp). Another pillar of the companys investment thesis is its ability to extract synergies from the merger. Following the release of 3Q11 results, management raised the synergy guidance from BRL 500 million to BRL 1 billion per year (or 3%-4% of sales in 2012).
Company Performance
140 120

Rising protein consumption in emerging Greenfield investments help and international foodmarkets like China and Africa; poultry exports to China rose 64% in 2011. Synergy extraction following the merger acquisitions could processing capacity. increase
100 80 60 40
Ibovespa
BRFS3
Suspension of strong brands and competition from other players opportunities. could cap growth
Source: Ita BBA
approval by anti-trust regulators in Brazil (still has BRL 440 mn).

We have a market-perform recommendation on BRF and YE12 fair value of BRL 40/share. In our view, the main headwinds that could prevent a stronger performance of BRF shares are: i) limited upside to our DCF-based fair value (assuming long-term EBITDA margin at 15.5%) after a strong run last year (+37%); ii) rich multiples (the stock is trading at 10.2x EV/EBITDA and 16.4x P/E 2012E, a ~25% premium to the historical average and in line with global branded-food companies); iii) little cash flow generation in 2012 given the companys high investment needs; and iv) the fact that consensus and our estimates already incorporate 13%-15% EBITDA growth in 2012. However, we believe the company still has some potential value to unlock from i) faster-than-anticipated volume recovery/growth in the domestic market; ii) larger-than-expected synergy gains; iii) potential accretive processed-food M&A opportunities in developing countries; and iv) the opening of export markets for pork meat, such as Japan, but is too early to price them in as they rely on flawless execution and external factors.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS FCFE (BRL m) EV/EBITDA P/E FCFE yield (%) DPS (BRL ) Dividend yield (%) P/BV
Source: Ita BBA
2010a 22,681 2,635 804 3,651 0.92 2047 16.0 39.6 6.4% 0.2 0.5% 2.3
2011e 25,539 3,376 1,753 4,860 2.02 -593 11.7 18.1 -1.9% 0.6 1.6% 2.1
2012e 27,176 3,895 1,939 4,936 2.23 362 10.2 16.4 1.1% 0.6 1.5% 1.9
2013e 29,096 4,304 2,051 4,041 2.36 1408 8.9 15.5 4.4% 0.6 1.6% 1.8
2014e 31,982 4,802 2,435 3,109 2.80 1541 7.8 13.1 4.8% 0.7 1.9% 1.6
2015e 34,787 5,275 2,796 2,073 3.22 1735 6.9 11.4 5.5% 0.8 2.2% 1.5
Alexandre Miguel, CFA +55-11-3073-3020 alexandre.miguel@itaubba.com
Ita BBA 82
B2W Varejo ON Market Perform

Company Description
B2W, the leading online retail company in Brazil, originated from the 2006 merger between Americanas.com and Submarino. It sells over 700,000 products through various sale channels such as the internet, television, catalogs and internet kiosks. Additionally, its subsidiaries Ingresso.com and B2W Viagens are engaged in online sales of movie/theater tickets and travel products, respectively. Lojas Americanas, B2Ws controlling shareholder (57.7% of total capital), is one of the most traditional retail chains in Brazil and is also listed on the Ibovespa.
BTOW3 BRL 12.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -13.5 -13.0 9.1 39.0 34.31/8.72 159,816 1,446 12.9 12m -71.6 -65.5
Investment Thesis
It all started with a big dividend to sweeten the deal for Submarino shareholders and help create B2W. A leveraged balance sheet was the result, and in the face of the explosion of interest-free financing for appliances, the entire balance sheet had to be devoted to financing receivables. Had competition remained dormant, B2W would probably be in decent shape, but this was not the case. With greater competition, particularly from players willing to burn cash for a couple of years in exchange for market share (B2W lost roughly 30 p.p. of share to ~25%), B2W was losing ground on all fronts; products became more expensive with less aggressive payment options, and problems were mounting in the consumer service and delivery segments. And the balance sheet got worse, reaching a peak of 4.1x net debt/EBITDA at the end of 2010, which had to be followed by a BRL 1 billion capital increase. After a year when consumers have been driven away by less-competitive pricing, poor order fulfillment and significant delivery issues, winning them back from competitors will demand state-of-the-art execution exactly what the company has been lacking since the merger. Estimates have been revised down many times (less growth, lower margins); if execution does not improve fast, more cash from the parent company may be needed.
Company Performance
140 120 100 80 60 40 20

A pick-up in growth that proves the companys ability to restore its competitiveness and halt market share losses. A clearer communication of the companys strategy alone would be a start. Potential M&A: Lojas Americanas could acquire B2W minorities or be acquired by a foreign player willing to gain exposure to Brazil.
Ibovespa
BTOW3
Source: Ita BBA

We still cannot find the light at the end of the tunnel for B2W. Because company visibility is limited, we are not aware of any strategy it might have to reignite growth (3Q11 sales were down 1% year over year). We believe that one way to do so would be to invest in aggressive pricing in order to grow while diluting expenses, but this would probably require another capital increase. We project an in-between scenario: stable margins (12%-13% EBITDA margin), a modest top line (10% CAGR 11-13) and positive cash generation only in 2016. This is an okay scenario, but also one of those tough-to-keep equilibriums, and the negatives could easily snowball again. We believe that there is upside in this scenario, but we are not very confident in its materialization. Hence, we are sticking to our marketperform rating and YE12 fair value of BRL 12.7/share.

Source: Ita BBA
2010a 4,074 547 34 2,231 0.2 (480) 6.0 30.9 -46.2% 0.1 1.1% 4.6
2011e 4,196 428 (100) 1,819 (0.6) (512) 7.7 n.m. -35.2% (0.2) -1.7% 1.3
2012e 4,630 548 82 2,051 0.5 (93) 6.4 17.7 -6.4% 0.1 1.4% 1.2
2013e 5,373 668 118 2,197 0.7 (101) 5.5 12.3 -6.9% 0.2 2.0% 1.1
2014e 6,114 779 182 2,372 1.1 (61) 4.9 8.0 -4.2% 0.3 3.1% 1.0
2015e 6,969 904 237 2,619 1.5 (12) 4.5 6.1 -0.8% 0.4 4.1% 0.9
Ita BBA 83
Cia. Hering ON Outperform

Company Description
Cia. Hering is one of the largest apparel retailers, designers and manufacturers in Brazil, with total net sales of BRL 1.3 billion estimated for 2011. Operating in the apparel industry for almost 130 years, Hering develops apparel collections under three proprietary brands, of which Hering is the primary (75% of sales) and most profitable. Its retail structure comprises two sales channels: 433 franchised stores (36% of sales) and 56 owned stores (14% of sales) and 16,000 multi-brand retail stores (third-party retailers responsible for 50% of sales). The company uses a fast-fashion strategy (i.e., six collections per year with mini-collections in between), and it has adopted a flexible make-or-buy supply chain model, which combines its own production with the outsourcing of lesser-value items, and the purchase of finished products from local and international suppliers.
HGTX3 BRL 44.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m -5.4 -4.8 35.8 23.2 40.45/23.52 164,934 5,896 40.2 12m 34.8 63.6
Investment Thesis
In the past few years, Hering has undertaken a new growth strategy geared towards expansion, price repositioning, mix changes and the remodeling of the Hering Store chain, all of which are successfully leading to a significant increase in its sales volume (average SSS of 24.5% in the last 4 year). Herings business model is marked by: i) high margins on the production and sourcing of its branded apparel; ii) high margins at the retail level (with no help or risk from consumer finance); and iii) leverage from the companys freedom to grow with or without store openings, based on a flexible combination of owned stores, franchises and multi-brand stores.
Company Performance
160

First guidance on a stand-alone roll-out of Hering Kids has been announced. Management believes in a full potential of 200-250 stores, which could add an extra 10% upside potential.
140 120 100 80 60 40


We have an outperform recommendation on Hering. We are very optimistic about the companys unique and flexible combination of apparel manufacturing and retail. This, coupled with a still-attractive valuation 15.1x 2012 P/E multiple (retail average of 16.7x) backed by superior returns on invested capital (48% vs. retail average of 23%) makes Hering one of our favorite names for playing the Brazilian Retail sector. On top of the existing value and an impressive track record of same-store-sales expansion, there is likely extra upside in diversification, such as the recently announced rollout of the Hering Kids model. Our preliminary analysis assuming a 250-store chain of Hering Kids suggests a BRL 3.5 addition to our fair value of BRL 44.0/share.
Ibovespa
HGTX3
Source: Ita BBA

Source: Ita BBA
2010a 1,013 277 212 -61 1.29 71 21.1 27.8 1.2 0.5 1.4 11.2
2011e 1,355 395 284 -102 1.72 154 14.7 20.8 2.6 0.7 1.9 8.4
2012e 1,686 514 368 -168 2.23 250 11.2 16.0 4.2 1.1 3.1 6.7
2013e 1,964 609 444 -239 2.69 337 9.3 13.3 5.7 1.6 4.5 5.6
2014e 2,245 702 519 -283 3.14 407 8.0 11.4 6.9 2.2 6.2 4.9
2015e 2,533 796 590 -316 3.57 475 7.0 10.0 8.1 2.7 7.5 4.3
Ita BBA 84
Cencosud Outperform
Company Description
Cencosud is the second-largest supermarket operator in Chile, and the market leader in supermarkets in Peru and Argentina. The company also has supermarket operations in Brazil, where it is the fourth operator and leads in some of the regions; home-improvement stores in Chile and Argentina; shopping malls in Chile, Argentina and Peru; department stores in Chile; and credit cards in all of its operations. Food retail represents 74% of the companys revenue and 58% of EBITDA generation. Shopping centers and financial services are the second-largest operations in terms of EBITDA, contributing 14% each. Cencosud has 774 stores and 23 shopping centers spread across formats and countries.
CENCOSUD CLP 3680.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IPSA CLP % CLP th CLP m CLP m 1m -1.3 -4.0 2,999.9 22.7 3720/2450 2,264,103 6,792,083 6,743.9 12m -16.7 -0.8
Investment Thesis
A strong footprint in South America, an underdeveloped retail industry and a healthy consumer environment (except for the next couple of months due to possible international volatility) will likely sustain Cencosuds 14% EBITDA expansion over the next five years. Brazil and Perus weight in the mix is set to increase significantly over the coming years, as the company designates nearly 30% of its capex program to these markets (their share of capex is expected to grow to over 45% beginning in 2014) and continues to extract synergies from past acquisitions. As a result, we expect Cencosud to progressively become a more defensive name with a geographically diversified revenue base in the supermarket industry. However, investors should bear in mind that Cencosud is a high-beta stock.
Company Performance

108
The company expects to spend nearly USD 1 billion per year on its operation-wide expansion plan (implying a 10% CAGR in selling space), which is likely to include minor acquisitions in the Brazilian supermarket space. Thriving consumer environments in the Northeast of Brazil and in Peru are expected to ensure a steady maturation of new investments and growth in same-store-sales. M&As in the LatAm retail space will continue to be key in Cencosuds long-term strategy. The opening of the Costanera Center mall will generate front-page news and positive sentiment for Cencosud around the world. Continued wealth increases in the countries where the company operates are likely to support multiple expansion. Investigation by the Chilean National
98 88 78 68 58
Jul-11
Nov-11
Jan-11
May-11
IPSA
CENCOSUD
Economic Attorney will add volatility to share price as more information becomes public. Competition in the Chilean supermarket space could put additional pressure on margins. A USD 500 million option by UBS before 2013 could pressure the companys cash levels.
Source: Ita BBA

Our DCF-based fair value of CLP 3,680/share implies P/E valuation multiples of 24.5x and 21.0x for 2012 and 2013, respectively. These are in line with the companys current multiples for 2011 and 2012 and only slightly above the companys historical average. We do not expect the shares to re-rate as long as uncertainty in international markets persists. As with most Chilean companies, Cencosud trades at a premium to its LatAm peers. We believe that this is justified by a lower cost of capital, exposure to high-growth countries like Peru and Colombia, and savings pressure from mandatory and voluntary pension savings. We maintain an outperform recommendation on Cencosud.

2010a 6,230 503 296 1,625 131 78 16.4 22.9 1.1% 24 0.8% 2.6 2011e 7,578 637 294 1,746 130 -41 13.2 23.1 -0.6% 41 1.4% 2.4 2012e 8,138 722 340 1,967 150 218 11.8 20.0 3.2% 42 1.4% 2.2 2013e 8,767 808 397 1,887 175 109 10.8 17.1 1.6% 56 1.9% 2.0 2014e 9,488 887 449 1,698 198 453 9.8 15.1 6.7% 63 2.1% 1.9 2015e 10,316 973 509 1,468 225 540 8.7 13.3 7.9% 70 2.3% 1.7 Barbara Angerstein +56-2-834-6297 barbara.angerstein@itau.cl
Net revenues (CLP bn) EBITDA (CLPbn) Net Income (CLP bn) Net debt (CLP bn) EPS (CLP) FCFE (CLP bn) EV/EBITDA P/E FCFE yield (%) DPS (CLP) Dividend yield (%) P/BV
Source: Ita BBA
Ita BBA 85
Sep-11
Mar-11
Jan-12
Chedraui Underperform
Company Description
Chedraui is the fourth-largest food retailer in Mexico, with roughly 21% and 14% of Walmexs domestic sales floor and revenues, respectively. Despite having a presence in all Mexican regions, 45% of Chedrauis domestic sales come from the southeast region and 39% come from the central region and Mexico City. In the U.S. (20% of sales and 12% of EBITDA), Chedraui has a 72% stake in Bodega Latina, a supermarket chain with 36 stores. Chedraui has a clear value proposition in the minds of consumers with its Every Day Lowest Price commercial strategy, leading to above-average customer traffic at stores. With thin margins (6.4% EBITDA margin and 2.7% net margin estimated for 2011) and with capex likely to be 92% of EBITDA from 2011-15, we expect Chedraui to turn free cash flow positive only in 2015. As of the end of 3Q11, Chedraui operated 171 stores in Mexico (79% of sales) and 36 in the United States (21% of sales). In its Mexican operations, 92% of its stores are hypermarkets.
CHDRAUIB MXN 39.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Mexbol MXN % MXN th
MXN m MXN m
34.1 16.6 40.87/30.5 963,917 32,821 13.9 12m -8.9 -4.8
Investment Thesis
We view Chedrauis strategy of focusing on hypermarkets rather than format segmentation as risky, because it means that the company will have less flexibility to deal with the ups and downs of different income classes, city sizes, consumer tastes and occasions. The lack of smaller formats puts Chedraui at a disadvantage to its competitors, especially convenience stores (e.g., Oxxo), as consumers are making fewer trips to big boxes due to lifestyle changes and the difficulty of moving around in larger cities (in terms of same-store sales, Chedraui has underperformed Oxxo for the past six quarters and ANTAD Self-Service for the past four quarters). And as self-service retailers react to this new environment, competition at hypermarkets is becoming increasingly aggressive (e.g., we estimate that after the re-launch of EDLP the price gap on an average basket between Walmart and Chedraui shrank to ~2%-2.5% from ~4%-5%). On top of this dependence on the one-store format, over the past 12 months a series of execution mishaps with the SAP Retail implementation have affected the companys results and raised concerns about its ability to profitably expand towards northern Mexico, increasing execution risk (9M11 same-store sales growth decelerated by 330 bps YoY, to 1.2%, and 9M11 net margin contracted by 30 bps YoY, to 2.8%).
1m 3.3 3.5
Company Performance
120 110 100 90 80 70 60
Dec-10
Jun-11
Aug-11
Oct-11
Apr-11
MEXBOL
CHDRAUIB
Source: Ita BBA

Easy comps established throughout 2011 could allow for higher-than-expected samestore sales growth in 2012. Management believes that there will be attractive M&A opportunities in the Mexican food retail industry in the next 12-18 months. Most potential targets are in northern Mexico. With Chedrauis net debt/EBITDA currently at 1.3x, it is probable that any eventual transaction would involve equity issuance.

We have an underperform rating on Chedraui. Besides the limited upside to our DCF-based fair value of MXN 39.7 per share, we are uneasy with Chedrauis problematic execution over the past year and its strategic concentration in hypermarkets (a format we view as increasingly under attack by competitors and consumers alike). We see Chedraui trading at 18.0x P/E 2012, with a ROIC 2012 of 10.6%, which leaves the company with the second worst P/E-to-ROIC ratio in our LatAm retail coverage universe.

Years Net revenues (MXN m) EBITDA (MXN m) Net income (MXN m) Net debt (MXN m) EPS FCFE (MXN m) EV/EBITDA P/E FCFE yield (%) DPS (MXN) Dividend yield (%) P/BV
Source: Ita BBA
2010a 50,900 3,375 1,428 978 1.48 -2,388 10.1 23.0 -7.3 0.0 0.0 2.1
2011e 57,615 3,687 1,534 2,983 1.59 -1,774 9.7 21.4 -5.4 0.2 0.5 1.9
2012e 64,856 4,326 1,827 4,349 1.90 -1,193 8.6 18.0 -3.6 0.1 0.3 1.7
2013e 72,748 4,961 2,112 5,270 2.19 -710 7.7 15.5 -2.2 0.1 0.3 1.6
2014e 81,269 5,652 2,390 5,983 2.48 -462 6.9 13.7 -1.4 0.1 0.4 1.4
2015e 90,002 6,364 2,801 6,031 2.91 378 6.1 11.7 1.2 0.3 0.9 1.3
Ita BBA 86
Dec-11
Feb-11
Falabella Outperform
Company Description
Falabella is the leading department-store and home-improvement player in Chile, Peru and Colombia. The company is also a key player in the department-store and home-improvement industry in Argentina, as well as in the supermarket and shopping mall industries in Chile and Peru. The Chilean operation generates 64% of the companys EBITDA, although no single operation accounts for more than 16% of EBITDA, evidencing well-diversified operations both in terms of current cash flow and potential sources for future growth. Falabella boasts sales per m that are 50% higher than its peers, and the lowest risk levels (provisions/loans were 3.9% in 3Q11) in a highly profitable credit operation relative to its peers.
FALAB CI CLP 5,340.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg. daily vol. Performance (%) Absolute Vs. Ipsa CLP CLP CLP th CLP m CLP m 1m -0.9 -3.6 4,149.9 28.9 5,340.9/3,699 2,405,408 10,030,550 5,946.9 12m -18.9 -3.0
Investment Thesis
The company is strongly positioned in Chile, which should partially shield it from the ups and downs of consumer spending. Falabella is also a leading player in the Peruvian and Colombian retail industries. The widespread underdevelopment of the formal-commerce industry in both countries offers Falabella significant expansion opportunities. We expect these advantages to translate into five-year CAGRs of 13% for revenue,12% for EBITDA and 12% for the companys bottom line.

Falabella is likely to be one of the main beneficiaries of the rise in consumption levels in Peru and Colombia as a result of the job formalization, expansion of credit, and the increasing purchasing power of their young and growing populations. The roll-out of the companys USD 3.5 billion capex program between 2011 and 2015 will likely allow it to turn most of these dynamics to its advantage, making it a good proxy for what is set to be an exciting consumer environment in the Andean economies in the years ahead. Falabella is also constantly scanning the region for new expansion opportunities or the opportunity for entry into a new country, providing new prospects for long-term growth. Falabella has a strong, visible 5-year capex program that is fully funded by the companys own cash-flow generation. Diversified growth opportunities reduce Market volatility could lead to excess
120 110 100 90 80 70 60
Company Performance
Jul-11
Nov-11
Jan-11
investments in Falabella by AFPs and to their divestment, creating a share overhang. The Congress is debating a cut in the maximum interest rate. Equally, retailers could be forced to share client data with banks. The usual macro-driven risks are present, but they are eased by geographic diversification.
Source: Ita BBA
May-11
IPSA
FALAB
exposure to country-specific volatility. Leading management team with a strong track record of delivering on expectations.

Our DCF-based fair value of CLP 5,340/share results in P/E multiples of 25.2x and 22.4x for 2012 and 2013, respectively. At present, Falabella is trading at multiples that are in line with its historical average; we do not expect a strong re-rating of Falabella shares in the near term, as long as global volatility persists. Although Falabellas multiples are above those of its peers in our Latin American coverage universe, we expect the companys premium to hold up over the coming quarters, due to its superior operating standards, strong management track record of delivering on expectations and the impressive growth opportunities in Peru and Colombia. We maintain our outperform rating on Falabella.

Years Net revenues (CLP bn) EBITDA (CLPbn) Net Income (CLP bn) Net debt (CLP bn) EPS (CLP) FCFE (CLP bn) EV/EBITDA P/E FCFE yield (%) DPS (CLP) Dividend yield (%) P/BV
Source: Ita BBA
2010a 4,430 705 413 2,208 172 451 17.3 24.1 4.5% 37 0.9% 4.2
2011e 5,169 806 466 2,224 194 423 15.1 21.4 4.2% 66 1.6% 3.5
2012e 5,725 871 504 2,300 209 418 14.1 19.8 4.2% 75 1.8% 3.2
2013e 6,455 987 574 2,333 239 528 12.5 17.4 5.3% 84 2.0% 2.8
2014e 7,249 1,109 653 2,335 272 597 11.1 15.3 6.0% 95 2.3% 2.5
2015e 8,062 1,231 740 2,271 307 705 10.0 13.5 7.1% 109 2.6% 2.3
Barbara Angerstein +56-2-834-6297 barbara.angerstein@itau.cl
Ita BBA 87
Sep-11
Mar-11
Jan-12
Guararapes ON Outperform
Company Description
Guararapes is the parent company of the Lojas Riachuelo chain, one of the largest apparel retailers in Brazil along with C&A, Renner, Hering and Marisa. In addition to 133 stores spread throughout Brazil (with a significant footprint in the Northeast region; 25% of its store base), the company also operates a consumer finance business (52% of its retail sales are made through its private-label card) and a shopping mall. In terms of target market, Guararapes focuses on the C income class, offering affordable apparel for women, men and children.
GUAR3 BRL 119.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 0.6 1.2 77.6 53.6 93.49/66.1 62,400 4,840 0.6 12m -3.1 17.7
Investment Thesis
In contrast to Renner and Marisa, Guararapes business model entails an integration of retail and production, with the owned plant supplying half of the stores sales. In theory, this model would give Guararapes the competitive advantage of being able to respond rapidly to market changes and trends, enabling higher margins and good returns on invested capital. The improvement in gross margins, although intensifying in the last two years (+220 bps), has not yet been enough to raise Guararapes ROIC (18%) to the levels of its peers (30% for Renner, 25% for Marisa and 48% for Hering). Particularly in 1H11 results, there were finally concrete indications that the significant investment in the industry is starting to pay off which is the reason for our recent recommendation upgrade but we believe that, given its low liquidity and the execution risk embedded in its strategy, Guararapes remains a tougher choice among apparel names.
Company Performance
140 120 100

Weak earnings momentum: 3Q11 results were a negative surprise on weaker sales (3.8% SSS) and stronger-than-expected expenses and we believe that the situation has not improved much in 4Q11 (SSS likely weaker than 3.8%). The recently announced downward revision of area growth for 2012 (from 40 to 30 stores) might trigger downward revisions in estimates. Although we do not have any reason to believe that this is the case, a worse-thanexpected structural deterioration in credit quality could hurt consumer finance results (which account for ~40% of EBITDA).
80 60 40
Ibovespa
GUAR3
Source: Ita BBA

After the 1H11 figures were released, we upgraded Guararapes to outperform (YE12 fair value of BRL 119.2/share), as the company was trading at a 35% discount to other apparel names and the previous set of results had finally shown concrete signs that the capital invested in the industry was starting to pay off in higher margins. Nonetheless, the 3Q11 figures appeared to be a departure from recent trends, and we have yet to understand to what extent the company will set a new trend going forward. Moreover, the stronger-than-expected deceleration led to a downward revision of the companys 40store expansion plan for 2012, adding some downside to our estimates. Hence, although we have an outperform rating, the fact that the discount to other apparel names has narrowed to 26% does not make Guararapes an obvious choice among Consumer names, particularly given its small trading volumes.

Source: Ita BBA
2010a 2,188 546 338 68 5.41 -106 9.0 14.3 -2.2 1.1 1.5 2.5
2011e 2,692 686 420 220 6.74 -41 7.4 11.5 -0.9 1.5 2.0 2.1
2012e 3,244 813 487 355 7.81 -24 6.4 9.9 -0.5 1.8 2.3 1.8
2013e 3,944 1,007 595 497 9.54 44 5.3 8.1 0.9 2.2 2.8 1.6
2014e 4,736 1,224 730 392 11.70 274 4.3 6.6 5.7 2.7 3.5 1.3
2015e 5,546 1,471 896 212 14.36 473 3.4 5.4 9.8 4.7 6.1 1.1
Ita BBA 88
Hypermarcas ON Market Perform

Company Description
Hypermarcas is one of the largest consumer goods companies in Brazil, with a vast and diversified portfolio of brands distributed through two main segments: pharmaceutical (7.8% market share, #1 in OTC and Branded Generics, #3 in Rx and Generics) and beauty/personal care (10.4% market share). Along with its national sales and distribution system, the company operates nine industrial complexes in three states of Brazil (about to be streamlined into two facilities, driving important operational synergies). Its growth strategy has combined strong organic growth with an aggressive pipeline of acquisitions (over 30 so far) focused in the higher-margin pharma and personal-care segments.
HYPE3 BRL 13.3
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 7.3 8.0 10.3 29.4 22.69/7.41 644,404 6,605 61.9 12m -56.3 -47.0
Investment Thesis
Hypermarcas continues to be one of the few vehicles available for gaining exposure to the booming low-end consumer staples market in Brazil, but the story has changed materially since its listing on the Bovespa. Until the end of 2010, the companys investment story was greatly dependent on its aggressive M&A strategy. Since its acquisition of Pharma company Mantecorp, though, a whole new game has started: the company has finally built up a robust pharma and personal-care portfolio of brands, and the investment story is no longer about the next accretive acquisition, but rather about organic growth opportunities, synergies and good management. Day-to-day execution has become the key metric, turning Hypermarcas into a story with a much longer maturation horizon and much less frequent triggers. We believe that the recent divestiture of food and homecare assets which were no longer meaningful to the companys profitability streamlines the over-extensive brand portfolio, allowing for an improved focus and some relief (BRL 445 million cash inflow) to the companys stretched balance sheet.
Company Performance
140 120 100 80 60 40 20

Short term: 4Q11 results are likely to be extremely weak, since the company guided for the completion of the implementation of its new commercial policy by the end of 2011. A pick-up in sell-in sales in 1Q12 is key to restore managements credibility. Improvement in cash flow generation from setting stricter conditions with clients, which supports the companys deleveraging FCF yield goes from negative in the past two years to 10% in 2012. Medium term: margin improvement as synergies materialize. The company has guided for BRL 280 million in annual synergies after it concludes its industrial plants consolidation.
Ibovespa
HYPE3
Source: Ita BBA

The change in commercial strategy implemented throughout 2011, which was a necessary part of the companys renewed focus on organic growth, has hurt results and damaged investors confidence in managements ability to execute. We believe that the shares are indeed oversold (down 62% YTD), but the lack of management credibility will likely dissuade investors from giving Hypermarcas the benefit of the doubt. Considering that improvements are only likely to materialize in future quarters, we see a tough road ahead for the stock and are thus sticking to our market-perform rating and YE12 fair value of BRL 13.3/share.

Source: Ita BBA
2010a 3,160 726 262 1,761 0.41 -188 9.8 20.5 -2.8 0.1 1.1 1.1
2011e 3,704 689 -5 2,689 -0.01 -189 11.7 n.m. -2.8 0.0 0.0 0.8
2012e 3,806 819 321 1,885 0.50 562 8.9 16.7 8.5 0.2 1.7 0.7
2013e 4,299 990 474 1,570 0.74 552 7.0 11.4 8.3 0.4 3.6 0.7
2014e 4,770 1,115 579 1,221 0.90 668 5.9 9.3 10.1 0.5 4.8 0.7
2015e 5,286 1,243 814 981 1.26 769 5.1 6.6 11.6 0.8 8.0 0.7
Ita BBA 89
Lojas Americanas PN Market Perform

Company Description
Lojas Americanas is one of the most traditional retail chains in Brazil. In activity for more than 80 years, the company has 571 stores in the major cities of Brazil and three distribution centers in So Paulo, Rio de Janeiro and Recife. Lojas Americanas is also involved in electronic commerce through its ownership stake in B2W (57.7%). The store chain sells more than 60,000 products classified into six sectors: leisure, beauty, home, children, clothing and convenience foods.
LAME4 BRL 18.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -5.8 -5.2 14.9 24.3 16.7/12.05 790,172 11,734 32.5 12m -2.6 18.3
Investment Thesis
Lojas Americanas store format is one of our preferred Brazilian retail formats. Selling convenience to price-savvy Brazilian consumers is an amazing feat. Brazilians seldom fall for impulse buying, given their cultural price awareness. But at a Lojas Americanas store, they go in to buy one thing and come out with three, because they trust that while Lojas may not be the cheapest, it will offer a competitive price. Having a brand that commands such a positive perception, even without necessarily offering the lowest prices, feeds directly into margins. Its flexible store format gives Lojas a presence in most of the country, including small municipalities. And additional store density in large cities has little cannibalizing effect, as the stores are based on convenience rather than planned consumption. Results for Lojas Americanas bricks-and-mortar stores have been impeccable, with a strong top line (18% 5-year CAGR) improving margins (150 bps from 2010 to 2015) and cash generation finally kicking in (1% FCF yield in 2012). But all this cash is being dragged to B2W (recent BRL 1 billion capital increase, 64.4% subscribed by LAME), whose results have been continuously deteriorating.
Company Performance
140 120

Operational improvements in B2W operations would take the pressure off Lojas Americanas shares. Pre-operational expenses from aggressive store openings have not translated into margin pressure. If it starts to, it could translate into downside to estimates.
100 80 60 40
Ibovespa
LAME4
Source: Ita BBA

Although B2Ws significance in Lojas Americanas market cap has dropped materially, from 20% at the beginning of 2010 to the less than 10%, B2W continues to be a major drag on the investment story. This is attributable not only to the frequent exchange of top management between the companies (CFOs have been back and forth from LAME to B2W), but also to their inability to define (or to communicate) their turnaround strategy for B2W. More than anything, the B2W drag and the limited visibility provided by management inhibits investor interest in the name. We too are put off; until we are more confident about B2Ws turnaround. Particularly if visibility remains limited, we see little reason for the stock to perform ahead of the market and will maintain our market-perform recommendation and YE12 fair value of BRL 18.5/share.

Source: Ita BBA
2010a 9,389 1,355 310 3,348 0.4 (503) 12.3 38.0 -4.3% 0.1 0.7% 21.4
2011e 10,364 1,425 281 3,747 0.4 (1,050) 11.8 44.3 -8.4% 0.1 0.4% 16.2
2012e 12,172 1,767 478 3,711 0.6 102 9.5 26.1 0.8% 0.2 1.3% 9.3
2013e 14,582 2,163 647 3,794 0.8 313 7.8 19.3 2.5% 0.4 2.3% 7.5
2014e 16,830 2,547 872 3,740 1.1 688 6.6 14.3 5.5% 0.6 3.9% 6.3
2015e 19,017 2,908 1,067 3,684 1.4 898 5.8 11.7 7.2% 0.8 4.8% 5.3
Ita BBA 90
Lojas Renner ON Outperform

Company Description
Lojas Renner is one of the three largest department stores selling apparel in Brazil, with expected net sales of BRL 2.9 billion for 2011 and a network of 195 stores. The average Lojas Renner store has a sales area of 2,100 square meters and carries an attractive range of clothing, accessories, footwear, personal care and other apparel-related merchandise, mostly in the companys own private-label brands. Lojas Renners target customers are women between 18 and 39, in the middle to upper-middle income groups, who can take advantage of the availability of credit through Renners private-label card base, with 18.4 million cards outstanding, which comprises some 55% of its sales. Lojas Renner has been listed as a true corporation in the Novo Mercado segment of Bovespa since 2005.
LREN3 BRL 78.9
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -4.3 -3.7 52.7 49.7 66/43.86 128,145 6,753 51.5 12m -3.5 17.2
Investment Thesis
Despite the eventual bumps (and slowdowns) created by the macroeconomic background, we firmly believe that fulfilling the discretionary demand of new consumers is one of the most attractive jobs in the Brazilian retail space. Renner caters specifically to middle-income consumers with an affordable (BRL 100 average ticket) and still-compelling apparel line that embraces emerging consumers but by no means alienates its core middle-income consumer base. One of the few recurring issues we have had with Renner was the long-term sustainability of its plan to grow through area growth when it was based on a single format (the large 2,000 sq. meter store). But over the last two years, more so lately, Renner management has addressed this issue by rolling out its new format expansion plans, including a smaller 1,200 sq. meter compact store. We view the Camicado acquisition as a testament to managements belief in this demand potential: Camicado sells to the same consumer group, although retailing a totally different product mix (8,000 SKUs in housewares). We believe that it is easier (and less risky) for management to adapt to a new product mix (which is also quite stable and free of the complexities of fashion) than to a new consumer.
Company Performance
140 120 100 80 60 40

Further quarters of stability in delinquency levels are important to erase any fears of deterioration of credit quality. Faster pick-up in profitability of Camicado stores (currently margin). at break-even EBITDA
Ibovespa
LREN3
Source: Ita BBA

Renner continues to be one of our top picks in the Consumer sector (we rate it outperform, with a YE12 fair value of BRL 78.9/share), because it combines most of the strengths we look for in a company: i) strong growth prospects based on store expansion and area maturation (10.4% 5-yr CAGR); ii) a strong, conservative management team; iii) strong returns based on a combination of high retail margins, significant contributions from consumer finance and limited use of capital (2012 ROIC 29.5%); and iv) strong liquidity and best-in-class corporate governance.

Source: Ita BBA
2010a 2,463 488 308 -635 2.40 132 12.5 21.9 2.0 1.2 2.3 6.6
2011e 2,963 565 354 -283 2.76 -123 11.5 19.1 -1.8 1.4 2.6 5.6
2012e 3,603 682 410 -153 3.20 76 9.7 16.5 1.1 1.6 3.0 4.8
2013e 4,221 844 509 -196 3.97 296 7.8 13.3 4.4 1.9 3.7 4.1
2014e 4,891 973 592 -287 4.62 382 6.6 11.4 5.7 2.2 4.2 3.5
2015e 5,734 1,164 712 -346 5.56 470 5.5 9.5 7.0 3.2 6.0 3.0
Ita BBA 91
Magazine Luiza ON Outperform

Company Description
Founded in 1957, Magazine Luiza is one of the largest household-appliance retail chains in Brazil (~10% market share), focused on the lower-middle and middle income classes. The company operates 684 stores spread throughout 16 Brazilian states, as well as eight distribution centers. Magazine Luiza has been built up through a combination of strong organic growth and, to date, 15 acquisitions (mostly small, with the exception of the last two, Lojas Maia and Ba). Magazine Luiza operates a multi-format sales platform composed of traditional stores, virtual stores and e-commerce.
MGLU3 BRL 22.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -19.0 -18.5 9.3 143.6 17.76/8.92 186,494 1,738 7.7 12m n.a. n.a.
Investment Thesis
We believe that Magazine Luiza combines unique factors that support the attractiveness of its investment story: i) a strong opportunity for market growth, particularly in the Northeast states of Brazil (we estimates a 3-year sales CAGR of 19%) ; ii) a good track record in area expansion (50% growth in the last four years, through both M&A and organic growth); iii) strong financial discipline (a maximum of 15% of sales are made in interest-free installments); iv) proprietary offerings of high-margin financial products and services through LuizaCred, LuizaSeg and Luiza Consrcios (15% of EBITDA); v) the ability to reach consumers through different but integrated formats (traditional, virtual and online stores); and vi) a higher return on invested capital than similar Brazilian players offer (15% in 2013 compared with 12% for CBD). Selling appliances has never been, in our opinion, the most attractive Brazilian retail segment not because of a lack of demand, but because of the apparent incapacity of most retailers to benefit from such growth potential while maintaining profitability (historical margins around low-single digits). Selling in interest-free installments has been both a major boost to the sector and the source of its malaise. Above all, we praise Magazine Luizas self-imposed limit on interest-free financing, which normally results in a higher net margin and a more profitable consumer-finance operation.
Company Performance
140 120 100 80 60 40
Jun-11 Aug-11 Oct-11 Apr-11 Dec-11

Short-term results will likely be tainted by nonrecurring costs related to the integration of Lojas Maia and Ba. A proper understanding of the businesss underlying profitability will be easier only in 2H12, which may meanwhile keep shares under pressure. Remodeling of Maia and Ba stores may provide another leg up in SSS (Maia SSS already increased by 42% in 3Q11), so that Magazine Luiza continues to gain market share.
Ibovespa
MGLU3
Source: Ita BBA

Although we are confident in a constructive scenario for Brazilian domestic demand in 2012 and 2013 (GDP growth of 3.5% and 5.4%, respectively), this not a consensus opinion, as many still fear that the global economic deceleration will hurt domestic demand sooner (and stronger) rather than later. Consequently, we see limited investor willingness to take up a highly cyclical, high-beta company like Magazine Luiza. Luiza is the highest-beta name we cover, due to its greater exposure to the economic cycle: its customers are lower-income consumers who depend on the visibility of employment levels and income sustainability in order to commit to high-ticket items (average ticket around BRL 500) and who depend on credit availability in order to guarantee the affordability of appliances (half of sales are made through LuizaCred). Moreover, the integration of two recent acquisitions (Lojas Maia and Lojas do Ba) has reduced visibility on the companys underlying profitability trends, making results tough to read. Nonetheless, we still expect fundamentals to prevail and we reiterate our outperform recommendation and YE12 fair value BRL 22.7/share.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS FCFE (BRL m) EV/EBITDA P/E FCFE yield (%) DPS (BRL) Dividend yield (%)
Source: Ita BBA
2010a 4,808 320 69 634 0.37 163 8.3 25.3 9.4 0.1 0.8
2011e 6,556 357 58 760 0.31 -609 7.9 30.0 -35.0 0.0 0.5
2012e 7,959 468 145 980 0.78 -139 6.4 12.0 -8.0 0.1 1.3
2013e 9,350 592 190 1,047 1.02 21 5.1 9.2 1.2 0.2 1.6
2014e 10,940 727 265 1,104 1.42 53 4.2 6.6 3.0 0.2 2.3
2015e 12,618 857 339 1,131 1.82 96 3.6 5.1 5.5 0.3 2.9
Ita BBA 92
Marisa ON Outperform
Company Description
Founded in 1948 under the leadership off the Goldfarb family, Marisa is one of the largest apparel retailers and one of the most renowned womens brands in Brazil. Focused on the lower to middle income classes in Brazil, Marisa operates a national chain of 302 stores under three different formats: i) Marisa expanded mix; ii) Marisa Feminine; and iii) Marisa Lingerie. It also profits from its consumer finance business, through which almost half of its sales are made. At the end of 2008, Marisa partnered with Ita bank to offer a co-branded credit card to its customer base.
AMAR3 BRL 32.3
Stock Data
Investment Thesis
We are structurally very positive on the companys demand exposure and the potential of its new store format. Largely focused on the C class, Marisa is the natural front door, capturing the reduction in inequality in Brazil (A, B and C classes grew 30%, while D and E reduced by half in 8 years), a marked trend that the country has been experiencing. The company was able to profitably develop an extensive footprint dedicated to that income class, which is now set to mature. As sales per square meter grow, so does return on invested capital (currently at 25%; lower than Renner and Hering), allowing for the value creation we see in our model. Marisas relatively young store base (44% of its store base hasnt matured yet) is also a strong indication of upcoming operating leverage and improving returns. We are also very fond of the Marisa Lingerie format, due to its ability to serve a broader range of consumers and strengthen the aspirational appeal of its brand. Nonetheless, a macro-induced slowdown, downward revisions of the area expansion plan and higher delinquency in its consumer-finance business (although we believe that the company learned a valuable lesson in 2007-08) continue to be significant risks. We also fear that consumer-finance results (~35% of EBITDA) could deteriorate more rapidly in Marisas case than for other apparel retailers, as its higher dependence on revenues from services and tariffs may not be sustainable in the face of fiercer credit competition.
Company Performance
140 120 100 80 60 40

Weak earnings momentum: demand Downside to area projection: while continued to slow down in 4Q11, and SSS is expected to print at low-single digits, below 3Q11s 6.9% level. Delinquency figures will again be tainted by the postal service strike (though 2012 outlook is positive). management has not committed to an official guidance for 2012 expansion plan yet, the 19 store openings already signed indicate that they are unlikely to repeat 2011 growth or to meet our 53-store estimate.
Ibovespa
AMAR3
Source: Ita BBA

We believe that weaker operating results in 3Q11 coupled with all the buzz surrounding delinquency trends and a potential downward revision in expansion plans might lure investors away. The companys recently streamlining of its administrative workforce might create more efficiency and savings next year (estimated at BRL 52 million), but the lack of visibility on area growth plans makes Marisa a riskier pick among the apparel names. Hence, in spite of our outperform rating (YE12 fair value of BRL 32.3/share), we favor Renner and Hering over Marisa.

Source: Ita BBA
2010a 1,703 383 208 37 1.12 19 8.3 15.0 0.6 0.3 1.8 3.8
2011e 2,106 471 244 171 1.32 37 7.0 12.8 1.2 0.9 5.5 3.5
2012e 2,513 558 278 259 1.50 107 6.1 11.3 3.4 1.1 6.2 3.2
2013e 2,959 692 353 321 1.90 185 5.0 8.9 5.9 1.3 7.9 2.9
2014e 3,499 842 442 363 2.38 266 4.2 7.1 8.5 1.7 9.9 2.6
2015e 4,015 968 518 367 2.79 359 3.6 6.0 11.5 2.0 11.6 2.3
Ita BBA 93
Marfrig ON Under Review

Company Description
Marfrig is a food company that processes and distributes fresh and industrialized beef, pork, lamb and poultry to clients in Brazil and abroad. As part of the initiative of geographical and protein diversification (Marfrig operates in 21 countries outside of Brazil), the company has initiated a series of acquisitions of assets, companies and brands, yielding a total of 40 operations over the last four years that include the purchases of Moy Park, Keystone and Seara. Marfrig recently increased its exposure to processed products (such as frozen, processed, ready-to-eat meals and pasta) in the domestic market through an asset-swap transaction with Brasil Foods (BRF) assets, following the anti-trust ruling in BRFs case.
MRFG3 BRL UR
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 6.9 7.6 8.9 UR 17.17/5.59 449,895 4,022 37.7 12m -42.4 -30.0
Investment Thesis
Marfrig has exposure to worldwide protein consumption growth through its in-natura exports to over 140 countries. It also commands good brand awareness in local markets like Europe (Moypark) and Brazil (Seara; 7%-8% market share). Since the acquisition of the Brazilian brand Seara in 2009 and Keystone (largest McDonalds supplier worldwide) in 2010, the company has focused on value-added processed food. Marfrig recently increased its capacity in poultry/pork slaughtering (by 22%) and processing (by 111%) through an asset exchange with BRF involving its Quickfood assets in Argentina, in an attempt to position itself as a relevant second player of processed products in the Brazilian market; the move was prompted by the suspension of some strong BRF brands from the Brazilian market. However, the company has historically struggled to turnaround the acquired assets and to deliver cash flow generation, which has prevented an improvement in its high leverage ratios (4.0x EBITDA at the end of 3Q11).
Company Performance
140

Market-share growth opportunity could The divestiture of assets would improve the companys operations. leverage The and streamline has its company already potentially double through the incorporation of new assets and brands, and the suspension of strong competitor brands. Delivery of synergies from previous
120 100 80 60 40 20
announced the sale of Keystones logistics assets for USD 400 million and is negotiating the sale of some Brazilian logistics assets for BRL 150 million. There is at least one port asset left, which could open room for further divestiture. Faster tax-credit utilization (BRL 2.3 million accumulated in the balance sheet) as the company increases its exposure to the domestic processed-food market.
Ibovespa
MRFG3
acquisitions; the guidance for Seara synergies was BRL 200 million.
Source: Ita BBA

Stronger operating results in 3Q11 provided some relief, particularly in cash generation (still below breakeven, but improving), which has been investors main concern. Moreover, the company has an opportunity to capitalize on the anti-trust restrictions imposed on Brasil Foods in the domestic market. Nonetheless, given Marfrigs below-expectation track record, we are hard-pressed to believe that investors will be willing to pay upfront for these improvements. Our estimates and recommendation are under revision in order to incorporate the recent developments. We will publish new estimates and a new YE12 fair value.

Source: Ita BBA
2010a UR UR UR UR UR UR UR UR UR UR UR UR
2011e UR UR UR UR UR UR UR UR UR UR UR UR
2015e UR UR UR UR UR UR n/a UR UR UR UR UR
Ita BBA 94
Minerva ON Market Perform

Company Description
Minerva produces and sells fresh beef, industrialized beef products and beef byproducts in Brazil. It has a slaughtering capacity of 10,480 head of cattle and a deboning capacity of 2,040 tons (equivalent to 12,911 head of cattle). The company also has international presence in Uruguay and Paraguay. Minerva operates in the food-service sector through a joint venture with Minerva Dawn Farms (MDF), which has a meat-processing capacity of 120 tons per day and produces beef-, pork- and poultry-based foods. It is among the top three Brazilian exporters of beef, beef by-products and industrialized beef products, and has 1,300 clients in nearly 100 countries. Minerva also exports wet blue hides and live cattle.
BEEF3 BRL 8.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m n.a. 0.6 5.0 68.7 7.22/4.55 135,733 684 0.9 12m -27.5 -12.0
Investment Thesis
Minerva is the only pure-beef player among the companies we cover in Brazil. While Marfrig and JBS made the transition from meatpackers to complex companies with diversified operations, both in terms of proteins and geography; Minerva remained focused on its Brazilian beef operations, which account for 80% of sales (its operations in Paraguay are responsible for the remaining 20%). Although the companys main focus continues to be exports (57% of sales), it significantly increased the importance of the domestic market in 2011 (from 34% at the end of 2010 to 43% in 3Q11). The change in mix was motivated by less attractive FX conditions and the development of the companys pulverized distribution channel, which allowed it to reach smaller retailers and increase its margins.
Company Performance
140

A significant improvement in the cattle cycle in 2012, which we are not fully convinced of, would support margin expansion. Following the considerable M&A activity by Marfrig, Sadia and Perdigo, and JBS, Minerva is now a relatively small, niche player; which opens room for a possible M&A (being acquired or merging with another player).
120 100 80 60 40
Ibovespa
BEEF3
Source: Ita BBA

Despite the attractive upside potential, we are cautious on engaging a pure-beef player as long as the sectors fundamentals remain tough. The expectation of an improved cattle cycle in Brazil failed to materialize in 2011 (cattle prices were 14% higher on average, pressuring margins), and we are not optimistic that 2012 will bring the expected improvement. Moreover, Minervas bottom-line figures have been extremely volatile and hard to predict, due to both the non-cash FX impact on debt (56% exposure to FX) and the companys active hedging policy, which clouds our understanding of the underlying profitability. We have a market-perform rating on Minerva with a YE12 fair value of BRL 8.5/share.

Source: Ita BBA
2010a 3,278 248 5 779 0.03 -139 5.9 n.m. -20.4 0.0 0.2 1.0
2011e 3,841 311 95 820 0.70 -41 4.8 7.2 -5.9 0.2 3.5 0.9
2012e 4,195 354 127 755 0.93 64 4.1 5.4 9.4 0.2 4.6 0.7
2013e 4,560 384 146 676 1.07 79 3.5 4.7 11.6 0.3 5.3 0.6
2014e 4,925 395 175 570 1.29 106 3.2 3.9 15.6 0.5 10.3 0.6
2015e 5,405 486 230 432 1.70 138 2.3 3.0 20.1 0.9 18.5 0.5
Ita BBA 95
Natura ON Market Perform

Company Description
Natura is the largest domestic-capital-based cosmetics company in Brazil, specialized in the integrated development, production and distribution of cosmetics, fragrances and personal hygiene items. Its product portfolio of ~750 SKUs includes make-up, fragrances, solar protection, skin care and hair care, and other products. Natura has 1.1 million direct-sales representatives in Brazil, covering practically the whole country. Natura also has profitable operations in Argentina, Chile and Peru, and operations are being implemented in Mexico, Venezuela and Colombia using local direct-sales consultants (over 200,000). It has a flagship store in Paris as well, opened in 2005 to introduce its products to European consumers. In 2011, we expect Naturas net sales to amount to BRL 5.6 billion, representing approximately 14.4% of the Brazilian cosmetics, fragrance and personal hygiene industry.
NATU3 BRL 45.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. BRL % BRL th BRL m BRL m 1m 1.8 2.4 36.9 22.0 49.19/30.12 438,543 16,182 35.5 12m -20.2 -3.1
Investment Thesis
A faster-than-expected deceleration in growth from 16.5% to 5.5% in Brazilian operations has affected Natura in 2011. Market deceleration, weak launching activity and increased competition have taken their toll on the top line and profitability, leaving investors cautious about growth sustainability. We still see sound growth opportunities and believe that the local market can sustain growth rates in the high-single digits. In the meantime, the structural challenge of developing a significant retail channel for cosmetics will likely prevent the competition from stealing significant share from Natura in its core categories (current market share is 24.6%). We are confident in managements focus on marketing and innovation (contrary to 2007), and we believe that its new distribution/logistics model structure distribution centers increasing from 5 to 8 is one of the seeds of an upgraded business model that can support a sustained core-market share while allowing the company to gain market share in areas where direct selling is underrepresented (particularly in the key day-to-day personal-care categories).
Performance (%) Absolute Vs. Ibovespa
Company Performance
140 120 100 80 60 40

Mixed 4Q11: growth in the Brazilian In a longer horizon, the new distribution and logistics structure will likely allow for cheaper and faster delivery to reps (48 hours from 5-6 days). That could boost growth, particularly for the personal-care products (~25% of sales). The entrance of an international player such as Sephora along with the development of a dedicated retail channel for cosmetics in Brazil could materially change the competitive landscape for Natura, reducing the current prominence of direct sales. operations in 4Q11 is unlikely to improve from the weak 5.5% booked in 3Q11. System problems continued to cause stock-outs and delays in deliveries. On the other hand, we expect margins to improve at least 350 bps year over year given easy expense comps.
Ibovespa
NATU3
Source: Ita BBA

We believe that the recent downward revision in consensus estimates (-14% since 2011) already reflects most of the slowdown in Naturas growth pace, and the P/E multiple de-rating (from historical 20x to current 17.5x) also factors in most of the new lower-growth reality. Nonetheless, though we have a positive stance on managements commitment to preparing the company for the long term, short-term challenges and weak earnings momentum lead us to stick to our market-perform rating and YE12 fair value of BRL 45.0/share.

Source: Ita BBA
2010a 5,137 1,257 744 131 1.70 610 13.0 21.7 3.8 1.6 4.4
2011e 5,607 1,371 827 265 1.89 569 12.0 19.6 3.5 1.6 4.3
2012e 6,207 1,531 926 348 2.11 658 10.8 17.5 4.1 1.7 4.6
2013e 6,879 1,732 1,051 359 2.40 829 9.5 15.4 5.1 1.9 5.2
2014e 7,558 1,932 1,177 272 2.68 1,029 8.5 13.7 6.4 2.1 5.8
2015e 8,244 2,148 1,310 240 2.99 1,146 7.6 12.4 7.1 2.5 6.9
Ita BBA 96
P.Acucar-CBD PN Market Perform

Company Description
With estimated net revenues of BRL 48 billion in 2011, Companhia Brasileira de Distribuio is the largest retailer in Brazil. The company operates over 1,600 stores, with approximately 2.8 million square meters of sales area, over 150,000 employees and 18 distribution centers. The businesss multi-format structure includes supermarkets, hypermarkets, stores for electronic products/household appliances, convenience stores, a cash-and-carry segment and e-commerce operations. Stores include neighborhood supermarkets for the upper class (Po de Acar), supermarkets geared to consumers of modest means (Extra Supermercado), hypermarkets (Extra), electronics and home-appliance stores (Ponto Frio and Casas Bahia), cash-and-carry stores (Assai) and convenience stores (Minimercado Extra). The most recently integrated businesses (Ponto Frio and Casas Bahia) demonstrates CBDs renewed focus on the appliance retail segment (non-food business reaching ~50% of sales).
PCAR4 BRL 86.0 CBD USD 46.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -0.6 0.0 66.6 29.0 82.11/54.3 262,138 17,469 32.9 12m -3.8 16.8
Investment Thesis
With its food operation reasonably on track, CBD has concentrated on improving its durables business. We have yet to make peace with the appliance-retailer acquisition strategy. First and foremost, we believe that the initial strategy was misguided. Certainly, CBD needed non-food businesses, but it needed non-food to counterbalance the decreasing willingness of consumers to spend hours shopping at hypermarkets (57% of CBDs food selling area). Buying appliance retailers with their own stand-alone stores did nothing to address this issue. While it is true that Globex was in such a dire state (SSS were down 17% and bottom line was negative) that its turnaround made for considerable upside, creating value for shareholders, the acquisition did not address the hypermarket problems. The rationale for Casas Bahia was the same, but the problem is much bigger; turning around Casas Bahia (three times the size of Globex) is not as easy as cutting expenses and improving gross margins, as was the case with Globex. It is about changing a business model that is too dependent on interest-free financing (over 70% of sales), and the major challenge is to do so without losing its consumer base.
Company Performance
140 120 100 80 60 40

Faster-than-expected improvements in the integration of Nova Globex may lead to an upward revision of our estimates. Lower-than-expected capex in 2011 (BRL 1 billion, below the top of the range, set at BRL 1.4 billion), is an indication of the companys big execution challenges. The short term could bring good news from the sale of Casas Bahias consumer finance exclusivity to a bank (the market estimates a potential transaction value of BRL 1.5-2.0 billion).
Ibovespa
PCAR4
Source: Ita BBA

Although we recognize improvements in Globexs latest results (EBITDA margins +100 bps and net margin +70 bps since start of 2011), we remain cautious on CBDs shares, as we continue to be skeptical about the companys non-food strategy. We also fear that CBD is increasingly driven by its controlling shareholders agenda rather than by the goal of maximizing value for all shareholders. Power disputes that divert managements attention could put additional strain on a team that already has a full plate with the integration of Casas Bahia. We believe that a potential Carrefour merger would inevitably be a lose-lose proposition for CBD. Buying Carrefour would materially increase the companys exposure to hypermarkets (50% of Carrefours selling area). At the same time, seeing Carrefour in the hands of fresh management (either Walmart or Cencosud) would intensify the competition in an already fiercely competitive segment. Given what we consider an unattractive risk-return equation (only 29 % upside potential and P/E aligned with Renner and Hering), we reiterate our market-perform rating on CBD and YE12 fair value of BRL 86.0/share (USD 46.1/share).

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS FCFE (BRL m) EV/EBITDA P/E FCFE yield (%) Dividend yield (%)
Source: Ita BBA
2010a 32,092 2,082 722 8,448 2.76 -3,446 13.0 24.2 -19.7 1.0
2011e 48,500 3,259 888 10,112 3.39 -1,530 8.8 19.7 -8.8 1.6
2012e 54,028 3,863 1,150 10,440 4.39 120 7.5 15.2 0.7 2.7
2013e 60,145 4,610 1,521 10,479 5.80 990 6.3 11.5 5.7 3.4
2014e 66,095 5,171 1,832 10,414 6.99 1,188 5.6 9.5 6.8 4.4
2015e 72,440 5,758 2,138 10,313 8.16 1,482 5.0 8.2 8.5 5.5
Ita BBA 97
RaiaDrogasil ON Outperform
Company Description
The third (Drogasil) and fifth (Raia) largest drugstore retail chains in the country announced the merger of their operations in August 2011. The resulting company is one of the countrys leading drug retailers (along with recently merged Pacheco-So Paulo), with an 8.3% market share and estimated gross sales of BRL 4.8 billion for 2011. Its 743-store base is spread over seven Brazilian states and comprises 78% of the Brazilian pharmaceutical market. The Raia-Drogasil transaction was completed on December 19, when Raia and Drogasil shares were unified under the ticker RADL.
RADL3 BRL 18.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 9.0 10.8 13.3 39.0 14.3/10 330,386 4,394 9.4 12m -4.8 14.7
Investment Thesis
The fundamentals of the Brazilian drugstore retail sector are attractive (12% 5-year CAGR, plus 30% growth in generics), with a quasi-discretionary component (drugs are paid for out-of-pocket, thus drug consumption is elastic to income gains) and a strong formalization and consolidation trend. With the RaiaDrogasil merger, later followed by the merger of Pacheco and Drogaria So Paulo, it is now even clearer that big players are emerging, and that consolidation is not only inexorable but happening much faster than anticipated the top-percentage players market share went from 15.8% in 2004 to 23% in 2010, with further expansion expected for 2011 onwards. We view RaiaDrogasil as a clear winner in the process, one of the few that will be driving the process and benefiting from this structural trend. On top of complementary management teams and store footprints, we believe that the two companies have significant potential synergies in their gross margins (160 bps gain in the next 5 years), both from aligning their buying policies and from the increased bargaining power of the consolidated company.
Company Performance
140 120

Positive earnings momentum: while most retailers experience sales deceleration, Raia and Drogasil are likely to see robust SSS in 4Q11 (around 11%-12%, accelerating for Drogasil). A new tax bill in So Paulo will likely allow for the recovery of accumulated credits while preventing the accumulation of new credits. We forecast a potential BRL 100-120 million cash inflow in a 12- to 18-month period, adding to their BRL 242 million net cash position by 3Q11. Synergies driving up consolidated margins. Although we only reach the 7% margin level in 2014 in our projection, management indicates that this level could be reached by the end of 2012.
100 80 60 40
Ibovespa
RADL3
Source: Ita BBA

We like both the sector and the separate companies, and now we like RaiaDrogasil even more. Our initial analysis of the synergies from the merger, which is conservative due to a lack of guidance at this point, nevertheless suggests significant upside potential. The implied fair value in this exercise yields a BRL 6.1 billion DCF target for RaiaDrogasil, of which almost BRL 1 billion comes from synergies (adding about 10% to EBITDA, or 80 bps, to the EBITDA margin by the end of the projection period). We currently have an outperform rating on RaiaDrogasil, with a YE12 fair value of BRL 18.5/share.

Source: Ita BBA
2010a 3,799 219 91 -434 0.27 -65 18.1 48.4 -1.5 0.1 0.7
2011e 4,570 265 150 -327 0.45 -82 15.3 29.3 -1.9 0.1 0.9
2012e 5,709 364 199 -291 0.60 43 11.3 22.1 1.0 0.2 1.4
2013e 6,996 474 262 -229 0.79 45 8.8 16.8 1.0 0.2 1.8
2014e 8,454 604 336 -156 1.02 68 7.0 13.1 1.5 0.3 2.2
2015e 10,074 756 432 -167 1.31 219 5.6 10.2 5.0 0.5 3.5
Ita BBA 98
Soriana Market Perform

Company Description
Soriana is the largest Mexican-owned food retailer, with approximately 59% and 30% of Walmexs domestic sales floor and revenues. Despite having a high concentration of sales in the hypermarket format (62%), Soriana has been developing a multi-format operation since the early 2000s, with bodegas and discount stores already accounting for roughly 21% of sales, followed by supermarkets with 9%, and membership clubs with 8%. The regions directly south of the U.S. border account for around 52% and 60% of Sorianas sales floor and revenues, respectively. Soriana entered Mexico City (~13% of sales) in 2007, when it acquired 199 stores from Grupo Gigante; the deals unfortunate timing and a rough integration process took ROIC from the low double-digit level to its current 8.7%, below the WACC of 9.8%. As of 3Q11, Soriana had 542 stores throughout all Mexican states.
SORIANAB MXN 37.9
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization MXN % MXN th
MXN m MXN m
32.3 17.5 42.5/26.51 1,800,000 58,050 12.1 12m -14.6 -10.7
Investment Thesis
We have repeatedly questioned Sorianas ability to grow profitably, as its returns on invested capital come in short of its cost of capital. Nevertheless, with a wide store base and an improving multi-format segmentation, Sorianas potential seems to be underexplored (the companys 2011 estimated samestore sales growth, EBITDA margin and ROIC fall short of Walmexs by 1.5 pp, 2.3 pp and 12.2 pp, respectively). We are closely following the ongoing transformational project that kicked off in 2011 and is expected to last a lengthy three years; if successful, this effort could result in a more competitive and return-oriented company (if operating margins in our model expand by 50 bps beginning in 2013, thus bringing the 2013-17 average EBITDA margin to 8.4%, in line with pre-Gigante levels, MXN 3.3 per share would be added to our fair value). While there are good initiatives evolving at Soriana, we have yet to see concrete results and are aware that staying focused will not be easy, given the increasingly tough competitive environment throughout the country and the macroeconomic challenges of northern Mexico, which is being plagued by drug-related violence and the worst drought on record, as well as being dependent on manufacturing exports to the United States.
3-mth avg daily vol. Performance (%) Absolute Vs. Mexbol
1m 1.4 1.7
Company Performance
120 110 100 90 80 70 60
Dec-10
MEXBOL
SORIANAB

Soriana managed to restart top-line growth after several quarters of stagnation, but only by sacrificing operating margins. The company needs to take customer traffic to a higher level in order to achieve enough SG&A dilution to bring margins to an equilibrium. The consumer environment in northern Mexico has been tough, and a contraction in manufacturing exports to the U.S. could make it even tougher. The first results of Sorianas transformational project could appear later in 2012.
Source: Ita BBA

We have a market-perform rating on Soriana, with a YE12 fair value of MXN 37.9 per share. We see the stock trading at 15.4x P/E 2012, with a ROIC 2012 of 9.4% and a 2011-13 earnings CAGR of 15.0%. Despite having an unattractive P/E-to-ROIC ratio of 1.65x only 2.9% lower than Chedrauis and among the worst in our LatAm retail coverage universe there is upside risk to our estimates. We like Sorianas improving multi-format segmentation and believe that any positive surprise from the ongoing transformational project are free options at this point.

Source: Ita BBA
2010a 93,700 7,181 3,278 5,610 1.82 1,822 8.9 17.7 3.1 0.2 0.6 1.7
2011e 97,800 7,335 3,273 3,707 1.82 2,155 8.4 17.7 3.7 0.1 0.3 1.5
2012e 104,705 8,010 3,765 2,039 2.09 1,952 7.5 15.4 3.4 0.1 0.3 1.4
2013e 115,010 8,926 4,329 1,225 2.41 1,354 6.6 13.4 2.3 0.2 0.7 1.3
2014e 126,559 9,933 4,984 817 2.77 1,524 5.9 11.6 2.6 0.6 1.7 1.2
2015e 138,364 10,970 5,630 150 3.13 2,487 5.3 10.3 4.3 0.9 2.9 1.1
Ita BBA 99
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Souza Cruz ON Underperform

Company Description
Souza Cruz is the leading tobacco and cigarette company in Brazil. Six of the ten top-selling brands of cigarette in Brazil belong to Souza Cruz, giving the company a 62.3% share of the local market. The company also derives 20% of its sales from the export of tobacco leaves, most of which are destined for its controlling shareholder, British tobacco company BAT, which owns 75% of Souza Cruz. Souza Cruz is involved in the entire cigarette production cycle, from the growing and processing of tobacco to the manufacture and distribution of cigarettes, servicing 260,000 retailers throughout the country.
CRUZ3 BRL 16.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -1.7 -1.0 22.7 (26.5) 24.42/15.2 1,528,451 34,696 23.2 12m 30.6 58.6
Investment Thesis
We commend the companys steady cash-flow generation (FCFE yield of 4.8 % in 2012) and dividend yield (4.5% in 2012), which should not be overlooked in times of market volatility. Nonetheless, we have long been skeptical of Souza Cruzs valuation, given the difficult market environment and the risks arising from taxation and regulation. A recent government measure that moved tax collection towards an ad valorem system made these risks explicit, reducing the companys pricing leverage (one of the pillars of its investment case; given low cigarette elasticity of 0.3x) and likely changing the current balance between pricing, volume and profitability.

The expected 14% increase in the minimum wage could further boost the cigarette mix towards more premium brands, which currently account for approximately 35% of gross sales. The price increase required we estimate ~17%-20% to offset higher taxes next year may have a higher-than-expected impact on volumes (fostering counterfeits); or may have a lower-than-expected impact, granting significant margin gains for Souza Cruz. A negative catalyst would be another step towards a full ad-valorem tax regime, which would limit the companys ability to increase prices and fully offset tax increases.
Company Performance
140 120 100 80 60 40
Ibovespa
CRUZ3
Source: Ita BBA

In light of Souza Cruzs significant outperformance in 2011 (over 50%), we believe that its steady cashflow generation and defensive profile are already fully factored into its current valuation. We see Souza Cruz trading at 20.9x P/E, which represents a 60% premium over global tobacco companies. We are therefore maintaining our underperform rating (YE12 of BRL 16.7/share) on the company, due to the lack of upside potential to our DCF-based valuation.

Source: Ita BBA
2010a 5,519 1,928 1,370 -1,030 0.90 1,474 16.8 23.9 4.2 0.9 4.0 16.6
2011e 5,485 2,361 1,605 -1,214 1.05 1,700 14.2 21.6 4.9 1.0 4.3 15.9
2012e 5,458 2,354 1,660 -1,305 1.09 1,660 14.2 20.9 4.8 1.0 4.5 15.4
2013e 5,665 2,446 1,702 -1,366 1.11 1,670 13.6 20.4 4.8 1.1 4.6 14.8
2014e 5,903 2,547 1,768 -1,434 1.16 1,738 13.1 19.6 5.0 1.1 4.8 14.3
2015e 6,191 2,634 1,846 -1,507 1.21 1,818 12.6 18.8 5.2 1.1 5.0 13.7
Ita BBA 100
Technos ON Outperform
Company Description
Grupo Technos is the largest watch company in Latin America and the market leader in Brazil, with a 30% market share in the domestic market and more than two million watches sold. Since 1956, the company has developed, assembled and distributed watches under five brands (three proprietary; two licensed), focused on the middle income class. Having started its operations under the proprietary brand Technos, which still accounts for 70% of its sales, the company has an assembly factory located in the Zona Franca de Manaus (all components imported from Asia) and distributes its products through an experienced sales force of 68 exclusive representatives who reach over 12,000 points of sale in all Brazilian states.
TECN3 BRL 22.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 4.7 5.4 15.1 45.7 18.2/12 78,693 1,188 1.5 12m n.a. n.a.
Investment Thesis
We believe that Grupo Technos shares are likely to provide investors with a rare combination of strong, low-risk growth potential (3-year sales CAGR of 14%) and significant cash generation, as 70%-75% of EBITDA is effectively converted into free cash flow. The growth potential is based on the aspirational demand from lower-income individuals (almost 90% of the population) who are becoming able to afford discretionary branded consumer goods. The cash generation comes from a high-margin (26.7% in 2012), asset-light business model that supports a high conversion of EBITDA into cash flow. Given the very high margins of the business, the working capital investments, although significant (cash cycle reaches about a year), are by no means large enough to harm returns, as evidenced by the 29% ROIC we estimate for 2012.
Company Performance
140

An upside to the investment case would be the acquisition of a new brand license, leveraging it on Technos distribution strengths and filling some market white spaces (the higher-value fashion segment, for example). Technos could also acquire one of the other four players that operate in Brazil that hold brand licenses. Sharp growth deceleration in 4Q11, due to the phase-out watches, of might the end interchangeable-band up bringing further
120 100 80 60 40
Jun-11 Aug-11 Oct-11 Dec-11
pressure to the stocks in the short term. A more aggressive roll-out of its franchisee store network currently there are only 24 kiosks and a total of 50 is planned by 2013 could result in BRL 50-60 million in value creation in our DCF model.
Ibovespa
TECN3
Source: Ita BBA

Although short-term results may suffer from the sooner-than-expected deceleration of a specific category (interchangeable-band watches, which account for ~10% of sales), it is not likely to have a sizeable impact on the companys long-term growth opportunities, given the limited influence of longerterm consumer financing on purchasing decisions. Moreover, consistent growth, high margins and high returns make Technos a less-risky asset relative to other names exposed to similar positive macro-level trends. We believe that the investment storys structural trends remain intact: attractive valuation (a 22% P/E discount to our Consumer universe) on a combination of reasonable growth in core operations and strong cash-flow generation (FCFE yield of 7.1% in 2012). We maintain our outperform rating on TECN3, with a YE12 fair value of BRL 22.0/share.

Source: Ita BBA
2010a 218 59 38 87 0.48 33 21.6 31.7 2.8 0.2 1.4
2011e 279 73 68 -91 0.86 32 15.1 17.5 2.7 0.2 1.4
2012e 314 84 93 -147 1.18 84 12.4 12.8 7.1 0.4 2.7
2013e 368 104 115 -182 1.46 89 9.7 10.3 7.5 0.7 4.4
2014e 416 120 133 -220 1.69 106 8.0 8.9 8.9 0.8 5.6
2015e 465 136 151 -252 1.92 124 6.9 7.9 10.4 1.2 7.6
Ita BBA 101
Walmex Market Perform

Company Description
Walmex is Latin Americas largest retailer and Mexicos largest private-sector employer, with estimated sales of USD 30.6 billion for 2011, a selling area of roughly 5.7 million square meters and over 230,000 employees. Since the acquisition of Walmart Centroamrica, in 2010, Walmex operates in six countries spread over a region with almost 150 million inhabitants. Besides its impressive scale and market dominance (its net sales in Mexico were 26% higher than the combined sales of its five closest competitors), Walmex differentiates itself by having best-in-class format segmentation. As of November 2011, Walmex operated 2,036 stores in Mexico (87% of sales) and 610 in Central America (13% of sales). The companys revenue generation is well divided between bodegas and discount stores (39%), membership clubs (25%), hypermarkets (24%), supermarkets (7%), apparel stores (3%) and restaurants (2%). Walmart Stores owns 68.5% of Walmexs shares.
WALMEXV MXN 41.6 WMMVY USD n/a
Stock Data
MXN m MXN m
36.8 13.0 40.25/29.26 18,101,244 666,126 542.6 12m 6.8 11.6
Investment Thesis
We believe that Walmexs premium valuation is warranted by its superior growth prospects, managements solid execution track record and high returns on invested capital (23.0% ROIC 2012, compared with 10.8% for LatAm food retailers under our coverage). Nonetheless, Walmexs current valuation already incorporates these advantageous attributes. The stock is currently trading at a 55.4% premium to LatAms retail sector and at a 12.8% premium to its own historical average in terms of P/E forward. With limited room for a re-rating, the upside risk of earnings growth is counterbalanced by the following challenges: i) new store productivity in Mexico has dipped to ~50%, and any rebound will be limited by real estate scarcity in premium markets such as Mexico City; ii) synergies in Central America will probably take longer to appear than expected, as the problematic introduction of EDLP has dented Walmexs reputation with consumers, particularly in Guatemala (same-store sales fell to 0.0% in 3Q11 from 6.9% in 3Q10, and the 3Q11 EBITDA margin fell by 90 bps YoY, to 5.5%); and iii) Ita BBAs macroeconomic team expects the global slowdown, especially in the U.S., to have a significant impact on Mexicos economy, with the ongoing deceleration in manufacturing exports eventually taking a toll on domestic demand (we project 2012 GDP growth at a mere 2.5%, compared with 4.0% in 2011).
1m 1.1 1.3
Company Performance
120 110 100 90 80 70
Dec-10
MEXBOL
WALMEXV
Source: Ita BBA

Standalone pharmacies are being tested in Mexico City and could be an important addition to Walmexs format segmentation. 2012 area growth guidance will be announced in 1Q11 and will likely reinforce the companys commitment to consistent double-digit area growth (we estimate +11.7%). An earlier-than-expected turnaround in Central America could be a positive trigger. Despite the aforementioned challenges, Walmart systems have been implemented, hypermarkets have been converted to Supercenters, and other formats have received a standardized image based on Mexicos formats.

We have a market-perform rating on WALMEXV, with a YE12 fair value of MXN 41.6 per share. At current prices, we see the stock trading at 26.1x P/E 2012 and 14.8x EV/EBITDA 2012, compared with averages of 16.8x and 9.6x for the LatAm retail sector. With the stock trading at a 12.8% premium to its P/E forward historical average, we see a balanced risk-return equation with the potential for earnings revisions being offset by challenges such as low new-store productivity, disappointing results from Central America and an economy on the brink of deceleration.

Source: Ita BBA
2010a 335,857 33,294 19,550 -10,273 1.08 12,054 19.7 34.1 1.8 0.3 0.9 5.4
2011e 378,332 37,077 21,314 -10,768 1.18 10,645 17.7 31.3 1.6 0.5 1.5 5.0
2012e 430,673 43,950 25,556 -16,794 1.41 16,901 14.8 26.1 2.5 0.6 1.6 4.5
2013e 489,496 51,394 30,108 -25,989 1.66 22,228 12.5 22.1 3.3 0.7 1.9 4.0
2014e 553,624 58,955 35,226 -35,089 1.95 27,461 10.7 18.9 4.1 1.0 2.7 3.6
2015e 623,415 67,281 40,394 -42,910 2.23 32,817 9.3 16.5 4.9 1.4 3.7 3.3
Ita BBA 102
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Healthcare & Education
Marcio Osako, CFA +55-11-3073-3040 marcio.osako@itaubba.com
HEALTHCARE + EDUCATION
About the Sector
We believe that Brazils Healthcare and Education sectors offer opportunities for solid growth and ample room for consolidation, given the macroeconomic and demographic changes in these underpenetrated and underdeveloped markets. In Healthcare, the government still plays a significant role, serving 75% of the population. Poor-quality service, budgetary restrictions and management inefficiency in the public sector, coupled with higher incomes, job formalization and broader wealth distribution, will continue to spur demand in the private sector. Healthcare-plan members had a 5.4% CAGR in the last five years (4.5% of GDP) but still represent only 25% of the population (vs. 77% in the U.S.). The top-five coverage providers have only a ~27% market share (with the number-five player having only ~1.5%), while the top-three diagnostic labs have only a ~30% share (with the number-three player having only ~2%), compared with ~65% in the United States. In Education, the growth potential is huge but the pace will likely be slow and steady (at the company level, consolidation is the main driver in the short-to-medium term). Brazil has a long way to go in education, despite the significant strides made in the past decade. Public schools serve 85% of students in primary and secondary schools but provide poor-quality education. Only 38% of the population aged 25-34 has completed secondary school, compared with a 77% average in the OECD countries and 87% in the United States. In our view, the low penetration of post-secondary education in Brazil (36%, vs. 59% in Chile and 89% in the U.S.) results from structural inefficiencies in basic education (i.e., a high drop-out rate, so fewer students progress to higher grades). Economic growth and the undersupply of skilled labor will continue to drive demand for private education. Finally, we note that student financing in post-secondary (FIES) could be a significant growth engine for the sector (greater access for low-income people, fewer dropouts), with important implications for margins (larger classrooms and lower delinquency). Post-secondary enrollments grew at a 7% CAGR 2005-10. The top three players have only a ~15% market share. Marcio Osako, CFA +55-11-3073-3040 marcio.osako@itaubba.com

Overall, the 2012 outlook for both sectors is relatively benign, in our view. Domestic economic activity is still favorable, with GDP likely to grow by 3.5% and the job market likely to remain solid, though we expect some accommodation. On top of this, three other factors i) companies expansion plans; ii) the recent wave of sizeable M&A moves; and iii) the maturation of partnerships and projects are likely to help sustain strong growth in 2012. In Education, the admissions process of the beginning of the year is so far pointing to solid enrollment growth across the board. We expect positive conditions for margins because of ramping-up integration processes and the likelihood of good top-line growth (double-digit organically). In Healthcare, we expect organic growth in the mid-teens and flat margins overall (except for OdontoPrev, which we expect to post significant gains). If an economic downturn materializes in Brazil, with an accompanying severe increase in unemployment, we believe that the education companies (excluding ABRE) and Amil are likely to be the most affected.
Catalysts
Because M&A has been a major theme in both sectors, we believe that quarterly earnings results will be key catalysts for most of these stocks, as the results can confirm the economics and synergies of recently announced deals and the progress of ongoing integration/restructuring processes (which are expected to yield higher margins). CADE rulings on a number of Healthcare-sector deals (DASA-MD1, Fleury-Labs DOr, OdontoPrev-Bradesco and Amil-Medial) and the conclusion of the deal between OdontoPrev and Banco do Brasil are also expected to take place in 2012.

OdontoPrev and Kroton are our top picks. OdontoPrev combines strong cash flow generation, positive momentum (18% growth with margin expansion), good earnings visibility, a solid track record and less vulnerability to a more severe economic downturn, all at a still-reasonable valuation. For Kroton, we believe that execution risk was significantly reduced after the Unopar acquisition (its cash flow will greatly increase), and it is trading at an attractive valuation (14.6x P/E 2012 and 9.8x P/E 2013, with a FCFE yield 2013 of 8%). On the flipside, Profarma and Cremer are our least-preferred names, given their limited liquidity and, in the case of Profarma, challenging fundamentals.
Ita BBA 104
Healthcare and Dental Plans Membership Evolution

CAGR 06-11 Healthcare 5.2% Dental 18.1%
30.7 31.1 31.1 31.8 33.7 35.0 45.7 37.0 38.7 40.7 42.1 47.0
Healthcare and Dental Plans Penetration by Population

77%
60%
25% 23% 14% 4.4 16% 18% 20%
30%
32%
34%
9% 2.8 00
10% 3.2 01
12% 3.8 02
12.6 6.1 7.3 8.8 10.3
14.4
16.0
25%
5.5
8%
03
04
05
06
07
08
09
10
11 *
Healthcare Brazil * USA **
Dental
Healthcare
Source: ANS and Ita BBA *As of September 2011
Dental
Dental / Healthcare
Source: AISs Directory of Health Plans, Amil, ANS and Ita BBA *As of September 2011, ** As of 2008
Enrollments in Post-Secondary (Millions) *

CAGR 05-10 Private Public Total 7.0% 6.6% 6.9%
3.9 3.5 2.4 2.7 3.0 2.1 2.5 2.8 3.0 4.2 4.6 4.9 5.3 4.0 4.3 4.4 4.7 5.8 6.4 6.0
Percentage of Population With Secondary/Post-Secondary Degrees

87 77 64
3.4
3.7
45%
39
42%
32 28%
38 21% 18
1.9
1.9
2.1
1.1 1.2 0.7 0.8
1.3 0.8
1.5 0.8
1.8
0.9 0.9
1.1 1.1
1.2
1.2
1.2 1.2
1.6
1.5
1.6
US OECD average Chile Brazil
At least secondary degree (25-34 years old)
96
97
98
99
00
Total
01
02
03
Public
04
05
06
07
08
09
10
Post-secondary degree (25-34 years old) Converstion rate

Source: OECD (2005) and Ita BBA
Private
Source: Inep and Ita BBA * In-class and distance learning
Valuation Summary
Com pany Healthcare Odontoprev Fleury Dasa Amil Cremer Profarma Education Kroton Anhanguera Estcio Abril Educao
Source: Ita BBA
Rating
Price
Fair Value 34.2 28.6 19.0 21.2 20.8 13.2
Total Market Cap Return (BRL m ) 31% 30% 34% 26% 32% 39% 27% 74% 4,808 3,374 4,755 5,842 513 351
12e 9.4 17.2 9.3 9.1 9.0 7.2 4.9 8.3
EV/EBITDA 13e To Grow th 8.0 14.9 7.4 7.5 7.4 6.4 4.4 6.5 6.9 7.8 6.2 5.4 0.68 0.70 0.61 0.74 0.73 0.89 0.42 0.34 0.43 0.43 0.35 0.25
12e 16.9 25.9 16.3 19.3 17.5 14.2 8.1 14.0 14.6 16.2 13.2 12.5
P/E 13e 14.3 23.6 13.2 15.3 14.4 12.3 6.7 10.2 9.8 11.2 10.0 9.4
To Grow th 1.04 2.23 0.91 0.88 0.85 0.91 0.48 0.42 0.39 0.45 0.44 0.35
CAGR 12-14 EBITDA EPS 14% 25% 15% 12% 12% 8% 12% 25% 22% 23% 23% 28% 21% 19% 26% 25% 20% 16% 17% 34% 37% 36% 30% 35%
Dividend Yield 2012E 2013E 1.8% 3.8% 1.3% 1.2% 1.2% 1.6% 1.7% 1.0% 1.7% 0.0% 2.7% 0.4% 2.6% 4.2% 1.6% 1.5% 1.6% 2.7% 4.3% 1.7% 2.5% 0.0% 3.6% 1.5%
OP OP MP MP MP MP
27.2 21.6 15.3 16.2 15.1 10.6
OP OP OP OP
17.9 20.7 17.7 21.0
27.7 35.7 27.2 40.7
57% 72% 56% 94%
2,404 3,016 1,456 1,616
9.3 9.9 8.0 7.0
Ita BBA 105
Abril Educao UNIT Outperform

Company Description
Abril Educao is the largest education company focused on K-12 in Brazil. It has a robust, integrated platform that serves students from pre-school up through secondary school (including prep courses for university admission exams) in both the public and private markets. The platform includes reputable brands and high-quality products that enable the company to charge premium prices. It operates in five segments: i) learning systems; ii) its own schools and university-exam prep courses; iii) book publishing; iv) technical and vocational courses; and v) prep courses for public-service jobs.
ABRE11 BRL 40.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 2.0 2.6 21.0 93.8 21/13 76,980 1,616 1.5 12m n.a. n.a.
Investment Thesis
We see Abril Educao as a compelling and differentiated story in the Brazilian education sector. It combines: i) superior positioning with premium brands; ii) strong growth opportunities through diversified drivers; iii) exceptional cash flow generation; and iv) the lower risk profile intrinsic to the basic-education segment. The private basic-education sector in Brazil clearly has the potential to grow, given: i) its improving but still-low penetration (15%, vs. 85% in public schools); ii) favorable income trends; iii) changes in wealth distribution; and iv) pent-up demand for better-quality education. If the overall level of education in Brazil is going to improve, the progress must start at the level of the primary and secondary schools. We believe that the private sector will play an important role in making this happen and will, in turn, benefit from the process. Abril Educao is well positioned to take advantage of this anticipated growth in education in Brazil through its robust, integrated platform, which caters to students from pre-school up through secondary school in the public and private markets. The companys prospects will be helped by its widely recognized brand name, its reputation for quality and its pursuit of acquisition opportunities.
Company Performance
140 120 100 80 60 40
Jul-11 Sep-11 Nov-11
ABRE11

In the short run, the announcement of contracted sales in the learning system segment for 2012 is the main catalyst. We note that most of Abril Educaos revenue (~75%) is already contracted/known by the beginning of the year (the exception being some book-publishing sales to the government that are defined in the third quarter). Therefore, earnings visibility is high, which is a positive characteristic of the K-12 business. Additionally, we believe that the building of a track record in earnings (given that the platform is new and the company only recently had its IPO) will be a positive driver for the stock. Finally, we note that there are M&A opportunities. In the longer term, we expect a positive scenario for the company as it integrates recently acquired companies and implements growth-driving initiatives based on a more robust platform of well-positioned brands. Efficiency and scale gains, and a richer mix geared towards the fast-growing learning-system segment (CAGR 2011-13 of 42%), will likely help spur further margin growth (we project an EBITDA margin of 32.4% in 2013, vs. 27.4% in 2011).
Ibovespa
Source: Ita BBA

We have an outperform rating (YE12 fair value of BRL 40.7) on Abril Educao, based on its combination of: i) an attractive valuation of 7x EBITDA 2012 and 12.5x EPS 2012, with a 2012 FCFE yield of 7.7%; ii) the more defensive characteristics intrinsic to the basic-education segment, and the companys premium positioning (translating into lower delinquency risk, no receivables issues, easier inflation pass-through); iii) strong growth opportunities (CAGR 2011-14 of 15%) and ample room for margin expansion (EBITDA margin of 32% in 2013, vs. 28% in 2010); and iv) exceptional cash-flow generation potential (pre-integration EBITDA margin of 28%, capex requirements at ~6% of net revenue and normalized working capital needs at ~2% of net revenue).

Source: Ita BBA
2010a 658 185 46 437 0.90 -704 8.8 25.7 -58.9 0.0 0.0 2.2
2011e 788 216 54 338 1.02 -286 9.1 26.4 -17.7 0.2 0.8 1.7
2012e 892 266 114 237 1.88 125 7.0 12.5 7.7 0.1 0.4 1.6
2013e 986 319 153 94 2.37 178 5.4 9.4 11.0 0.3 1.5 1.4
2014e 1,204 436 235 -56 3.44 204 3.6 6.1 12.7 0.4 2.1 1.3
2015e 1,312 512 301 -257 4.30 343 2.7 4.8 21.2 0.7 3.4 1.1
Ita BBA 106
Amil ON Market Perform

Company Description
Amil is the largest healthcare coverage provider in Brazil, with a 9% market share of healthcare plans (4.3 million members), and the second-largest dental coverage provider, with a 9% share (1.4 million members). It operates in seven states and the Federal District, covering 67% of the market. The corporate market represents 60.7% of its revenues, the consumer market (individual plans) 36.8% and the dental market 2.5%. Amil has a comprehensive product portfolio, offering basic to premium plans. It is a vertically integrated operation, owning 25 hospitals (3,500 beds). The company has a positive M&A track record, with 14 acquisitions (including five hospitals) since 2007.
AMIL3 BRL 21.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -6.5 -5.9 16.2 30.9 20.74/14.95 361,758 5,842 10.9 12m -10.2 9.0
Investment Thesis
We see Amil as the natural consolidator in the fragmented, underpenetrated Brazilian healthcare-plan industry. We believe that it is strongly positioned to benefit from a highly fragmented market (the top five players have a ~27% share, with the number-five player having only a ~1.5% share), given its: i) scale (number-one in terms of membership, with a 9% share scale is a key cost advantage in a highly competitive insurance market where margins are in the single-digits); ii) own network (which focuses on high-cost chronic illness e.g., 1% of members represent 40% of costs and gives it bargaining power with service providers); iii) demonstrated cost-management and pricing discipline (translating into one of the lowest medical loss ratios in the sector, an average of ~71% in the last five years, vs. 77% among managed care operators and ~81% for the whole market); and iv) successful track record of acquiring and integrating operations (nine operators and five hospitals since 2007). Lack of scale, capital and adequate IT systems, together with stricter monitoring and more stringent requirements by the regulator (ANS), are likely to gradually drive out the smaller, less-efficient providers. Organic growth prospects are positive. Healthcare plans in Brazil have posted growth of 5.4% in the last five years (vs. GDP of 4.5%), but penetration is still low (25% of the population) and we expect coverage to keep increasing (to 28% in 2015), leveraged by a positive macroeconomic scenario (jobs, formalization and income).
Company Performance
140 120 100 80 60 40

The evolution of MLR and the realization of the expected dilution of G&A are the likely main drivers for this stock. We see limited room for MLR improvement in 2012, given that: i) Medials MLR improvement process is almost concluded and is reflected in Amils consolidated figures in 2011 (we project an MLR of 71.3%); and ii) healthcare-plan usage may increase if macroeconomic conditions deteriorate (i.e., the moral hazard effect, as seen in the crisis of 2008: industry MLR went up by 2.7 pp, to 83.0%, in 2009). We expect a minor dilution in G&A, given the slightly harder comparison base in 2011, which benefited from REFIS gains (0.6% of revenue) and a decline in bad-debt provision (-0.3 pp, to 0.8% of revenue).
Ibovespa
AMIL3
Source: Ita BBA

We have a market-perform rating on Amil, with a YE12 fair value of BRL 21.2/share. Despite the companys solid and encouraging fundamentals, we see its risk-adjusted valuation as being less attractive than OdontoPrevs and Fleurys. In the event of an economic downturn that more severely reduces employment, Amils growth and margins would be more negatively affected (e.g., +1.0 pp in MLR reduces Amils net earnings by 20%). On P/E 2012, Amil is trading at a 6% premium to Fleury and a 33% discount to OdontoPrev, which we believe is deserved, given OdontoPrevs higher return (39%, vs. Amils 20%), higher growth (EBITDA CAGR 2011-13 of 27%, vs. Amils 12%) and lower risk (actuarial, regulatory, demographic).

Source: Ita BBA
2010a 7,261 467 214 42 0.59 479 12.6 27.4 8.2% 0.1 0.5% 4.2
2011e 8,299 594 286 371 0.79 (272) 10.5 20.4 -4.7% 0.1 0.7% 3.7
2012e 9,212 659 334 80 0.92 358 9.0 17.5 6.1% 0.2 1.2% 3.3
2013e 10,193 750 406 -300 1.12 473 7.4 14.4 8.1% 0.3 1.6% 2.9
2014e 11,305 832 485 -744 1.34 561 6.1 12.0 9.6% 0.3 2.0% 2.5
2015e 12,439 922 566 -950 1.57 647 5.3 10.3 11.1% 1.2 7.6% 2.4
Ita BBA 107
Anhanguera ON Outperform
Company Description
Anhanguera is Brazils largest post-secondary education company, with a ~6.1% market share (in the undergraduate segment only) and over 400K students (in undergraduate, graduate and extension programs and in prep courses for public service jobs) in 73 campuses and 500 learning centers. The campuses are located in six states and in the Federal District but are concentrated in So Paulo. The company serves middle- and low-income working young adults, a large and underpenetrated segment of the Brazilian population. It has acquired 37 companies since 2007 (eight in 2011).
AEDU3 BRL 35.7
Stock Data
Investment Thesis
We see Anhanguera as one of the most advanced stories in the sector and one of the players best positioned to take advantage of the underpenetrated, fragmented post-secondary education sector in Brazil, based on its: i) superior value proposition (good-quality courses at affordable, competitive prices); ii) low-cost, replicable model (standardized academic model and centralized back office); iii) scale; iv) strong brand name; and v) track record of acquisitions and integration. Anhanguera has been at the forefront of the sector, posting the strongest growth (21% revenue growth in 2011, vs. Estcios 13% and Krotons 10%) and highest margins (23% EBITDA margin, vs. Estcios and Krotons 14%) due to its proven and efficient academic model, shared service centers and integration capacity. The M&A opportunities are vast. Anhanguera is still concentrated in the state of So Paulo, with little or no presence in the Northeast and South regions, and it just recently entered the state of Rio de Janeiro. Its expansion will therefore involve increasing its distribution platform to other markets, particularly cities with over 100,000 inhabitants (it operates in 44 such cities, in a potential universe of 253). Given the sectors high fragmentation, competition is still regional, with very limited overlap among large players. Organic growth is also attractive (low double-digits), given the maturation of existing campuses and learning centers and the opening of new units. We believe that there are still significant margin gains to come, especially in gross margin for the campuses (currently at 43%, vs. the companys expectation of 50%), with the integration of acquired companies, higher occupancy rates and scale gains in G&A.
Company Performance
140 120 100 80 60 40
Ibovespa
AEDU3

Given Anhangueras recent credibility issues, we believe that the main catalysts for the stock are: i) the end of adjustments to earnings for non-recurring items, and the companys subsequent ability to maintain solid results (gross margin and G&A expenses) and generate cash flow; and ii) the integration with Uniban. Anhanguera has already anticipated no need for adjustments in 2012, given that no acquisitions are planned and that most of the layoffs related to Uniban will be completed in 4Q11 (positive news). The outlook for enrollments and improvements in the campuses gross margin remains positive. Lower interest rates are also positive for Anhanguera.
Source: Ita BBA

We have an outperform rating on Anhanguera (YE12 fair value of BRL 35.7/share), based on its attractive valuation (16x P/E 2012, with an EPS CAGR 2012-14 of 36%) and solid fundamentals. Consolidation is a major driver in the sector, and we continue to see Anhanguera as one of the companies best positioned to come out on top, based on its superior, replicable model, its scale and its track record of acquisitions. The companys decision to focus on integration (implying no need to adjust for non-recurring expenses) is also a positive move that could regain the markets confidence.

Source: Ita BBA
2010a 1,004 242 125 -360 0.86 641 11.0 24.0 21.3 0.0 0.0 1.5
2011e 1,212 284 168 658 1.15 -462 12.9 17.9 -15.3 0.0 0.0 1.5
2012e 1,587 355 186 508 1.28 74 9.9 16.2 2.5 0.0 0.0 1.4
2013e 1,852 444 269 466 1.85 42 7.8 11.2 1.4 0.0 0.0 1.3
2014e 2,197 538 345 422 2.37 44 6.4 8.7 1.5 0.0 0.0 1.2
2015e 2,517 640 439 275 3.01 146 5.1 6.9 4.9 0.0 0.0 1.0
Ita BBA 108
Cremer ON Market Perform

Company Description
Cremer is the leading manufacturer of surgical textiles and adhesives and the largest distributor of disposable healthcare products in Brazil. It operates in five segments, categorized by sales channel and product: hospitals (58% of revenues), retailers (21%), dentists (7%), industrial adhesives (11%) and other (3%). The company has a national presence, with distribution centers located in nine states and industrial facilities in Santa Catarina and So Paulo.
CREM3 BRL 20.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 5.5 6.2 15.1 37.8 17.89/12.71 33,894 513 0.4 12m -12.6 6.2
Investment Thesis
We see Cremer as a defensive, moderate-growth story with solid cash flow generation in the Brazilian healthcare space. Cremer is exposed to a moderate-to-low growth industry (given the staple nature of disposable healthcare products). However, we believe that there are good growth opportunities for the company, due to its low market share (~13%, including both present markets and complementary ones). With its existing clients, Cremer has already initiated efforts to increase its penetration (e.g., a detailed map of opportunities by client, in order to better serve them; a larger and more organized sales force to strengthen the relationship with large clients; and marketing investments) and to maximize its role (broadening its portfolio through partnerships to become a one-stop-shop). After executing four accretive and strategic deals since September 2010, Cremer will now take a breather on the M&A front to focus on integration (i.e., cross-selling and production integration). Of the channels, retail has the strongest growth potential, with a much higher margin than hospitals (EBITDA margin of 21% for retail, vs. 12% for hospitals).
Company Performance
140 120

The integration of recent agreements and acquisitions and the execution of initiatives to boost sales in the retail and hospital channels are the main drivers for the company. We are conservatively not assuming major cost synergies from P. Simon and Topz at this point (we project a practically flat EBITDA margin in 2012). Yet we expect positive earnings momentum, with an acceleration in top-line growth (to 30% in 2012 from 22% in 2011). Given Cremers leverage position, the decline in interest rates is positive for the company, and no further acquisitions are expected, at least in the short run. Cremer has a resilient business case, given the staple nature of disposable healthcare products.
100 80 60 40
Ibovespa
CREM3
Source: Ita BBA

We have a market-perform recommendation (YE12 fair value of BRL 20.8/share) on Cremer, given the undifferentiated valuation on what is a low-liquidity stock. Considering the companys limited liquidity and modest organic growth, we see its valuation as unexciting on a relative basis (on P/E 2012, it is trading at discounts of only 13% to Fleury and 26% to DASA, which have higher EPS CAGRs 2012-14 of 26% and 25%, respectively, compared with Cremers 16%). We note, however, that there may be upside risk to our numbers in terms of margins, as we are not assuming major cost synergies from P. Simon and Topz (a 1.0-pp increase in EBITDA margin, to 17%, would add BRL ~2.3/share to our fair value).

Source: Ita BBA
2010a 375 54 33 64 1.04 71 10.1 14.5 14.6 -0.9 -5.8 1.7
2011e 458 71 24 191 0.72 -13 9.9 21.0 -2.6 0.0 0.3 1.7
2012e 597 95 36 172 1.06 27 7.2 14.2 5.3 0.2 1.6 1.6
2013e 651 103 42 150 1.23 35 6.4 12.3 6.8 0.4 2.7 1.4
2014e 697 111 48 126 1.42 40 5.8 10.7 7.9 0.5 3.2 1.3
2015e 746 119 54 134 1.58 44 5.5 9.6 8.6 1.5 10.1 1.3
Ita BBA 109
DASA Market Perform

Company Description
DASA is the largest diagnostics laboratory in Brazil, with a ~15% share of the private B2C market. It operates in three segments: i) inpatient and outpatient (84% of sales), providing clinical analysis and imaging tests through 439 patient services centers and 79 hospital units; ii) lab-to-lab (10%), performing clinical analysis for over 4,000 labs nationwide; and iii) public (6%), through contracts with municipalities. DASA has a presence in 13 states and in the Federal District, with 26 brands.
DASA3 BRL 19.0
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m 5.5 6.2 15.3 24.6 23.99/12.75 311,803 4,755 26.2 12m -33.0 -18.7
Investment Thesis
We see DASA as one of the companies best positioned to keep gaining share in the fragmented, high-single-digit-growth Brazilian diagnostic market, due to its: i) scale (number-one, with a ~15% market share, which results in variable costs being ~50% lower than the market average, according to the company); ii) strong distribution through leading regional brands; and iii) presence in different segments (outpatient, hospitals, lab-to-lab and public). The companys growth prospects are promising, due to: i) increasing coverage of healthcare plans in Brazil; ii) more frequent use of diagnostic testing; and iii) consolidation opportunities. Healthcare plans in Brazil have posted growth of 5.4% in the last five years (vs. GDP of 4.5%), but penetration is still low, at 25% of the population, and we expect coverage to keep increasing (to 28% in 2015), leveraged by a positive macroeconomic scenario (jobs, formalization and income). For diagnostics, we expect the frequency of use to continue to rise, due to: i) demographic changes (i.e., the aging population and increase in life expectancy); ii) increasing awareness of and reliance on diagnostic testing to improve healthcare results (by reducing overall costs through early detection and prevention); and iii) continuous industry innovation (i.e., the development of new and more complex technologies). Lastly, the fragmented diagnostics market (the top-three players have a ~30% share, but the third has only ~2%) implies that there is room for further acquisitions (though the remaining potential targets are small in size).
Company Performance
140 120 100 80 60 40

Earning results and CADEs final decision about the deal with MD1 are the main catalysts for DASA. Having reduced its guidance twice (with a risk of missing the current targets) and changed its focus (to quality and growth) after MD1, the company must deliver better margins in its next quarterly results if it is to regain the markets confidence. On CADE, the company has reached an agreement to preserve the reversibility of operation with MD1, imposing no restrictions on the operational integration so far between the two companies and allowing the incorporation of the holding company MD1. We expect a favorable decision, but this may take over a year.
Ibovespa
DASA3
Source: Ita BBA

We have an market-perform rating (YE12 fair value of BRL of 19.0/share) on DASA, due to unnatractive valuation and a certain degree of caution regarding the earnings outlook, given: i) the restructuring/adjustment process, aimed at improving quality, currently being undertaken by the company, which led to the sharp cost increase seen in 3Q11 and may restrain margin expansion in the short-to-medium term (e.g., further cost pressure related to wages/qualification of physicians, profitsharing); and ii) the negative short-term impact on margins of the resumption of organic expansion and DASAs debut in the high-end market.

Source: Ita BBA
2010a 1,502 401 134 484 0.58 94 9.9 26.2 2.7 0.1 0.8 5.7
2011e 2,216 552 238 736 0.76 -107 10.4 20.4 -2.3 0.1 0.9 1.9
2012e 2,450 589 321 580 1.03 213 9.1 19.3 4.5 0.2 1.2 1.7
2013e 2,723 675 411 337 1.32 313 7.5 15.3 6.6 0.2 1.5 1.6
2014e 2,995 742 477 128 1.53 375 6.6 12.3 7.9 0.5 3.5 1.5
2015e 3,283 813 542 -116 1.74 439 5.7 9.8 9.2 0.6 4.1 1.4
Ita BBA 110
Estcio ON Outperform
Company Description
Estcio is Brazils fourth-largest post-secondary education company, with a ~4.5% market share (in the undergraduate segment only) and a total of 248K students (207K on-campus and 41K in distance learning) in 69 campuses and 52 learning centers. The company has a nationwide presence but is concentrated in Rio de Janeiro. It serves middle- and low-income working young adults, a large and underpenetrated segment of the Brazilian population. Estcio has acquired 14 companies since 2007 (three in 2011).
ESTC3 BRL 27.2
Stock Data
Investment Thesis
We see Estcio as a turnaround story, with some consolidation opportunities, in the underpenetrated and fragmented post-secondary education sector in Brazil. After becoming a for-profit entity in 2007 and with the entry of GP private equity in May 2008, Estcio has concluded a profound restructuring process (including the implementation of a shared service center, the optimization of the course portfolio in 2009 and a new standardized academic model in 2010), which together with a richer mix from the ramp-up of distance learning (which has much higher margins and was initiated in 2H09) and scale gains in G&A from acquisitions, is likely to yield a significant expansion in margins in the next couple of years (the company targets a 20% EBITDA margin in 2014; we conservatively assume 18.5%, and for 2011 we expect 14%). Key pillars supporting margin expansion are: i) the new academic model (standardization of programs, shared disciplines and more room for online content and self-learning activities); ii) the optimization of teachers hour-class allocations; iii) a centralized back office; and iv) the recovery in topline growth. Given the large enrollment base and mature campus structure, organic top-line growth could be in the high single-digits. However, the very fragmented market creates ample consolidation opportunities, and Estcio plans to acquire ~20K students per year in the next few years.
Company Performance
140 120 100 80 60 40

The admission cycle at the beginning of the year, progress towards the expected margin expansion and the performance of receivables are the key drivers for the company. The outlook is still positive, as companies are seeing no deterioration so far in the enrollment process for 2012 and are expecting a strong intake and margin improvement. The risk to this scenario is an economic downturn leading to higher unemployment (and therefore raising drop-out and delinquency rates). Our base-case scenario is for gradual accommodation in the labor market, which we still regard as overheated. M&A activity is likely for Estcio, but given the current market conditions, we believe that it will play a secondary role.
Ibovespa
ESTC3
Source: Ita BBA

We have an outperform rating (YE12 fair value of BRL 27.2/share) on Estcio, mostly based on its attractive valuation (13.2x P/E 2012, with an EPS CAGR 2012-14 of 30%) and positive earnings momentum. We believe that the companys prospects are positive, given the ongoing recovery of the student base (allowing for some operating leverage) and the more benign outlook for 2012, with the end of the step-up of the payroll tax (which reduced margins by 0.7 pp in 2011).

Source: Ita BBA
2010a 1,016 127 100 -156 1.21 -29 12.2 14.6 -2.0 0.4 2.1 2.5
2011e 1,148 158 96 -5 1.17 249 10.0 15.2 17.1 0.5 2.6 2.4
2012e 1,322 198 111 124 1.34 -89 8.0 13.2 -6.1 0.5 2.7 2.2
2013e 1,491 251 146 94 1.77 82 6.2 10.0 5.6 0.6 3.6 2.0
2014e 1,624 298 186 34 2.26 129 5.0 7.8 8.9 0.8 4.8 1.7
2015e 1,735 319 206 -48 2.51 170 4.4 7.1 11.7 1.1 6.1 1.7
Ita BBA 111
Fleury ON Outperform
Company Description
Fleury is the second-largest diagnostics laboratory in Brazil, with a ~12.5% share of the private B2C market. It operates in three segments: i) inpatient and outpatient (97% of revenues), providing clinical analysis and imaging tests through 193 patient-service centers and 30 hospital units; ii) lab-to-lab (2%), performing clinical analysis for 3,000 labs; and iii) preventive and therapeutic medicine (1%), providing check-ups and disease management services. It has a presence in six states and the Federal District.
FLRY3 BRL 28.6
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m -0.9 -0.2 21.6 32.4 26.76/18 156,196 3,374 4.5 12m -13.2 5.5
Investment Thesis
We view Fleury as one of the companies best positioned to continue gaining share in the fragmented, high-single-digit-growth Brazilian diagnostic market. Fleury is a differentiated player, due to its: i) solid reputation in the medical community and among end-customers (it is viewed as the premium provider in the sector); ii) strong presence in the high-end market (number-one in market share; ~40% of revenues; DASA will debut in 2012); and iii) strong presence in the hospital market, which increased after the Labs DOr acquisition (now number-one; ~18% of revenues). The company has strong growth prospects (~14% in the next two years, vs. ~11% for DASA, due to a sizeable expansion plan) and room for margin expansion (24% EBITDA margin, up from the current 23%, due to incorporation and synergies with Labs DOr, improvement in the ex-Fleury brand PSC and the Integrated Medicine division, and scale gains; we project a 25% margin for DASA). Fleury is undertaking a deep restructuring in its intermediate-segment operation with the recently launched brand a+, which we expect to bear fruit and further strengthen its positioning over the long term. Lastly, revenue synergy opportunities with Labs DOr (introduction of clinical analysis, hospital expansions) add potential upside to our model.
Company Performance
140 120 100 80 60 40

The integration with Labs DOr, CADEs final decision about the deal and the execution of the expansion plan are the main catalysts for Fleury. We also expect to see a significant reduction in adjustments for non-recurring items in 2012 (in 2011, there were adjustments for write-offs, marketing costs, costs related to the launch of the new brand a+ and pre-operating costs). Overall, we see a neutral to slightly positive scenario with growth accelerating and margins stable. Labs DOr is likely to positively contribute to Fleurys results in 2012, offsetting the negative impact on margins of the store openings and keeping the consolidated EBITDA margin at the 23% level. For 2012, based on the valuation report (used to base the calculation of goodwill), Fleury is expecting net revenue growth of 18%, to BRL 525 million, and margin expansion of 3.3 pp, to 28.3% (vs. the annualized nine-month figures to 1Q11).
Ibovespa
FLRY3
Source: Ita BBA

We have an outperform rating (YE12 fair value of BRL 28.6) on Fleury, based on its solid and strong growth prospects (~14% CAGR 2011-13 on a pro-forma basis), room for margin expansion (24.8% EBITDA margin in 2014, vs. 22.8% in 2011) and compelling valuation (16.5x P/E 2012, with an EPS CAGR 2012-14 of 26%). We prefer Fleury over DASA, due to: i) Fleurys more attractive valuation (15% discount on P/E 2012); ii) our caution regarding DASAs earnings, given the current adjustment process after the MD1 deal; iii) the potential for an earnings surprise after the full incorporation of Labs DOr in 2012; and iv) our expectation of a faster decision by CADE regarding Labs DOr (Fleurys management believes that it could be approved soon, while DASAs approval may take more than a year).

Source: Ita BBA
2010a 872 205 170 (423) 1.29 171 12.2 16.9 5.9% 0.3 1.4% 2.8
2011e 1,129 258 130 312 0.83 (1) 17.6 25.4 0.0% 0.2 0.8% 1.6
2012e 1,667 392 265 265 1.70 90 9.4 16.6 2.6% 0.3 1.3% 1.5
2013e 1,919 463 309 69 1.98 251 7.5 13.4 7.3% 0.3 1.6% 1.4
2014e 2,099 520 369 (109) 2.36 310 6.4 10.4 9.1% 0.8 3.9% 1.3
2015e 2,278 564 401 (293) 2.56 335 5.5 8.5 9.8% 1.0 4.4% 1.2
Ita BBA 112
Kroton UNIT Outperform

Company Description
Kroton is one of the largest education companies in Brazil, with operations in the K-12 segment (through the learning system; number-five in market share, with a ~11% share in the private market; 12% of total revenue) and in the post-secondary segment (number-three, with a ~4.6% share in the undergraduate segment only). In K-12, Kroton has 281K students in 770 associated schools. In postsecondary, it has 254K students (108K on-campus and 146K in distance learning) in 45 campuses in nine states (but mostly in Minas Gerais and Mato Grosso) and 469 learning centers in 422 municipalities. Kroton has acquired 18 companies since 2007, including the deals made by IUNI (four in 2011).
KROT11 BRL 27.7
Stock Data
Investment Thesis
Krotons investment thesis significantly improved, in our view, with its recent acquisition of Unopar (the leading company focused on distance learning in Brazil, with 162K students and a network of 469 learning centers; it posted a top-line CAGR 2009-11E of 14% and a consistent EBITDA margin of 28% over the last three years). The previous investment case was a combination of margins turnaround, strong growth driven by small- to medium-sized acquisitions and the development of its own distancelearning platform. With Unopar, the story changed for the better. Kroton is now much larger, is exposed to a faster-growing and more lucrative segment (distance learning) and has a stronger cash flow generation profile. Execution risk is reduced. Unopars size and position, its well-run operation (i.e., this is not a turnaround that might take a few years to generate results) and the accretive valuation paid reduces the risk related to the previous plan of acquiring (and integrating) 52K students, building its own distance learning platform and dependence on the Pitgoras turnaround. Consolidated results will appear in 2012, with consolidated EBITDA margin likely reaching 21.4% (vs. 15% in 2011 and with ample room for expansion we expect 25% in 2014 from synergies and the ramp-up of Krotons standalone margins). The M&A vector remains valid, but the company will likely be much more selective and the significance is smaller. Finally, Krotons cash generation has greatly increased through the addition of Unopar (high margin, a tax shield from Prouni, low capex and receivables partially funded by learning-center partners; we estimate operating cash flow after capex of BRL 164 million in 2012; Unopar made BRL 94 million in 2011).
Company Performance
140 120 100 80 60 40
Ibovespa
KROT11

The incorporation of Unopar (to be completed by 1Q12) is the main driver for the stock, in our view, as it can confirm Krotons strong economics. The admissions cycle at the beginning of the year, progress towards the expected margin expansion and the performance of receivables are other important drivers. We believe that the outlook is positive, due not only to Krotons incorporation of Unopar, with a 28% EBITDA margin (and synergies likely starting to appear in 2H12) but also to its confidence in delivering a margin of 17% at Kroton standalone. Companies are seeing no deterioration so far in 2012 enrollments and are expecting a strong intake. The main risk to this scenario is an economic downturn leading to higher unemployment (and therefore raising drop-out and delinquency rates). Our scenario is for gradual accommodation in the labor market, which we still regard as overheated.
Source: Ita BBA

We have an outperform recommendation (YE12 fair value of BRL 27.7/share) on Kroton, which is our top pick among the post-secondary education companies, due to its more attractive risk-adjusted valuation, positive earnings momentum and strong cash flow generation. It is trading at 14.6x P/E 2012 and 9.8x P/E 2013, representing discounts of 17% to Anhanguera and 2% to Estcio for 2013. Assuming no more acquisitions, our model indicates that cash flow generation will be strong (2013 FCFE yield of 8.1%). We note that 12% of Krotons revenue comes from the K-12 segment and that 20% of its post-secondary students have FIES, which provides some resilience to an economic downturn.

Source: Ita BBA
2010a 642 63 21 76 0.31 -437 20.1 58.0 -36.7 0.0 0.0 1.5
2011e 708 102 55 461 0.64 114 19.7 27.9 7.4 0.1 0.4 1.3
2012e 1,313 276 165 171 1.23 49 9.3 14.6 2.0 0.3 1.7 1.3
2013e 1,483 354 246 37 1.83 194 6.9 9.8 8.1 0.4 2.5 1.1
2014e 1,632 410 312 -148 2.32 261 5.5 7.7 10.9 0.6 3.2 1.0
2015e 1,770 446 362 -281 2.69 314 4.8 6.6 13.1 1.3 7.5 1.0
Ita BBA 113
OdontoPrev ON Outperform
Company Description
OdontoPrev is the largest dental care plan provider in Brazil, with a nationwide presence and a 34% market share (5.4 million members). The company has an accredited network of 25,000 dentists in 2,000 cities. It commercializes mainly pre-paid plans to corporate clients (6,000 companies) that offer dental-care benefits to their employees, representing 93% of OdontoPrevs revenue. It also sells to the consumer market (i.e., individual plans) through partnerships with retailers. One of its growth drivers is the development of partnerships with distribution channels (e.g., healthcare plans, retailers and banks).
ODPV3 BRL 34.2
Stock Data
Investment Thesis
As the specialist in the dental care industry in Brazil, OdontoPrev will likely remain in the forefront of this fast-growing, still-young industry. OdontoPrev has diversified, viable growth drivers, exceptional cash flow generation and sustainable competitive advantages (the deepest know-how in the industry, built up over its 24-year history; top-notch proprietary IT systems; significant scale advantages, such as its 34% market share, vs. 9% for the number-two player; a reputation for quality and a strong brand; an extensive distribution platform, recently enlarged with Bradesco). The sector has been growing at an 18% rate in terms of members since 2002 (16.4% in 3Q11), but this still represents only 8% of the population and 34% of healthcare plans. The growth potential is enormous, in our view. Within the corporate segment, there is a potential dental volume of over 8 million members (vs. a current base of 16 million) within only the companies that already offer health insurance to their employees, and we cannot forget that the healthcare market is expected to keep adding over 2 million members yearly (assuming growth of ~5%) for the next several years. On top of this, Brazil has an untapped consumer market that will start to be addressed (through partnership with retailers and banks). OdontoPrevs cash flow generation and profitability are unique: high margins (24% in EBITDA in 2011), almost nonexistent capex needs (1% of revenue) and a positive cash cycle (it receives first and pays providers later).
Company Performance
140 120 100 80 60 40

The conclusion of the deal with Banco do Brasil, CADEs approval of the merger with Bradesco, signs of improvement in loss ratio (48%, vs. 44% before the deal, reflecting the integration with Bradesco) and the maintenance of strong net additions are the main events and themes investors are monitoring. We would also note that the company will start to sell individual plans through Bradescos branches in 2012, and a strong start to this initiative may also be a catalyst. Overall, we anticipate a positive scenario for OdontoPrev, with top-line growth remaining solid at ~18% and margins continuing to improve (+2.3 pp, to 26.4%, for EBITDA in 2012, mostly due to a lower loss ratio following the integration with Bradesco). Unfavorable outcomes or delays in these events and themes are the main risks.
Ibovespa
ODPV3
Source: Ita BBA

We have an outperform rating (YE12 fair value of BRL 34.2/share) on OdontoPrev, due to its: i) upward earnings momentum (with EBITDA margins set to keep improving, having already reached ~26% in 2012, vs. 22% in 2010); and ii) still-reasonable valuation (30% total return) for a company with an intrinsically lower-risk profile (regulatory risk and actuarial risk, with predictable and robust cash flow generation and long-term contracts pegged to inflation), the highest return in the sector (ROIC of 39% in 2012), highly capable management and an exceptional track record of positively surprising the market.

Source: Ita BBA
2010a 698 154 130 -133 0.73 142 30.4 37.0 2.9 0.6 2.2 6.7
2011e 836 202 174 -224 0.98 148 22.7 30.8 3.1 0.8 3.1 6.3
2012e 990 261 212 -327 1.20 218 17.2 25.9 4.5 1.0 3.8 5.7
2013e 1,180 323 245 -404 1.28 258 14.9 23.6 5.0 1.1 4.2 5.9
2014e 1,462 406 286 -494 1.49 306 11.6 19.9 5.9 1.3 4.9 5.6
2015e 1,817 513 320 -583 1.67 346 9.0 16.7 6.7 1.6 5.9 5.3
Ita BBA 114
Profarma ON Market Perform

Company Description
Profarma is Brazils third-largest distributor of pharmaceutical products, with a market share of 9%. Drugs account for ~89% of its sales. It also sells beauty and personal hygiene products to hospitals, as well as vaccines. The company operates 12 distribution centers that serve 20 states and the Federal District, covering 94% of the market for pharmaceuticals in Brazil.
PFRM3 BRL 13.2
Stock Data
Current price BRL % BRL th BRL m BRL m 1m 2.7 3.4 10.6 24.5 16.19/8.15 33,164 351 0.4 12m -30.0 -15.0 Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa
Investment Thesis
Profarma is one of the best-positioned companies in the fragmented drug distribution industry in Brazil. In our view, consolidation is the main sector driver, given that the top three players have only a ~38% market share (vs. ~93% in the U.S.). Profarma has an advantage in this environment, given its: i) scale (pricing power); ii) national presence (94% coverage); and iii) robust balance sheet (i.e., access to capital, as companies in this sector fund their working capital needs through banks). The fundamentals, however, are mixed, in our opinion, due to the negative implications of the rapid, ongoing consolidation of drugstores (causing reductions in either growth or margins), as the chains can bypass wholesalers (by negotiating directly with laboratories and arranging their own distribution) or apply bargaining pressure. The reduction in informality is one of the consolidation drivers, but Profarma is also seeking to accelerate the process through M&A. The company has some targets in the pipeline that would strategically complement its client portfolio in markets where it has a relatively weak presence (e.g., So Paulo and the South region). In October 2011 Profarma acquired a drug distributor in the hospital segment, Prodiet, which provided some diversification (reducing drugstore sales share) and strengthened Profarmas position in the hospital segment (making it one of the top-five players in the market) by complementing its geographic presence and broadening its product portfolio.
Company Performance
140 120 100 80

Earnings results and the consolidation of the Prodiet acquisition are the main drivers for Profarma. Given the companys poor recent results (declining margins, weak top-line growth and no major reduction in cash cycle), we believe that any consistent improvement could be a catalyst for the stock. This years drug-price increase (to be announced in March) is expected to be equal to or slightly higher than the 2011 increase, in line with inflation. Finally, we also note that lower interest rates are positive for Profarma, given the companys financial leverage position.
60 40
Ibovespa
PFRM3
Source: Ita BBA

We have a market-perform recommendation (YE12 fair value of BRL 13.2/share) on Profarma and a still-cautious view of the company, given its limited upside potential, restricted liquidity and recent earnings track record. Still, we expect the Prodiet acquisition to improve Profarmas financials, based on Prodiets higher margins (5%, vs. 3% for Profarma) and stronger growth prospects. Lower returns and liquidity justify the discount to international peers. PFRM3 is trading at 8.1x P/E 2012, or a 28% discount to its U.S. peers. We note, however, that its ROIC is inferior (we expect ~12% going forward, vs. a historic average of ~20% for U.S. peers), which is fully explained by a higher cash cycle (~73 days adjusted for recoverable taxes, vs. <15 for U.S. peers) that more than offsets its higher EBIT margin (3%, vs. ~1.6% for U.S. peers).

Source: Ita BBA
2010a 2,626 80 38 106 1.15 16 5.7 9.2 4.6 0.1 0.7 0.7
2011e 2,768 73 30 123 0.91 -12 6.5 11.6 -3.4 0.1 0.9 0.6
2012e 3,219 102 43 144 1.30 -18 4.9 8.1 -5.1 0.2 1.7 0.6
2013e 3,530 116 52 158 1.57 -9 4.4 6.7 -2.4 0.5 4.3 0.6
2014e 3,827 127 59 172 1.78 2 4.1 5.9 0.4 0.8 7.1 0.5
2015e 4,134 137 66 219 1.99 -22 4.1 5.3 -6.3 0.9 8.1 0.5
Ita BBA 115
Industrials, Transportation & Logistics
Renata Faber, CNPI +55-11-3073-3017 renata.faber@itaubba.com
Thiago Macruz, CNPI +55-11-3073-3034 thiago.macruz@itaubba.com

Vivian Salomon (Mexico) +52-55-5262-0672 vivian.salomon@itaubba.com
INDUSTRIALS + TRANSPORTATION & LOGISTICS

About the Sector
An urgent need to invest in infrastructure is probably the most important thing the Latin American countries have in common with respect to the transportation, logistics and industrials industries. For most of the region, the lack of infrastructure investment in recent years threatens to become a bottleneck for future growth. We therefore expect to see extensive infrastructure investments being made in the next few years by both the private and the public sectors in Latin America. Thiago Macruz, CNPI +55-11-3073-3034 thiago.macruz@itaubba.com Vivian Salomon (Mexico) +52-55-5262-0672 vivian.salomon@itaubba.com Renata Faber, CNPI +55-11-3073-3017 renata.faber@itaubba.com

In Brazil, we expect the largest infrastructure investments in the next few years to come in the energygeneration, the logistics and the oil and gas sectors. Hosting the World Cup in 2014 and the Olympic Games in 2016 will require new stadiums and investments in urban transportation (such as new subway lines, light-rail lines and highways). Of all of the infrastructure projects likely to be built in Brazil (expected to cost a total of BRL 558 billion), 55% have already been initiated and 34% are still in the development phase. As for Mexico, the upcoming presidential elections in 2012 will likely provide a boost for the infrastructure sector, as most projects will have to be accelerated if they are to reach completion before then. Looking ahead, we still believe that this segment has great potential, with low interest rates providing an opportunity for private companies to continue investing in roads, water-treatment plants and public transportation.
Catalysts
In Brazil, concessions for the Viracopos, Guarulhos and Brasilia airports are slated to be auctioned in February 2012 (in order to be ready for the World Cup, these three airports will require ~BRL 3 billion of investment in the next two years). We also expect to see some federal and state toll-road concessions being auctioned in 2012. Presidential and state elections in Brazil in 2014. As most of Brazils governor plan to have new projects ready before the end of their terms, some infrastructure projects (especially those related to urban transportation) are likely to be accelerated during 2012. In Mexico, we expect some fast-execution contracts (mostly for public works and projects that do not require major investments) to be tendered in 2012, instead of large infrastructure projects. Lower interest rates in Brazil are also positive for infrastructure investment, as lower rates tend to increase the attractiveness of projects. Brazil hosting the World Cup (in 2014) and the Olympic Games (in 2016). Most of the construction required for these events has been delayed, but we expect to construction accelerate during 2012. see

CCR is our top pick, but we also have a very positive view of ICA, ASUR, Iochpe Maxion and Mills. Among these companies, CCR, ICA and Mills are the players directly exposed to infrastructure in Brazil (CCR and Mills) and Mexico (ICA). Iochpe Maxion offers an attractive avenue for gaining exposure to the Brazilian automotive industry through geographic diversification, reducing the companys risk while providing exposure to the fast-recovering North American automotive industry. ASUR has proven to be one of the most defensive airport groups due to its high exposure to international traffic. At this point, we would not recommend exposure to GOL or GAP. For GOL, the cost pressures coming from the FX rate and high jet-fuel costs will likely make the current environment even more challenging. As for GAP, the continued uncertainty surrounding the outcome of GAPs legal battle with Grupo Mexico sets a ceiling on GAPs valuation level and increases the risk for minority shareholders.
Ita BBA 117
Brazilian Infrastructure Works: Current Stage
Brazilian Infrastructure Works: Are There Any Obstacles?
3%
22%
34%
55% 8%
78%
Project
Tender
Initiated
Halted
No
Source: Anurio Exame 2011-12 - Infraestrutura
Yes
Brazilian Infrastructure Works: Funding Sources
Brazilian Infrastructure Works: Which Obstacles?
2% 18%
24% 33%
12% 68%
19% 24%
Source: Anurio Exame 2011 2012 - Infraestrutura
Public
Private
Public-Private
Undefined
Environmental
Financial
Technical
Others
Source: Anurio Exame 2011 2012 - Infraestrutura
Brazilian Infrastructure Works: Robust Pipeline

Investments (BRL billion) Premium 1 Refinery- Maranho COMPERJ - RJ Belo Monte Hydroelectric Plant Abreu and Lima Refinery - PE Premium 2 Refinery - Cear Santo Antnio Hydroelectric Plant Jirau Hydroelectric Plant Subway - Line 5 - SP North-South Railroad Rodoanel -North Part Transnordestina Railroad West-East Railroad Carajs Railroad Subway - Line 4 - RJ Rodoanel - East Part Au Superport Monorail - Line 17 Gold - SP Transolimpica Transcarioca Arco Rodovirio - RJ Rio de Janeiro Stadium So Paulo Stadium Belo Horizonte Stadium Transoeste Braslia Stadium Salvador Stadium Recife Stadium Fortaleza Stadium Amazon Stadium Natal Stadium Cuiab Stadium Porto Alegre Stadium Curitiba Stadium 2005 2007 2009 5 2011 2013 2015 10 2017 Estimated Duration
12 of the Worlds 40 Greatest Infrastructure Works are Brazilian

Oman - Sohar Port Expansion Brazil - Au Superport Qatar - Ras Laffan Port Expansion United Kingdom - London Gateway Port Brazil - Teles Pires Hydroelectric Plant Brazil - Santos Port Expansion Chile - Argentina-Chile Tunnel Colombia - Pescadero Hydroelectric Plant Brazil - Transnordestina Railroad China - River Yangtze Dredging Vietnam - Ho Chi Minh City Rodoanel Brazil - Rodoanel - North Part- SP Vietnam - Underground Railroad (Hau River) Netherlands - Roterd Port Expansion India - Mundra Thermoelectric Brazil - Subway Line 5 - SP China - Xangai-Hangzhou Train USA - International Detroit River Bridge Vietnam - Nha Trang Railroad China - Xiangjiaba Hydroelectric Plant Brazil - Angra 3 Nuclear Plant Panama - Panama Canal Expansion Canada - Romaine Hydroelectric Plant Canada - Pace River Hydroelectric Plant Brazil - North-South Railroad China - Xiluodu Hydroelectric Plant USA - Colorado Railroad China- Yangshan Port Brazil - Jirau Hydroelectric Plant Brazil - Santo Antonio Hydroelectric Plant China - Yangjiang Nuclear Plant Malasya - Kuala Lumpur-Vale Klang Railroad China - Hong Kong-Zhuai-Macau Bridge USA - Gree Power Express Transmission Brazil - S. Luis dos Tapajs Hydroelectric Plant China - Harbin-Dalian Railroad USA - Modernization of O'Hare Airport Brazil - Belo Monte Hydroelectric Plant China - Jiuquan Wind Plant China - New Kunning Airport 1 2 2 3 3 3 3 3 3 4 4 4 4 4 4 4 5 5 6 6 6 7 7 7 7 7 7 8 8 10 10 10 11 12 13 14 15 16 18 23
40.2 29.2 26.2 25.7 22.0 16.0 13.1 6.9 6.7 6.1 5.4 5.3 4.5 4.0 4.0 3.4 2.9 2.2 1.3 1.2 0.9 0.9 0.7 0.7 0.6 0.6 0.5 0.5 0.5 0.4 0.4 0.3 0.2
2019152021
Investments (USD billion)

Source: CG/LA Infrastructure
Ita BBA 118
ASUR Outperform
Company Description
Grupo Aeroporturrio del Sureste (ASUR) is a Mexican airport operator founded in 1998 that holds a 50-year concession to operate, maintain and develop nine airports in the Southeast region of Mexico. The concessions include Cancn International Airport, Mexicos second busiest airport in terms of passenger traffic in 2011 and the busiest in terms of regular-service international passengers. ASUR also holds concessions to operate airports in Cancn (74% of EBITDA), Mrida (4% of EBITDA), Villahermosa (2% of EBITDA), Huatulco, Minatitln, Oaxaca, Tapachula, and Veracruz ( 9% of EBITDA).
ASURB MXN 93.0 ASR US USD 72.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol MXN MXN MXN m MXN m MXN m 1m 3.5 3.1 80.4 9.8 80.6/62.0 300,000 24,132 26.3 12m 13.0 18.5
Investment Thesis
In our view, ASUR continues to be one of the best positioned airport groups, posting a speedy one-year recovery after Mexicana ceased its operations. The company offers attractive valuation levels (discount to GAP of 17% in terms of EV/EBITDA and 27% in terms of P/E) and has demonstrated resilient passenger traffic, higher dividend yields, and the strongest relative commercial strategy among its peers. The Riviera Maya has gained recognition as one of the top tourist destinations in the world, likely boosting domestic and international traffic for ASUR. Cancn represents 74% of ASURs traffic; due to its proximity to the U.S. and appeal among U.S., Canadian and European travelers, the company has increased its commercial revenue per passenger to MXN 65.2 (66% above GAP and 34% above OMA). We believe that ASURs position in the Caribbean could open up the possibility of international expansion through the upcoming tender of the Puerto Rico airport (results expected by April 2012) and other airport options including Brazil.
Company Performance
122 112 102 92 82 72
Aug-11 Dec-10 Jun-11 Oct-11 Apr-11 Dec-11 Feb-11

Domestic carrier fleet expansions in 2012 will play a key role in increasing passenger traffic, likely easing the capacity constraints caused by the suspension of Mexicana. New growth opportunities in the Caribbean and Latin America. ASUR benefits from MXN depreciation. There is still room for continued expansion in the commercial business. The ADO acquisition could create further synergies. Natural disasters infrastructure. could damage airport
MEXBOL
ASURB
Source: Ita BBA
An economic downturn in Mexico and the U.S. would have a negative impact on ASUR, given that 87% of its traffic comes from Mexico, Canada and U.S. Continued sale of Fernando Chico Pardos stake in ASUR.

We reiterate ASUR as our top pick in the airport sector, with an outperform rating and a YE12 fair value of MXN 93.0/share (USD 72.7/share). We expect passenger traffic to increase 5.2% in 2012, comparing favorably to the increase in 2011 of 4.9%. Our model does not consider any additional airport concessions. In our view, commercial revenue per passenger could increase by 7.6% in 2012. We see ASURs current valuation as attractive relative to its Mexican and international peers, at 7.9 EV/EBITDA and 13.7x P/E. We believe that ASUR will maintain the lowest leverage ratio in the industry, at -0.07x.

Years Net revenues MXN m) EBITDA (MXN m) Net income (MXN m) Net debt (MXN m) EPS FCFE (MXN m) EV/EBITDA P/E FCFE yield (%) DPS (MXN) Dividend yield (%) P/BV
Source: Ita BBA
2010a 4,235 2,104 1,275 (552) 4.25 924 11.2 18.9 3.8 2.5 3.1% 1.6
2011e 4,551 2,488 1,537 (884) 5.12 1,143 9.3 15.7 4.7 3.0 3.7% 1.6
2012e 4,836 2,793 1,757 (1,966) 5.86 1,527 7.9 13.7 6.3 3.4 4.3% 1.5
2013e 4,880 2,989 1,921 (3,087) 6.40 1,923 7.0 12.6 8.0 4.0 4.9% 1.4
2014e 5,462 3,226 2,081 (3,980) 6.94 1,720 6.2 11.6 7.1 4.2 5.2% 1.4
2015e 6,209 3,527 2,265 (4,879) 7.55 1,855 5.5 10.7 7.7 4.8 5.9% 1.3
Vivian Salomon +52-55-5262-0672 vivian.salomon@itaubba.com Renata Faber, CNPI +55-11-3073-3017 renata.faber@itaubba.com
Ita BBA 119
Autometal ON Outperform
Company Description
Autometal is an automotive component and sub-assembly supplier in Brazil and NAFTA. Its operations are divided into four segments: Plastics, Stamping, Painting and Forging, Casting & Machining. It offers a combined portfolio of 6,000 products including cockpits, tulips, pick-ups and door panels. The company has 17 plants throughout Brazil (10) and Mexico (7), which have the capacity to supply all of the Americas. In 3Q11, the Brazilian market was responsible for roughly 68% of its consolidated revenue. The company supplies both Tier I clients (component suppliers like Bosch, Delphi and Continental) and OEMs (like VW, GM, Fiat, Renault and Ford, among others), earning its place as a Tier 1.5 supplier.
AUTM3 BRL 19.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 11.2 11.9 13.8 41.0 18.67/11.33 125,908 1,741 2.3 12m n.a. n.a.
Investment Thesis
We have a constructive approach to Autometal supported by several factors. The first is the companys diversification: it is not highly dependent on a single product or client. For example, less than 6% of Autometals revenue is concentrated on any one client. Moreover, the company also offers geographical diversification, with plants in two emerging markets. In an industry that is highly dependent on GDP growth, the company reduces risk and revenue volatility by placing its units in different countries. Furthermore, the company has a strong track record of acquisitions, which, combined with the companys comfortable cash position (net cash position of BRL 190.2 million at the end of 3Q11) and its focus on diversification, could lead to further acquisitions. The main goal of any eventual acquisition would be to increase Autometals portfolio, enter new segments like commercial vehicles, and implement vertical production (e.g., by acquiring a foundry).
Company Performance
140 120 100 80 60 40
Jun-11 Dec-11 Aug-11 Feb-11 Oct-11
AUTM3

Anfavea (National Association of Automotive Vehicle increase Manufacturers) in car and estimates a 3% light-commercial Several OEMs have announced substantial investments in Brazil over the next few years, which could generate new contracts. Due to the companys strong cash position, acquisitions are another value driver for Autometal, as they will likely provide further diversification and a consequent boost in growth.
Apr-11
Ibovespa
Source: Ita BBA
production, representing a positive scenario for the company.

Autometal trades at a discount in relation to its peers and is a good way to gain exposure to the LatAm automotive industry. Furthermore, we believe that there is upside potential to the stock from acquisitions, which is not considered in our forecasts. We reiterate our outperform rating on the company and our YE12 fair value of BRL 19.5.

Source: Ita BBA
2010a 1,570 300 137 252 1.09 0 6.8 12.7 0.0 0.5 3.7 2.9
2011e 1,669 326 210 -317 1.67 0 4.5 8.3 0.0 0.8 6.0 1.7
2012e 1,779 324 198 -377 1.57 139 4.4 8.8 8.0 0.8 5.7 1.5
2013e 1,924 339 197 -420 1.57 124 4.0 8.8 7.1 0.8 5.7 1.4
2014e 2,056 357 208 -462 1.65 124 3.7 8.4 7.1 0.8 6.0 1.3
2015e 2,223 384 225 -536 1.79 158 3.3 7.7 9.1 0.9 6.5 1.2
Renata Faber, CNPI +55-11-3073-3017 renata.faber@itaubba.com Thiago Macruz, CNPI +55-11-3073-3034 thiago.macruz@itaubba.com
Ita BBA 120
CCR ON Outperform
Company Description
CCR is one of the worlds largest infrastructure companies, involved in highway concessions (~90% of revenue), passenger transportation (subway operator in the city of So Paulo, ~4% of revenue), environmental vehicular inspection (~2% of revenue), and automatic toll and parking payment systems (CCR holds 38% of STPs capital, ~4% of revenue). The company is currently responsible for ~2.5 thousand kilometers of highways in three Brazilian states (Rio de Janeiro, So Paulo and Paran). CCR is listed in the Bovespas Novo Mercado and currently has a free float of ~49% of the total shares.
CCRO3 BRL 15.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 3.0 3.7 11.8 26.7 12.7/10.06 1,765,588 20,905 42.7 12m 6.2 29.0
Investment Thesis
We currently have an outperform rating on all of the toll-road companies we cover. We believe that the combination of a stable cash-flow generation (~3% yield), business predictability (volume expansion tracks GDP growth and tariffs are indexed to inflation IPCA), and hefty upside to our YE12 fair value (~30%) make for compelling investment opportunities. That said, a lack of catalysts has been a major issue for investors. The recent announcement of a contract amendment at Via Lagos in December suggests that we might be on the verge of a structural change in the segment, and that these opportunities could finally become an interesting growth route for the toll-road companies we cover. CCR has billions of reais mapped out in additional investments in its current portfolio. We believe that we could see a relevant value generation process if even a fraction of these opportunities come to fruition.
Company Performance
140 120 100 80 60 40

Higher IPCA levels are another catalyst for the business, as the tariffs charged by the toll roads concessions will be readjusted by this index beginning in 2H12. A value driver for the toll-road division is traffic expansion, which is highly correlated with GDP growth; historically, this increase represented roughly 1.3x GDP growth. We believe that contract amendments are an interesting growth route for CCR, as the company could obtain IRRs above new concession levels (~12% vs. ~8%, real, unlevered).
Ibovespa
CCRO3
Source: Ita BBA

As mentioned above, the combination of a stable cash-flow generation, business predictability and compelling upside to our YE12 fair value are the three arguments that support our positive approach. Furthermore, the possible signing of new contract amendments should offer tailwinds to all of the tollroad companies we cover, as it suggests that these are indeed a plausible and attractive growth route. Accordingly, we have an outperform rating on the name and a YE12 fair value of BRL 15.0/CCRO3 (11.4% WACC in nominal BRL).

Source: Ita BBA
2010a 4,658 2,259 672 5,533 0.38 0 11.7 31.1 0.0 0.0 0.0 6.7
2011e 4,909 2,907 873 5,611 0.49 1,068 9.1 23.9 5.1 0.1 1.0 6.0
2012e 5,321 3,425 1,158 5,189 0.66 898 7.6 18.0 4.3 0.5 4.2 5.5
2013e 5,983 3,909 1,579 4,405 0.89 486 6.5 13.2 2.3 0.7 5.7 5.0
2014e 6,754 4,479 2,014 3,386 1.14 477 5.4 10.4 2.3 0.9 7.2 4.5
2015e 7,568 5,081 2,476 2,165 1.40 397 4.5 8.4 1.9 1.1 8.9 3.9
Ita BBA 121
CICSA Outperform
Company Description
Carso Infraestructura y Construccin (CICSA) is a Mexican company that operates in the Construction and Engineering sectors through its subsidiaries. The companys operations include manufacturing and services for the oil industry (8.8% of EBIT), infrastructure projects (33.9% of EBIT), as well as civil construction (17.6% of EBIT), housing (0.7% of EBIT), and duct installation (41.1% of EBIT). CICSA was established in 1999 as Grupo Industrial Carso. The company was spun off in October 2005, following various acquisitions and consolidations among the companies that comprise Grupo Carso.
CICSAB1 MXN 9.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding MXN MXN MXN th MXN m MXN m 1m -1.3 -1.8 8.07 12.7 8.4/6.5 2,552,576 20,599 5.3 12m 4.9 10.0
Investment Thesis
We still believe that if Grupo Carso maintains its offer for CICSA, the best outcome for the company is to accept the buy-out. On October 24, 2011, Grupo Carsos board of directors approved the acquisition of all of the B1 shares for Carso Infraestructura y Construccin (CICSAB1). GCARSO plans to acquire CICSAs 32.82% shares outstanding at an offer of MXN 8.20 per share and to delist the shares. GCARSO currently owns (directly and indirectly) 67.18% of the companys shares. As of December 19, no decision had been reached by CICSA shareholders due to insufficient votes. CICSA has an attractive expansion model in Latin America based on: i) its exposure to Mexican infrastructure projects (62% of backlog); ii) participation in projects with PEMEX (19% of backlog); and iii) the availability of other markets for Grupo Carso companies like AMX that provides duct installation and fiber-optic services (11% of backlog). The company compares favorably against its Mexican peer ICA in terms of leverage, with a 0.67x net debt to EBITDA as of 3Q11 (vs. ICAs 5.4x net debt to EBITDA).
Market capitalization 3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol
Company Performance
122 112 102 92 82 72
Aug-11 Dec-10 Oct-11 Apr-11 Dec-11 Feb-11 Jun-11

We expect the main revenue drivers for CICSA to be the duct installation segment and the possible lease or sale of the Jack-Up I oil platform. We also expect CICSA to participate in the fast execution contracts to be tendered as the election period approaches. Grupo Carsos acquisition of 100% of the companys shares outstanding. The sale or lease of the Jack-Up I oil platform. The duct-installation segment is expected to continue to boost both revenue and margins as projects in Latin America increase. Limited liquidity. Backlog additions affected by delays in public tenders. Higher infrastructure spending election year. during an
MEXBOL
CICSAB1
Source: Ita BBA

The shareholders basically failed to reach a resolution due to the high number of abstentions, which is attributable to the timing of the meeting that generated a low attendance. While the process will probably be delayed until February 2012, Carsos plans remain intact. We therefore expect the stock to continue to trade at current levels. Although we believe that the stock could be worth MXN 9.10/CICSAB1, our fair value calculation assumes the lease or sale of the Jack-Up I platform by 1H12. We have an outperform rating on CICSA with a YE12 fair value of MXN 9.1/share.

Source: Ita BBA
2010 11,837 1,238 452 1,885 0.58 (2,697) 18.5 42.5 (13.1) 0 0 2.1
2011e 13,757 1,309 842 448 0.49 917 16.4 24.5 4.5 0 0 2.0
2012e 16,526 1,691 995 448 0.51 39 12.7 20.7 0.2 0 0 1.8
2013e 18,629 1,987 1,168 598 0.63 (195) 10.8 17.6 (0.9) 0 0 1.6
2014e 20,358 2,150 1,219 145 0.64 365 9.8 16.6 1.8 0 0 1.4
2015e 22,534 2,260 1,376 -1,551 0.69 1,608 8.6 14.7 7.8 0 0 1.3
Ita BBA 122
Duratex ON Market Perform

Company Description
Duratex operates in two segments: Deca (37% of consolidated revenue in 9M11) and the Wood division (63% of consolidated top line). Deca manufactures metal fittings and vitreous chinaware. The Wood division comprises the industrialization of wooden panels such as MDF (medium density fiber board), MDP (medium density particle board) and hardboards; as well as laminate flooring and multiform components. The companys Brazilian facilities include 13 industrial plants and seven forestry plants, which offer Duratex self-sufficiency in wood.
DTEX3 BRL 14.0
Stock Data
Investment Thesis
We maintain our positive stance on Deca. Although the divisions margins are expected to decrease due to a poorer product mix, its gross income in absolute terms is expected to increase in 2012, reflecting the start-up of new capacity. We do not see the poorer mix of products as negative, as reducing exposure to the high-end segment is a natural consequence of Decas capacity increase. The Deca division is better positioned due to: i) its strong brand; ii) the high capillarity of its sales network; and iii) the fact that the industry is expected to continue to run at a high capacity utilization, even after the new investments, leading to a favorable supply-and-demand equation for Deca. We expect a tougher scenario for the Wood division, where the ramp-up of the new Arauco and Duratex plants is likely to compress margins from 2013 to 2017. Assuming an increase in MDF demand of 2x GDP going forward (which seems optimistic in the short term, given its poor performance in 2011), the start-up of Duratexs new MDF production line at the beginning of 2013 would seem premature. That said, we expect the companys installed capacity utilization (considering the effective capacity, which is lower than nominal capacity) to remain low between 2013 and 2017, which would have a negative impact on margins. On the other hand, although the oversupply of MDF in the market could pressure margins between 2013 and 2017, we believe that these investments will strengthen both Duratex and Arauco and will likely continue to consolidate the market.
Company Performance
140 120 100 80 60 40
Jan-11 Jul-11 Nov-11 Mar-11 May-11 Sep-11 Jan-12
Ibovespa
DTEX3
Source: Ita BBA

Deca is expected to continue to post rapid growth and deliver good results. Because this division has a delayed reaction to new launches, demand is expected to remain strong over the next few years. Margins in the Wood division are expected to remain pressured, particularly after the startup of Araucos new MDF plant at the end of 2012 and Duratexs plant in 1H13.

Although Duratexs long-term investment thesis remains positive and the valuation looks attractive, we believe that the short-term results could bring negative news flow. We therefore maintain our marketperform rating on the name with a YE12 fair value of BRL 14.0/share.

Source: Ita BBA
2010a 2,742 855 467 977 0.85 319 6.9 10.6 6.4 0.3 2.8 1.4
2011e 3,046 843 408 1,258 0.74 131 7.4 12.1 2.6 0.2 2.1 1.4
2012e 3,389 957 404 1,100 0.73 257 6.3 12.3 5.2 0.2 2.2 1.3
2013e 3,770 1,040 465 928 0.85 220 5.7 10.6 4.4 0.2 2.3 1.2
2014e 4,191 1,152 543 725 0.99 275 4.9 9.1 5.6 0.2 2.5 1.1
2015e 4,625 1,233 605 357 1.10 454 4.3 8.2 9.2 0.2 2.6 1.0
Ita BBA 123
Ecorodovias ON Outperform
Company Description
Ecorodovias is an integrated logistics infrastructure company that operates intermodal logistics assets (16% of revenue), toll-road concessions (82% of revenue) and correlated services (2% of revenue). Its operations focus on logistics systems, which include two logistics terminals (one of which is the largest in Latin America) and five toll-road concessions covering more than 1,450 km. The companys assets are strategically located in Brazils main import and export corridors, and offer the possibility of capturing operating and economic synergies throughout the intermodal chain. Ecorodovias also holds a stake in STP, a company responsible for electronic collection systems in toll booths and parking lots.
ECOR3 BRL 17.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 1.4 2.0 12.8 36.9 14.77/11.29 558,699 7,140 18.2 12m 2.4 24.3
Investment Thesis
We have a positive view on toll-road concession companies, given their strong cash-flow generation, business predictability, resilience, and attractive upside potential on spot prices. Furthermore, these companies have no exposure to global markets, a plus in times of weaker macroeconomic backdrops. Ecorodovias is no exception; its current stock price implies that investors are buying the toll-road operation at a reasonable discount and getting the logistics business for free. Our current fair value for Ecorodovias of BRL 17.5/share reflects respective DCFs of BRL 15/share and BRL 2.5/share for Ecorodovias toll-road and logistics operations. Although we understand that there are market concerns regarding Ecorodovias ability to meet expectations in the logistics segment, we believe that ascribing it no value at all is unreasonable.
Company Performance
140 120 100

One of the value drivers for the toll-road division is traffic expansion, which is highly correlated with GDP growth (historically, this increase growth). represented roughly 1.3x GDP We believe that contract amendments are an interesting growth route for Ecorodovias, as the company could obtain IRRs above new contract levels (~12% vs. 8%, real, unlevered).
80 60 40
Ibovespa
ECOR3
Source: Ita BBA
Higher IPCA levels are another catalyst for the business, as the tariffs charged by the tollroad concessions will be readjusted by this index from 2H12 on.

For the reasons mentioned above, we adopt a constructive approach to Ecorodovias story, rating it an outperform. Our YE12 fair value of BRL 17.5/share is based on two discounted cash flows. For the logistics segment we estimate a value of BRL 2.5/share, and for the toll-road segment we calculate a value of BRL 15/share. Note that we discounted both flows using the same WACC (~11%), reflecting cost of equity (13.6%) and cost-of-debt after tax (7.7%), both in nominal BRL, and a 50% debt-to-capital ratio.

Source: Ita BBA
2010a 1,428 1,154 590 869 1.06 0 6.9 12.1 0.0 0.0 0.0 4.0
2011e 1,737 1,051 394 1,075 0.70 63 7.8 18.1 0.9 0.3 2.7 3.9
2012e 1,895 1,208 528 1,062 0.94 97 6.8 13.5 1.4 0.5 3.7 3.4
2013e 2,109 1,372 621 834 1.11 136 5.8 11.5 1.9 0.6 4.3 3.0
2014e 2,338 1,556 747 468 1.34 103 4.9 9.6 1.4 0.7 5.2 2.6
2015e 2,584 1,730 877 -61 1.57 61 4.1 8.1 0.8 0.8 6.1 2.2
Ita BBA 124
Embraer Market Perform

Company Description
Embraer (Empresa Brasileira de Aeronutica S.A.) is one of the largest aircraft manufacturers in the world, focusing on three different market segments: Commercial, Executive, and Defense Aviation. The company, headquartered in So Jos dos Campos, is involved in the aircraft design, development, assembly, sale and after-sale support. The Commercial Aviation segment contributes most significantly to the companys top line, representing more than half of the consolidated net revenue in 2010, followed by Executive (21%) and Defense Aviation (13%).
ERJ USD 36.3
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding USD % USD th USD m USD m 1m 2.0 25.9 39.8 35.41/20.98 185,116 4,801 30.3 12m -10.7
Investment Thesis
We believe that the company is uniquely positioned in its competitive environment, with a well-built line of products in both the corporate and commercial segments. Furthermore, the stock does not seem to be particularly expensive from a valuation standpoint, trading at below historical levels (~10x P/E 12month forward, vs. historical average of ~14x). We also believe that a stronger U.S. dollar is likely to help sustain its short-term profitability. That said, we believe that despite the companys more diversified current revenue base, Embraers business model is still highly dependent on both the U.S. and Europe, with roughly 45% of its revenue stemming from sales in these regions. As concerns regarding growth in the developed world intensify, we believe that investors are unlikely to pay multiples similar to Embraers historical levels. In other words, in our opinion, the current macroeconomic backdrop limits Embraers potential for valuationmultiple expansion.
Market capitalization 3-mth avg daily vol. Performance (%) Absolute
Company Performance
119 109 99 89 79 69
Jan-11

A stronger USD supports profitability. We estimate that Embraers EBITDA margin will increase 100 bps for every 5% appreciation in the USD. Embraer has a very strong lineup of products. The companys market share could surpass the current 45% level. New firm orders in the commercial aviation segment usually support stock performance. The KC-390 defense project is still in the design phase. If the project comes to fruition, we believe that it could add up to USD 4.5 billion to Embraers backlog; assuming that the signed letters of intent become firm orders.
May-11
ERJ
Source: Ita BBA

For the reasons mentioned above, and despite seeing Embraer as a leading player in its main markets, we have a market-perform rating on the company. We prefer to wait for better color on the macroeconomic backdrop in Europe and United States before adopting a more constructive approach to the story. Our valuation for Embraer is calculated using a DCF-based methodology. Our current model assumes a 3% growth in perpetuity and a 9.2% WACC (80% equity, 20% debt), both in nominal U.S. dollars. Our current estimates indicate a YE12 fair value of USD 36.3/ADR.

Source: Ita BBA
2010a 5,357 461 327 -692 1.77 711 8.9 14.7 14.8 -0.9 -3.4 1.6
2011e 5,885 702 454 -367 2.45 -219 6.3 10.6 -4.6 -0.6 -2.4 1.4
2012e 6,235 778 457 -320 2.47 269 5.8 10.5 5.6 -0.6 -2.4 1.3
2013e 6,944 871 537 -599 2.90 416 4.8 8.9 8.7 -0.7 -2.8 1.2
2014e 7,228 907 586 -827 3.17 627 4.4 8.2 13.1 -0.8 -3.1 1.1
2015e 7,528 966 637 -1,102 3.44 687 3.8 7.5 14.3 -0.9 -3.4 1.0
Ita BBA 125
Sep-11
Nov-11
Mar-11
Jan-12
Jul-11
GAP Market Perform

Company Description
Grupo Aeroporturrio del Pacfico (GAP) has a 50-year renewable concession to operate 12 airports in the Pacific and Central regions of Mexico. GAPs airports serve two major metropolitan areas, Guadalajara and Tijuana; six midsized cities (Aguascalientes, Guanajuato, Hermosillo, Los Mochis, Mexicali and Morelia); and the tourist destinations La Paz, Los Cabos, Manzanillo and Puerto Vallarta; Guadalajara is ranked third (6.9 million passengers in 2010) and Tijuana fifth (3.7 million). In 2010, the company handled 20.2 million passengers and generated MXN 3.7 billion, with a reported EBITDA of MXN 2.4 billion.
GAPB MXN 53.0 PAC US USD 44.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization MXN MXN MXN th MXN m MXN m 1m .8 2.3 32.9 12m -4.0 2.5 47.8 10.9 51.65/42 561,000
Investment Thesis
GAPs controlling shareholders reached an agreement to end legal disputes. However, Grupo Mexicos interest in the company could overshadow any positive results that the company might deliver. It is important to note that these disputes have not affected the day-to-day operations at GAPs airports. Nevertheless, we are concerned about possible conflicts arising from Grupo Mexicos shareholder status and how long these disputes might drag on. As of November 30, 2011, Grupo Mexico owned 27.8% of GAPs total outstanding capital stock. Although the companys commercial activity relative to its peers has been lagging, its commitment to redesigning the commercial offering will likely be reflected in the 2012 and 2013 results. Commercial revenue per passenger was MXN 37.5 in 2010, down 1% from its historical average; we believe that the redesign could help the company regain a MXN 40.4 commercial revenue per passenger.
3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol
Company Performance
102 92 82 72
Dec-10 Oct-11 Dec-11 Apr-11 Jun-11 Aug-11
GAPB

We believe that the issues with Grupo Mexico will be the main driver for the stock. Attractive dividend policy and share buybacks. Redesigning of commercial activity. Delays in the completion of expansion projects Recovery of passenger traffic due to an easier comparison base in 2012. at GAP airports, such as those in Los Cabos and Puerto Vallarta, could reduce capacity. Regulatory changes and changes in the airline industry could affect passenger traffic. Business could continue to be hurt by the economic downturn in Mexico and the U.S.
Feb-11
MEXBOL
Source: Ita BBA

The dispute with Grupo Mexico sets a short-term ceiling for the stock price at around MXN 50/share. If Grupo Mexicos tender is either cancelled or fails to reach a 51% ownership, the group might sell its entire position in GAP and cause a stock overhang. We expect traffic in 2012 to increase 3.3%, rebounding from a flat growth figure in 2011. GAP is currently trading at 9.5x EV/EBITDA 2012E, a 16% premium versus ASUR and 19% to OMA that we see as unjustified. Relative to its international peers, the company is trading at a premium of 3% in terms of EV/EBITDA 2012E and 18% in terms of P/E 2012E, which we also see as unjustified. We maintain our market-perform rating on GAP and a YE12 fair value of MXN 53.0/share (USD 44.5/ADR).

Source: Ita BBA
2010a 4,374 2,439 1,500 -1,040 0.58 1,914 10.6 17.9 7.1 1.78 3.7 1.0
2011e 4,613 2,509 1,437 -680 0.49 1,162 10.4 18.6 4.3 1.92 4.0 1.0
2012e 4,839 2,710 1,414 -1,105 0.51 1,495 9.5 18.9 5.6 2.13 4.5 1.0
2013e 5,120 2,949 1,491 -1,925 0.63 1,908 8.4 18.0 7.1 2.23 4.7 1.0
2014e 5,334 3,197 1,578 -3,243 0.64 2,444 7.4 17.0 9.1 2.31 4.8 0.9
2015e 5,797 3,546 1,693 -4,386 0.69 2,390 6.3 15.8 8.9 2.57 5.4 0.9
Ita BBA 126
GOL PN Market Perform

Company Description
GOL is a Low Cost Carrier (LCC) based in Brazil. The airline company focuses on the Brazilian domestic market (~90% of RPKs), but it also has a small international operation (short flights to destinations in Latin America). GOL operates about 940 daily flights to 63 different locations (13 international). It uses exclusively the Boeing 737 family, signaling its intent to streamline its cost structure. Operating one type of aircraft implies significant cost savings in inventories, pilot training and maintenance. GOL currently retains 38% of market share in the Brazilian local market (as of 10M11) in terms of RPKs.
GOLL4 BRL 18.0 GOL USD 10.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m -16.4 -15.9 12.1 48.5 27.01/8.86 278,400 3,374 25.1 12m -53.3 -43.3
Investment Thesis
We believe that the strategic shift by Brazilian airline companies toward the domestic market, favoring yields over market share, is not a flash in the pan. Moreover, the markets new capacity addition process, based on a more balanced ASK expansion for the foreseeable future, is likely to support this new pricing strategy. We expect less than 4% growth in ASK for GOL and TAM in 2012. We welcome the new trend and believe that a reasonable increase in capacity and richer yields could, in the medium term, halt the erosion in unit revenues seen in the Brazilian domestic market over the last few years (3.5% decrease for GOL from 2008 to 2011, and we estimate a 7% increase in 2012 versus 2011).
Company Performance
That said, there are at least three points that support our more conservative approach to GOL in the short term: i) uncertainty regarding the immediate demand response to this new yield-increasing trend, given the weaker macroeconomic backdrop in Brazil; ii) cost pressures stemming from high jet-fuel prices and increasing labor expenses (we expect another real wage increase by the end of the year); and iii) the depreciation of the BRL versus the USD, which leads to additional cost pressure, as 50% of the companys costs are USD-linked.
130 110 90 70 50 30

A significant appreciation of the BRL would offer tailwinds to GOLs profitability. Every BRL 10 centavo appreciation in the BRL leads to a 200-bp improvement in GOLs operating margin. Any important decrease in jet fuel prices would provide a welcome relief to GOLs consolidated costs. Every USD 10 decrease in jet fuel prices means a 200-bp increase in GOLs operating margin.
Ibovespa
GOLL4
Source: Ita BBA

We think that GOLs and TAMs more conservative capacity expansion plans for the next couple of years are supportive of a mindset change in the industry. Additionally, we believe that this could indeed lead to a sustainable recovery in yields and unit revenues. That said, high jet-fuel prices and a weaker BRL imply a tough combination for GOL from a cost perspective in the short term. Accordingly, we rate GOL a market perform. We have a BRL 18.0/share YE12 fair value for the company stemming from an 8.2x EV/EBITDAR 2012 target multiple.

Years Net revenues (BRL m) EBITDAR (BRL m) Net income (BRL m) Net debt (BRL m) EPS FCFE (BRL m) EV/EBITDA P/E FCFE yield (%) DPS (BRL) Dividend yield (%) P/BV
Source: Ita BBA
2010a 6,980 1,535 214 5,644 0.77 859 5.9 15.7 25.5 -0.7 -5.5 1.2
2011e 7,314 719 -671 5,790 -2.41 462 12.8 n.m. 13.7 0.0 0.0 1.5
2012e 7,894 1,327 123 5,941 0.44 -58 7.0 27.5 -1.7 0.0 0.0 1.5
2013e 8,394 1,663 284 5,876 1.02 159 5.6 11.9 4.7 0.0 0.0 1.3
Ita BBA 127
ICA Outperform
Company Description
Empresas ICA is one of the largest engineering, procurement, and construction companies in Mexico, and provides services to both public- and private-sector clients. ICAs construction-related activities include industrial, urban, housing and infrastructure facilities. The company also focuses on real-estate development; the construction, maintenance, and operation of airports, and concessions. ICA has operations in Mexico, Peru, Panama and Colombia, and holds a 52% stake in Grupo Aeroporturio del Centro Norte (OMA). As of 2010, the construction division represented 46% of ICAs total EBITDA, housing 7%, concessions 28% and airports 18%.
ICA* MXN 24.0 ICA US USD 8.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization MXN MXN MXN th MXN m MXN m 1m -8.2 -8.6 16.6 44.6 32.49/13.51 645,668 10,718 58.9 12m -47.8 -45.3
Investment Thesis
We believe that ICA is a long-term growth story, and expect profitability to increase once the majority of the concessions in its portfolio become operational. Twenty-five percent of the projects in ICAs current backlog are expected to be completed in 2012, and 50% in 2013. The heavier investment is expected to reduce leverage and improve cash flow generation. ICA has increased its exposure to Panama, Peru and Colombia to become less dependent on the Mexican governments tendering of infrastructure projects. We believe that there is still value in the companys untapped concession portfolio; only six concessions are operational and ten are under construction, four of which are scheduled to start up in 2012 and five in 2013. According to our calculations, the sale of Corredor Sur and two concessions to RCO will result in a one-off high ROE of 10%, which compares positively with the 4.3% delivered by ICA over the last five years; however, we expect ROE to reach ~14% with the startup of the concession operations (not considering additional concession sales). Based on its high leverage (5.4x net debt to EBITDA), the companys balance sheet is expected to remain at around these levels once the concessions become operational.
3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol
Company Performance
106 96 86 76 66 56 46 36
Feb-11 Aug-11 Dec-10 Jun-11 Oct-11 Apr-11 Dec-11

ICAs increased debt and low profitability pose a growing concern. Solid MXN 39.4 billion construction backlog; most of the projects are scheduled for completion in 2012. Unexpected increases in project costs to be The delivery of La Yesca in 2012 is expected to decrease debt by around MXN 12 billion. The companys attractive concession portfolio is likely to boost profitability. absorbed by ICA; execution costs for projects that require company financing. Higher working-capital requirements that could imply increased debt. Potential delays in breaking ground on some concessions could subsequently delay growth.
MEXBOL
ICA
Source: Ita BBA

The stock has underperformed the IPC index by 45% over the last 12 months, which we attribute to the companys low visibility in the concession segment and its higher debt levels. We see an attractive entry point due to the stocks underperformance, and a turnaround for the company as concessions become operational in 2012 and 2013. We maintain our outperform rating on ICA and our YE12 fair value of MXN 24.0/share (USD 8.1/ADS).

Source: Ita BBA
2010a 34,965 5,318 909 28,712 1.44 (5,302) 7.8 11.8 (49.5) 0 0 0.7
2011e 39,209 6,294 2,110 38,380 3.27 (7,038) 8.1 5.1 (65.7) 0 0 0.6
2012e 45,034 6,925 1,156 27,845 1.79 11,701 5.9 9.3 109.2 0 0 0.6
2013e 48,774 7,854 1,519 31,232 2.35 (1,578) 5.6 7.1 (14.7) 0 0 0.6
2014e 52,423 8,060 1,603 34,580 2.48 (3,130) 5.9 6.7 (29.2) 0 0 0.5
2015e 56,948 8,385 1,871 38,392 2.90 (3,319) 6.1 5.7 (31.0) 0 0 0.5
Ita BBA 128
IDEAL Outperform
Company Description
Impulsora del Desarrollo y Empleo en Amrica Latina (IDEAL) focuses on infrastructure-oriented projects and services and was founded in 2005. IDEAL currently participates in the construction, management, maintenance, and procurement of different highway concessions, water treatment plants, electronic highway-toll-system services and electric energy in Panama. As of September 2011, IDEAL held MXN 30.1 billion in infrastructure assets and MXN 1.4 billion in total services. Toll-road concessions represent 80% of IDEALs revenue, services 16%, water projects 1.5% and energy 0.7%.
IDEALB1 MXN 24.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding MXN MXN MXN th MXN m MXN m 1m 9.3 8.8 22.4 7.6 22.5/14.99 3,000,153 67,203 1.7 12m 23.5 29.5
Investment Thesis
IDEAL has delivered organic growth (with no new kilometers added; operating 1,084 km of a total 1,268 km) and double-digit revenue increases over the last six quarters. The company has a very strong asset position, which is expected to generate a higher cash flow from the projects under construction such as the two hydroelectric plants in Panama and four toll-roads. We expect EBITDA to increase 48% YoY in 2012. IDEAL will continue to seek opportunities in capital markets as a means to finance its current and future concession portfolio. On November 8, the company sold MXN 4.5 billion in peso-denominated notes (certificados burstiles) in two tranches, as part of a MXN 9.0 billion bond program. However, among the disadvantages is that the companys total interest-rate swap position was MXN 29.4 billion, MXN 14.7 billion of which is unmatched. The unmatched position, which is calculated by mark-to-market quarterly figures, adds considerable volatility to the net income line despite being a non-cash item. There could be downside risk to our MXN 12 million net income estimate.
Market capitalization 3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol
Company Performance
128 118

The MXN 9 billion bond program does not eliminate the possible execution of the equity offering announced in June 2011. Recent changes in the Mexican regulation are expected to improve IDEALs negotiation of terms for new toll-road concessions. Strong traffic growth in highway concessions. Higher cash flow in the absence of any major maintenance work. Start-up of hydroelectric plants in Panama. Interest-rate volatility. The MXN 9.2 billion equity follow-on at a minimum price of MXN 22.0/share, which is still in the pipeline. Limited stock liquidity.
108 98 88 78
Oct-10
Oct-10
May-10
IDEALB1
Mexbol
Source: Ita BBA

The companys recent weakness in margins is expected to revert in 2012, as its maintenance projects are completed; this is also expected to continue to boost results as infrastructure projects come on stream. IDEAL is currently trading at 16.4x in terms of EV/EBITDA 2012E, a 108% premium to its international peers (7.9x EV/EBITDA12E). We would expect the premium to be maintained once the projects are fully operational, and to start generating the expected cash flows. We maintain our outperform rating on IDEAL and YE12 fair value of MXN 24.1/share.

Source: Ita BBA
2010a 4,165 3,137 (109) 9,679 0.58 -1,687 25.9 NM -2.5 0 0 6.6
2011e 5,200 3,576 12 13,989 0.49 1,853 24.3 NM 2.8 0 0 6.8
2012e 7,056 5,293 1,778 13,210 0.51 3,664 16.4 37.8 5.5 0 0 5.8
2013e 7,954 6,341 1,709 12,337 0.63 3,503 13.7 39.3 5.2 0 0 5.1
2014e 9,870 7,855 2,104 11,035 0.64 3,590 10.9 31.9 5.3 0 0 4.4
2015e 11,397 9,097 2,380 8,767 0.69 2,940 9.2 28.2 4.4 0 0 3.8
Ita BBA 129
May-11
Feb-11
Aug-10
Sep-10
Jun-10
Jan-11
Mar-11
Nov-10
Dec-10
Dec-10
Mar-11
Apr-11
Jul-10
Jul-10
Iochpe Maxion ON Outperform

Company Description
Iochpe Maxion is the leading Brazilian wheel manufacturer for commercial vehicles, passenger cars and rail cars. The company has plants in Mexico and China and recently announced the acquisitions of Hayes Lemmerz and Gallaz, in order to increase its global footprint and portfolio of products. In addition to doubling Iochpes EBITDA, the acquisitions secured the companys global leadership in steel wheels and marked its entry in the chassis business for commercial vehicles in North America. South America will continue to be Iochpes main market after the company consolidates the Gallaz and Hayes operations. South America will represent 44% of the new companys revenue, followed by Europe (25%), North America (24%) and Asia (7%).
MYPK3 BRL 30.7
Stock Data
Investment Thesis
In the passenger-car segment, going global was a way to compensate for the lower competitive advantages in Brazil; the company will now benefit from: i) the recovery in the North American market; ii) access to higher technology; and iii) an improved relationship with the OEMs. Furthermore, Iochpe Maxion offers exposure to the promising truck industry in Brazil, which, despite the short-term headwinds (we expect a 10% decline in truck production in 2012), is expected to benefit from fleet renewal and growth.
Company Performance
Iochpes global presence allows it to carry out more global sourcing, benefiting from lower production costs in certain regions. Exposure to several regions and countries reduces the companys dependency on any single market. We also believe that Iochpes global presence and strong relationship with the OEMs will generate greater future investment opportunities. The net debt/EBITDA ratio, after the acquisitions are concluded, is expected to be lower than 2.5x. Once the OEMs recognize that, given its size and financial position, Iochpe is ready for new investment opportunities, they might invite Iochpe to invest with them in new countries and/or introduce new opportunities to increase its product portfolio.
130 110 90 70 50 30
Ibovespa
MYPK3
Source: Ita BBA

The acquisitions of Hayes and Gallaz are expected to be concluded at the beginning of 1Q12. The consolidation of these deals will likely be positive for Iochpes results. Any restrictions by the Brazilian anti-trust authority on the Hayes acquisition would likely be a non-event, as the focus of the acquisition was on Hayes presence outside of Brazil.

Our YE12 fair value of BRL 30.7/share for Iochpe Maxion is based on a DCF analysis, which considers only the acquisition of Gallaz. Adding Hayes Lemmerz to our valuation model would increase our fair value by BRL 6.4/share, to BRL 37.2/share. We reiterate our outperform rating on the company because the market is not yet pricing in the acquisitions, which were accretive and are expected to have a huge positive impact on Iochpes results.

Source: Ita BBA
2010a 2,227 311 164 408 1.73 122 9.3 15.2 4.9 0.6 2.4 3.2
2011e 2,763 427 213 354 2.25 267 6.7 11.7 10.7 0.8 3.2 2.8
2012e 2,982 453 229 677 2.42 80 7.0 10.9 3.2 0.9 3.4 2.4
2013e 3,234 489 247 584 2.60 195 6.3 10.1 7.8 1.0 3.7 2.1
2014e 3,432 512 265 472 2.79 135 5.8 9.4 5.4 1.0 3.9 1.8
2015e 3,685 540 289 335 3.05 166 5.2 8.6 6.7 1.1 4.3 1.6
Ita BBA 130
Localiza ON Outperform
Company Description
Localiza is a Brazilian company that provides car rental services. The company has four divisions: i) rent-a-car (~56% of EBITDA); ii) fleet management (38% of EBITDA); iii) car resale outlets (~5% of EBITDA); and iv) franchises (~1% of EBITDA). Localiza has around 424 rent-a-car stores and 56 car resale outlets (called Seminovos). Its robust car sale capability is one of Localizas main competitive edges (selling expenses around 10% of car value, vs. ~15% for the competition). The company is the market leader in both the rent-a-car and fleet management segments, with respective market share (in terms of fleet) of 38% and 13%. Localiza is the largest private acquirer of new vehicles in Brazil (buys ~ 2% of the new vehicles sold in the country). The companys total fleet size as of 3Q11 was 88 thousand vehicles (57 and 31 thousand for the fleet management and rent-a-car segments, respectively).
RENT3 BRL 37.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. BRL % BRL th BRL m BRL m 1m -7.4 -6.8 26.0 42.3 30/22 201,708 5,244 24.6 12m -6.5 13.6
Investment Thesis
We believe that the company is remarkably well positioned to reap the benefits of the fragmented car rental market and consistent growth in Brazil (average of 3x GDP since 2005). Localizas leadership in the segment is based on several factors: i) it has the lowest cost of capital among its peers (cost of debt of CDI + ~1.1%, versus CDI + ~5% for competitors); ii) it enjoys the biggest discounts with OEMs (25% versus competition around 20% at best); iii) it has the largest store base in Brazil (thus reaching a larger portion of the market); and iv) it benefits from a fragmented used-car resale business. With these advantages, Localiza generates the highest ROIC in the industry (~14.5%).
Company Performance
130 110

Depreciation: Any significant increase in new car depreciation in Brazil would pressure Localizas returns. A 10% increase depreciation wears down earnings by 5%. in Competition has been struggling financially since the 2008 financial crisis. Should any other large player shrink in size, we would expect Localiza to see volume growth. All of Localizas debt is CDI-linked. Every 100bp decrease in interest rate generates an additional 3% in earnings. The company funds its growth primarily with new debt.
90 70 50 30
If the Brazilian government cuts the IPI tax on vehicles again (by the same amount it did in 2008), we believe that the immediate impact would be a depreciation increase of around BRL 200 million.
Ibovespa
RENT3
Source: Ita BBA

We currently rate Localiza as outperform, with a YE12 fair value of BRL 37.0/share. We believe that good prospects for the car rental industry in Brazil, coupled with the above-mentioned structural advantages we believe Localiza has, support our constructive approach to the story. At ~14x P/E 12M forward, the company is trading in line with its historical level. That said, we are increasingly concerned about the following factors: i) we believe that the companys success has led the market to adopt overly optimistic forecasts for the short-term (annual volume expansion above 20% in the car rental segment over an already large base) ; and ii) the company is finding it progressively harder to sell the required number of vehicles to keep the fleet young and keep both maintenance and depreciation levels in check (evidenced by the increase in the average fleet age we have seen in 2Q11 and 3Q11, going from six months to close to eight months). For the time being, we give Localiza the benefit of the doubt and maintain our positive view on the stock.

Source: Ita BBA
2010a 2,551 650 253 1,281 1.25 -109 10.0 20.8 -2.1 -0.2 -0.7 5.7
2011e 3,037 807 284 1,473 1.41 98 8.3 18.5 1.9 -0.2 -0.7 4.7
2012e 3,764 985 388 1,587 1.92 -44 6.9 13.5 -0.8 -0.4 -1.4 3.6
2013e 4,435 1,145 469 1,595 2.32 289 6.0 11.2 5.5 -0.5 -1.8 2.9
2014e 5,124 1,323 574 1,471 2.85 242 5.1 9.1 4.6 -0.6 -2.2 2.3
2015e 5,827 1,502 691 1,317 3.43 298 4.4 7.6 5.7 -0.7 -2.7 1.9
Ita BBA 131
Mahle Metal Leve ON Outperform

Company Description
Mahle Metal Leve (MML) is the leading engine component supplier in South America. With facilities in Brazil and Argentina, the company supplies Brazilian and foreign OEMs, as well as offering after-market services. MML has over 11,000 employees, five installed manufacturing facilities, two distribution centers and a technological center in South America. Based on its high-tech products, the company has a solid, long-term relationship with its clients, a considerable advantage in an industry in which margins are expected to decline.
LEVE3 BRL 57.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 8.0 8.7 44.5 28.1 49/34.04 42,770 1,903 1.9 12m n.a. n.a.
Investment Thesis
High-tech products and strong client relationships. We believe that companies that sell high-tech products tend to have more bargaining power with OEMs, as price is not the only factor to be considered by OEMs when deciding on a supplier. Furthermore, MML has an indisputable track record for on-time delivery and leverages on its strong relationship with the Mahle Group, which serves OEMs worldwide. For all these reasons, we see a 15% ENITDA margin as sustainable for the company. Reduced risk through a fragmented client/market base. MML offers high-tech products to a fragmented client base that includes OEMs in Brazil (42% of revenue) and abroad (29% of revenue), and the aftermarket (29%). The companys presence in different segments implies low exposure to any single client or platform, which diminishes its operating risks. While the ratio of vehicles per person is low in Brazil (14.5 vehicles/100 inhabitants, compared with 21 in Argentina and 83 in the U.S.), the country lacks an efficient public transportation system. We therefore believe that there is room for increased demand, which is likely to materialize given the rising personal income and credit availability. As OEMs continue to announce investments in Brazil (justified by the countrys large-scale opportunities), the escalating demand will likely lead to production growth, which is positive for auto-part manufacturers.
Company Performance
130 110 90 70 50 30
Jan-11 Jul-11 May-11 Nov-11 Mar-11 Sep-11
LEVE3
Ibovespa

According to Anfavea (National Association of Automotive Vehicle Manufacturers), car and light-commercial vehicle production is expected to increase 3% in 2012, representing a positive scenario for the company. Several OEMs have already announced substantial investments in Brazil in the coming years, which could generate new contracts for MML.
Source: Ita BBA

Given MMLs good operating results and low capex needs, the company is expected to have a 100% payout ratio, which implies a 13.2% dividend yield for 2011. This scenario is likely to be recurring, with the company registering high dividend yields over the next few years. This, combined with MMLs diversification, solid relationship with OEMs and the positive vehicle-production scenario in 2012, support our constructive stance on the company. We reiterate our outperform rating and YE12 fair value of BRL 57.0/share.

Source: Ita BBA
2010a 1,823 270 83 322 1.94 374 8.3 23.0 19.7 0.0 0.0 1.4
2011e 2,191 362 152 26 3.56 258 5.4 12.5 13.6 4.6 10.4 1.5
2012e 2,349 378 169 84 3.95 37 5.3 11.3 2.0 4.7 10.6 1.5
2013e 2,534 388 182 131 4.26 119 5.3 10.4 6.2 4.9 10.9 1.6
2014e 2,752 426 207 172 4.84 160 4.9 9.2 8.4 5.3 12.0 1.6
2015e 2,964 449 219 228 5.13 187 4.8 8.7 9.8 5.5 12.4 1.6
Ita BBA 132
Marcopolo PN Outperform
Company Description
Marcopolo is the leading bus-body manufacturer in Brazil, with roughly 46% of the countrys production share during 9M11. Its product portfolio includes inter-city, urban, micro and mini buses, as well as its Volare family (complete buses, including chassis and body). Marcopolo also holds significant ownership stakes in Spheros (climate control and air-conditioning), WSUL (seat foams) and MVC (plastic components), which reinforce its vertical integration. The company has 12 production facilities, four of which are in Brazil and account for roughly 65% of production during 9M11. The eight remaining industrial complexes are abroad, including one wholly-owned facility in South Africa, and joint ventures in Argentina, Colombia, Egypt, India (2), Mexico and, more recently, in Australia. Although Marcopolos global footprint is robust, the most representative customer base in terms of sales is the domestic one, which represented 76% of consolidated revenue in 3Q11.
POMO4 BRL 8.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. BRL % BRL th BRL m BRL m 1m -3.6 -3.0 7.4 8.1 8.37/5.15 448,450 3,319 9.1 12m 3.4 25.6
Investment Thesis
Our positive stance on Marcopolo is supported by several factors. The first is the companys vertical integration, which allows Marcopolo to reduce costs and still deliver customized products. The second is the companys solid relationship with chassis manufacturers. In this context, it is vital to build partnerships with these suppliers, as any issues regarding chassis deliveries directly affect Marcopolos production. Thirdly, because bus-body production involves some degree of hand manufacturing, Marcopolos know-how is more important than substantial investments in machinery. This, coupled with the low-cost production line, yielded reasonable levels of return on invested capital (ROIC), which reached 27% in 2010 and will likely remain at around 25% over the next few years.
Company Performance
130 110 90 70 50

The auction of new interstate bus lines will likely generate demand for up to six thousand inter-state buses, providing tailwinds for the company in the domestic market. Investments in transportation, including the World Cup and Olympic games, will likely boost domestic demand for bus bodies. Due to the companys healthy financial position, acquisitions in Brazil or abroad are another value driver for Marcopolo, which will likely provide a capacity increase and a consequent boost in the companys growth.
30
Ibovespa
POMO4
Source: Ita BBA

The companys vertical integration, strong relationship with clients and suppliers, and high ROIC reinforce our positive stance on Marcopolos story and our outperform rating on the name. Despite the mild upside potential, we believe that the rating suits the stock based on the upside risk to our estimates generated by the companys healthy financial position. Given its comfortable position, Marcopolo could announce acquisitions (i.e., a chassis manufacturer), a fact that has not been considered in our forecasts. In the absence of acquisitions, we expect an increase in the pay-out ratio, which we currently forecast at 70%. For this reason, we reiterate our outperform rating on Marcopolo and our YE12 fair value of BRL 8.0/share.

Source: Ita BBA
2010a 2,964 365 289 133 0.64 292 9.5 11.5 8.8 0.3 4.5 4.3
2011e 3,204 407 304 -83 0.68 148 8.0 10.9 4.5 0.5 6.5 3.5
2012e 3,553 431 267 -89 0.60 172 7.5 12.4 5.2 0.4 6.0 3.3
2013e 3,879 464 295 -127 0.66 189 6.9 11.2 5.7 0.4 6.0 3.0
2014e 4,227 510 328 -188 0.73 218 6.2 10.1 6.6 0.5 6.2 2.7
2015e 4,620 562 366 -269 0.82 248 5.5 9.1 7.5 0.5 6.8 2.4
Ita BBA 133
Mills ON Outperform
Company Description
Mills is a Brazilian company that provides engineering solutions, including equipment, personnel and services throughout the country. The company has business operations in four segments: Heavy Construction (18.7% of revenue in 3Q11), which offers concrete formwork and shoring for complex infra-structure projects by large contractors like Odebrecht and Queiroz Galvo. Industrial Services (35.1% of revenue in 3Q11), which supplies services like industrial painting, surface treatment and thermal insulation, as well as equipment such as scaffoldings and aerial platforms for industrial plants; the companys main clients in this segment are large companies. The Jahu division (21.2% of revenue in 3Q11) provides concrete formwork, scaffolding and shoring for large homebuilders like Cyrela and Gafisa. Finally, the Rental segment (25.1% of revenue) focuses on the rental and sale of aerial-work platforms and telescopic handlers.
MILS3 BRL 27.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. BRL % BRL th BRL m BRL m 1m 1.0 1.6 17.8 51.7 23.77/14.49 125,495 2,234 5.4 12m -16.3 1.6
Investment Thesis
Mills is a good way to play the booming investment scenario in Brazilian infra-structure over the next few years, through reduced risk (given its broad client base) and exposure to different segments (real estate, heavy construction and industrial). Results are expected to improve in 2012. Contracts in the Heavy Construction division have already been signed, and will start demanding Mills products in 2012. As for the Jahu and Rental divisions, the ramp-up of the new units opened since the IPO tend to increase margins and ROIC. Jahus novel units were responsible for 14.6% of the divisions 3Q11 revenue, leaving room to grow. The same is true of the Rental division; new units represented 27.2% of the segments 3Q11 revenue. As for the Industrial division, we expect many of Mills unprofitable contracts to be cancelled in the year ahead, which is likely to have a positive impact on margins (we believe this segments margins, after the contracts are canceled, will return to the 15% level).
Company Performance
130 110 90 70 50 30

The ramp-up of the new units in the Jahu and Rental divisions hurt margins in 2011; however, these units have room to grow and expand margins in 2012. The lack of infra-structure in Brazil opens room for further investments in this space, which could represent new contracts in the Heavy Construction division.
Ibovespa
MILS3
Source: Ita BBA

We expect results to improve in 2012 based on: i) the ramp-up of the new units in the Rental and Jahu divisions and ii) stronger revenue in the Heavy Construction segment. The improving results are expected to generate positive momentum for Mills; this, coupled with the high-growth prospects and attractive valuation (fair value of BRL 27.0/share), justifies our outperform rating on the name.

Source: Ita BBA
2010a 550 194 103 -10 0.82 0 11.4 21.7 0.0 0.0 0.0 3.4
2011e 673 245 104 371 0.83 -99 10.6 21.5 -4.4 0.2 1.2 3.1
2012e 832 327 140 303 1.11 427 7.8 16.0 19.1 0.3 1.6 2.7
2013e 983 398 182 174 1.45 221 6.0 12.3 9.9 0.4 2.0 2.3
2014e 1,151 472 237 3 1.89 286 4.7 9.4 12.8 0.5 2.7 1.9
2015e 1,345 557 302 -215 2.41 361 3.6 7.4 16.2 0.6 3.4 1.6
Ita BBA 134
OHL ON Outperform
Company Description
OHL Brasil is among the largest operators of road concessions in Brazil. The company has the concession to operate a total of nine different roads. This includes four state concessions in the state of So Paulo regulated by ARTESP (the agency responsible for regulating transport contracts in So Paulo state) and five federal concessions regulated directly by ANTT (the national agency responsible for regulating land-based transportation), totaling 3.2 thousand kilometers of extension. The company is controlled by OHL Concessiones, a Spanish corporation that develops infrastructure projects in several different countries.
OHLB3 BRL 79.0
Stock Data
Investment Thesis
OHL has always traded at a deeper discount to fair value than its peers. This was due to market doubts over whether the company could make the investments required in the federal concessions auctions it won in 2007. There are three new developments that assuage these doubts: first, the original investment plans were not carried out because of delays in obtaining the environmental licenses, which are mandatory prior to making any investments. As a consequence, OHLs investment curve turned out to be smoother than first imagined. Note that this postponement in capex did not lead to any countermeasures by the regulators, which suggests that the postponement actually generated value for OHLs shareholders. Second, OHL has been notably successful in securing long-term agreements with BNDES for loans that enable it to make the aforementioned investments, which not only improves its cost of debt but also allows for a more favorable debt amortization schedule. Third, the ramp-up of the federal concessions coupled with the smoother capex curve helped OHL to deleverage. The companys balance sheet was once remarkably leveraged, but now it looks better, at ~1.7x net debt/EBITDA.
Company Performance
130 110 90 70 50 30

Higher levels of IPCA are another catalyst for the business, as the tariffs charged in the toll road concessions are readjusted by this index. A value driver for the toll road segment is traffic expansion, which is highly correlated with GDP growth (historically, this increase represented roughly 1.3x GDP growth). We think that contract amendments are an interesting growth route for OHL, as the company could obtain IRRs above new concession levels (~12% versus ~8%).
Ibovespa
OHLB3
Source: Ita BBA

We believe that attractive upside potential combined with the new developments that decrease OHLs risk warrant a constructive approach to this story. Accordingly, we are maintaining our outperform rating on OHL and introducing our YE12 fair value of BRL 79/share. Note that we did not factor in any sort of value in perpetuity in our fair value calculation. Instead we have only modeled each concession until its current expiration date.

Source: Ita BBA
2010a 2,185 974 304 1,620 4.41 0 5.9 13.6 0.0 1.0 1.7 3.8
2011e 2,172 1,132 364 1,990 5.28 276 5.4 11.4 6.7 0.8 1.4 3.1
2012e 2,039 1,277 393 1,994 5.70 248 4.8 10.5 6.0 2.9 4.8 2.7
2013e 2,271 1,438 443 2,002 6.43 207 4.3 9.3 5.0 3.2 5.4 2.3
2014e 2,517 1,608 501 1,894 7.28 209 3.7 8.2 5.1 3.6 6.1 2.0
2015e 2,779 1,790 580 1,664 8.42 197 3.2 7.1 4.8 4.2 7.0 1.8
Ita BBA 135
OMA Market Perform

Company Description
Grupo Aeroportuario del Centro Norte (OMA) operates 13 airports in the North-Central region of Mexico. The company operates in Monterrey, Ciudad Jurez, Reynosa, Acapulco, Mazatln, Zihuatanejo, Chihuahua, Culiacn, Durango, San Luis Potos, Tampico, Torren and Zacatecas. Monterrey is the fourth busiest airport in Mexico, which currently transports 48% of OMAs total traffic and generates 46% of its revenue. In October 2008, OMA acquired 90% of a 20-year contract to develop and operate the NH2 Hotel and around 5,000 m of commercial space inside Mexico City International Airports Terminal 2. In 2010, OMAs airports served 11.6 million passengers, generated revenues of MXN 2.6 billion and an EBITDA of MXN 941 million.
OMAB MXN 26.0 OMAB US USD 17.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg. daily vol. Performance (%) Absolute Vs. Mexbol MXN MXN MXN th MXN m MXN m 1m 5.0 6.6 22.8 13.9 27.71/19.65 399,107 9,104 5.4 12m -8.6 -2.4
Investment Thesis
The adverse economic backdrop in the aeronautical industry has led OMA to focus its business strategy on commercial opportunities and diversification into other businesses in an attempt to offset the negative impact of decreased passenger traffic. Additional profitability could come from the diversification business, generating ROE levels of 12% relative to the 9.0% in 2010. Commercial revenue could yield a CAGR 2010-15E of 11% to reach MXN 72 per passenger in 2015E as its commercial offering improves (including increased advertising, NH Hotels maturity and the possible expansion of commercial offering in Terminal 2). There could also be potential upside from these businesses in our numbers if the execution and acceptance is successful.
Company Performance
120 110

We expect a higher contribution from commercial businesses in 2012, which could boost profitability. However, the higher capex designation for the coming years could lead to higher leverage. Focus on diversifying the business to improve commercial offering and be less dependent on traffic growth. International opportunities such as Commercial businesses are highly correlated with the countrys economic situation; any slowdown could cause related investments to be postponed. Travel to OMAs border and tourist airports could decline due to recent news reports of criminal activity. Regulatory changes and variations in the airline industry could affect passenger traffic.
100 90 80 70
Dec-10 Dec-11 Jun-11 Aug-11 Feb-11 Oct-11 Apr-11
MEXBOL
OMAB
Source: Ita BBA
participating in tenders for Brazilian airports. Potential hub creation for Aeromexico and Interjet at Monterrey Airport.

OMAs new commercial diversification will likely maximize the companys return on assets. Although we welcome the commercial improvements, our main concerns for OMA are airport locations and the impact of the ongoing violence in the Northern region of Mexico and its tourist destinations. We expect traffic in 2012 to increase 2.9% YoY. OMA is currently trading at 8.0x EV/EBITDA 2012, which we consider to be a fair valuation. We maintain our market-perform rating on OMA, with a YE12 fair value of MXN 26.0 per share (USD 17.5/ADR).

Source: Ita BBA
2010a 2,651 942 551 790 0.58 169 10.5 16.5 1.9 1.0 4.4 1.5
2011e 2,770 1,078 695 992 0.49 (244) 9.4 13.1 (2.7) 1.0 4.4 1.5
2012e 2,945 1,223 727 730 0.51 458 8.0 12.5 5.0 1.0 4.4 1.4
2013e 3,265 1,377 798 810 0.63 164 7.2 11.4 1.8 1.0 4.4 1.3
2014e 3,616 1,650 948 800 0.64 348 6.0 9.6 3.8 1.0 4.4 1.2
2015e 3,887 1,903 983 54 0.69 1,157 4.8 9.3 12.7 1.0 4.4 1.1
Ita BBA 136
Randon PN Outperform
Company Description
Randon is a Brazilian leader in commercial trailers, auto parts and automotive systems. The company is highly exposed to the commercial vehicle segment, with a primary focus on the domestic market (~80% of revenue). The companys revenue is almost equally divided between commercial trailers and auto parts, although it also operates consortiums. Randon has strategic partners in its auto-part companies, such as Arvin Meritor and Jost, which bring to the company new technologies and help strengthen relationships with OEMs. Randon is controlled by the Randon family, which holds 79% of the common shares (40.6% of the total capital).
RAPT4 BRL 15.0
Stock Data
Investment Thesis
Randon has learned from its mistakes and we expect to see the company be more aggressive in gaining market share in the future. The robust growth of the truck trailer segment over the last two years caught Randon by surprise. Having taken a conservative approach, Randon did not invest in increased capacity, and the companys market share, which was 35.2% in 2009, declined to 32.2% in 2010. During this period, some of the companys competitors (particularly Librelato) had the chance to grow and look for ways to strengthen their financial position. Although we view Randons unpreparedness as negative, we believe that the company has learned from its mistakes and that it will be more aggressive in its future investment programs. Randon had a 32.9% market share in truck trailers in 1H11. Four other players (Facchini, Guerra, Librelato and Noma) have a combined 37.3% market share, while close to 30% of the market is still fragmented among many smaller players, leaving room for consolidation. Despite short-term headwinds, we forecast a positive scenario for the truck industry in Brazil. Notwithstanding the decline in truck production in 2012, we have a positive view for the industry based on: i) Brazils dependency on road transportation (~60% of the transportation matrix); ii) the high average age of the Brazilian fleet (14.6 years); iii) the fact that logistic companies are growing and becoming more formal; and iv) better access to credit (independent truck drivers still own 55% of the Brazilian truck fleet, with an average fleet age of 20 years; increased access to credit is likely to accelerate the renewal of this fleet.)
Company Performance
130 110 90 70 50 30
Ibovespa
RAPT4
Source: Ita BBA

Short-term results might bring headwinds. The adoption of the Euro 5 technology in Brazil (which will raise new truck prices by ~15% in 2012), led to pre-buying of new trucks in 2011. Therefore, we expect truck production to fall by 10% in 2012, highly concentrated in 1Q12. A positive trigger would BNDES launching of a special financing line (Finame Verde) for the acquisition of technology. trucks that use Euro 5
The announcement of an investment program would be positive, as it would show that Randon has adopted a more aggressive strategy to prevent repeating past mistakes.

Given the companys strategic positioning, which will allow it to enjoy the positive long-term trends, and its attractive upside potential, we rate Randon as an outperform with a YE12 fair value of BRL 15.0.

Source: Ita BBA
2010a 3,719 532 249 294 1.02 0 4.8 8.6 0.0 0.0 0.0 1.8
2011e 4,102 611 277 152 1.14 0 4.0 7.7 0.0 0.3 3.8 1.6
2012e 4,442 674 272 162 1.12 0 3.6 7.9 0.0 0.5 6.2 1.4
2013e 4,916 750 314 164 1.29 0 3.3 6.8 0.0 0.6 7.2 1.3
2014e 5,435 832 323 176 1.33 0 3.0 6.6 0.0 0.7 7.5 1.2
2015e 5,971 917 351 183 1.44 0 2.8 6.1 0.0 0.7 8.2 1.1
Ita BBA 137
Romi ON Underperform
Company Description
Located in Santa Barbara DOeste, in the interior of So Paulo, Romi manufactures machine tools (~60% of revenue), plastic-injection molding machines (~20% of revenue) and castings (~20% of revenue). Romis main competitive advantages are its technical support network and the availability of an attractive financing line from BNDES (FINAME finances products with 65% local content). Because technology is crucial to the companys clients, Romi invests around 4% of its revenue in R&D, and more than half of the companys revenues come from products developed in the last three years. Romi is listed in Bovespas Novo Mercado with a 52.6% free float.
ROMI3 BRL 7.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 14.0 14.7 6.9 5.1 13.38/5.25 74,758 512 0.3 12m -45.5 -33.9
Investment Thesis
The scenario is likely to remain challenging for Romi (particularly for its Plastic Injection business), as we do not expect any major depreciation in the BRL. Margins are expected to continue to be pressured (we expect gross margin at this segment around 30%, which might translate into a slightly negative EBIT margin) by the still-weak investment scenario in Brazil and the fierce competition from imported products, particularly those from China that compete with products from the Plastic Injection division. Given the difficult scenario, we expect Romi to further tighten its control on costs, expenses and the cash cycle. Romi has already shown its ability to rein in costs and expenses during rough times; we are now likely to see even tighter working-capital and capex controls, which will be necessary in order to ensure a positive cash flow. On the positive side, Romi is investing in technology and signing technology transfer contracts with foreign companies. Furthermore, the company is reinforcing its sales force abroad in order to increase its geographic diversification; the external market still represents 12% of the companys revenue. We expect to see some recovery in the castings segment; this segment, which benefits from the higher investments in eolic energy plants, posted a negative 9% margin in 9M11 due to its low installed capacity utilization (less than 40%), which is expected to increase to ~60% in 2012.
Company Performance
130 110 90 70 50 30
Ibovespa
ROMI3
Source: Ita BBA

An increase in the companys backlog Any depreciation in the BRL is positive for the company, as it reduces competition with foreign players. depends on a higher-investment scenario in Brazil, particularly from small and medium-size companies willing to increase capacity.

The uncertain macro scenario will likely prevent companies from increasing investments in 1H12, while competition from foreign players (particularly the Chinese in the plastic-injection machine segment) is expected to remain fierce. That said, the challenging scenario and the companys unattractive valuation prevent us from having a more constructive approach on Romi. We therefore rate the company as underperform, with a YE12 fair value of BRL 7.2/ROMI3.

Source: Ita BBA
2010a 674 99 68 -9 0.91 26 5.1 7.5 5.0 0.3 4.7 0.7
2011e 663 55 27 17 0.35 53 9.6 19.3 10.4 0.1 1.7 0.7
2012e 731 77 34 -7 0.46 44 6.6 15.0 8.7 0.2 2.2 0.7
2013e 802 93 45 -30 0.60 63 5.2 11.4 12.3 0.2 2.9 0.7
2014e 877 109 57 -41 0.76 107 4.3 9.0 20.9 0.3 3.7 0.6
2015e 964 128 69 -57 0.93 121 3.6 7.4 23.7 0.3 4.6 0.6
Ita BBA 138
Santos Brasil UNIT Outperform

Company Description
Santos Brasil is a Brazilian enterprise that provides port handling and logistics services. The company holds the concession to operate three container terminals in Brazil: Tecon Santos in So Paulo, which is the largest container terminal in South America; Tecon Imbituba in Santa Catarina; and Tecon Vila do Conde in Par. Santos Brasil also operates the largest vehicle terminal in Brazil, located in Santos (it has the capacity to provide a throughput of 290 thousand vehicles annually). Handling of containers, warehousing and logistic services, and handling of vehicles, respectively, account for 47%, 48%, and 5% of Santos Brasil consolidated gross revenues (as of 9M11).
STBP11 BRL 39.0
Stock Data
Investment Thesis
We currently have a constructive approach to the Santos Brasil story. Our view is supported by three arguments: i) strong cash flow generation and consequent balance sheet deleveraging in the short term (from 1.5x net debt/EBITDA to 0.3x in 2013); ii) ongoing good operating momentum (EBITDA margin above 40% and around 10% YoY expansion in revenues); and iii) attractive valuation (~14x P/E 2012). We see these three factors as reason enough to be more bullish on the story. Separately, we highlight that the significant boost in cash flow generation we expect from 2012 onwards implies that a significant portion of the value we estimate for Santos Brasil is in the short term. Roughly 18% of our estimated fair equity value for the stock lies within the first three years of our forecast. This decreases the risk of the investment substantially and provides further support for our bullish view.
Company Performance
130 110 90 70 50 30

We see two main risks to our investment thesis: i) FX: warehousing services are a vital part of the companys business model. If the BRL depreciates substantially, import flows are likely to weaken, thus affecting warehousing revenues; and ii) a legal dispute between shareholders: two controlling shareholders are currently battling it out for the control of the company. We are unable to assess the likely outcome of this dispute, which poses a risk to our investment thesis. Stronger international trade in Brazil boosts Santos Brasils revenues. New port concessions in Brazil. There are at least two new opportunities ready to come to the market: port of Manaus and Prainha area at the port of Santos. Should Santos Brasil win any of the auctions at accretive returns, this could be a trigger to the stock.
Ibovespa
STBP11
Source: Ita BBA

We currently rate Santos Brasil an outperform. We believe that the potential for cash flow generation in the short term coupled with valuation multiples below international peers make for a compelling investment opportunity. Our YE12 fair value of BRL 39.0/share is a result of a DCF model that uses perpetuity growth of 4.5% and WACC of 12.5%, both in nominal BRL.

Source: Ita BBA
2010a 866 309 112 359 0.85 -242 12.2 30.6 -7.1 0.3 1.2 2.8
2011e 1,171 498 212 332 1.62 179 7.5 16.2 5.2 0.4 1.5 2.5
2012e 1,330 571 271 149 2.07 319 6.3 12.6 9.3 1.0 4.0 2.3
2013e 1,447 625 323 -56 2.46 367 5.4 10.6 10.7 1.2 4.7 2.0
2014e 1,473 630 345 -272 2.63 389 5.0 9.9 11.3 1.3 5.0 1.9
2015e 1,451 609 349 -490 2.66 392 4.8 9.8 11.4 1.3 5.1 1.7
Ita BBA 139
Tegma ON Outperform
Company Description
Tegma is a Brazilian company that provides integrated logistics services and has warehouses located in different states of Brazil, including So Paulo, Rio de Janeiro, Minas Gerais and Rio Grande do Sul. Its businesses operate in two segments: the Automotive and the Non-Automotive, which represented 84% and 16% of consolidated EBITDA in 3Q11, respectively. The first division is Tegmas cash cow (the company has a 30% market share in Brazil), comprising automobiles and auto-parts transportation, storage control, yard management and also automotive auctions for financial institutions. In the NonAutomotive segment, Tegma transports consumer and industrial goods, such as e-commerce products, electronics, chemicals, pulp and paper.
TGMA3 BRL 29.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -2.2 -1.6 25.6 13.3 27.96/18.05 66,003 1,689 1.5 12m 8.2 31.4
Investment Thesis
Our positive approach towards Tegma is based on several factors. First, the company is a way to play the positive scenario of car sales in Brazil in the coming years without incurring the BRL appreciation risk. The company takes advantage of higher volumes of both imported and domestic cars sales. Consequently, the increasing number of imported cars purchased in Brazil is not a concern for Tegma, as it is for the auto-part manufacturers. Second, Tegma has the highest ROE and ROIC among its peers (27% and 22% for 2012, respectively). The company outsources most of its equipment, which means lower capex needs and a variable cost structure. Furthermore, the company focuses only on profitable contracts (for example, it canceled some contracts in 2010 that proved to be non-profitable). Therefore, the asset-light model coupled with profitability focus has helped the company generate strong returns. Third, its strong track record of acquisitions, the most recent being the acquisition of Direct. This allowed Tegma to increase its client portfolio (Direct has all the e-commerce sites as clients) and to cross-sell to its current portfolio (which is, besides the delivery of inventories to the distribution centers, now Tegma might offer to distribute these products to the final consumer), therefore leading the NonAutomotive segment to experience strong growth rates from this year on.
Company Performance
130 110 90 70 50 30
Ibovespa
TGMA3
Source: Ita BBA

Direct is a value driver for the company, as it brings the last-mile knowledge to Tegmas current customer base. It also increases Tegmas actual client portfolio. Tegma is already negotiating with OEMs that announced substantial investments in Brazil in the next years, which might represent new contracts. Brazilian companies are experiencing a logistics outsourcing trend, delegating to third parties the task of inventory management and distribution in order to focus on core businesses and reduce costs.

We think that Tegma is an attractive way to benefit from the positive environment for vehicle sales in Brazil and to enjoy consolidation and growth in logistics services in the Non-Automotive division, with an upside risk coming from further acquisitions. For that reason, we reaffirm our outperform recommendation for Tegma and our YE12 fair value of BRL 29.0.

Source: Ita BBA
2010a 1,167 181 106 27 1.61 -34 9.5 15.9 -2.0 0.0 0.0 4.0
2011e 1,495 199 107 161 1.61 27 9.3 15.9 1.6 0.9 3.5 4.1
2012e 1,676 224 129 126 1.95 101 8.1 13.1 6.0 1.0 3.8 3.5
2013e 1,825 254 150 82 2.27 120 7.0 11.3 7.1 1.1 4.4 3.0
2014e 1,976 283 171 27 2.58 161 6.1 9.9 9.5 1.3 5.0 2.6
2015e 2,132 313 192 -38 2.92 129 5.3 8.8 7.6 1.5 5.7 2.3
Ita BBA 140
WEG ON Underperform
Company Description
With plants in Brazil, Argentina, Portugal, China, Mexico and India, WEG is one of the largest electric motor manufacturers in the world. The company also manufactures generators, transformers and automation products. Over the years, WEG has gained client recognition as a provider of energy solutions, based on its broad product portfolio and the synergies between different segments. The Industrial Equipment segment represents 58% of the companys total revenue, followed by the GDT segment (24.6%), Motors for home appliances (10.5%) and Paints and Varnishes (6.5%). In 2010, the domestic market represented 61% of the companys revenue, while 32% of sales came from Brazilian exports, and the remaining 7% came from products manufactured and sold abroad.
WEGE3 BRL 19.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 9.3 10.0 19.1 (0.4) 22.22/14.51 617,627 11,797 5.3 12m -6.6 13.4
Investment Thesis
WEGs notable track record for growth (14% 2000-10 EBITDA CAGR) is attributable to its ability to develop new products and enter new regions. The companys track record for quality has strengthened its relationship with clients, who have started to perceive WEG as an energy-solution provider, rather than just an equipment manufacturer. Industrial electric motors represent 25% of global energy consumption. In a scenario of ever-increasing energy prices, WEGs growth in the Industrial Equipment segment is a consequence of both new investments and the replacement of existing motors, as new motors tend to have lower energy consumption. Because investments in renewable energy tend to increase, WEG is diversifying its product portfolio and entering new segments like eolic energy. On the negative side, the competitive landscape in Brazil is becoming fiercer; this, coupled with rising costs, could pressure margins. We therefore do not expect the companys EBITDA margin to return to the historical 22%-24% level over the next four years.
Company Performance
130 110 90 70 50 30

Room for international expansion and an increased product portfolio. We expect WEG to continue to gain market share abroad, in both the Industrial Equipment and GDT segments. Furthermore, the company could expand its portfolio of products, particularly through acquisitions. FX rates affect the companys results, given that ~40% of its revenue is generated by the external market. WEGs plants in India and in the state of Esprito Santo are expected to ramp up during 2012, benefiting the companys margins (we expect a ~200 bps increase in EBITDA margin in 2012).
Ibovespa
WEGE3
Source: Ita BBA

Despite WEGs strong fundamentals and track record for growth, we have an underperform recommendation on the name, with a YE12 fair value of BRL 19.0/share. In our view, the companys valuation remains stretched, while the DCF-based upside potential is unattractive. We believe that both the uncertainty regarding the companys margins and the lower-than-average ROIC in the next few years (average 17% between 2012-15, compared with the historical ~20%) leave no room for an expansion in multiples. Although we do not question the fact that this is a high-quality company, the more challenging scenario going forward might require a discount to historical multiples.

Source: Ita BBA
2010a 4,392 786 521 -80 0.84 731 14.9 22.6 6.2 0.4 2.2 3.4
2011e 4,941 919 641 -511 1.04 383 12.3 18.4 3.3 0.5 2.7 3.2
2012e 5,587 1,164 745 -735 1.21 592 9.5 15.8 5.0 0.6 3.3 3.0
2013e 6,506 1,374 879 -957 1.42 586 7.9 13.4 5.0 0.7 3.9 2.7
2014e 7,324 1,564 1,013 -1,264 1.64 712 6.7 11.6 6.0 0.9 4.5 2.4
2015e 8,306 1,793 1,172 -1,609 1.90 777 5.7 10.1 6.6 2.0 10.4 2.4
Ita BBA 141
Wilson Sons UNIT Market Perform

Company Description
Wilson Sons is a company registered in Hamilton, Bermuda, that provides an extensive array of services related to international trade as well as the oil and gas industry. The sole focus of the companys business is Brazil, and its main operating activities are divided into the following six segments. Port Terminals (47% of EBITDA): Wilson Sons has a concession to operate two public container terminals, one in Salvador and the other in Rio Grande. The company also has a private port (Brasco) focused on providing support to the offshore industry. Towage (27% of EBITDA): Wilson Sons is the largest towage-service provider in Brazil, boasting the largest fleet of tug boats in South America (~70 boats). Logistics (15% of EBITDA): The company provides customized logistic services like warehousing and supply-chain solutions to companies operating in Brazil. Shipyard (5% of EBITDA): Wilson Sons has strategic shipyards for the construction of tug boats and OSVs. Offshore (5% of EBITDA): The company operates a fleet of OSVs that provide support for the oil platforms in Brazil. Ship Agency (1% of EBITDA): Wilson Sons is the oldest ship agent in Brazil, providing services like documentation and container control, among others.
WSON11 BRL 37.0
Stock Data
Investment Thesis
We continue to be bullish on Wilson Sons growth trends, as we believe that the companys current investment plan will allow it to take advantage of the surging growth in the Brazilian oil and gas industry in the coming years. That said, a combination of rich valuation multiples and several years of negative cash-flow generation (which will likely prevent valuation multiples from contracting substantially in the foreseeable future) keep us from becoming more upbeat on the stock. Wilson Sons short-term valuation multiples are far from being a bargain. The company trades at a premium to both Santos Brasil and its international peers. On the flipside, we see attractive upside for the stock from a DCF perspective. However, we note that the prospect of several negative cash-flow-generation years ahead also indicates that most of the companys value in our model is in the very long term, which implies that investors are likely to have better entry points in the future.
Company Performance
130 110 90 70 50 30
Ibovespa
WSON11
Source: Ita BBA

Petrobras auctions for the construction and operation of OSVs. Wilson Sons usually bids at these auctions, and any winning bid could be a market-mover for the stock. Wilson Sons container terminals have a greater focus on export flows. Accordingly, a USD appreciation is supportive of volumes. Increasing international trade volume in Brazil boosts both towage and port-terminal revenue.

Although constructive on Wilson Sons growth prospects, the already-rich valuation multiples and the likelihood of several negative-cash-flow generation years ahead prevent us from becoming bullish on the stock. Accordingly, we have a market-perform rating on the company. Our YE12 fair value of BRL 37.0/BDR is DCF-driven and assumes 3% growth in perpetuity and 7.4% WACC, both in nominal U.S. dollars.

Source: Ita BBA
2010a 565 113 62 164 0.87 8 9.9 15.5 0.9 0.3 2.6 2.1
2011e 701 140 57 369 0.81 23 9.5 16.7 2.4 0.2 1.7 1.9
2012e 760 168 59 538 0.83 55 8.9 16.3 5.8 0.2 1.4 1.8
2013e 840 185 60 651 0.84 104 8.7 16.1 10.8 0.2 1.5 1.6
2014e 919 209 71 742 1.00 129 8.1 13.5 13.5 0.2 1.7 1.5
2015e 1,007 236 84 813 1.18 155 7.5 11.5 16.1 0.3 2.0 1.4
Ita BBA 142
Oil, Gas & Petrochemicals
Paula Kovarsky, CNPI +55-11-3073-3027 paula.kovarsky@itaubba.com
Diego Mendes, CNPI +55-11-3073-3029 diego.mendes@itaubba.com

Ricardo Cavanagh, CFA (Argentina) +54-11-5273-3593 ricardo.cavanagh@itau.com.ar
OIL, GAS AND PETROCHEMICALS

About the Sector
While geopolitical uncertainty prevails in the Middle East, no volume disruption would be large enough to cause a significant reduction in oil prices. The recent strength of the WTI further reinforces our belief that oil prices are unlikely to fall below USD 100/bbl anytime soon. Meanwhile, petrochemical prices are likely to remain pressured by weaker demand, while the growing share of gasbased crackers offers lower support to resin prices from a cost standpoint. Brazil continues to be very attractive for the oil industry, combining exploration potential with economic stability. The Brazilian government could help by easing the regulatory uncertainty and calling for new bidding rounds, relieving Petrobras of its operatorship obligation in the PSCs, or being more pragmatic about local content. While acknowledging that production growth targets are aggressive across the board, the companies guidance average is 3.1 mboepd by 2015, which implies 50% growth over 2011. We expect the Brazilian oil industry to continue expanding fast. We believe that Colombias oil industry might be entering a second growth phase, boosted by investments to increase recovery factor; while the environment in Argentina remains challenging for the countrys oil industry. Diego Mendes, CNPI +55-11-3073-3029 diego.mendes@itaubba.com Ricardo Cavanagh, CFA (Argentina) +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Paula Kovarsky, CNPI +55-11-3073-3027 paula.kovarsky@itaubba.com

Petrobras continues to be the growth engine for both Brazil and its oil industry, fueling the market with its USD 224 billion five-year investment program. Looking at oil-industry fundamentals, it is impossible to dispute Petrobras long-term potential; but for the potential to materialize, the current level of investments will likely have to continue far longer than its strategic five-year plan. Concerns regarding Petrobras ability to deliver on production growth promises and questions on capital discipline caused a Junior E&P boom in Brazilian capital markets. However, reality hit Brazilian Junior E&P valuations pretty hard, reflecting the painful learning process related to the difference between contingent and prospective resources and D&M reports and production. High risk aversion makes it a tough scenario for these names in the short term, although the de-rating caused valuation to look quite attractive; none of the names we cover, including Colombia, have prospective resources trading anywhere near USD 1/boe. The ability to deal with local content (up to 70%) is positive for OGX and QGEP, whose controlling groups have strong commitments to the oil-service industry in Brazil. The latter has proven to be a welcome partner for Petrobras, while OGXs independence makes it an attractive partner for IOCs willing to play Brazil independently.
Catalysts
Amid the turbulence, we believe that oil-related names will be a good investment option, but positive news on the macro scenario will likely favor commodities other than oil. Production ramp-ups are the main catalysts for PBR and OGX. The results of the exploration campaign are important for QGEP and HRT, which also has a potential farm-out in Namibia. New reserve reports are triggers for OGX and PRE, while results of the STAR test will affect the latter.

Our top picks in the sector are PRE, QGEP and TS. Both PRE and QGEP offer a good combination of production, cash flow generation, and exploration potential. PRE continues to trade close to its 2P valuation (CAD 19.9/PRE CN) as the market ignores the companys potential to replace the Rubiales production by 2016; we expect this to change as the first barrels of CPE6 are booked as reserves. QGEP has two important catalysts ahead, the Santos 2 and 4 prospects, which together could add BRL 4.5/QGEP to our fair value. Tenaris is a great option to play oil strength versus weak iron ore and scrap prices. Ultrapar remains our safe bet through the turmoil. Petrobras might be a defensive option as well, betting on the strength of oil prices and the likelihood that domestic diesel and gasoline prices remain unchanged. But production growth is the main potential short-term catalyst, and we only expect consistent improvements toward 2013. High risk aversion and initial production ramp-up challenges make OGX a better choice for 2H12, by which point a new D&M becomes available, and exclude HRT as an option. Assuming a pickup in the Brazilian economy in 2H12, Braskem might be a cheap way to play domestic growth. The negative momentum in Argentina reduces YPFs chances of performing in the short term. Ecopetrol has been a good option so far, combining execution (18% production growth) and leverage on oil, but a potential share issuance remains an overhang on the story.
Ita BBA 144
WTI vs. Brent

160 140 120
Petrochemical Spreads
1,000
800
USD/Ton
100
600
USD/bbl
80 60 40 20 0 Jan-08
400
200
Jul-08
Jan-09
Jul-09 Brent
Jan-10
Jul-10 WTI
Jan-11
Jul-11
Jan-12
0 Jan-07
Oct-07
Jul-08
Apr-09
Jan-10 PP - Naphtha
Nov-10
Aug-11
PE - Naphtha
Junior Companies Oil Production

450 400 350
Pipe Prices vs. Raw Material Costs

3500 3000 2500 2000 60 1500 1000 500 0 Jan-08 40 20 0 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 120 100 80
Base 100 (Jan 2008)
KBPD
250 200 150 100 50 0 2011e 2012e OGX HRT 2013e QGEP 2014e PRE 2015e
USD/Ton
300
Seamless Pipes
Source: Pipelogix, Bloomberg and Ita BBA
Iron Ore & Scrap
Source: Companies and Ita BBA
Prospective Resources Valuation

OGXP3 a b Reserves (mm boe) Reserves Exclusion (mm boe) 10,800 3,695 We excluded from our calculation i) CesarRancheria Basin, ii) Parnaba Basin - w e considered only 1.1 TCF of gas and iii) the Santos Basin c =a-b Reserves Considered (m m boe) Pricing for Producing/Contingent Resources d Volume Considered (mm boe) 3C 3P 3,000 0 3C reseources 87 0 3C oil reserve Certified by D&M 42 81 3C +3P reserves Certified by GCA 350 0 2P Reserve estimated by Petrotech and RPS 7,105 Cam pos Basin HRTP3 6,807 4,318 We excluded Gas in the Solimes Basin and Gas in Namibia in the absence of an economic commercialization route + 50% of Namibia Oil 2,489 Solim es We are assuming 381mmm boe from the GCA's report + 500 mm boe for BMS8 (QGEP's share 50 mmboe) + 2100 mm boe OOIP for BS-4 (considering 10% recovery factor and 30% share to QGEP = QGEP's share 63 mm boe) 494 Cam am u basin Inlcudes 2P reserves and prospective resources. Does not include leads nor the STAR 1,260 2P @ Target QGEP3 494 PRE CN 1,260
Barrels Valued at (US$/boe) 3C 3P 8.3 0.0 11.4 0.0 12.2 15.2 16.7
Discount to fair value 3C 3P 30% 0% 30% 0% 30% 0% 30% 0%
g =e/(1-f) Barrels Valued at (US$/boe) - Discounted 3C 3P 6.4 0.0 @ 30% discount to Fair Value h =g*d i j k =i/j l m =k*l n o =m +n p =o-h q r =p/q Total value (US$ m m ) Share Price (Local Curency) Local Currency/USD Share Price (USD) # of shares Market Cap (USD mm) Net Debt (USD) Current EV (US$ m m ) Current EV ex-contingent/producing barrels (US$ mm) Reserves ex-Barrels priced above EV/Boe of the rest of the portfolio 19,154 R$ 15.9 1.77 $9.0 3,232.0 29,139 (1,020) 28,119 8,965 4,105 2.18 8.8 0.0 @ 30% discount to Fair Value 763 R$ 464.0 1.77 $262.8 6.4 1,669 (1,088) 581 -182 2,402 -0.08 9.4 15.2 3C @ 30% discount to Fair Value and Producing/3P Fair Value 1,628 R$ 15.6 1.77 $8.8 265.8 2,341 (225) 2,116 488 371 1.32 0.0 16.7 3C @ 30% discount to Fair Value and Producing/3P Fair Value 5,845 C$ 23.5 1.01 $23.3 267.6 6,231 110 6,341 496 910 0.55
Note: * We are assuming 500 mm boe for BMS8 (QGEP's share 50 mmboe) + 2100 mm boe OOIP for BS-4 (considering 10% recovery factor and 30% share to QGEP = QGEP's share 63 mm boe)
Source: Ita BBA
Ita BBA 145
Braskem PNA Market Perform

Company Description
Braskem is Latin Americas largest petrochemical company, with a resin production capacity of more than 12 million tons. Braskem produces ethylene (the largest producer in Latin America), propylene and benzene, as well as gasoline and LPG. The company is also the leading Latin American thermoplastic resin producer (PE, PP, PVC and other resins). In 2010, Braskem strengthened its position in the Brazilian market through the acquisition of Quattor for USD 1.4 billion. The company also widened its international footprint through the purchase of Sunocos PP plants in the U.S and Dows U.S and European PP assets (2 MTPY in total), as well as through the construction of a million-ton gas cracker in Mexico, aiming to become one of the top five global petrochemical companies by 2020.
BRKM5 BRL 22.0 BAK USD 25.2
Stock Data
Investment Thesis
Braskem has a solid track record for operational efficiency and cost control, which is fundamental for a company that operates in a cyclical business, and interesting expansion projects, particularly in Mexico (1MTPY PE capacity and USD 3 billion capex), which currently imports most of its PE needs. However, the macro scenario looks quite challenging. We foresee limited room for a significant drop in oil prices, while petrochemical prices continue to be affected by weaker demand (PP -7% YTD, PE -11% YTD). To complicate the story further, gas-based crackers now represent a higher share of the petrochemicalproduction matrix, especially in the U.S. (from 50% in 2008 to 80% in 2011), offering lower support to resin prices from a cost standpoint given the decoupling from oil. Domestic demand-growth for petrochemical products will likely decelerate in 2012 to 7%, from 9.4% in 2011, following the lower GDP forecast; we expect domestic producers to capture a significant portion of this growth next year.
Company Performance
140 120 100

Braskems main drivers are the petrochemical spreads, FX, and domestic demand. Resin spreads are the main driver of the companys profitability. Spreads are currently pressured by the economic slowdown (which affects demand) and high oil prices. 100% of Braskems sales are USD-linked, while 85% of COGS are USD-linked; BRL depreciation helps the companys bottom line. Braskem sells resins in the domestic market at ~10%-20% premium to the international market. Domestic market expansion improves the companys sales mix and margins. The termination of the 9% ICMS tax benefit on imported products could reduce competition with imported products.
80 60 40
Ibovespa
BRKM5
Source: Ita BBA

We have a market-perform recommendation and YE12 fair value of BRL 22.0/BRKM5 (USD 25.2/BAK). Braskem has been diligently cutting costs and improving asset efficiency to face a possible economic deceleration. We ran a sensitivity analyses on Braskems model to test the robustness of our estimates against further deterioration of the scenario. If we assume that current spreads (PE USD 420/ton and PP USD 505/ton) remain flat throughout 2012, ceteris paribus, we would reach an EBITDA of BRL 3.8 billion, implying 4.8x EV/EBITDA12, which is still within historical levels. However, another couple of weak quarters ahead, along with the risk of further worsening of the global economic scenario depressing the global petrochemical outlook in the short term, will likely discourage investors from looking at the name for the time being. That said, we believe that Braskem could be a good investment option for the second half of 2012, leveraging on a potential local economic rebound (Ita BBAs economists expect a 7% annualized GDP in the 2H12).

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EV/EBITDA P/E Dividend yield (%)
Source: Ita BBA
2010a 25,493 3,964 919 9,868 5.1 11.3 0.0
2011e 33,008 3,817 145 10,455 5.5 n.m. 0.6
2012e 34,049 4,343 1,432 10,442 4.8 7.2 0.6
2013e 35,425 4,860 1,308 11,069 4.4 7.9 3.2
2014e 36,410 5,360 1,859 10,648 3.9 5.6 4.5
2015e 38,359 5,442 1,857 9,259 3.6 5.6 4.5
Paula Kovarsky, CNPI +55-11-3073-3027 paula.kovarsky@itaubba.com Diego Mendes, CNPI +55-11-3073-3029 diego.mendes@itaubba.com
Ita BBA 146
Comgs PNA Market Perform

Company Description
Comgs is a regulated utility in the state of So Paulo responsible for the distribution of piped natural gas to residential, retail and industrial customers, NGV, power producers and cogeneration plants within its concession area, which represent 18% of Brazilian gas demand. The company is well managed and enjoys an efficient infrastructure. It has a track record of delivering strong results (13% volume CAGR99-10) while regulated by ARSESP, the So Paulo state energy agency. Comgs was privatized back in 1999 and began the expansion of its infrastructure to target larger customers, especially in the industrial segment. More recently, the company adjusted its focus to less volume-intensive but highermargin residential and commercial segments, targeting the addition of 100 thousand clients per year.
CGAS5 BRL 47.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 9.3 10.0 42.8 9.9 49/31 119,823 5,122 2.8 12m 15.1 39.8
Investment Thesis
Comgs growth over the last few years was capped by the lack of firm gas contracts, as Petrobras prioritized the thermoelectric plants. Our forward-looking gas supply/demand view for Brazil, however, calls for a gas over-supply of more than 30 mm /d in the country over the next five to ten years, and consequently, lower gas prices. This scenario will likely allow Comgs to grow again. Furthermore, the announcement of a potential move into the Novo Mercado is also positive news for the company.
3

Comgs growth is based on gas availability, which will likely increase in the medium to long term. The main short-term catalyst for the story relates to the move to Novo Mercado. We expect Petrobras and independent players to increase gas availability in Brazil. More attractive prices (below USD 8/Mmbtu), from interruptible auctions or driven by the need to open new markets for gas, will likely stimulate demand, supporting Comgs long-term 5% p.a. volume growth. The company is studying a potential move to the Novo Mercado to increase its free float. In our view, controlling shareholders will likely sell shares in excess of the controlling block rather than issue new shares to achieve the Novo Mercado 25% minimum free float.
Company Performance
140 120 100 80 60 40
Ibovespa
CGAS5
Source: Ita BBA

We have a market-perform recommendation on Comgs and a YE12 fair value of BRL 47.0/CGAS5. The companys decision to move to the Novo Mercado will, in our view, likely resolve the three main issues constraining the stocks performance: i) liquidity (currently at BRL 3 million/day); ii) concentration of the shareholder base (two significant minority shareholders); and iii) limited communication with investors. If the Novo Mercado move is approved, we believe that it will attract new investors to the name, especially if the transaction results in a free float greater than 25%.

Source: Ita BBA
2010a 4,095 1,188 580 1,308 4.84 157 5.4 8.8 3.1 4.8 11.2 3.7
2011e 4,043 767 251 1,777 2.09 785 9.0 20.4 15.3 2.1 4.9 3.9
2012e 4,420 986 455 1,903 3.80 1,101 7.1 11.3 21.5 3.0 7.1 3.7
2013e 4,719 1,133 505 1,955 4.22 301 6.2 10.1 5.9 3.2 7.4 3.4
2014e 4,730 1,208 540 2,092 4.51 345 6.0 9.5 6.7 3.8 9.0 3.2
2015e 4,981 1,255 558 2,191 4.65 455 5.8 9.2 8.9 4.0 9.3 3.0
Ita BBA 147
Ecopetrol Market Perform

Company Description
Ecopetrol is Colombias national oil company and the largest integrated oil and gas producer in the country, holding 1.7 billion boe of proved reserves (YE10) and producing 730 kboepd (2011E). Until 2004, EC held conflicting roles, acting as both the contractor and operator in the exploration and production business, which hindered competition. The creation of the ANH, which became the counterparty for all new exploration contracts, and the end of the companys obligation as operator, opened room for Ecopetrol to shift its strategy toward exploration while coping with its NOC role. But the shift in strategy was particularly notable after the IPO in 2007, when the company started to focus on production growth and return improvements Ecopetrols production has almost doubled since, making it one of the worlds top-20 oil producers. The company targets 1300 kbpd production in 2020.
EC USD 52.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute USD % USD th USD m USD m 1m 7.2 45.7 15.4 46.35/37.48 2,023,626 92,399 13.7 12m 15.7
Investment Thesis
ECs ability to deliver on its production-growth promises (18% in 2011), combined with higher oil prices and diligent cost controls, led the company to deliver consistent EBITDA margin improvements over the last five years, from less than 30% in 2008 to 47% in 3Q11, and has made it an outstanding name in the oil industry. Furthermore, EC remains committed with returns. The company recently issued a new investment plan (USD 80 billion 2012-2020) with an increased focus on E&P and Colombia (90% of total capex), which we believe will likely contribute to a high ROCE over the next three years 25% on average, higher than both that of its NOC peers (16%) and large IOCs (19%) while leveraging on higher oil prices and reducing execution risk.
Company Performance
114 104

Ecopetrol trades at high multiples (12.6x PE12 versus 7.7x IOC Majors average), reflecting growth and becoming a priced-to-perfection story. Therefore, keeping up with the production growth supported by new finds is the key to sustaining the companys performance. Furthermore, the lack of visibility on the upcoming capital increases (primary and secondary, which are expected to total USD 16 billion) will likely continue to constrain the stocks performance.
94 84
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
EC
Source: Ita BBA
Ecopetrol targets production of 730 kbpd in 2011, 1000 kbpd in 2015 and 1300 kbpd in 2020. Reaching these targets is important to supporting the companys premium valuation. Production targets require significant reserve additions. EC expects to add 5 billion boe in reserves over the next nine years. We foresee good prospects for improving recovery factors reducing the risk, but it is still challenging.
The company plans to issue another 8.3% through a primary offering, completing the 20% free float approved prior to the IPO. The Colombian government is also trying to approve the floating of an additional 10% through a secondary offer. Depending on the offering structure and schedule, this could imply a long-term overhang for the stock. According to EC, the primary offer is not in the cards for 2012.

We have a market-perform recommendation and YE12 fair value of USD 52.7/EC. In our view, the final format of the upcoming share offering will be the key to understanding its potential impact on the stocks performance. If Ecopetrol carries out the successive offers within the remaining 8.3% of the already-approved primary offer and the governments 10% secondary float, the overhang could be high and long lasting. According to local press, the goal is to carry it out in four tranches (2012-13-14-15). If the company decides to carry out a single offering, it could become a liquidity event through the ADRs; reducing the potential overhang and creating opportunities for foreign investments in the company.

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) Net debt (USD m) EPS EV/EBITDA P/E DPS (USD) Dividend yield (%) P/BV
Source: Ita BBA
2010a 22,109 8,797 4,292 2,538 2.12 10.8 21.5 0.0 0.0 4.3
2011e 34,606 16,304 8,225 1,890 4.06 5.8 11.2 0.4 0.9 3.4
2012e 33,681 14,605 7,311 -35 3.61 6.4 12.6 0.6 1.4 2.9
2013e 34,969 14,498 7,335 39 3.62 6.4 12.6 0.6 1.4 2.5
2014e 38,170 15,757 7,276 426 3.60 5.9 12.7 0.6 1.4 2.1
2015e 41,062 16,859 8,100 -399 4.00 5.5 11.4 0.7 1.5 1.9
Ita BBA 148
Dec-11
Jun-11
HRT ON Market Perform

Company Description
HRT currently operates 21 blocks in the Solimes Basin in the Brazilian Amazon region and 10 blocks in Namibia, of which five are located in the Walvis Basin and five in the Orange Basin. The company also holds a 2.85% working interest in two blocks in the Namibe Basin and a 10% stake in four exploration blocks in Brazil, and it offers geological and geophysical (G&G) services through its subsidiary, IPEX. According to DeGolyer & MacNaughton (D&M), HRTs total analyzed resources in Namibia add up to 5.9 billion boe (4.3 billion boe of oil and 1.6 billion boe of gas), while HRTs net risked resources in the Solimes Basin total 964 million boe (353 million boe of oil, 25% contingent, and 619 million boe of gas, 73% contingent). The companys total resource portfolio amounts to 6.9 billion boe.
HRTP3 BRL 1350.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -38.7 -38.3 406.5 232.1 2220/381 6,353 2,582 36.9 12m -74.4 -68.9
Investment Thesis
Setbacks in its first wells confirmed the 25% success rate indicated by D&M, which cast some doubt on the companys widely announced upside potential in the Solimes Basin, adding to the challenges of developing resources (if found) in a sensitive environment. The company finally formed a partnership with TNK-BP (USD 1.05 billion for a 45% stake in the Solimes blocks), which could help develop the drill-deeper theory through fracking. The drilling schedule in Namibia is still contingent upon securing a rig, and HRT is considering a potential farm-out prior to drilling, which may result in lower-thanoriginally-guided valuations for that basin (<USD 0.5/bbl vs. the USD 1-2/bbl market expectations).
Company Performance
140 120 100 80 60 40

HRTs short-term drivers include: the results of the next of four wells to be drilled in the Solimes Basin, which are expected to be available by April 2012, and a potential farm-out in Namibia. Results from the next four wells will be a key to HRTs investment story, as they will determine whether the companys geological model for the drill-deeper theory is correct or not and will likely give a better sense of the basins upside potential beyond the original D&M estimate. HRT plans a farm-out in Namibia in 1Q12. Although current share prices incorporate limited value for Namibia, we believe the farmouts implicit valuation will be very important. If the price obtained by HRT ends up being similar to that of the recent deals, the farm-out might be perceived by investors as another setback in expectations.
20
Ibovespa
HRTP3
Source: Ita BBA

We have a market-perform recommendation on HRT and a YE12 fair value of BRL 1,350/HRTP3. While the current valuation looks tempting (we see HRT trading at a TNK-BP valuation for the Solimes Basin plus cash BRL 620/HRTP3 with close to zero value attributed to Namibia) due to its huge optionality, we believe that HRTs risk profile remains quite high given current market conditions. There is always a price at which the potential upside makes the risk bearable, but we believe that the story lacks short-term catalysts to make the market forget the recent setbacks and give the company a second chance. The results of the next four wells to be drilled in the Solimes Basin are expected only toward the end of 1Q12.

Source: Ita BBA
2010a 0 0 0 -2,600 0.00 0 n/a n/a 0.0 0.0 0.0 0.9
2011e 0 0 46 -1,687 7.25 0 n/a n.m. 0.0 0.0 0.0 0.8
2012e 0 -250 -175 -465 -27.51 0 n.m. n.m. 0.0 0.0 0.0 0.8
2013e 317 -6 -64 1,226 -10.08 0 n.m. n.m. 0.0 34.2 8.4 0.8
2014e 808 397 149 2,636 23.46 0 13.2 17.3 0.0 34.3 8.4 0.8
2015e 1,315 801 363 3,696 57.08 324 7.8 7.1 12.6 38.1 9.4 0.7
Ita BBA 149
Lupatech ON Under Review

Company Description
Lupatech is a holding of 19 companies that was divided into two main segments following the announcement of the sale of the Metallurgy business. The Energy Product segment (80% of the companys EBITDA) provides high value-added products (namely valves and anchoring ropes) and services (namely coating and light workover) for the oil and gas industry. The Flow Control Product segment (20% of the companys EBITDA) produces and supplies industrial valves. The companys focus is shifting toward the energy product segment in an attempt to leverage on the booming Brazilian oil and gas industry, which is supported by growing local-content requirements.
LUPA3 BRL UR
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -16.9 -16.4 4.6 UR 20.34/3.38 47,437 217 5.5 12m -76.8 -71.8
Investment Thesis
Lupatechs investment thesis gained momentum since its IPO, driven by the booming Brazilian oil industry and Petrobras multi-billion-dollar investment program. The story also benefits from the countrys local content requirements (up to 75% of the O&G companies investments in E&P) and was, for a long time, the only traded vehicle to play the sector in Brazil. Over the last two years, however, Lupatech weathered a perfect storm, which ended up yielding weak results and high capex requirements, leading the company to face serious liquidity issues. Recently, the company announced a capital restructuring, encompassing an equity increase of up to BRL 700 million (if all minority shareholders decide to follow) and do-able if the minimum BRL 350 million minimum is achieved (BNDES and Petros are committed to BRL 300 million and GP to BRL 50 million), while including the incorporation of San Antonio Brasil (SABR). SABR is the Brazilian arm of San Antonio International, owned by GP, with operations in Argentina, Colombia, Venezuela, and Bolivia. The capital increase will be at BRL 4/LUPA3. Assuming a minimum capital increase of BRL 350 million in cash, the dilution for existing shareholders is 68%, while the entire BRL 700 million would cause minority shareholders to be diluted by 80%. If we assume that most of the additional subscription to the minimum BRL 350 million in cash will be based on the conversion of BNDES debentures (BRL 320 million), the interest expense reduction will be approximately BRL 11 million for every BRL 100 million conversion, partially offsetting the dilutive effect on earnings.
Company Performance
140 120 100 80 60 40 20
Ibovespa
LUPA3
Source: Ita BBA

The most important short-term triggers for Lupatech are: the announcement of the capital increase timeline and the disclosure of the new business plan, including the numbers for the SABR assets. Assuming the capital increase happens as expected, the companys ability to deliver on its business plan, showing consistent improvements in results, will be the main driver for the stocks performance. Furthermore, the Aspro sale process continues. Lupatech aims to raise BRL 150-200 million through the sale of assets. The company raised BRL 44 million through the sale of Steelinject and Microinox; the sale of Aspro is expected to generate the difference.

We believe the transaction, once approved, will be positive because the solution addresses execution, where Lupatech has been lagging, and liquidity. However, the disclosure of the business plan is key to understanding how the company plans to evolve. Lupatech intends to disclose more details on its new business plan, combining the companys original assets and SABRs assets, as soon as the agreement becomes binding. Until then, and at least until the capital increase date is set, we expect the stock to keep trading around the BRL 4/LUPA3. Once the capital increase is completed, delivering on the proposed business plan will be the main driver for the stock, as the net debt/EBITDA will likely remain quite high. Our recommendation and fair value are currently under review.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) Dividend yield (%)
Source: Ita BBA
2010a UR UR UR UR UR
2011e UR UR UR UR UR
Ita BBA 150
OGX ON Outperform
Company Description
The EBX Group founded OGX as a way to invest in the booming Brazilian oil and gas industry, acquiring 21 blocks in the ANPs 9 bid round for BRL 1.3 billion. The companys exploration portfolio includes a farm-in contract for a block in the Santos Basin (BM-S-29) and five onshore exploration blocks in Colombia acquired in 2010. OGXs current resource portfolio totals 10.8 billion boe, validated by D&M in April 2011 and comprising: i) 3.1 billon boe classified as 3C resources and 1.3 billion boe classified as delineation resources in the Campos Basin; ii) 5.5 billion boe in prospective resources throughout the Santos, Esprito Santo, Par-Maranho, Parnaba and Colombia Basins; and iii) 1.0 billion boe in potential resources in Colombia. OGX will start producing oil in Campos soon.
th
OGXP3 BRL 25.9
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -5.2 -4.6 13.6 91.1 20.92/9.09 3,232,000 43,794 232.4 12m -34.0 -19.8
Investment Thesis
Investors were disappointed by the companys last D&M report (700 mmboe 2C and 3.1 billion boe 3C), and we believe that its guidance on production targets for the coming years remains aggressive (730 kbpd in 2015 and 1380 kbpd in 2019). However, when we step back and compare the recent achievements against the IPO promises, we have to acknowledge the companys deliveries, including the production start-up (2.7 billion boe in prospective resources in Campos risked at 27% versus a 100% hit ratio, and 3 billion boe of 3C resources only three years later).

The first platform ordered by OGX arrived in Brazil in October 2011. In that month, the company also signed an agreement with Shell for the sale of Waimeas first 1.2 million barrels at Brent minus USD 5.5/bbl. The production ramp-up and a new D&M report are the main triggers for OGX in 2012. The performance of the Waimea EWT is the companys most important short-term driver, which, if successful, will likely become a good argument for OGX to push for a higher recovery-factor assumption by D&M and open room for an increase in 2C resources. Production from the EWT is unlikely to meet the 15 kbpd average, as the companys quest is to better understand the reservoir characteristics. This may cause stock volatility. Two more wells to be connected support 40 kbpd production by mid-year. The declaration of commerciality for Waimea and Waikiki will be important triggers in 2Q12. Results are not expected before mid-year, as OGX is unlikely to call for a D&M review prior to completing the EWT. We see room for the company to deliver on a higher number of 2C resources (1.4-2.0 billion boe), reflecting a higher recovery factor and more than double the wells drilled.
140 120 100 80 60 40
Company Performance
Ibovespa
OGXP3
Source: Ita BBA

We have an outperform rating on OGX with a fair value of BRL 25.9/OGXP3. Our recommendation is based on the companys attractive portfolio, with an exploration upside potential, and valuation (USD 0.9/bbl for prospective resources). While the short-term environment of high risk aversion could pose a challenge to the performance of a story like OGX, the company is gradually moving into the production phase, expected to start at the end of January. Furthermore, liquidity (BRL 320 million ADTV) makes it the only option, other than Petrobras, for playing oil strength in the Brazilian market. We expect the production start-up to slightly support performance, while the declaration of commerciality for Waimea and Waikiki are positive triggers. But the market will only regain full confidence in the story once the company undergoes another D&M review, indicating a significantly higher number of 2C resources.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS P/E DPS (BRL) Dividend yield (%) P/BV
Source: Ita BBA
2010a 95 -425 -267 -1,905 -0.08 n.m. 0.0 0.0 5.2
2011e 95 -425 -267 -1,905 -0.08 n.m. 0.0 0.0 5.2
2012e 1,766 811 501 1,345 0.16 n.m. 0.0 0.0 4.7
2013e 4,034 2,211 1,249 5,688 0.39 35.1 0.0 0.0 4.1
2014e 10,220 6,357 3,806 6,839 1.18 11.5 0.0 0.0 3.0
2015e 20,623 13,415 8,325 3,338 2.58 5.3 0.0 0.0 1.9
Ita BBA 151
OSX ON Outperform
Company Description
OSX aims to be the largest shipyard in the Americas (180 kton steel processing capacity) and a key player in the demanding oil-service and equipment businesses in Brazil, leveraging on local-content requirements (75% of the E&P investments for the blocks auctioned in the last three bid rounds: 2006, 2007, 2008). OSX was established on one of the largest expected order books among its peers: USD 30 billion over the next ten years (48 platforms from OGX). In exchange, OSX would provide OGX with the required local content at competitive costs by fast-tracking the shipyards learning curve through a partnership with Hyundai Heavy Industries, the Korea-based world leader in naval construction. The companys current firm order book encompasses five FPSOs and two WHPs (USD 4.8 billion).
OSXB3 BRL 38.6
Stock Data
Investment Thesis
We foresee good opportunities for OSX, assuming that demand for oil and gas equipment continues to grow in line with the development of exploration and production in the country. In our view, the company could benefit from the theoretical order book from its sister company OGX (estimated at 48 units, USD 30 billion) to build a scalable and consequently competitive shipyard in Brazil. While the long-term prize could be significant, the company will likely face significant short-term challenges such as: i) the shipyard construction, which requires a 5km channel dredging, BRL 2.9 billion investment and is expected to take 3 years; ii) the learning curve; and iii) workforce availability and training (the company expects to train more than 4 thousand workers by 2013), among others; not to mention the uncertainty of OGXs demand. The financing of the shipyard construction and of OSX1 and OSX2 are already secured, but funding for the next units under current market conditions could be challenging, at least from a cost standpoint, even though debt costs are passed through to OGX.
Company Performance
140 120 100 80 60 40

In our view, the two main triggers for the stocks short-term performance are: i) additional firm orders from OGX; and, most importantly, ii) potential third-party orders, which would be an outward acknowledgement that the shipyard is moving forward. Furthermore, new orders will require additional cash, likely triggering the exercise of a USD 1 billion put option on the controlling shareholders. Additional firm orders from OGX. While the company currently has only seven firm orders (5 FPSOs and 2 WHPs), the total order book was initially estimated at 48 orders. The effective construction of the shipyard is scheduled to start in 1Q12. Delivering on schedule and on budget will likely be good catalysts (we consider 30% capex overrun and a one-year delay in construction in our model), given the high risk of delays and overruns. OSX has a USD 1 billion put option against its controlling shareholder at BRL 32/OSXB3 plus IGPM. If the option is exercised, the dilution will be very accretive for minority shareholders, as the stock is currently trading at BRL 11.6/OSBX3. Third-party reality, firm orders supporting would the be an
Ibovespa
OSXB3
Source: Ita BBA
acknowledgement that the shipyard is a further companys economics.

We have an outperform rating on OSX and YE12 fair value of BRL 38.6/OSXB3. Our recommendation is based on the companys upside potential. At current levels, the stock is trading at more than 30% discount to the current cash position plus OGXs backlog (BRL17/OSXB3). However, we do not expect shares to post a sustainable performance until the shipyard construction begins and the company decides to exercise its put option on the controlling shareholder.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/E DPS (BRL) Dividend yield (%) P/BV
Source: Ita BBA
2010a 9 -157 40 -1,527 0.14 n.m. n.m. 0.0 0.0 1.4
2011e 79 -68 52 175 0.19 n.m. n.m. 0.0 0.0 1.4
2012e 179 67 14 5,511 0.05 n.m. n.m. 0.0 0.0 1.3
2013e 360 216 -122 9,859 -0.43 n.m. n.m. 0.0 0.0 1.4
2014e 747 540 -238 13,567 -0.85 31.4 n.m. 0.0 0.0 1.5
2015e 1,448 1,123 -387 19,427 -1.38 20.4 n.m. 0.0 0.0 1.8
Ita BBA 152
Pacific Rubiales Outperform

Company Description
Pacific Rubiales, the largest private oil and gas producer in Colombia, was created by ex-PDVSA employees in 2004. They decided to leverage on their vast understanding of Venezuelan geology in order to pursue a similar play in Colombia, betting on the analogies throughout the heavy oil belt that seems to extend from the Orinoco Basin all the way down to Ecuador. Since then, this team of highly qualified professionals has made significant discoveries, achieving a 2P reserve of 350 million boe (net after royalties). Pacific Rubiales portfolio now includes Colombia, Peru and Guatemala. The company estimates 2012 net production to grow between 15%-35% in 2012.
PRE CAD 39.6
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute CAD % CAD th CAD m CAD m 1m 19.53 20.2 96.4 34.85/18.03 267,649 5,401 1,479 12m -28.05
Investment Thesis
We believe that PRE offers an interesting combination of: i) producing assets that generate cash (USD1.9 billion EBITDA in 2011); ii) a fully-funded exploration campaign; iii) 15%-35% net production growth in 2012; and iv) exploration potential (more than 900 million boe of risked prospective resources and leads). The company has a good track record for execution, increasing production more than eleven times in the past five years while certifying 2P reserves of 350 million boe. In our view, the next tranche of reserve additions will likely come from a combination of: i) exploration, namely in the Sabanero field, CPE6 and CPO12, operated by PRE and CPO17, operated by Ecopetrol through Hocol; and ii) higher recovery though the application of STAR technology.

We expect the company to book reserves from the CPE6 block in the next reserve report, expected early this year. While the booking is unlikely to be significant, it will be an important milestone in terms of proving the extension of the Rubiales-Quifa heavy oil play 70 km to the Southwest. Proving the STAR technology could also be a game changer in the Rubiales-Quifa and neighboring areas, enhancing the recovery factor from 15% to 45%. The company has been effective in We see the results of the STAR test as the main catalyst to the stocks performance over the next 8-10 months. We believe that investors attribute limited to no value to this option, even in the case of Quifa, where the contractual structure is already in place. Considering Quifa alone, STAR could add as much as 680 million boe to the current 2P estimate by raising the recovery factors from 15% to 45%. transforming prospective reserves into 2P reserves. 50% of the 900 million boe risked prospective resources and leads are expected to become 2P resources over the next five years. Production is expected to reach 300 kbpd by the end of 2012; the Rubiales field alone is expected to reach 200 kbpd by that time.
Company Performance
113 103 93 83 73 63 53
Feb-11
Jun-11
Aug-11
Oct-11
Apr-11
Dec-10
PRE
Source: Ita BBA

We have a outperform recommendation on Pacific Rubiales and a YE12 fair value of CAD 39.6/PRECN. In our view, the market has overreacted to the political issues in Colombia over the past few months, while the negative momentum on other companies owned by the PRE founders also negatively affected performance. We see PRE as the most balanced option to play the oil strength in the LatAm space, combining production with a fully funded, promising exploration campaign. The story offers a 96% upside on a DCF basis, 35% if we exclude STAR in the Rubiales field, and 6% considering 2P reserves only. In our view, the street has been ignoring much of the company's exploration potential (15% of our fair value), but the initial booking of the CPE6 will likely increase market awareness on that front. Furthermore, we expect the good 4Q11 prospects to help the stock recover from its recent dip following the tax investigation issue.

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) Net debt (USD m) EPS EV/EBITDA P/E DPS (USD) Dividend yield (%) P/BV
Source: Ita BBA
2010a 1,662 850 219 134 0.82 6.4 24.1 0.2 1.0 2.6
2011e 3,423 1,958 796 401 2.97 2.9 6.6 0.7 3.7 2.0
2012e 3,733 2,126 985 4 3.68 2.5 5.3 0.9 4.6 1.5
2013e 3,647 1,941 828 -933 3.09 2.2 6.4 0.8 3.9 1.3
2014e 3,601 1,900 722 -1,799 2.70 1.8 7.3 0.7 3.4 1.2
2015e 3,493 1,833 632 -2,612 2.36 1.4 8.3 0.6 3.0 1.0
Ita BBA 153
Dec-11
Petrobras PN Market Perform

Company Description
Petrobras is one of the largest oil companies in the world, producing over 2.5 million bpd and holding the world record for ultra-deepwater oil production. In 2007 the company made the biggest oil discovery in recent years, the pre-salt, vaulting Brazil from a potentially self-sufficient country to one of the main exploration players in the oil world. The Brazilian pre-salt is expected to deliver 30-100 billion boe, th which could make Brazil the 10 -largest global resource holder.
PETR4 BRL 30.2 PBR/A USD 34.5
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m 0.4 -2.4 23.1 30.8 29.26/17.9 13,044,424 301,065 438.4 12m -11.7 3.7
Investment Thesis
Looking at oil-industry fundamentals, it is impossible to dispute Petrobras long-term potential. The company has a proved reserve of 14 billion boe and 15 billion boe from the areas of the pre-salt of which the company has already disclosed the volume, plus the rest of the pre-salt potential. Based on that potential, the DCF analysis of Petrobras usually leads to material upside (90% in the perpetuity). But for the potential to materialize, the current level of investments (+USD 40 billion/year) will likely have to continue far longer than the strategic five-year-plan horizon, in our view. A good portion of the upside perceived by the market was based on the assumption that, by the end of the strategic plans horizon, the company would be able to reduce capex significantly, which we have viewed as overly optimistic.

The main question in the Petrobras investment story is about execution, i.e., the companys ability to convert reserves and resources into production. Over the last two years in particular, production has lagged behind expectations, growing at 1%-2% p.a. versus 5% guidance, mainly due to: i) rig constraints; ii) unscheduled maintenance on the platforms; and iii) depletion in the Campos Basin, (higher than 10%). In our view, more-consistent production growth will be the main catalyst to help Petrobras regain investor confidence. Sustainable production growth is, in our view, the main trigger for stock performance. Further increases in diesel and gasoline prices could also be important catalysts, but we assign very limited probability to that occurring again in 2012. Oil is a resilient commodity, and the industry will likely continue to attract investments, even if the global economy weakens further. An improvement in results, beyond the already announced increase in fuel prices, particularly related to a reduction in lifting costs which have recently hit a USD 13/bbl record.
Company Performance
140 120 100 80 60 40
Ibovespa
PETR4
Source: Ita BBA

We have a market-perform rating on Petrobras and a YE12 fair value of BRL 30.2/PETR4 (USD 34.5/PBRA). Petrobras valuation looks relatively attractive compared with historical multiples (6% and 12% discount to historical EV/EBITDA and P/E respectively) and integrated peers (4% on a PE12 basis), while the technicals remain encouraging, but we maintain our market-perform recommendation. The turmoil and uncertainty caused by the global crisis could position Petrobras as a defensive option, given that oil remains one of the most resilient commodities and the likelihood that domestic diesel and gasoline prices remain unchanged. But from a company perspective, we are left with production growth as the main potential short-term catalyst, and we only expect consistent improvement in this metric towards 2013. 2012 production growth is expected to be 3%-4%.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/E DPS (BRL) Dividend yield (%) P/BV
Source: Ita BBA
2010a 213,274 60,749 35,189 61,203 2.70 6.0 8.6 0.0 0.0 1.0
2011e 244,772 65,953 38,713 100,997 2.97 6.1 7.8 0.7 3.2 0.9
2012e 250,083 76,228 42,966 129,640 3.29 5.7 7.0 0.8 3.6 0.8
2013e 260,036 84,201 44,831 163,115 3.44 5.6 6.7 0.9 3.7 0.7
2014e 262,161 88,140 43,101 195,751 3.30 5.7 7.0 0.8 3.6 0.7
2015e 267,048 90,990 42,609 236,050 3.27 5.9 7.1 0.8 3.5 0.6
Ita BBA 154
QGEP ON Outperform
Company Description
QGEP is the oil and gas exploration and production arm of the Queiroz Galvo group. The company currently holds 2,639 km spread across one producing and five exploration blocks; according to an estimate by Gaffney, Cline & Associates, the area contains 381.3 million boe in reserves (80.8 million boe 3P) and resources (42.5 million boe 3C and 258 million boe prospective). Manati, the companys producing asset, pumped out 37.8 kboed in natural gas and 600bbl/d in condensate in 2010. Furthermore, QGEP is the only Brazilian independent oil company qualified as a Type-A operator. In fact, the company was the first to operate an offshore exploration in Brazil, on behalf of Petrobras. The company also recently acquired a 10% stake in BM-S-8 (pre-salt) and a 30% stake in BS-4 (containing Atlanta and Olivia heavy-oil fields and with pre-salt potential).
QGEP3 BRL 27.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -2.6 -2.0 15.7 73.4 25/12.1 265,807 4,171 7.3 12m n.a. n.a.
Investment Thesis
QGEP is the only Brazilian junior oil company that combines a producing asset with an exploration portfolio. Furthermore, QGEP stands out among its peers by diligently delivering on its promises to diversify its portfolio at attractive valuations (for less than USD 3/bbl) and increase its operator role, while building market trust through a more conservative approach to guidance.

We believe that QGEP has clear short-term catalysts, namely the results of the exploration campaign in the Santos Basin. The companys ability to take the discoveries (if confirmed) to production represents a medium-term driver. QGEP currently operates two blocks (BS-4 and BM-J-2) of its portfolio. The drilling results for the Santos 2 prospect are expected by the first half of 1Q12. Depending on the level of certainty, volumes might also be disclosed by then. The company expects to be able to confirm significant upside to GCAs initial volume estimate. The first well was interrupted by a gas kick and failed to reach the oil-water contact. After that, the drilling process was interrupted due to higher pressure level at the reservoir than originally expected, causing a second delay. Doubling the volume implies a BRL 2.5/QGEP3 upside to our fair value. The Santos 4 prospect is expected to be reached no earlier than the end of 1Q12. If the company confirms the extension of the Santos pre-salt through this prospect, resulting in an oil find, the addition to our fair value would be another BRL 2/QGEP3. Our base case assumes a 60% gas probability. QGEP expects to be able to disclose an initial volume estimate for the BM-S-8 before the end of 1Q12. The company initiated discussions with Petrobras (the operator) regarding the development plan. The Carcar pre-salt well is being drilled by Petrobras, also in the BM-S-8 block. Results are expected by May. The company plans to drill a well in the BMCAL-5 block (Copaia prospect) by mid-2012. Drilling in the Jequitinhonha is expected to begin by April 2012, depending on rig availability. Results will likely take 45 days. If oil is confirmed, the addition to our fair value would be around BRL 3/QGEP3. The company keeps on searching for M&A opportunities in Brazil.
140 120 100 80 60 40
Jun-11 Feb-11 Aug-11 Oct-11 Apr-11 Dec-11
Company Performance
Ibovespa
QGEP3
Source: Ita BBA

We have an outperform recommendation on QGEP with a YE12 fair value of BRL 27.2/QGEP3. QGEP remains our top pick among the Brazilian junior E&P companies. In our view, it offers a more balanced investment option for the current market conditions, combining production, exploration and short-term catalysts. Needless to say, disappointments regarding the upcoming results are always a risk to stock performance.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/E DPS (BRL) Dividend yield (%)
Source: Ita BBA
2010a 388 261 148 128 0.56 16.5 28.2 0.0 0.0
2011e 359 222 245 -1,261 0.92 13.1 17.0 0.0 0.0
2012e 426 340 312 -1,154 1.17 8.9 13.4 0.3 1.9
2013e 447 306 234 -387 0.88 12.4 17.8 0.2 1.4
2014e 469 323 202 443 0.76 14.3 20.7 0.2 1.2
2015e 492 335 177 1,310 0.66 16.4 23.6 0.2 1.1
Ita BBA 155
Tenaris Outperform
Company Description
Tenaris is one of the three largest manufacturers and suppliers of steel pipe products for the oil and gas industry (6.8 Mtpy capacity) and has a worldwide reputation for high-quality products and a global footprint, with North America as its primary market (45% of the companys revenues). The companys activities can be divided into three segments: i) its main segment, tubing for the oil and gas industry (seamless and welded tubes used in the drilling process, 88% of EBITDA); ii) pipeline services (7% of EBITDA); and iii) other services (5% of EBITDA). Argentina, Mexico and the U.S. host the companys main production facilities, which export to the rest of the world. More recently, production capacity has been expanded in Europe and Mexico.
TS USD 44.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute USD % USD th USD m USD m 1m 3.0 38.6 14.1 51.07/23.29 590,268 22,755 75.8 12m -17.4
Investment Thesis
Although Tenaris operates in a competitive and cyclical business, the company has been able to maintain relatively stable margins even in bad times. Over the last two years, its EBITDA margin varied within a small band (23%-27%), due to: i) the companys longer-term contractual strategy; and ii) the gradual shift towards more premium applications, which have a less-volatile profile than onshore exploration, particularly in the U.S. We note, however, that competition in the premium products segment is rising, as exploration growth moves towards new frontiers and as low-end producers like China and Russia raise the profile of their product portfolios. We believe that a strong balance sheet (0.2x net debt/EBITDA) and cash generation (6.3% FCFE yield), with a relatively stable EBITDA despite the cyclical nature of its business, make Tenaris the type of name investors should be looking for when markets are this unstable.
Company Performance
109 99 89 79 69 59

Margin growth is the main catalyst for stock performance in the short term. The companys ability to maintain its profitability in the high-end segment will be the main long-term driver. Tenaris results were recently hurt by the impossibility of passing through high rawmaterial costs to final prices. However, EBITDA margin recovered by 200 bps in 3Q11, and we expect a further improvement of 100 bps per quarter in the next two quarters, following the reduction in iron ore and scrap prices. We forecast a 27% EBITDA margin in 2012 versus 24% in 2011. Fierce competition is not new to commodity and low-end products, leading the three main players to increasingly shift their focus toward premium products. The move toward high-end products provided a nice shelter for these companies for quite a while (Sumitomo in Asia, Vallourec in Europe and Tenaris in the Americas). However, as the triad moves into new exploration frontiers, we expect competition to squeeze margins. Therefore, we forecast normalized long-term margins at 28% versus the historical 30%
Jan-11
Jul-11
May-11
TS
Source: Ita BBA

We have an outperform recommendation on Tenaris and a YE12 fair value of USD 44.0/TS. In our view, most of the Tenaris investors seem focused on short-term results. Tenaris shares suffered prior to 3Q11 because of poor results and market fears that oil prices would go down during the global crisis. We believe that oil will prevail no matter how deep the crisis goes due to political unrest in the Middle East, while results have already started to improve ahead of market expectations. We expect results to improve further in the coming two quarters (100 bps improvement per quarter) on the recent drop in steel and scrap prices, leading investors to price in better margins longer term. We still see the stock pricing a 24% normalized EBITDA margin in the long term, versus our 28% assumption.

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) Net debt (USD m) EPS EV/EBITDA P/E DPS (USD) Dividend yield (%)
Source: Ita BBA
2010a 7,712 2,080 1,141 401 1.93 11.4 19.9 1.0 2.5
2011e 9,840 2,357 1,303 1,552 2.21 10.6 17.5 0.6 1.4
2012e 10,928 2,940 1,696 833 2.87 8.3 13.4 1.3 3.3
2013e 11,564 3,245 1,884 70 3.19 7.2 12.1 1.6 4.1
2014e 12,121 3,372 1,957 -724 3.32 6.7 11.6 1.7 4.3
2015e 12,065 3,367 1,947 -775 3.30 6.7 11.7 3.3 8.6
Ita BBA 156
Nov-11
Sep-11
Mar-11
Jan-12
Ultrapar ON Outperform
Company Description
Ultrapar is an industrial conglomerate made up of four companies: Ultragaz (15% of EBITDA), the leader in the Brazilian distribution market for liquid petroleum gas (LPG); Oxiteno (13% of EBITDA), the largest specialty-chemical producer in Brazil and largest manufacturer of ethylene oxide and its main derivatives in South America; Ultracargo (7% of EBITDA), a leading provider of storage and handling services for chemicals and fuels; and Ipiranga/Texaco (65% of EBITDA), ranked second in oil-product distribution in Brazil (22% market share), with operations concentrated in the countrys South and Southeast regions and expanding into other regions.
UGPA3 BRL 41.0 UGP USD 23.4
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 5.3 6.0 33.3 23.2 34.21/23.18 544,384 18,123 22.7 12m n.a. n.a.
Investment Thesis
Although Ultrapar is not a bargain when considering valuation (9.5x EV/EBITDA12 and 17.4x P/E12), we believe that the company offers an almost unique combination of: i) excellent management and outstanding corporate governance; ii) appealing growth rate (17% net income CAGR11-14); iii) business resilience to the crisis; iv) strong cash generation (5.7% average FCFE for the next three years); and v) a relatively attractive dividend yield (3.7% in 2012). Together, these factors support the premium performance against the Ibovespa over the last two years.

The growth drivers for Ultrapar are based on the increase in consumer wealth and credit availability, which support car sales and higher fuel consumption per capita. The company is also heavily investing in: i) white-flag station conversions, likely gaining market share in the coming years; and ii) the growing number of sales points/capacity (store, gas station, storage and production capacity). Increased wealth allows consumers to acquire more higher-value-added products, while the increased number of sales points and capacity allows the company to reach more consumers. Combined, we expect the abovementioned factors to generate a 12% EBITDA CAGR over the next three years. Results remain an important trigger for the company, attesting to the effectiveness of both the growth strategy and EBITDA/m margin expansion in 2012 to BRL 63.
3
Company Performance
180 160 140 120 100 80 60
Aug-11 Oct-11 Dec-11
UGPA3
Ibovespa
Accretive
acquisitions,
backed
by
the
Source: Ita BBA
companys proven track record for capital discipline, are another possibility, particularly in the oil-product distribution business.

We have an outperform rating on Ultrapar and a YE12 fair value of BRL 41.0/UGPA3 (USD 23.4/UGP). Within our coverage universe, it stands alone as a high-conviction story amid the economic turbulence and offers both earnings momentum and defensiveness. We expect the company to continue to post good results (12% EBITDA CAGR11-14), mainly driven by its oil-product distribution business, which we expect to post a 15% yearly EBITDA increase in 2012; while the impact from a possible economic slowdown would likely be minor. The main risk to our recommendation would be a rapid improvement in the global economic environment, leading investors to favor higher-beta names.

Source: Ita BBA
2010a 42,482 1,776 765 2,195 1.41 1,104 11.5 23.7 6.1 0.0 0.0 3.5
2011e 48,919 2,014 854 3,261 1.57 128 10.6 21.2 0.7 1.2 3.6 3.3
2012e 55,892 2,303 1,043 3,727 1.92 427 9.5 17.4 2.4 1.1 3.5 3.0
2013e 60,303 2,551 1,169 3,685 2.15 694 8.6 15.5 3.8 1.3 3.9 2.8
2014e 64,323 2,827 1,338 3,572 2.46 1,012 7.7 13.5 5.6 1.5 4.4 2.6
2015e 68,060 3,028 1,467 3,392 2.69 1,289 7.1 12.4 7.1 1.6 4.9 2.4
Ita BBA 157
YPF Outperform
Company Description
YPF is the leading oil and gas player in Argentina with 39% of the countrys hydrocarbons production (240,000 kbpd of oil and close to 220,000 boepd of natural gas). The company holds a refining capacity of 320,000 bpd, and is responsible for almost 60% of processed diesel and gasoline volumes in Argentina. It also has a chemical unit selling fertilizers and other products, contributing 5% to the EBITDA. YPFs proven reserves were 982 million boe as of December 2010. The company plans to keep liquids production constant for a fifteen-year term by increasing the recovery factors from 20% to 26%. In addition, YPF holds 12,000 km of net unconventional acreage at the Vaca Muerta formation at Neuquina basin. For Loma de la Lata Norte alone, a 430 km area representing 4% of the total acreage, YPF estimates recoverable resources of 927 million boe, mostly oil.
YPF USD 46.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization USD % USD th USD m USD m 1m 1.5 36.6 50.5 55.34/31 393,300 14,375 17.6 12m -34.9
Investment Thesis
YPF, as Argentinas leading energy company, is a beneficiary of an ongoing convergence of domestic with international fuel prices. In the past three years, fuel prices have increased more than 40% in U.S. dollars. Still, domestic crude prices present a 46% discount to Brent, and diesel and gasoline prices carry a 30% discount to import parity. Conventional resources will be the main source of production and cash-flow generation in the next few years, but the development of unconventional resources has the potential to prompt significant crude production growth. YPF has a target of producing 50 kbpd in five years from unconventional resources, targeting further increases to become fully integrated as soon as possible. Our preliminary valuation of Loma de la Lata Norte is equivalent to 22% of market value.
3-mth avg daily vol. Performance (%) Absolute
Company Performance
112 102 92 82 72 62 52

A significant value driver would be sovereign-risk compression augmenting DCF. Company-specific drivers would be fuel-price increases and developments in unconventional resources. Every 10% increase in gasoline and diesel prices augments EBITDA by around USD 385 million, or 9% of the total projected for 2012. Every 1% increase of the recovery factor of the fields augments crude reserves by 200 million barrels, or almost 40%. We assess a DCF of USD 7.4/ADS for the development of just 4% of unconventional acreage. Therefore progress unconventional development will be key. on
Dec-10
Feb-11
Jun-11
Oct-11
Apr-11
YPF
Source: Ita BBA
Natural gas accounts for almost 50% of output adding zero to results. A 10% rise in prices could increase EBITDA by USD 90 million.

We maintain our outperform rating on YPF, with a YE12 fair value of USD 46.8/YPF. Our fair value is based on a DCF analysis in which the WACC is 11.6%, including 800 bps of sovereign-risk premium. Our DCF for YPF was calculated as the sum of USD 39.4/YPF, for the conventional business, and USD 7.4/YPF, for the unconventional resource development of Loma de la Lata Norte. DCF would fall to USD 39/YPF assuming a current sovereign premium of 1,000 bps and would rise to USD 55/YPF should it fall to 600 bps. The main risks are: i) fuel prices failing to rise consistently; and ii) eventual governmental restrictions on companies ability to transfer U.S. dollars abroad, which would further restrict the availability of dollars and worsen demand dynamics in Argentina.

Years EPADS EBITDA (USD m) Free Cash Flow (USD m) DPS Price to Earnings EV/EBITDA Dividend Yield Leverage ratio Debt to EBITDA ROE
Source: Ita BBA
2009a 2.35 3,153 1,009 2.35 15.8x 5.2x 6% 19.8% 0.4x 17%
2010a 3.76 3,774 876 2.87 9.8x 4.4x 8% 21.6% 0.3x 30%
2011e 3.82 3,843 -216 3.05 9.7x 4.3x 8% 34.1% 0.6x 32%
2012e 3.58 4,458 633 3.10 10.4x 3.7x 8% 41.9% 0.7x 32%
2013e 5.03 5,083 964 2.90 7.4x 3.2x 8% 41.1% 0.6x 48%
2014e 5.36 5,344 1,115 4.08 6.9x 3.1x 11% 39.5% 0.5x 51%
Ricardo Cavanagh, CFA +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Paula Kovarsky, CNPI +55-11-3073-3027 paula.kovarsky@itaubba.com
Ita BBA 158
Dec-11
Aug-11
Real Estate
David Lawant, CNPI +55-11-3073-3037 david.lawant@itaubba.com Enrico Trotta, CNPI +55-11-3073-3064 enrico.trotta@itaubba.com Vivian Salomon (Mexico and Colombia) +52-55-5262-0672 vivian.salomon@itaubba.com
REAL ESTATE
About the Sector
After the execution setbacks over the last 18 months that led to cost overruns, delays in cash flow generation (which were expected in 2H11, but are now likely to extend into 2012), and below-cost-ofcapital ROEs for several companies (13% average), investors seem uncomfortable with the Brazilian Homebuilder sector. However, we believe that valuation levels are attractive (6.4x P/E 2012). Regarding real estate property companies (i.e., shopping malls and commercial properties), we still believe that the current high valuation levels (P/FFO of 11.4x for 2013) will be sustained due to a solid combination of long-term, inflation-linked contracts; solid cash flow generation (EBITDA margins in the 70%-80% range); and plenty of opportunities for growth via M&A, new greenfield projects or expansions to the current assets. We have a cautious stance on the Mexican Homebuilder sector (revenue growth 9.5% vs. -2.2% in Infonavit loans) despite cheap valuation 4.5x EV/EBITDA for 2012, as the industrys dynamics have changed and sentiment is still negative due to the lack of consistency in delivering results and the inability to generate cash. We will become more constructive on the sector once the current guidance has been achieved. Vivian Salomon (Mexico and Colombia) +52-55-5262-0672 vivian.salomon@itaubba.com Enrico Trotta, CNPI +55-11-3073-3064 enrico.trotta@itaubba.com David Lawant, CNPI +55-11-3073-3037 david.lawant@itaubba.com

We believe that for Brazilian Homebuilders the main question will be how these companies plan to generate positive cash flow as they cash in the receivables for the 2007-09 launch cycle. Most (if not all) of the companies we cover are likely to deliver at least a neutral cash flow by 2H12. For the property companies, the main issue in our view will be their ability to sustain the current returns (8%-10% entry cap rates for acquisitions and above 14% for greenfields) in an environment of higher rental prices, tougher competition in the development of new assets and interest from foreign players. Concern regarding the ability of Mexican Homebuilders to generate cash raises doubts about the efficiency of their construction process. The government continues to support the industry; however, results will depend on whether or not these companies are able to capitalize on mortgage availability while avoiding a negative impact on working capital and higher leverage. Homebuilders will continue to align the sales mix with the Infonavit product and vertical construction (around 40%), to capture as much of the MXN 9.5 billion subsidy program.
Catalysts
Given the long-cycle nature of the Brazilian homebuilding business (1.5-3.5 years, depending on the segment), we believe that a gradual recovery in margins over the next few quarters is possible. Furthermore, we expect positive free cash flow generation to trigger an improvement in investor sentiment toward the sector. For shopping mall companies, we continue to expect a solid operating environment of above 10% in terms of same-store rent; new projects should also help companies expand their EBITDA margins due to the dilution of SG&A expenses. The main drivers for Mexican homebuilders will likely be a combination of growth (9.5%), cash generation, and a significant reduction in leverage ratios.

Among the Brazilian homebuilders, we highlight MRVE3 shares as one of our top pick in the sector, given that we see it as the one liquid company with the ability to deliver a combination of positive FCF generation (we estimate BRL 100-200 million for 2012), high ROEs (around 20%) and in-line (or above) the sectors launch and contracted sales growth of 5%-10%. Our other top pick is PDGR3 due to its attractive valuation levels (6.3x P/E 2012 vs. 6.6x of the average of its peers). On the other hand, we would stay away from CYRE3 shares because we believe that the companys potential for greater profitability has already been mostly priced in by the market (7.8x P/E12, vs. the 6.7x sector average). Among the real estate property names we cover, we like BRPR3 and MULT3 and would avoid IGTA3 due to relative valuations (please refer to the valuation table on the next page for details). For Mexico, we like GEOs moderate growth strategy (7% 2012E) that will allow it to strengthen its operations, reduce debt (1.8x net debt/EBITDA), and deliver positive FCFE (MXN 913 million). In addition to the discount in terms of P/E 14% vs. its peers. We would avoid Sare, because although the company was authorized to sell more assets, we still believe that the poor working capital management will be reflected in the delivery of results.
Ita BBA 160
Brazilian Homebuilders Launches and Inventory Duration

16.3 9.4 7.9 6.6 7.7 6.7 8.3 6.6 18.3 10.3 9.9 8.7 8.7 8.7 8.7 8.4 9.5 7.1 8.0 7.3
Brazilian Homebuilders Contracted Sales and Sales Speed

31% 23% 32% 27% 25% 30% 24% 17% 15% 23% 30% 27% 29%
26% 27% 24%
23%
26% 26%26%
13.8 10.1 1.9

1Q07A
14.9 7.0 9.1 9.9
10.2 5.5 2.8 1.8 2.7

1Q07A 2Q07A 3Q07A 4Q07A
8.4 5.0
3.8 4.8
2Q07A 3Q07A 4Q07A
5.9 5.5 2.1

3Q08A 4Q08A 1Q09A
4.3
2Q09A
6.4
8.9 4.7
4Q09A 1Q10A
7.9 8.9
4.4
6.1
4.7
5.5 3.4 3.2

4Q08A 1Q09A 2Q09A
6.6
7.4
6.2
8.2 7.8
7.4
8.8 9.0
10.6
1Q08A
2Q08A
3Q08A
3Q09A
4Q09A
1Q10A
2Q10A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
Sep-11
1Q08A
2Q08A
3Q09A
2Q10A
3Q10A
4Q10A
1Q11A
2Q11A
3Q11A
4Q11E
Launches (BRL bn)

Source: Ita BBA
Inventory Duration (months)

Source: Ita BBA
Pre-Sales (BRL m)
Sales Speed (%)
Mexican Homebuilders: Cash Burn MXN in Millions

6,000 5,000 4,000 3,000 2,000 1,000 0 (1,000) (2,000) 2007
Source: Ita BBA
Mexican Homebuilders: Average EV/EBITDA 12-Month Forward

16 14 12 10 8 6 4 2
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Dec-10
Jul-11
2008 Ara
2009 Geo Homex
2010 Urbi
2011e
2012e
EV/EBITDA Forward
Average EV/EBITDA Sector
Source: Ita BBA estimates. Sector includes Ara, Geo, Homex and Urbi.
LatAm Real Estate Valuation Matrix

Com pany Rating Last Price (BRL) Large Hom ebuilders 6.3 PDG OP Cyrela MP 15.5 MRV OP 11.6 Gafisa MP 4.4 Rossi MP 8.5 Brookfield MP 5.6 Sm all Hom ebuilders 6.5 Even OP Tecnisa MP 9.9 9.5 Direcional OP CCDI MP 4.2 EZTEC OP 16.1 Brokers Lopes 27.8 OP Com pany Rating Last Price (BRL) Mexican Hom ebuilders (In MXN m & MXN) Ara UP 4.12 Geob OP 18.61 Homex OP 39.64 Sareb UP 1.34 Urbi MP 17.63 Cem ent Cemargos OP 11,100 Cemex MP 5.43 Com pany Rating Last Price (BRL) Malls OP BR Malls 18.1 Multiplan OP 36.3 Iguatemi MP 36.2 Aliansce OP 14.2 Sonae OP 23.2 Hotels OP BHG 15.4 Properties Br Properties OP 18.0 So Carlos MP 24.0
Source: Ita BBA
YE12 Fair Value (BRL) 10.4 18.0 18.4 9.3 16.2 12.1 11.5 17.3 14.3 5.8 23.7 46.8 YE12 Fair Value (BRL) 5.2 24.0 50.0 2.2 19.0 13,100 6.0 YE12 Fair Value (BRL) 26.2 47.4 43.4 20.2 33.8 28.1 26.7 32.2
Upside (%) 65% 16% 58% 112% 91% 118% 76% 74% 51% 38% 47% 68% Upside (%) 26% 29% 26% 60% 8% 18% 10% Upside (%) 45% 31% 20% 43% 45% 82% 48% 34%
P/BV 1.0 1.1 1.4 1.6 0.5 0.8 0.8 1.2 1.0 1.2 1.2 0.7 1.7 n.a. n.a. EV/EBITDA 12 4.3 4.9 3.8 4.1 4.3 4.5 10.3 8.8 11.8 P/FFO 12 15.2 15.6 17.4 14.4 16.3 12.1 11.7 11.7 12.2 13.0 11.5
P/ABV 0.8 0.8 1.1 1.2 0.4 0.7 0.6 0.9 0.7 0.9 0.9 0.5 1.4 n.a. n.a. EV/EBITDA 13 3.8 4.2 3.5 3.6 3.8 3.9 8.6 7.3 9.8 P/FFO 13 11.6 12.9 12.8 12.6 11.4 8.1 7.8 7.8 11.2 11.4 11.1
P/E 12 6.6 6.3 7.8 6.7 7.9 4.7 5.8 6.2 6.2 6.9 6.1 5.3 6.5 12.7 12.7 P/E 12 6.5 8.1 5.6 5.7 6.0 6.9 21.2 NA 21.2 Im plied Cap Rate 9.7% 9.4% 7.7% 9.9% 9.9% 11.8% n.a. 11.8% 10.6% 12.9%
P/E 13 5.7 5.9 6.2 6.0 6.2 4.4 5.2 7.4 5.1 4.5 4.3 17.1 6.0 10.8 10.8 P/E 13 5.6 6.5 5.3 5.1 5.2 6.0 18.9 NA 18.9 Im plied Cap Rate 12.7% 11.5% 9.9% 11.6% 13.3% 17.0% n.a. 13.9% 12.8% 14.9%
Ita BBA 161
Dec-11
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
4Q11E
Aliansce ON Outperform
Company Description
Aliansce is one of the leading shopping mall developers in Brazil, with stakes in 15 shopping malls and a total owned gross leasable area (GLA) of 274 thousand square meters. The companys owned assets target the middle- to lower-middle income segments and are diversified geographically, as Aliansce was the first company to explore less traditional regions. In 9M11 the companys revenue breakdown was: 68% from rental revenue, 12% from parking lots and the remaining 20% from services and others. Aliansce also has projects under development (new malls, expansions and mixed-use projects) that are expected to drive its GLA to 459 thousand square meters by 2013.
ALSC3 BRL 20.2
Stock Data
Investment Thesis
We believe that Aliansce is well positioned to take advantage of the positive environment for the Brazilian shopping mall industry based on: i) its portfolio of young malls, which is expected to show a strong maturation effect over the next few years and support the companys above-average, like-for-like growth; ii) the strong pipeline of new projects, which once inaugurated are likely to contribute significantly to top-line growth and dilute G&A expenses (we estimate a top-line CAGR of 34% between 2010 and 2013, and EBITDA margin increasing from 66% to 74% between 2010 and 2013); and iii) its attractive relative valuation in terms of P/FFO 2013 (11.4x vs. 11.5x for its peers).

We believe that the resilient profile of the Shopping Mall sector (which combines the growth potential of the Brazilian retail segment with long-term, inflation-adjusted contracts and high cash flow generation) will continue to grab investor attention. Moreover, an environment of lower long-term real interest rates tends to compress implied cap rates and reflect positively on the shares. Triggers include: The companys young Risks include: A weaker macroeconomic backdrop could lead to lower demand for retail space in Brazil. Net debt/EBITDA is forecasted to reach 4.6x Announcement of new projects or stake acquisitions from partners in the malls the company already owns. Case in point, the company recently acquired an 8% stake in its most important mall (Iguatemi Salvador) at an attractive 9.3% implied cap rate for 2012 and five additional stakes in other malls it already owns comprising 59,524 m of GLA at an implied cap rate of 9.2% (2012). Lower trading liquidity versus its peers could prevent investors from adding shares (ADTV of BRL 2.5 million in the last 21 days). by YE12, which is comfortable in our view, but might look a bit tight if the company continues to announce new projects.
Company Performance
140 120 100 80 60 40
portfolio of malls will likely generate aboveaverage same-store sales, same-store rent, and ultimately like-for-like top-line growth.
Ibovespa
ALSC3
Source: Ita BBA

We have a constructive stance on ALSC3 shares due to the companys strong growth outlook and the sectors resilient profile. Our projections include no new projects outside those that have already been announced. We see the stock trading at a 9.9% cap rate for 2012 and 13.3% for 2013, which looks compelling relative to the 9%-10% 12-month forward cap rates seen in recent acquisitions. We have an outperform rating on ALSC3 shares with a YE12 fair value of BRL 20.2/share. We see the company trading at 11.4x P/FFO 2013, compared with the sector average of 11.5x. We see no relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Years Owned GLA (m) Net revenues (BRL m) EBITDA (BRL m) FFO (BRL m) EV/EBITDA P/FFO
Source: Ita BBA
2010a 263,706 206.8 137.2 90.3 15.2 21.9
2011e 284,327 278.8 189.2 118.0 13.6 16.7
2012e 428,097 381.1 282.0 120.9 11.6 16.3
2013e 467,009 499.8 369.8 172.9 8.6 11.4
2014e 476,973 540.8 400.2 212.3 7.5 9.3
2015e 476,973 565.2 418.3 249.5 6.6 7.9
David Lawant, CNPI +55-11-3073-3037 david.lawant@itaubba.com Enrico Trotta, CNPI +55-11-3073-3064 enrico.trotta@itaubba.com Vivian Salomon +52-55-5262-0672 vivian.salomon@itaubba.com
Ita BBA 162
BHG ON Outperform
Company Description
BHG is one of the largest hotel operators in Brazil, managing over 7,065 rooms in over 37 hotels, 19 of which the company owns. Most of the hotels have a three- to four-star rating. The company mainly focuses on the business travel segment, which is more stable than the leisure segment. BHG also has a long-term land bank inherited by Investur (acquired by BHG), which has a book value of BRL 157 million and could be an additional source of value going forward. The company is focused on growth through acquisitions, greenfield projects and increasing administration in third-party hotels. In 3Q11, 72.8% of its top-line came from room revenue, 21.9% from food and beverage (F&B) and the remaining 5.3% from administration fees.
BHGR3 BRL 28.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -3.8 -3.2 15.4 82.5 23.8/15.05 40,296 621 0.2 12m -15.7 2.4
Investment Thesis
We believe that BHG is an attractive vehicle to play the hotel industry in Brazil, particularly for longterm investors. Among the main highlights are: i) the fragmented nature of the hotel industry and the lack of candidates to carry out a relevant consolidation movement; ii) the company has an aggressive strategy of growth through greenfields and acquisitions, improving its EBITDA margin as the G&A expenses as-a-percentage-of-revenue diminish going forward (we expect the companys EBITDA margin to improve to 30.7% in 2013 vs. 20.5% in 9M11); iii) a top-notch management team and board members; and iv) a large, untapped land bank (BRL 157 million) that management plans to monetize in order to finance its expansion plans (our model assumes a fair value that implies a 2.0x P/BV multiple for this land bank).
Company Performance
140 120

In our view, both business and leisure tourism have strong growth prospects, particularly in light of the World Cup and Olympic Games to be hosted in 2014 and 2016, respectively. The sectors strong fragmentation also suggests that there is potential for a strong M&A trend ahead, as 71% of the market share in the hotel segment is not attributed to any major player. Triggers include: Acquisitions at interesting valuation levels. We project BRL 295 million in acquisitions at an EV/EBITDA multiple of roughly 8.0x in 2012. New greenfield announcements. Over the next five years, the company plans to build 4,000 hotels in 30 cities that show solid demand from the business travel segment. Risks include: The stocks limited liquidity, which could pose a problem for new investors (ADTV of BRL 0.3 million for the last 21 days). Acquisitions may not be in exact accordance with the timing, pricing and leverage ratios factored into our model. Case in point, the company is currently in litigation against Accor regarding the acquisition of the Rio Palace Hotel, one of the most important hotels in Rio de Janeiro.
100 80 60 40
Ibovespa
BHGR3
Source: Ita BBA

We maintain our outperform recommendation on the stock, with a YE12 fair value of BRL 28.1/share. In terms of P/FFO multiples, BHGR3 shares are currently trading at 11.7x for 2012 and 7.8x for 2013. Although we do not foresee a relevant dependence on global growth and credit, we acknowledge that a possible economic deceleration and a higher inflation scenario could affect our top-line growth projections for the company.

Years Number of Rooms Net revenues (BRL m) EBITDA (BRL m) FFO (BRL m) EV/EBITDA P/FFO
Source: Ita BBA
2010a 712 124 3 0 n.m. n/a
2011e 937 197 36 0 22.6 n/a
2012e 1,070 310 85 0 10.3 n/a
2013e 1,070 439 135 0 6.6 n/a
2014e 1,070 520 164 0 5.4 n/a
2015e 1,070 533 168 0 4.9 n/a
Ita BBA 163
BR Malls ON Outperform
Company Description
BR Malls is the largest shopping mall player in Latin America and is responsible for the development, ownership and operation of 45 malls, comprising 795 thousand square meters of owned gross leasable area (GLA). It has a diversified geographical presence and serves mostly middle-income consumers. BR Malls operates as a full-service provider that acquires a direct stake in a mall, and in most cases also manages it. In 3Q11, 72.1% of its top-line came from rental revenue, 14.0% from parking lots and the remaining 13.9% from services and others. BR Malls is currently developing seven new shopping malls and eight expansions, which are projected to add 341,194 m of owned GLA to its portfolio by 2013.
BRML3 BRL 26.2
Stock Data
Investment Thesis
We believe that BR Malls is the most efficient mall operator in Brazil, and reinforce the company as one of our preferred names among the most liquid shopping malls we cover based on: i) one of the best operational indicators and profitability in the sector (EBITDA margin and occupation costs in 3Q11 at 80.0% and 10.3% vs. the sector average of 75.4% and 10.7%, respectively); ii) the companys ability to deliver another sizeable and profitable M&A cycle ahead; and iii) solid additional growth through the opening of its greenfield and brownfield projects over the next few years (we expect a 31% increase in BR Malls owned GLA by 2013 vs. the 51% sector average).

Given the low competition for the acquisition of assets and the still-high fragmentation in the industry, the top six players currently own assets that represent only 33% of the countrys total gross leasable area. Although we expect BR Malls to continue to develop new greenfield malls and expand its portfolio, at this point we believe that M&As will continue to be the most relevant value driver for the company. Triggers include: The announcement of more acquisitions at attractive cap rates; we expect around BRL 500 million in acquisitions in 2012. Our model estimates a 9.0% cap rate for acquisitions (vs. an 11.2% average for its recent acquisitions). Execution of its M&A pipeline. Our estimates Maintenance of strong operational indicators over the next few quarters. The company recently guided a same-store-sales and samestore-rent growth of 7%-10% and 10%-13% in 2012, respectively. Announcement of new greenfield and Potentially higher costs of funding. BR Malls cost of funding could potentially increase in the medium to long term, as TR-linked funding becomes scarcer (average debt cost currently stands at IGP-M + 6.92%). brownfield projects. We believe that BR Malls has the capacity to open approximately three malls per year going forward. could be affected if acquisitions are not carried out in accordance with the timing, cap rate or leverage factored into our models. Risks include: Dependence on the overall retail sales environment in Brazil. In case of an economic deceleration, our estimates for real growth in terms of rent per square meter could be negatively affected.
Company Performance
140 120 100 80 60 40
Ibovespa
BRML3
Source: Ita BBA

We reinforce our outperform recommendation on the company and YE12 fair value of BRL 26.2/share. At current prices, we see BRML3 shares trading at 12.9x P/FFO 2013, a deserved premium to the 11.5x sector average, given the companys premium profitability and compelling growth outlook. We see no relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Source: Ita BBA
2010a 593,251 546 425 285 21.8 28.6
2011e 764,121 883 701 391 14.5 20.8
2012e 954,117 1,197 971 523 11.7 15.6
2013e 1,000,112 1,440 1,173 631 9.5 12.9
2014e 1,000,112 1,602 1,306 785 8.2 10.4
2015e 1,000,112 1,703 1,388 881 7.2 9.2
Ita BBA 164
BR Properties ON Outperform
Company Description
BR Properties is one of the largest real estate companies in Brazil, mainly focusing on the acquisition, administration, rental and sale of commercial, industrial and retail properties. The company seeks to maximize value mainly by acquiring and retrofitting properties, and potentially selling them once there is no further upside to the asset. In 3Q11, 45.0% of the companys top line came from offices, 41.0% from warehouses, 11.0% from retail stores and the remaining 2.0% from services and others. In September 2011, the company announced its plan to merge with One Properties to become the largest property company in Brazil, with a portfolio valued at approximately BRL 10 billion.
BRPR3 BRL 26.6
Stock Data
Investment Thesis
We believe that BR Properties is one of the most successful and attractive cases in the real estate sector and reiterate the company as our top-pick in the lease income space based on: i) a healthy business profile that includes long-term, inflation-adjusted contracts; ii) potential approval of the merger with BTG-WTorre, improving the quality of its portfolio and its exposure to the triple A segment (12% of the consolidated company portfolio will be concentrated in this segment); iii) sizeable and profitable M&A cycle ahead, consolidating the underpenetrated commercial property segment (we believe that 91% of the market in terms of GLA comes from non-organized companies); and iv) interesting relative valuation (11.4x P/FFO 2013, vs. 11.5x for the real estate property segment).

In our view, the approval of the merger between BR Properties and BTG-WTorre will continue to be the main value driver for the company, at least in the short term. Although we still need further information (to be provided by BR Properties after the end of the due-diligence process), we view the deal favorably due to BTG-WTorres sizeable, high-quality portfolio. Triggers include: Strong upside from the renegotiation of rental contracts. We believe that BR Properties is in a comfortable position to renegotiate leasing contracts scheduled to expire over the next two years, as the supplydemand balance for almost all sub-segments of the Brazilian property market remains tight (42% of its rental contracts in terms of revenue can be renegotiated in the next two years). The announcement of further acquisitions at attractive prices. BR Properties acquired no new assets after its recent primary equity follow-on in June. We believe that the company will deliver around BRL 1.6 billion in acquisitions in 2012 at a cap rate of 11.0% (vs. an entry cap rate of 12.1% for the last acquisitions). Risks include: Because the Brazilian Property sector is highly leveraged to macroeconomic conditions in the country, negative surprises in key macroeconomic indicators could have a negative impact on our estimates. We also note that acquisitions may not be carried out in exact accordance with the timing, cap rate or leverage factored into our models. Case in point, BR Properties deal with BTG-WTorre might not be approved in accordance with our expectations. Potentially higher cost of funding. The
Company Performance
140 120 100 80 60 40
Ibovespa
BRPR3
Source: Ita BBA
companys cost of funding could increase slightly in the medium to long term, as TRlinked funding becomes scarcer (TR-linked debt currently stands at 71% of its total debt).

We remain confident in BR Properties investment thesis and maintain our outperform recommendation on BRPR3 shares, with aYE12 fair value of BRL 26.6/share. We currently see the company trading at 11.4x P/FFO 2013, in line with the mall sector average. We do not see a relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Source: Ita BBA
2010a 1,159,756 204 170 84 28.5 38.3
2011e 1,230,692 361 322 121 15.2 26.9
2012e 1,601,257 575 529 246 10.9 13.2
2013e 1,617,778 667 614 283 9.1 11.4
2014e 1,617,778 709 653 316 8.3 10.3
2015e 1,617,778 745 685 352 7.5 9.2
Ita BBA 165
Brookfield Incorporaes ON Market Perform

Company Description
Brookfield is one of the largest Brazilian homebuilders (in terms of launches). The company is the result of the merger of Brascan Residential, Company and MB Engenharia. It focuses on the development of real estate projects in both the residential and commercial segments, which represented 60% and 40% of launches in 9M11, respectively. The company operates in three main regions: So Paulo, Rio de Janeiro and Braslia, and is primarily focused on the middle-income residential segment. Brookfields main shareholder is Brookfield Asset Management (BAM), one of the largest global real estate groups with approximately USD 68 billion in property assets.
BISA3 BRL 12.1
Stock Data
Investment Thesis
Brookfield is the only large homebuilder with a strong presence in both the commercial and residential real-estate markets, and has a relevant participation in the Mid-West region of Brazil (33% of total launches in 9M11). The company has been focusing aggressively on increasing returns via higher asset turnover (4.3-year land bank duration in 3Q11 vs. 5.8 in 2010) and lower cost of debt (the company indicates that all future debt increases will come from SFH financing). As a result, the company has increased its annual ROE from 7% in 2008 and 10% in 2009 to 14% in 9M11. We believe that Brookfield will reach 16% by 2013.
Company Performance
140

We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%; which is lower than the 30% plus levels in 2010, but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash flow generation and leverage. Triggers include: We are more confident in the companys potential to achieve positive cash flow generation in mid-2012 after the reduction in launch guidance for 2011 (to BRL 4.0-4.2 billion from BRL 4.8- 5.3) and 2012 (to BRL 4.3-4.8 billion from BRL 5.3-5.8 billion). In our view, the companys strong execution capacity is among the most comfortable in the sector due to its considerable construction expertise in the regions in which it operates, and will likely contribute to lower earnings volatility relative to the other names we cover. Risks include: We believe that the Brazilian Homebuilder sector is highly leveraged to the long-term macroeconomic backdrop. Thus, significant changes in GDP growth expectations, unemployment rates, consumer confidence and inflation (among others) could significantly change our estimates for the companies. We note that a company-specific risk is that it is outpacing its peers in terms of launches in 2011 (growth of 31% vs. 13% for the sector average), which will only make the company cash-flow positive by 2013 (vs. 1H12 for most peers).
120 100 80 60 40
Ibovespa
BISA3
Source: Ita BBA

We have an market-perform rating on BISA3 with a YE12 fair value of BRL 12.1/share due to our expectation that positive cash flow generation will happen only in 2013. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings, as labor is a key component in any homebuilder cost structure (~40%-50%).

Years Launches Contracted Sales Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) P/BV P/E
Source: Ita BBA
2010a 2,999 2,263 3,284 743 355 0.9 7.1
2011e 3,930 4,388 3,813 828 338 0.8 7.4
2012e 4,581 4,215 4,178 956 423 0.7 6.0
2013e 4,810 4,569 4,422 1,041 473 0.7 5.3
2014e 5,051 4,691 4,700 1,131 574 0.6 4.4
2015e 5,303 5,157 4,983 1,190 666 0.6 3.8
Ita BBA 166
CCDI ON Market Perform

Company Description
CCDI is the homebuilding division of the Camargo Corra group, a large-scale Brazilian conglomerate focused on big infrastructure projects. The company mainly focuses on the development of residential units in the middle-income and commercial segments. CCDI also has exposure to the low-income segment mainly through HM Engenharia, its low-income arm. Of its launch volume in 9M11, 44.2% was concentrated in the middle to upper-middle income segment, 48.0% in low-income, and the remaining 7.8% in commercial. CCDI is currently developing two triple-A projects comprising 88,836 square meters of owned GLA.
CCIM3 BRL 5.8
a i
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 20.5 21.3 4.2 38.0 8.5/3 112,483 473 0.3 12m -50.2 -39.6
Investment Thesis
While we would rather focus on companies with greater visibility on execution among the smaller homebuilders we cover (namely Even and EZTEC), we believe that CCDI has competitive advantages: i) the groups strong brand name and synergies that can be explored; and ii) expected margin recovery going forward, as projects with lower margins cease to make larger contributions to revenue than the new and more profitable projects.

Company Performance
Although we disagree with the view that short-term interest rates affect the fundamental analysis of the sector (as most of companies debts are TR-linked), we believe that further SELIC rate cuts and a deceleration in inflation could improve sentiment toward homebuilder stocks. We stress that the companys focus will remain on margin improvement, following the recent cost overruns and deleveraging of its balance sheet. Triggers include: The sale of CCDIs current triple-A projects under development (namely the Paulista and the JK buildings), reinforcing its cash position (currently at BRL 154.6 million). Faster-than-expected margin recovery. After the BRL 141 million cost overrun in 2Q11, we expect the company to improve its gross margins to 25.1% in 2012 (vs. 21.3% in 3Q11). Further small costs overruns going forward could continue to pressure margins. Although we believe that the company will no longer suffer from costs overruns, we highlight that the execution risks for homebuilder companies in general will continue to be a key point to watch going forward. Risks include: High-leverage relative to its peers. CCDIs current net debt/equity ratio stands at 120% (vs. the 58% sector average).
130 110 90 70 50 30
Ibovespa
CCIM3
Source: Ita BBA

We still see the company lagging behind its peers, particularly on the profitability side. We maintain our market-perform recommendation on CCIM3 with a YE12 fair value of BRL 5.8/share, for the time being. At current levels, we see the stock trading at 0.5x P/ABV, relative to the sectors 0.9x. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-thanexpected inflation could have a negative impact on earnings considering that labor is a key component in any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 1,392 1,179 1,029 216 143 0.6 3.3
2011e 436 1,207 1,022 66 -48 0.7 n.m.
2012e 721 729 1,149 182 88 0.6 5.4
2013e 984 824 666 71 27 0.6 17.4
2014e 1,033 883 763 110 42 0.6 11.3
2015e 1,085 967 882 150 77 0.6 6.2
Ita BBA 167
Cementos Argos Outperform

Company Description
Cementos Argos is a leading Colombian cement, concrete and aggregates producer founded in 1934, which holds a 48% market share in Colombia as of 2010. It is the fifth-largest cement producer in Latin America with investments in Panama, U.S. and the Caribbean. The assets acquired from Lafarge in the U.S. will begin consolidating in 4Q11 and Argos will become the second-largest producer in the Southeast and the fourth-largest ready-mix producer in the U.S. It also exports cement and clinker to 39 countries. Cementos Argoss annual installed capacity is 16 million tons per year as of 2011.
CEMARGOS CB COP 13,100
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding COP % COP th COP m COP m 1m 3.3 2.4 11,100 18.0 11780/9700 1,151,677 12,783,610 4,316.3 12m -2.3 14.1
Investment Thesis
Cementos Argos has been one of the best ways to play the construction sector in Colombia and has experienced impressive growth with support from the government. The Caribbean region is also showing positive market dynamics. Argoss Cartagena plant continues to register good results in terms of efficiency and productivity, is currently operating at 85% of capacity and has had a 300-bp impact on margins. The acquisition from Lafarge aims to vertically integrate Argos in the U.S. With these assets, the total installed capacity will increase to 16 million metric tons of cement, a 25% increase, and its ready-mix capacity will grow by 31%, to 13.8 million m . Due to the difficult economic conditions in the U.S. in the construction sector, we expect results to be insignificant until 2013, when the assets will represent 6% of total EBITDA.
3
Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IGBC
Company Performance
109

Argos benefits from the strong outlook for infrastructure investment in Colombia and the Caribbean, as we expect governments to remain supportive of growth in the region Higher licensed construction area in Colombia. Tenders of infrastructure projects in Panama. CEMARGOS after the divestiture will now be seen as solely a cement player, and will have a more transparent valuation. Higher energy costs might be impossible to pass to the inflation costs of the final product. Recovery in the U.S. will depend on new cement-intensive projects and recovery of the residential sector.
Source: Ita BBA
99 89 79 69
Jan-11
Jul-11
May-11
IGBC
CEMARGOS
Difficult weather conditions in Colombia, U.S. and Caribbean could slow down growth.

We have an outperform rating on the company and a YE12 fair value of COP 13,100/share. We continue to see positive results in Colombia and the Caribbean. However, after our calculations for the transfer of assets to Inversiones Argos which is expected to take place in 2012, we view the impact as neutral since most EBITDA-generating assets will be left in Cementos Argos. This move will likely make the companys valuation more transparent. The 2005-10 CAGR of EBITDA was 23%; we expect EBITDA in 2012 to increase 8.2%. By 2015, the company expects EBITDA to be 42% in Colombia (87% as of 3Q11), 32% in the U.S. (-3.4% as of 3Q11) and 26% in the Caribbean (29% in 3Q11). We have a more cautious stance on the U.S. numbers until 2013, in line with the PCAs expectations for recovery in cement volumes.

Years Net revenues (COP m) EBITDA (COP m) Net income (COP m) Net debt (COP m) EPS FCFE (COP m) EV/EBITDA P/E FCFE yield (%) DPS (COP) Dividend yield (%) P/BV
Source: Ita BBA
2010a 3,023 539 289 2,396 251 (190) 14.2 17.8 -1.5 126 1.1 0.46
2011e 3,338 606 377 1,559 328 (29) 11.2 13.6 -0.2 132 1.2 0.45
2012e 3,506 655 242 2,501 210 (1,168) 11.8 21.2 -9.1 138 1.2 0.45
2013e 3,892 765 273 2,291 237 66 9.8 18.9 0.5 142 1.3 0.44
2014e 4,220 850 336 2,074 292 336 8.6 15.3 2.6 146 1.3 0.44
2015e 4,573 952 400 1,894 347 437 7.5 12.9 3.4 151 1.4 0.43
Vivian Salomon +52-55-5262-0672 vivian.salomon@itaubba.com David Lawant, CNPI +55-11-3073-3037 david.lawant@itaubba.com Enrico Trotta, CNPI +55-11-3073-3064 enrico.trotta@itaubba.com
Ita BBA 168
Nov-11
Sep-11
Mar-11
Jan-12
Cemex Market Perform

Company Description
CEMEX is the worlds third-largest cement manufacturer and one of the largest cement and clinker traders. CEMEXs consolidated global cement production capacity is around 96 million tons per year as of 2010 and USD 606 million in assets. CEMEX has operations in Mexico (49% of EBITDA), U.S. (-4.5% of EBITDA), Northern Europe (18.6% of EBITDA), Mediterranean (19.2% of EBITDA) including Spain, Croatia and Africa, South America and the Caribbean (21.5%), and Asia ( 3.5% of EBITDA).
CEMEXCPO MXN 7.2 CX US USD 6.0
Stock Data
Current price Upside (YE12) 52 Week high/low USD % USD th USD m USD m 1m 14.1 5.43 10.5 10.55/2.27 1,041,337 5,618 61.3 12m -46.8
Investment Thesis
The United States, in our view, remains CEMEXs main obstacle to restoring profitability (EBITDA contribution is still negative at 6.2%). In our opinion, there is low visibility on how CEMEX plans to regain profitability; we therefore prefer to wait for positive margins, which we expect by 4Q12. For the U.S. operation, CEMEX will use the PCAs guidance, which in its Fall 2011 forecast expects a recovery in volumes in 2014. This forecast is based on slower-than-expected economic recovery and job creation, which implies a slower recovery in all types of construction. CEMEXs main objective continues to be to deleverage; it is focusing its efforts on cash generation and regaining financial flexibility in order to resume growth. The company reported USD 17.0 billion of total debt as of 3Q11 and we believe that the company will be able to comply with its December 2011 covenant of 7.0x total debt/EBITDA (our estimate 6.8x). However, it is at risk for the 6.5x June 2012 covenant (our estimate 6.9x). CEMEXs financing agreement obligations have been met so far, and there are no important maturities until 2014, of USD 8.1 billion.
Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute
Company Performance
115 95 75 55 35
Aug-11 Dec-10 Jun-11 Oct-11 Apr-11 Dec-11 Feb-11

Under the current global conditions, we believe that in order for growth to resume, the companys U.S. operations need to deliver at least neutral results; while its operations in Mexico, Colombia, Poland, Egypt and the Philippines need to maintain growth
15
CX
Source: Ita BBA
Disposal of some non-core and non-operating assets, divest non-core businesses.
Cost-inflation recovery in 2012. Difficult weather conditions could slow down
Continued activity in the debt markets to avoid a breach of covenants.
the demand for cement products. A new Highway Bill in the U.S. that will help
Higher-than-expected
EBITDA
generation
the cement industry is not expected until 2014, and this will lead to a recovery in consumption during 2014-15.
from Mexico, U.S. and Colombia, which could offset any weakness from other regions.

Our YE12 fair value of USD 6.0/share (MXN 7.2/share) is based on a DCF valuation that assumes a 10.0% discount rate and a 1.5% terminal growth rate, implying a target EV/EBITDA multiple of 9.1x for 2012E. CEMEX is currently trading at a premium compared with its international peers, which we dont see as justified due to the low levels of FCF generation and higher leverage ratios. Thus we rate the stock as market perform. The company expects a mid-cycle EBITDA of at least USD 4.5-5.0 billion with the expected contribution from the U.S. between USD 1.5 and USD 1.8 billion; we dont expect those levels until 2015-16.

Source: Ita BBA
2010a 14,069 2,314 -1,304 17,053 (1.32) 389 10.1 n/a 6.9 0 0 0.4
2011e 14,761 2,434 -557 17,335 (0.53) 195 9.7 n/a 3.4 0 0 0.4
2012e 15,193 2,581 -169 16,579 (0.16) 201 8.8 n/a 3.6 0 0 0.4
2013e 16,202 3,027 63 15,857 0.06 312 7.3 78.4 5.5 0 0 0.4
2014e 17,267 3,267 298 14,842 0.29 397 6.4 16.7 7.0 0 0 0.4
2015e 18,660 3,610 396 13,864 0.38 603 5.5 12.5 10.7 0 0 0.4
Ita BBA 169
Cyrela Brazil Realty ON Market Perform

Company Description
Cyrela Brazil Realty, founded in 1962, is the second largest Brazilian homebuilder in terms of launches PSV. The company currently focuses on the development of residential real estate projects for the low-, middle- and high-income segments (32%, 23% and 45% of 9M11 launches, respectively) and is present in 17 states throughout the country. Cyrela started its low-income brand Living in 2006, and has two inhouse sales forces (Seller and Selling), which were responsible for 63% of the total sales in 9M11. The company is also currently engaged in 4 JVs: Mac, SKR, Cury and Plano&Plano.
CYRE3 BRL 18.0
Stock Data
Investment Thesis
Cyrela has been the sector benchmark for several years, but after expanding geographically via partners between 2006 and 2008, the company reduced its participation in the management of its construction sites (from 74% in 2005 to 28% in 2007 and 34% in 2008). As a result, Cyrela incurred significant cost overruns that tarnished its operating profitability; adjusted gross margins dropped to 31.4% in 9M11 versus 35.5% in 9M10. We believe that in 1H12 the company will be working with lower margins on the delivery of these legacy projects in order to recover its historical profitability levels in 2H12. On the other hand, we believe that Cyrelas solid balance sheet with a net debt/equity of only 3.1% (excluding SFH financing) and an additional BRL 1.6 billion in performed receivables (which can be easily translated into cash) is a differentiating factor versus other companies.
Company Performance
130

We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%, which is lower than the 30% plus levels in 2010, but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash flow generation and leverage. Triggers include: After reducing the number of JVs (from 11 in 2008 to 4 in 2011) and focusing on the markets in which it has more expertise (e.g. SP and RJ represented 60% of launches in 9M11 vs. 45% in 9M10), Cyrela is guiding a gradual improvement in adjusted gross margin to 31%-35% in 2012 versus 27%-31% in 2011. Lower launch growth (8% in 2012 vs. a 17% CAGR between 2009 and 2011) will likely continue to sustain the companys positive cash flow generation in the next few quarters. Risks include: Because we believe that the Brazilian leveraged Homebuilder to the sector countrys is highly
Source: Ita BBA
110 90 70 50 30
Ibovespa
CYRE3
long-term
macroeconomic backdrop, significant changes in GDP growth expectations, unemployment rates, consumer confidence and inflation (among others) could significantly change our estimates for the companies. We note that a company-specific risk is the high inventory of finished units (BRL 827 million, or 14% of the total as of 3Q11), which in our view requires attention, particularly demand environment. in a decelerating

We have a market-perform rating on CYRE3 with a YE12 fair value of BRL 18.0/share due to its rich valuation relative to our coverage universe. At current prices, we see the stock trading at 1.1x P/ABV and 7.8x P/E 12, versus 1.2x and 6.7x for our top pick MRV and the average 0.9x and 6.2x for large homebuilders. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component in any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 5,926 4,809 4,890 925 601 1.4 10.4
2011e 6,079 5,204 6,083 991 521 1.4 12.0
2012e 6,549 6,098 7,487 1,464 817 1.2 7.6
2013e 6,876 6,683 7,998 1,717 1,036 1.0 6.0
2014e 7,220 6,910 8,145 1,704 1,125 0.9 5.5
2015e 7,581 7,297 8,617 1,787 1,263 0.8 4.9
Ita BBA 170
Consorcio Ara Underperform

Company Description
Consorcio Ara was founded in 1977. The company designs, builds and markets homes for the progresiva (21% of units), affordable entry-level (27.8%), middle income (32.9%) and residential housing (14.1%) segments, and acts as a contractor (1.5%). It also develops and operates shopping malls and builds golf-course communities and vacation clubs. The malls business, with a GLA of 163,329 m , is a 50% joint venture with OConnor Capital Partners, and is not consolidated in Aras results. Ara is the fifth-largest concrete producer in Mexico, producing only for internal consumption. In 2010, Ara sold 18,423 homes and reported an EBITDA margin of 19.3%.
2
ARA* MXN 4.0
Stock Data
MXN m MXN m
4.13 -3.2 7.92/3.5 1,300,736 5,398 10.9 12m -45.3 -42.6
Investment Thesis
Ara has always been seen as the homebuilder with the strongest balance sheet, maintaining low levels of debt and net debt-to-equity of 0.13x. But over the last seven quarters, Aras net debt has increased 143% in peso terms. Ara decided to introduce a new product line to its business in October 2010 in a joint venture with Crystal Lagoons Corporation, offering high-value-added homes with artificial lagoons in order to help boost housing sales. In our view, these projects will take time to generate higher sales and margins, and have required higher levels of debt (1.45x net debt-to-EBITDA vs. an average of 0.93x in the past three years) and higher working capital. The company increased its cycle to 867 days from 759 before starting construction on the lagoons. Although Ara will continue to be exposed to the lowest-priced segments (49% of revenues and 71% of units sold), we expect an increase in the exposure to the middle-income segment in 2012 (41% of revenues vs. 33% currently).
1m 9.5 9.1
Company Performance
120 100 80 60 40
Dec-10 Jun-11 Dec-11 Aug-11 Feb-11 Oct-11 Apr-11

Ara has experienced problems at the operating level that have prevented it from titling the number of homes initially expected in 2011; but is expected to resume growth in 2012. Execution is crucial for driving the stock price. More mortgages with subsidies to be allocated in 2012; Ara could take advantage of this offer if production for these homes accelerates. There could be a visible improvement in operating efficiencies from reducing the number of days of construction-in-progress. Higher working capital requirements, from the Crystal Lagoons. Higher exposure to most expensive segments, under a housing scenario focusing mostly on affordable-income segments. Additional execution problems that could prevent the company from delivering growth.
MEXBOL
ARA
Source: Ita BBA

We have an YE12 fair value of MXN 4.0 and an underperform rating. Aras P/E multiple is at a 47% discount to its historical average of 15.4x, which we attribute to execution difficulties, lower top-line growth, higher debt and higher working capital requirements. We believe that Ara should be trading at a discount to its peers; it is currently trading at 10% premium in terms of EV/EBITDA and 25% in terms of P/E, due to the lower revenue and lower returns. The upside potential to our fair value will depend on the success of the Crystal Lagoons.

Source: Ita BBA
2010a 7,371 1,401 754 1,115 0.58 -70 4.6 7.1 -1.3 0.08 2.0% 0.6
2011e 6,873 1,204 636 1,121 0.49 1,248 5.4 8.4 23.2 0.09 2.1% 0.6
2012e 7,348 1,256 663 828 0.51 377 5.0 8.1 7.0 0.07 1.8% 0.5
2013e 7,348 1,423 823 637 0.63 477 4.2 6.5 8.9 0.08 1.9% 0.5
2014e 8,609 1,584 832 522 0.64 27 3.6 6.5 0.5 0.09 2.3% 0.4
2015e 9,206 1,729 901 186 0.69 -23 3.2 6.0 -0.4 0.10 2.3% 0.4
Ita BBA 171
Corporacin GEO Outperform

Company Description
Corporacin GEO is a leading housing developer for Mexicos lower-income segment. GEO was established in Mexico City in 1973. The company is vertically integrated, engaging in all aspects of the development, construction, marketing, sales of mainly low-income housing developments, with limited exposure to the middle-income and residential segments. Around 80% of GEOs revenues come from the affordable income segment. GEO sells around 57,000 homes annually, and has presence in 20 states. GEOs land bank is a combination of owned, outsourced, and optioned land, as well as joint ventures with Prudential Real Estate Investors and Banortes Slida.
GEOB MXN 24.0
Stock Data
MXN m MXN m
18.6 29.0 43.44/13.8 553,986 10,332 57.4 12m -56.1 -53.9
Investment Thesis
Positive cash generation and lower leverage have been the key variables for GEO to adapt its business strategy to deliver a more efficient model and remain the leader in the affordable income segment. Its main focus in 2012 will be reducing debt levels. We estimate net debt-to-EBITDA at 1.9x, improving from our 2.2x estimate for 2011; while generating positive FCF of MXN 913 million (GEO estimates above MXN 1.5 billion) and maintaining a strong participation in the low-income housing segment. We estimate that the company will be able to deliver 63,800 homes in 2012, which represents a 5.5% increase in volume, with a higher average selling price as a result of the higher subsidy program approved for 2012. GEO will be delivering around 45% of its total units under vertical construction, by using its ALPHA technology and traditional methods of construction. GEO has forecast more modest levels of growth for 2012 to strengthen its production capacity, mainly in vertical construction, to deliver sustained and profitable growth. In our view this is more realistic, due to the current economic scenario. We still believe that GEO will be able to maintain the shortest working capital cycle (564 days vs. 661 on average for its peers) and highest ROE (of 16%) among its peers.
1m 9.1 8.7
Company Performance
110 90 70 50 30
Dec-10
ALPHA technology is expected to play a key role in GEOs business model, as around 30% of the companys construction in the low-income segment will likely be carried out using this technology. Higher-than-expected sales in the affordable income segment that could increase its current market share of 9.4% with Infonavit to an estimated 12%. Strong participation in a defensive segment under tougher economic conditions. Higher contribution of vertical construction in its sales mix could still pose a risk, as the company is not past the learning curve for using ALPHA technology. Higher leverage than expected can put pressure on its balance sheet.
MEXBOL
GEOB
Source: Ita BBA

We have an outperform rating on GEO with a YE12 fair value of MXN 24.0/share. In our view, GEO will be able to deliver revenue growth in 2012, and a positive FCF-to-equity position taking advantage of the governments support of the affordable income segment. GEO is currently trading at 5.6x P/E and 4.1x EV/EBITDA 2012E, implying a 48% and 36% discount to its 3-year average multiple, respectively. Relative to its peers, the company is trading at a 10% discount to URBI and Homex in terms of EV/EBITDA 2012E.

Source: Ita BBA
2010a 19,154 4,311 1,490 6,972 2.5 (1,396) 4.5 6.9 (13.7) 0 0 1.1
2011e 21,506 4,682 1,603 10,068 2.9 1,613 4.8 6.4 15.8 0 0 1.1
2012e 23,021 5,186 1,832 9,359 3.3 263 4.1 5.6 2.6 0 0 0.9
2013e 25,024 5,542 1,935 9,166 3.5 650 3.8 5.3 6.4 0 0 0.8
2014e 27,074 5,970 2,248 8,560 4.1 1,794 3.4 4.5 17.6 0 0 0.7
2015e 29,445 6,480 2,546 8,607 4.6 110 3.2 4.0 1.1 0 0 0.6
Ita BBA 172
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Direcional Engenharia ON Outperform

Company Description
Direcional is one of the largest homebuilders entirely focused on the low-income segment. The company relies heavily on the Minha Casa, Minha Vida (MCMV) program, with a particularly high exposure to the 0-3 MW segment; and is strategically positioned in less-competitive areas of the country (the North and Mid-West regions), where it participates in many large-scale projects. The company also has significant exposure to the middle, upper-middle and commercial segments. In 9M11, 40.5% of its launch volume was concentrated in the 0-3 MW segment, while the middle to upper-middle income segments accounted for 47.7%, and the remaining 4.8% was focused on the commercial segment.
DIRR3 BRL 13.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -3.2 -2.6 9.5 45.0 14/8.25 151,637 1,463 0.7 12m -27.1 -11.5
Investment Thesis
We believe that Direcional has a solid investment thesis due to the companys: i) strong execution track record for solid margins and high returns (Direcional posted a 29.7% gross margin and a ROE of 17.4% in 3Q11, vs. the sector average of 28.5% and 13.0%; ii) strategic presence in less-competitive, blossoming regions in the Brazilian market (67.7% of the launch volume 9M11 was focused on the countrys North region); and iii) distinct presence in the 0-3 MW segment of the MCMV housing program, which could improve considerably (the company had a market share of 2.4% in number of units contracted for this segment in 2010, which we believe could improve over the next few years).
Company Performance

We acknowledge that the low-income segment has its execution challenges, as companies usually work on tighter budgets due to the lower average selling prices (as low as BRL 57,000 in the 0-3 MW segment). However, we also note the segments shorter production cycle (1.5-2.5 years vs. 2.5-3.5 years in the traditional segment) and faster cash collection, due to the Crdito Associativo financing scheme. Moreover, we like the potential for process standardization in this segment versus the middleand high-income segments (i.e., homes built are almost exactly the same). Triggers include: Cash burn reduction or any sign that the company is becoming a cash generator. Direcional posted low average cash burn of around BRL 60 million in the past few quarters (vs. BRL 124 million for the sector). Further exposure to the 0-3 MW segment that is expected to trigger results given the strong demand (about 60% of the expected 2 million units for MCMV2 are designated to the 0-3 MW segment). In 2012, we expect the company to launch BRL 749 million in PSV in this segment, but see upside potential to this number. Given its totally verticalized workforce, it could be difficult for Direcional to find qualified labor if it enters new markets. Case in point, the company is already developing 0-3 MW projects in the city of Rio de Janeiro. Risks include: Concentration in MCMV; if the government for any reason decides to cut back, unlikely as it may be, it could have a negative impact on the company. Moreover, the Crdito Associativo financing scheme offers less inflation protection than the middle to high income segment.
130 110 90 70 50 30
Ibovespa
DIRR3
Source: Ita BBA

We have an outperform rating on DIRR3 with a YE12 fair value of BRL 13.7/share. Valuation wise, we see the stock trading at 4.4x P/E 13, versus the sector average of 5.6x. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 1,067 1,037 782 203 167 1.9 8.8
2011e 1,316 1,146 1,073 253 193 1.3 7.6
2012e 1,794 1,623 1,427 310 236 1.1 6.2
2013e 1,797 1,762 1,952 437 334 0.9 4.4
2014e 1,549 1,380 1,616 369 262 0.9 5.6
2015e 1,627 1,545 1,460 347 248 0.8 5.9
Ita BBA 173
Even ON Outperform
Company Description
Even is the one of largest developers and builders in the So Paulo metropolitan region, with a broad range of products that targets from the high end to the mid-to-low end of the market. Even focuses on residential developments and operates with an agile management team and a business model based on the fast turnover of land and quick pre-sales. Of its launch volume in 9M11, the middle to uppermiddle income segments accounted for roughly 60%, while the commercial segment was responsible for 25%, and the high-income segment represented 6%. The company also uses innovative marketing and client-relationship methods.
EVEN3 BRL 12.1
Stock Data
Investment Thesis
We continue to see Even as an attractive opportunity among the smaller companies we cover based on: i) solid balance sheet position, which is expected to support the companys above-average growth over the next few years (Even currently has a net debt to equity ratio of 59.5%, vs. 57.9% for the sector average); ii) low execution risk and strong execution expertise in its main markets (mainly So Paulo and Belo Horizonte which accounted for 72% of the companys launch volume in 9M11); iii) experienced management team; and iv) unjustified underperformance relative to its sector peers, namely EZTEC and Tecnisa (EVEN3 shares fell by 23.2% in the last 12 months, vs. a 13.8% increase for EZTC3 and a 10.8% decrease for TCSA3).
Company Performance

We believe that the combination of solid execution expertise with premium profitability and potential for positive cash flow generation in 2012 position Even as one of the most interesting investment opportunities in the Brazilian Homebuilder sector. Going forward, we believe that the companys strategy will be to match land purchases with launches; given that it already has more than two years of land bank, it is therefore likely to focus on cash flow generation going forward. Triggers include: The potential to generate positive cash flow in less than 12 months (we expect a positive cash flow of BRL 161.9 million in 2012). Above-average growth, with the company posting a launch CAGR growth of 14.1% between 2011 and 2013, versus 13.1% for the sector. Efficiency in the transfer of receivables to banks, which we believe will be a key factor in the generation of positive cash flow in the Homebuilder sector. Relatively short land bank. A material shortage of land could impact the growth projections or margins going forward. Risks include: A weaker-than-expected
Source: Ita BBA
130 110 90 70 50 30
Ibovespa
EVEN3
macroeconomic scenario could negatively affect the company. Despite its strong sales speed levels (30.0% LTM vs. 26.1% for the sector average), it is important for Even to remain disciplined and improve launches gradually in order to avoid an undesirable execution risk. increase in perceived

We maintain our outperform recommendation with a YE12 fair value of BRL 12.1/share. At current levels, we see the company trading at 0.7x P/ABV, 6.2x P/E 2012 and 5.0x P/E 2013, relative to the sector average of 0.9x, 6.1x and 5.4x, respectively. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 1,528 2,064 1,960 412 254 1.1 5.8
2011e 2,005 1,639 1,835 350 225 0.9 6.6
2012e 2,487 2,023 1,940 399 245 0.8 6.0
2013e 2,611 2,028 2,113 460 296 0.8 5.0
2014e 2,742 2,418 2,340 505 328 0.7 4.5
2015e 2,879 2,586 2,461 528 356 0.6 4.1
Ita BBA 174
EZTEC ON Outperform
Company Description
EZTEC Empreendimentos Imobilirios e Participaes S.A. is one of the largest real estate developers and construction companies in the So Paulo metropolitan region, focused on the development of residential units in the mid-to-high income segments. The company also has significant exposure to the commercial segment. Of its launch volume in 9M11, 58.2% was in the middle to upper-middle income segment, 34.2% in the commercial segment and 7.4% in the high-income segment. The company is part of the EZTEC Group, a holding company that has over 40 years of experience in the Brazilian real estate industry.
EZTC3 BRL 23.7
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m -0.9 -0.3 16.1 47.0 17.85/11.92 146,724 2,367 5.9 12m 19.1 44.6
Investment Thesis
We believe that EZTEC is one of the most premium companies among the homebuilders we cover based on: i) focused and integrated homebuilding operation, which generates low execution risk and higher profitability; ii) comfortable balance sheet and healthy debt profile that position EZTEC as the sector leader in terms of leverage ratios (it is the only company in the sector with a net cash position, which currently stands at BRL 275 million); and iii) positive cash flow generation, with the company already generating BRL 87 million in cash in 2010. We see a company with solid execution experience that will likely continue to deliver impressive net margins in the 40% range over the next two years (vs. 16.0% for the sector) and converge to a still-solid level of 30% in the long run (compared with the 17.8% for the sector).
Company Performance
130 110 90 70 50 30

We believe that EZTECs compelling valuation levels, decent profitability and potential for positive cash flow generation will continue to draw investor attention. Although we disagree with the view that shortterm interest rates affect the sectors overall fundamentals (100% of the companys debt is TR-linked, vs. the 53% sector average), we acknowledge that further SELIC rate cuts coupled with moderate inflation could improve sentiment toward Brazilian homebuilder stocks. Triggers include: Potential launch of a triple A commercial project in the South region of So Paulo with an estimated PSV of approximately BRL 1.0-1.2 billion, according to our estimates. This project is not factored into our earnings estimates. We estimate that EZTEC will continue to report above-average profitability and maintain a strong average gross margin of 44.6% over the next two years (vs. the 31.0% sector average). Risks include: The companys ability to continue to grow with such high margins relative to the industry average in a competitive market like the metropolitan region of So Paulo. The real estate market in So Paulo
Ibovespa
EZTC3
Source: Ita BBA
represents virtually 100% of the companys launch volume in 9M11 (vs. 46% for the other homebuilders). Moreover, the company has significant exposure to small office spaces (43% of total launches in 9M11).

We have an outperform recommendation on EZTC3 with a YE12 fair value of BRL 23.7/share. At current levels, we see the company trading at 1.4x P/ABV, 6.5x P/E 2012 and 6.0x P/E 2013, relative to the industry average of 0.9x, 6.1x and 4.4x, respectively. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 887 748 636 236 244 2.3 10.3
2011e 1,158 885 716 273 311 1.8 8.0
2012e 1,361 1,129 953 343 363 1.5 6.9
2013e 1,429 1,370 1,184 385 394 1.3 6.4
2014e 1,500 1,369 1,300 403 430 1.3 5.8
2015e 1,575 1,404 1,341 410 466 1.3 5.4
Ita BBA 175
Gafisa ON Market Perform

Company Description
Gafisa, one of largest Brazilian homebuilders in terms of launches, was founded in 1954. The company is focused in the residential segment through three strong brands: Gafisa (upper-middle income segments), Tenda (low-income segment) and Alphaville (residential lots), which represented 62%, 17% and 21% of the launches in 9M11, respectively. Gafisa is one of the most diversified Brazilian homebuilders and has a presence in 22 states and over 120 cities. GP Investments (the largest private equity group in Brazil) and Equity International (the leading real estate private equity funds focused on emerging markets) and their main shareholders were previously owned by Gafisa.
GFSA3 BRL 9.3
Stock Data
Investment Thesis
In late 2008, the company acquired Tenda (60% initially and increasing to 100% at the end of 2009), which was entirely focused in the low-income segment. Since then, the company has had problems with low-margin legacy projects and an inadequate financing structure. Moreover, the companys rapid geographical expansion also generated lower margins in the Gafisa middle- and high-income segments. As a result, Gafisa is currently one of the sectors least profitable companies (4% net margin in 9M11) with one of the highest leverage ratios in the industry (75% net debt/equity as of 3Q11).

We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%, which is lower than the 30% plus levels in 2010 but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash flow generation and leverage. Triggers include: Gafisa currently books 40% of its launch revenue carried out before 2008, which generate gross margins of only 17%. Profitability is likely to increase as the company starts to book revenue from the projects launched after 2009. The companys cash burn rate (measured as change in net debt) decreased to BRL 56 million in 3Q11 from BRL 453 million in 3Q10. We believe that the recent 30% reduction in its launch guidance for 2011 will help to generate positive free cash flow in 2012. Risks include: Because we believe that the Brazilian leveraged Homebuilder to the sector countrys is highly long-term
Company Performance
130 110 90 70 50 30
Ibovespa
GFSA3
macroeconomic backdrop, significant changes in GDP growth expectations, unemployment rates, consumer confidence and inflation (among others) could significantly change our estimates for the companies. We note that a company-specific risk is that the poor execution over the last few years and relatively high leverage could still weigh on profitability and returns over the next few quarters.
Source: Ita BBA

We have a market-perform rating on GFSA3 and a YE12 fair value of BRL 9.3/share, relative to our coverage universe. Although the stock trades at the lowest P/ABV multiples under our coverage (0.4x), we would rather focus on companies with a more stable operating environment. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 4,492 4,006 3,721 747 416 0.5 4.5
2011e 3,654 3,875 3,949 611 95 0.5 19.8
2012e 3,721 3,639 3,632 763 239 0.5 7.9
2013e 4,069 3,887 3,605 757 304 0.4 6.2
2014e 4,273 4,152 4,000 870 431 0.4 4.4
2015e 4,486 4,351 4,139 902 498 0.4 3.8
Ita BBA 176
Homex Outperform
Company Description
Homex is a vertically integrated housing developer focused on the affordable entry-level (67% of total revenues) and middle-income segments (26% of revenues). Homex operates in 21 states in Mexico and in three cities and two states in Brazil. In addition, the government division was launched in 2010, to focus on building-services contracts with the federal and state governments. As a result of this reorganization, today Homex comprises five divisions: Mexico (66% of revenues), International (4.0%), Infrastructure (4.0%), Penitentiaries (26.0%) and Tourism (0.2%). In 2010, Homex sold and titled 58,000 homes and reported an EBITDA of MXN 9.4 billion. Homex is the only Mexican company that trades an ADR (1:6 ADR) at NYSE, under the HXM symbol.
HOMEX* MXN 56.0 HXM USD 26.2
Stock Data
MXN m MXN m
39.6 41.4 69.3/24.8 335,869 13,310 38.4 12m -42.8 -40.0
Investment Thesis
Homexs infrastructure division was awarded a long-term contract with the SSP (Security Ministry) to build and operate two separate federal penitentiaries, worth MXN 10.6 billion. Homexs current contracts (ongoing projects only) will generate 5% top-line growth, and generate around 45%EBITDA margin (compared with the 22% EBITDA margin of the housing business). We believe that in 2012 Homex will work to capture the highest amount of loans with subsidies for housing and to deliver the two penitentiaries on time to begin operations in 4Q12. We estimate the IRR of these projects will be around 15%, which compares positively with Homexs current ROE of 12.5%. We dont discard the possibility of Homex participating in more of these projects, as four penitentiaries are expected to be tendered. We expect to see a turnaround in Homexs balance sheet as cash generation will aid in reducing leverage. As of September, Homex reported a total debt-to-EBITDA ratio of 3.23x.
1m 24.2 23.6
Company Performance
110 90 70 50 30

The main drivers for Homex will be generating positive FCF in the housing business, reduction of debt, improving sales in Brazil, and on-time execution for the delivery of penitentiaries. Higher use of molds for vertical construction Operating the concession will bring additional cash flow starting 2013. Continued focus on defensive segment. Tightness in liquidity could pose a risk in rolling-over credit lines. Risk of breaching covenant of 3.25x total debt with cost-to-EBITDA ratio. Greater investment in international expansion could add more debt.
Dec-10
MEXBOL
HOMEX
Source: Ita BBA

We are positive on Homexs business model, with an outperform rating and a YE12 fair value of MXN 56.0/share (USD 26.2/share) .This fair value is derived from the DCF valuation of the housing business YE44.0 and from the DCF valuation of the two penitentiaries (MXN 12.0). We feel comfortable with the conservative valuation we have given to the penitentiaries as well as the more conservative number for FCF of MXN 336 vs. the MXN 500-800 million guided by the company. We believe that there could be upside to our numbers if Homex surpasses expectations for cash generation and debt reduction.

Source: Ita BBA
2010a 19,652 4,077 1,512 9,486 4.50 -67 5.6 8.8 -0.50 0 0 1.1
2011e 22,173 4,726 1,765 10,992 5.26 -196 5.2 7.5 -1.47 0 0 1.0
2012e 24,365 5,166 2,187 9,844 6.51 -419 4.5 6.1 -3.15 0 0 0.8
2013e 26,665 5,981 2,519 8,999 7.50 545 3.8 5.3 4.10 0 0 0.7
2014e 29,526 6,775 3,049 7,988 9.08 586 3.2 4.4 4.40 0 0 0.6
2015e 32,597 7,494 3,283 7,626 9.77 183 2.8 4.1 1.37 0 0 0.5
Ita BBA 177
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Iguatemi ON Market Perform

Company Description
Iguatemi Empresa de Shopping Centers is one of the main players in the Brazilian shopping mall industry, with a strong presence in the South and Southeast regions and in the upper-middle and highincome segments. In 9M11, 70.1% of the companys top-line came from rental revenue, 15.8% from parking lots, and the remaining 14.1% from services and others. Its portfolio includes 14 shopping malls and three commercial towers totaling 266 thousand square meters of owned gross leasable area (GLA). Iguatemi is also developing five new greenfield shopping mall projects and two expansions, which together are expected to expand its owned GLA to 427 thousand square meters by 2014. The company aims to reach BRL 450-500 million in EBITDA by 2014, with up to 520 thousand square meters of GLA.
IGTA3 BRL 43.4
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 0.1 0.7 36.2 20.1 42.91/28.61 79,150 2,861 5.9 12m -9.4 10.0
Investment Thesis
We currently have a more conservative stance on the company due to its valuation levels relative to its peers (10.2% P/FFO13 premium to the sector average), but recognize Iguatemi as one of the best mall operators in Brazil given its: i) solid pipeline of high-quality greenfield and expansions projects, which is expected to increase the companys owned GLA by 48.6% by 2013; ii) strong brand name recognition, which helps to create and strengthen identification with consumers and retailers; and iii) top-notch management team.

We believe that the healthy profile of the Brazilian mall sector in Brazil, combining long-term inflationadjusted rental contracts, compelling growth in the next few years and indirect access to the countrys booming consumer sector will keep these stocks in the spotlight. We acknowledge a possible slight deceleration in same-store-sales and same-store-rent metrics over the next few quarters mainly due to hard comps. Triggers include: The inauguration of JK Iguatemi in early April, which will be one of the main premium shopping malls in the city of So Paulo and will add 35,246 of owned GLA to Iguatemis portfolio. Announcement of new projects or stake acquisitions from partners in the malls that the company already owns. The company recently announced bids for two small stakes in Iguatemi So Paulo (7.0%) and Iguatemi Campinas (5.0%) at attractive entry cap rates (9.6% average). Risks include: A weaker-than-expected could affect
Company Performance
130 110 90 70 50 30
macroeconomic
scenario
Ibovespa
IGTA3
consumer demand and pose downside risk to our real growth estimates. Although we would assign a small profitability to further delays in the delivery of its malls, new delays would imply that our expectation of increases in GLA and margin improvements could take longer to be fulfilled.
Source: Ita BBA

We have a market-perform rating on IGTA3 and a YE12 fair value of BRL 43.4/share. While we recognize that the company has a high-quality pipeline of malls to be inaugurated over the next few years, and that it will also deliver a strong maturation effect from its newer assets (namely Alphaville and Brasilia), at current valuation levels we prefer other names in the sector. We see the stock trading at P/FFO 2012 of 14.4x and P/FFO 2013 of 12.6x, compared with the sector average of 14.6x and 11.5x. We do not see a relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Years Owned GLA (m) Net revenues (BRL m) EBITDA (BRL m) FFO (BRL m) EV/EBITDA P/E P/FFO
Source: Ita BBA
2010a 237,429 264 186 177 14.7 20.1 16.1
2011e 266,772 323 215 182 13.8 17.8 15.7
2012e 293,570 379 279 198 11.7 17.2 14.4
2013e 396,416 462 342 226 10.0 15.8 12.7
2014e 426,864 558 413 287 8.0 12.1 10.0
2015e 426,864 604 447 333 7.0 10.2 8.6
Ita BBA 178
LPS Brasil ON Outperform

Company Description
LPS Brasil is one of the largest real estate brokerage and consulting companies in Brazil, with a contracted sales value of BRL 12.7 billion in 9M11. The company has over 75 years of experience providing services to real estate developers, purchasers and sellers across all income segments. Its main current business units are: i) Lopes, which is focused on the upper-middle and high income segments in the primary market; ii) Habitcasa, which is focused on the low-income segment in the primary market; iii) Pronto! operates in the secondary real estate market; and iv) Credipronto! is a JV with Ita for the origination and distribution of mortgages. LPS Brasil also currently has a sales team of over 15,000 independent brokers at more than 550 temporary points of sale.
LPSB3 BRL 46.8
Stock Data
Investment Thesis
We have a constructive view on LPS Brasil and reiterate our confidence in the brokerage business in the Brazilian real estate sector given: i) the lower execution risk relative to the homebuilders, as they collect a brokerage fee at the time of the sale and do not incur the industrys usual heavy working capital requirements; ii) additional upside from the secondary market, which still represents only 16% of the companys total contracted sales (despite representing 60% of the total market); iii) LPS mortgage distribution arm, Credipronto! which is expected to break even in 2H12.
Company Performance

We have a long-standing positive view on the company because we expect to see lower execution risk as a result of solid cash-flow generation and successful ventures into new businesses (mortgage distribution and brokerage in the secondary market), which will continue to sustain a valuation premium versus the homebuilders. Triggers include: The faster-than-expected development of the Credipronto! business, which will likely allow for the cash-in of the second earn-out installment between 4Q12 and 4Q13 (approximately BRL 55 million, according to our estimates). The announcement of acquisitions in the secondary market at attractive prices. Dilution of costs related to recent acquisitions and potential synergies across its platforms. We expect EBITDA margin to improve to 45.4% in 2012, from 30.1% in 3Q11. Risks include: High operational leverage, which could strongly impact its profitability in the case of lower revenues from a less favorable market in terms of demand. Case in point, LPS consolidated EBITDA margins dropped to -114.7% in 4Q08, from 45.2% in 2Q08. The possibility that acquisitions may not be in exact accordance with our assumptions. We note, for example, that the operating costs associated with the acquired companies were higher than our estimates (24% of total expenses as of 3Q11).
130 110 90 70 50 30
Ibovespa
LPSB3
Source: Ita BBA

We have a positive view on LPSB3, and maintain our outperform recommendation on the company with a YE12 fair value of BRL 46.8/share. We continue to view LPS Brasil as an interesting vehicle for diversifying investments in the real estate space, based on its solid business model and exposure to the secondary market. At current prices we see the stock trading at 12.7x P/E 2012 and 10.8x P/E 2013.

Years Contracted Sales Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) P/BV P/E
Source: Ita BBA
2010a 14,350 339 163 107 5.9 14.6
2011e 19,663 440 174 100 4.0 15.5
2012e 21,384 490 223 124 3.2 12.5
2013e 22,761 536 252 146 2.7 10.6
2014e 24,227 570 273 165 2.2 9.4
2015e 25,599 619 303 190 1.9 8.2
Ita BBA 179
MRV Engenharia ON Outperform

Company Description
MRV is the only large Brazilian homebuilder entirely focused in the low-income segment. The company has over 30 years of experience in the sector and has a presence in 90 cities and 18 states. Approximately 90% of its product mix is concentrated in the Minha Casa, Minha Vida housing program. MRV also founded MRV Log (now called Log) in 2009, which focuses on the development of real estate property assets and has over 1 million square meters of GLA under development in 19 cities.
MRVE3 BRL 18.4
Stock Data
Investment Thesis
Due to its standardized product line and top-notch execution expertise, MRV currently presents the highest return levels among the large homebuilders (23.5% annualized as of 9M11). In our view, the main advantages of the low-income segment are the shorter product cycle (18-24 months vs. 24-36 months in the traditional segment) and faster collection due to the Crdito Associativo financing scheme. Moreover, we believe that the companys superior returns are partially attributable to its verticalized structure, including in-house construction expertise and sales force. The company recently invested in its website, which has already generated 32% of its total contracted sales in 9M11.

Company Performance
We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%, which is lower than the 30% plus levels in 2010 but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash flow generation and leverage. Triggers include: Due to its focus in the lowincome segment and the MCMV program, we believe that the demand for MRVs product could be more resilient than the middle-to-high income segments, which tend to be more cyclical. Based on its lower cash intensiveness and premium execution, we believe that the company will be the only large homebuilder to post positive free cash flow generation, with ROEs in the 20% range and still growing in line with (or slightly above) the industry average. In our view, this combination deserves a premium to other homebuilders. Risks include: Because we believe that the Brazilian leveraged Homebuilder to the sector countrys is highly long-term
130 110 90 70 50 30
macroeconomic backdrop, significant changes in GDP growth expectations, unemployment rates, consumer confidence and inflation (among others) could significantly change our estimates for the companies. We note that a company-specific risk is the low-income segment, which poses particular risks such as: i) larger number of simultaneous construction sites; ii) dependence on the CEF and the MCMV housing program; and iii) higher exposure to inflation.
Ibovespa
MRVE3
Source: Ita BBA

We have an outperform rating on MRVE3 with a YE12 fair value of BRL 18.4/share. In our view, the company trades at 1.2x P/ABV and 6.7x P/E 12, versus the large homebuilder average of 0.9x and 6.7x. We believe that current valuation levels are attractive in light of the companys premium business model. We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 4,604 3,753 3,021 796 634 2.1 9.6
2011e 5,307 4,353 3,856 965 677 1.8 9.0
2012e 7,045 4,841 4,915 1,244 829 1.5 7.4
2013e 7,397 5,559 5,344 1,336 930 1.3 6.6
2014e 7,767 7,094 6,640 1,692 1,230 1.1 5.0
2015e 8,156 7,421 6,945 1,772 1,376 1.1 4.4
Ita BBA 180
Multiplan ON Outperform
Company Description
Multiplan Empreendimentos Imobilirios S.A. is one of the leading players in the Brazilian shopping mall sector, responsible for the development, ownership and operation of 14 shopping malls across the country. The company currently has 371,730 square meters in owned gross leasable area (GLA) and new greenfield and expansion projects comprising another 245,371 square meters of GLA to be inaugurated by 2013. In 9M11, 61.2% of its top line came from rental revenue, 10.8% from parking lots, and the remaining 27.8% from services and others. Multiplan also has an extensive track record of developments and is considered to hold the highest-quality portfolio among all the Brazilian mall operators.
MULT3 BRL 47.4
Stock Data
Investment Thesis
We upgraded the company to outperform (from market-perform) in September 2011 and maintain its status as our top-pick in the mall sector mainly based on: i) the solid and high-quality pipeline of new developments to be inaugurated over the next few years, expanding its GLA by 55.9% by 2013 (vs. an average sector growth of 51.2%); ii) an EBITDA margin improvement over the next two years, as the company starts to deliver its vast pipeline of greenfield projects and reduce pre-operational expenses (we expect an EBITDA margin of 72.3% in 2013, from 74.4% in 3Q11, and vs. the 75.4% sector average in the same year); and iii) an under-leveraged balance sheet to support the companys growth plans (Multiplan currently has a net debt to equity ratio of only 1.9% vs. the 14.6% sector average).
Company Performance
130 110 90 70 50 30

We believe that the healthy profile of the Brazilian mall sector, combining a compelling growth outlook with high cash flow generation and long-term, inflation-adjusted contracts will continue to create a positive environment for Brazilian shopping mall companies in the coming years. Although we acknowledge that a possible deceleration in inflation could imply lower same-store-rent growth. Triggers include: A high-quality portfolio Risks include: The execution capacity of the greenfield pipeline. Although we acknowledge that the company is an efficient developer of new projects, its pipeline is heavily concentrated in 2012, with the planned inauguration of four malls. We also note that a weaker-than-expected macroeconomic scenario could affect consumer demand and pose downside risks to our real growth estimates.
Ibovespa
MULT3
Source: Ita BBA
(average monthly sales per square meter of 1,210 vs. the 1,067 peer average). We believe that in a weaker macro scenario, Multiplans shopping malls will be more resilient than its peers. The announcement of new projects to be delivered in the future. The company has a land bank of 583,035 square meters that can be used to support this growth.

We have an outperform rating on the company with a YE12 fair value of BRL 47.4/share. At current prices, we see MULT3 shares trading at 12.8x P/FFO 2013, a deserved premium relative to the 11.5x industry average. We do not see a relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Source: Ita BBA
2010a 371,956 604 350 368 17.7 17.6
2011e 397,196 662 434 352 15.3 18.4
2012e 520,300 778 524 371 13.4 17.4
2013e 619,044 971 702 503 9.7 12.9
2014e 619,694 1,109 802 618 8.0 10.5
2015e 619,694 1,098 804 670 7.3 9.7
Ita BBA 181
PDG Realty ON Outperform

Company Description
PDG was founded in 1998 and is currently the largest Brazilian homebuilding company in terms of launches. The company consolidated its diversified homebuilding platform with the acquisition of Agre in 2010, and now has a presence in the low income (36% of 9M11 launches), middle income (39%), high income (15%), commercial (7%) and residential lots (2%). PDG also has other minor operations such as a strip mall company (REP), a securitization company and a 3.4% stake in Br Brokers.
PDGR3 BRL 10.4
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m -6.5 -6.0 6.3 65.0 10.63/5.59 1,123,632 7,089 132.8 12m -36.6 -23.0
Investment Thesis
PDG is one of the most successful stories in the Brazilian homebuilding industry due to the powerful combination of a solid management team with financial and real estate development expertise and an aggressive M&A strategy (leading to a 67% launch CGAR between 2007 and 2011). Despite the Agre acquisition in 2010, with problematic, low-margin projects, the company maintained its adjusted gross margins at 36.3% in 9M11(vs. 37.8% in 9M10). In our view, PDG has fairly high leverage ratios (78.3% net debt/equity as of 3Q11, including securitizations), but a healthy debt profile (56% of total debt in 3Q11 from SFH financing; 19% from asset-backed securities). Moreover, we believe that the company will achieve positive free cash flow generation in 2012 and reduce its net debt/equity to below 70%.

We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%, which is lower than the 30% plus levels in 2010 but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash flow generation and leverage. Triggers include: PDG generated a free cash flow of BRL 160 million in 3Q11. However, it was partly related to the transfer of receivables that were supposed to be carried out in 2Q11. Therefore, greater visibility on the sustainable free cash flow generation will be crucial to the stocks performance in 2012. According to management guidance, the lower-margin Agre projects will be delivered by 2Q12, after which consolidated gross margins could increase by approximately 200 bps relative to the 29.1% level in 3Q11. Risks include: Because we believe that the Brazilian leveraged Homebuilder to the sector countrys is highly long-term
Company Performance
130 110 90 70 50 30
Ibovespa
PDGR3
macroeconomic backdrop, significant changes in GDP growth expectations, unemployment rates, consumer confidence and inflation (among others) could significantly change our estimates for the companies. We note that a company-specific concern is that the current launch volume (the largest in the sector at BRL 9 billion expected for 2011) makes the companys growth profile tougher than its peers, particularly considering the sectors limited economies of scale.
Source: Ita BBA

We have an outperform rating on PDGR3 with a YE12 fair value of BRL 10.4/share. The company trades at 0.8x P/ABV and 6.3x P/E 12, versus the large homebuilder average of 0.9x and 6.7x, which we believe is an attractive valuation level given the companys above-average execution capacity. We do not see a relevant dependence on global growth and credit for the companys earnings, but higherthan-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 7,005 6,520 5,805 1,474 833 1.3 9.0
2011e 9,010 7,475 6,944 1,670 935 1.1 8.0
2012e 9,552 7,692 7,992 1,933 1,118 1.0 6.7
2013e 10,030 8,650 8,494 2,107 1,199 0.9 6.3
2014e 10,531 10,153 9,676 2,414 1,418 0.8 5.3
2015e 11,058 10,718 10,178 2,533 1,578 0.7 4.8
Ita BBA 182
Rossi Residencial ON Market Perform

Company Description
Rossi Residencial is one of the largest companies in the Brazilian Homebuilding sector, with a 30-year track record in the low-, mid- and high-income segments. Of the companys total launches in 9M11, 39% were made in the low-income segment, 46% in the mid/high-income segments and 15% in the commercial segment. On top of that, the company is one of the homebuilding companies with the most widespread geographical presence, having a land bank in 23 states totaling 146 thousand units as of 9M11. In order to maintain good control over its many partners, the company has pioneered the intensive use of IT systems and has been using SAP technology since 1999.
RSID3 BRL 16.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -17.6 -17.1 8.5 91.0 15.36/8 267,699 2,274 32.3 12m -39.3 -26.4
Investment Thesis
We are fully comfortable with Rossis execution capacity at the construction-site level. The company has eight plants for aluminum molds and pre-cast and pre-fabricated slabs with a capacity of 15-21 thousand units per year, and an established IT platform. Rossi has been posting a very compelling combination of solid results (ROEs in the 12%-17% range) with a low cash burn rate (BRL 190 million on average) over the last six quarters. However, we still prefer to focus on other names with more attractive valuation levels and more potential for solid cash-flow generation in the short term.
Company Performance

We are still constructive on the demand outlook for the Homebuilder sector in 2012, with sales speeds hovering at around 23%-25%, which is lower than the 30%-plus levels of 2010 but still healthy in our view. We therefore believe that the main drivers for the stocks performance will continue to be execution, margins, returns, and ultimately cash-flow generation and leverage. The company is implementing a program to improve efficiency at the G&A level and keep the 2012 level the same as 2011, which will likely help to increase its EBITDA in 2013 to 21.1% (versus our 20.5% estimate for 2011). After the consolidation of several JVs (Norcon, Capital, GMS and Toctao are the most recent), the company has a solid land bank and operational platform to sustain good returns going forward. Because we believe that the Brazilian
Source: Ita BBA
130 110 90 70 50 30
Ibovespa
RSID3
Homebuilder sector is closely correlated to the countrys long-term macroeconomic backdrop, major changes in GDP-growth expectations, unemployment rates, consumer confidence and inflation (among other factors) could affect our estimates. We note that a companyspecific risk is that Rossi has had launch growth rates that were among the highest over the last three years (31%, versus 25% for the average of the sector), which means it could take longer than the average of the sector to turn cash-flow positive.

We have a market-perform rating on RSID3 with a YE12 fair value of BRL 16.2/share due to its rich valuation relative to our coverage universe. At current prices, we see the stock trading at 0.7x P/ABV and 4.7x P/E 12, versus 1.2x and 6.7x for our top pick MRVE and the average 0.9x and 6.7x for large homebuilders. We do not see a significant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component in any homebuilders cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 3,347 3,084 2,496 544 350 0.9 6.7
2011e 4,256 3,495 2,965 585 313 0.8 7.5
2012e 4,520 4,383 3,873 791 479 0.7 4.9
2013e 4,746 4,477 4,275 903 515 0.7 4.5
2014e 4,983 4,782 4,486 937 560 0.6 4.2
2015e 5,232 5,008 4,725 990 625 0.5 3.7
Ita BBA 183
Sare Underperform
Company Description
Sare was founded in Mexico City in 1967. Sares core business is housing construction, both horizontal and vertical, for the low-, middle- and high-income segments as well as the second-home market. Sare has a presence in 11 states; its most important markets are Mexico City, Guadalajara and Puebla. Sares land bank is equivalent to MXN 7.3 million in assets, and suitable for building 45,583 homes (88.6% affordable income segment and 11.4% middle-income and residential segments).
SAREB MXN 2.15
Stock Data
MXN m MXN m
1.3 61.6 3.67/1.1 1,374,698 1,842 9.2 12m -62.6 -60.8
Investment Thesis
After the equity follow-on of October 2010, where Sare raised USD 755 million to strengthen its liquidity position and restore housing production, focusing on the defensive segment did not allow the company to meet its original target. The original plan was to title MXN 824.5 million from apartments that had already been sold and, in addition, around MXN 698 million from the unsold apartments. However, the company delivered weak results due to poor execution and working-capital management (reaching 1,653 days of its cycle compared with 1,258 before the equity follow-on), tougher conditions for selling its middle-income and residential units, and tight liquidity. Sare reached levels of 6.4x net debt-toEBITDA in 3Q11 after it had managed to decrease this to 4.9x after the equity follow-on. Sare plans to sell MXN 1.03 billion in nonstrategic assets in 2012 mostly projects under development and commercial space and to sell another MXN 986 million in assets in 2013. The sale of nonstrategic assets represents 27% of the builder's inventory, and will likely be the only way that the company can meet its maturities and still manage to restore production, to reach sales growth of 5.0%-7.0% annually.
1m 4.7 4.3
Company Performance
120 100

The only driver for Sare will be to meet its maturities on time and being able to sell assets in 2012. Faster-than-expected improvement in workingcapital management. An improvement in the companys liquidity position due to the sale of assets. Approval for the rescheduling of its amortizing payments. Poor track record in management and execution. working-capital
80 60 40 20
Dec-10
MEXBOL
SAREB
Source: Ita BBA
Around 130 units pending sale in the middle income segment, around MXN 495 million. Sares vertical development implies a longer collection period and higher working-capital needs.

Although the company is taking measures to continue operating and to reactivate its housing production, we have a negative view on the name. We have a YE12 fair value of MXN 2.15/share and an underperform rating. Sare currently trades at 4.5x EV/EBITDA and 6.0x P/E, in line to the Mexican housing sector, which we dont see as justified. The company has liquidity issues and has not been able to reactivate housing production and deliver efficient working-capital management.

Source: Ita BBA
2010a 2,294 400 93 1,979 0.24 37 7.5 9.8 4.0 0 0 0.2
2011e 2,482 447 123 1,456 0.18 278 5.5 7.4 30.4 0 0 0.2
2012e 2,723 507 153 1,259 0.22 124 4.5 6.0 13.6 0 0 0.2
2013e 2,950 582 179 1,261 0.26 51 4.0 5.1 5.6 0 0 0.2
2014e 3,267 653 226 1,072 0.28 28 3.1 4.1 3.0 0 0 0.2
2015e 3,591 710 264 1,091 0.29 -400 3.0 3.5 (43.7) 0 0 0.2
Ita BBA 184
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
So Carlos ON Market Perform

Company Description
So Carlos is one of the largest commercial property administrators in Brazil, with over 50 properties comprising more than 412 thousand square meters of leasable area. So Carlos is mainly focused in the acquisition, administration, rental and sale of properties. The company established its operations through the management of Lojas Americanas properties in 1989. It then spun off in 1999, to become a separate publicly traded company. The companys revenue breakdown in 9M11 was: 92.0% from offices, 4.0% from retail stores, and the remaining 4.0% from others.
SCAR3 BRL 32.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m -1.6 -1.0 24.0 34.2 25.2/20 57,352 1,376 0.4 12m 5.5 28.1
Investment Thesis
We believe that So Carlos is an interesting player in the commercial property segment, despite the fact that it is not currently among our top picks. We see value in its business based on: i) interesting lease maturity over the next few years (12% of the contracts are scheduled to expire in December 2012, which could contribute an additional BRL 9 million per year in terms of revenue); ii) comfortable cash position to carry out its M&A pipeline going forward (we estimate that the company has a buying power of around BRL 1.0 billion, if it leverages its current cash position of BRL 317 million at a 70% loan-tovalue). However, the lower discount relative to BRPR3 prevents us from taking a more aggressive stance on the stock (11.1x P/FFO 13 vs. 11.4x for BRPR3).
Company Performance

We have a positive view of the commercial property segment, and believe that an environment of lower long-term real interest rates tends to compress implied cap rates and result in property-value appreciation. Furthermore, with the economy growing steadily, we believe that the supply-demand balance in the Brazilian commercial segment will remain strong going forward. Triggers include: Acquisitions at compelling cap rates. Our model assumes BRL 212 million in acquisitions in 2012 at a cap rate of 10.0% (vs. an average 12.1% cap rate for the companys recent acquisitions). Above-inflation contract renegotiations, at Risks include: A weaker-than-expected could affect
130 110 90 70 50 30
macroeconomic
scenario
Ibovespa
SCAR3
consumer demand and pose downside risk to our real growth estimates. The stocks low liquidity (an average daily traded volume of BRL 0.3 million in the past 21 days) could prevent investors from gaining exposure to the name. Acquisitions may not be in exact accordance with the timing, pricing and leverage ratios factored into our model, and could therefore affect our estimates.
Source: Ita BBA
attractive rates (27% of its rental contracts are scheduled to expire by 2013). EBITDA margin improvement; we expect the company to post an EBITDA margin of 85.02% in 2013, relative to 92.0% for BR Properties.

We have a market-perform rating on SCAR3 with a YE12 fair value of BRL 32.2/share. We see So Carlos trading at 11.5x P/FFO 2012 and 11.1x P/FFO 2013. We do not see a relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil (readjusted by inflation, mostly IGPM).

Years Owned GLA (m) Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) EV/EBITDA P/FFO
Source: Ita BBA
2010a 412,898 166 132 52 14.3 18.9
2011e 503,112 213 180 65 12.1 14.8
2012e 568,385 285 243 84 9.6 11.6
2013e 568,385 320 272 88 8.3 11.1
2014e 568,385 336 296 100 7.4 10.1
2015e 568,385 353 310 110 6.8 9.4
Ita BBA 185
Sonae Sierra Brasil ON Outperform

Company Description
Sonae Sierra is one of the largest shopping-mall developers and operators in Brazil, with an owned GLA of 205 thousand square meters distributed among 10 malls. The company expects to increase its GLA by 189 thousand square meters over the next two years, through the development of three greenfield and five expansion projects. Its malls mainly target the middle-income sector and are concentrated in the state of So Paulo, which constitutes 76% of the companys owned GLA. Sonae Sierras top-line revenue breakdown in 9M11 was: 76.2% from rental revenue, 10.0% from parking lots, and the remaining 13.7% from services and others.
SSBR3 BRL 33.8
Stock Data
Current price Upside (YE12) 52 Week high/low BRL % BRL th BRL m BRL m 1m -0.1 0.5 23.2 45.4 26.75/19.3 76,424 1,776 2.0 12m n.a. n.a.
Investment Thesis
We believe that Sonae Sierra is well positioned to take advantage of the prolific environment in the Brazilian shopping mall industry due to: i) a strategy that focuses on high-quality assets in underserved Brazilian cities, like the Manauara mall in Manaus; ii) a great greenfield pipeline that is expected to generate a 89% increase in the companys GLA by 2013 (vs. the 51.9% sector average); iii) healthy margins, which are expected to improve going forward; iv) a comfortable capital structure, with plenty of room for leverage to finance new greenfield and brownfield expansions (we expect the company to ramp up its EBITDA margin to 81.7% in 2013 vs. the sectors 76.7%); and v) excellent management and board, backed by two large international shopping mall groups.
Company Performance
130

We believe that the sturdy profile of the Brazilian shopping mall sector successfully integrates the growth in the retail and consumer segments. Another positive aspect is the long-term, inflation-adjusted contracts. This, together with the high cash-flow generation profile will continue to draw investor attention. Moreover, an environment of lower long-term real interest rates tends to compress implied cap rates and positively affect shares. Triggers include: The on-time development of its main greenfield projects should be well received by investors. The announcement of new projects would increase the efficiency of the companys capital structure; we estimate that Sonaes net debt to equity will increase to 3.8% in 2013, from -4.6% in 3Q11. High exposure to GDP growth via share of tenant sales. Relatively low stock trading liquidity (ADTV of BRL 2.1 million in the last 21 days vs. the BRL 12.4 million sector average). Increasing competition for acquisitions or the development of new malls could lead to lower returns on newer projects. Risks include: A weaker macroeconomic backdrop could lead to lower demand for retail space in Brazil and could pose downside risk to our real growth estimates.
110 90 70 50 30
Jun-11 Dec-11 Aug-11 Feb-11 Oct-11
SSBR3
Apr-11
Ibovespa
Source: Ita BBA

We remain positive on the SSBR3 based on the companys strong growth outlook for the next two years and its compelling valuation. We maintain our outperform recommendation on the name with a YE12 fair value of BRL 33.8/share. SSBR3 is the cheapest amongst its peers, trading at 8.1x P/FFO 13, which represents a 29% discount to the sector average. We do not see a relevant dependence on global growth and credit for the companys earnings, but reinforce that it has a resilient profile against higher-than-expected inflation due to the nature of rental contracts in Brazil readjusted by inflation, mostly IPCA).

Source: Ita BBA
2010a 205,616 184 106 88 18.3 20.1
2011e 208,318 216 155 137 10.8 13.0
2012e 295,053 259 206 147 8.9 12.1
2013e 386,633 375 306 218 6.0 8.1
2014e 386,633 421 343 251 4.9 7.1
2015e 386,633 443 361 279 4.1 6.4
Ita BBA 186
Tecnisa ON Market Perform

Company Description
Tecnisa S.A. is one of the largest homebuilders in the So Paulo metropolitan region, with over 34 years of experience in the industry. The company is focused on the upper-middle and middle-income segments and has been increasing its exposure to the lower-middle segment through Tecnisa Flex, its low-income arm (48% of its 9M11 launches). The company was among the first to develop an in-house sales force, which was responsible for 42% of its total contracted sales in 9M11.
TCSA3 BRL 17.3
Stock Data
Current price BRL % BRL th BRL m BRL m 1m -11.2 -10.6 9.9 74.0 13.71/8.87 184,859 1,837 5.7 12m -8.8 10.7 Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute
Investment Thesis
We believe that Tecnisa is ready to engage in another launch growth cycle over the next two years and is an attractive way to play the Brazilian real estate story based on: i) the relatively low execution risk, driven by the companys focus on a few specific markets and its considerable construction expertise; ii) attractive valuation, trading at among the lowest multiples in our coverage universe; and iii) potential positive impact on gross margins from the Bairro do Futuro project (a.k.a. Telefonica Project) over the next few years.

We believe that the Telefonica Project (with an estimated total PSV of over BRL 4.0 billion) will continue to be a significant value driver for Tecnisa. Although we recognize that the project is expected to have a positive effect on the companys consolidated revenues and margins from 2013 to 2018 (mostly between 2014 and 2016), the stock could lack short-term catalysts. Triggers include: Launching of the first phase of the Bairro do Futuro (i.e. Telefonica Project) in the first half of 2012. We expect the company to launch around BRL 750 million (company stake) in terms of potential sales value in 2Q12. We estimate a gross margin of 58% for this project alone, which could raise Tecnisas consolidated margins to 34% in 2013, versus the current 28% in 3Q11. Above-average profitability; according to our estimates, the company is expected to deliver a ROE of around 20.8% by 2013 (vs. 17.2% in 3Q11). Risks include: The rapid increase of the lowmiddle-income segments (Tecnisa flex) share in the companys launch mix could have an adverse effect on margins if Tecnisa is unable to maintain margins comparable to those in the middle segments. and upper-middle income
Vs. Ibovespa
Company Performance
130 110 90 70 50 30
Ibovespa
TCSA3
Source: Ita BBA
Higher-than-average leverage ratios in 2012 (net debt to equity ratio of 79% vs. the 55% sector average), as the company will be executing a high construction volume by then (mostly from 2011 and 2012), while cashing in relatively low receivables (mostly from 2009 and 2010).

We have an market-perform rating on TCSA3 with a YE12 fair value of BRL 17.3/share due to our expectation that positive cash flow generation will happen only in 2013. At current levels, we see TCSA3 shares trading at 0.9x P/ABV and 4.5x P/E 2013 (vs. the sector average of 0.9x and 5.6x, respectively). We do not see a relevant dependence on global growth and credit for the companys earnings, but higher-than-expected inflation could have a negative impact on earnings considering that labor is a key component of any homebuilder cost structure (approximately 40%-50%).

Source: Ita BBA
2010a 2,054 1,511 1,364 254 200 1.7 9.0
2011e 2,137 1,836 1,636 326 332 1.1 5.4
2012e 2,713 2,328 1,991 368 268 1.0 6.7
2013e 2,848 2,545 2,353 520 412 0.8 4.3
2014e 2,991 2,633 2,629 659 521 0.7 3.4
2015e 3,140 2,890 2,778 716 612 0.6 2.9
Ita BBA 187
Urbi Market Perform

Company Description
Urbi was founded in 1981 as a vertically integrated housing development company. Urbi is the thirdlargest homebuilder in Mexico. It has developed and sold more than 370,000 homes. Urbi targets mainly the affordable entry-level and low-middle-income homebuyers, and a smaller percentage of homes for the high-middle-income and upper-income segment (housing represent 80%-82% of revenues). Urbi is engaged in other housing-related activities (18%-20% of revenues) such as selling equipment and furniture, participation in the secondary housing market and commercial and industrial land sales.
URBI* MXN 19.0
Stock Data
MXN m MXN m
17.6 7.8 29.9/15.0 976,445 17,205 68.6 12m -38.9 -36.0
Investment Thesis
Urbi remains the market leader in the Mexican housing industry due to the diversity of products it offers, as well as innovative schemes for selling houses, which are achieved by incorporating technology in every business area. Urbis strategy for 2011-15 will be to continue with investment (around MXN 1 billion) and cash-flow usage to double the size of the company by 2015. Urbi will continue to invest in ongoing projects, reduce liabilities and capitalize on the current rates and reductions in deferred taxes in order to pay dividends. Management plans to achieve 14%-16% growth in ROE by 2015, compared with 11% currently (13.5% our estimate), and FCF of MXN 1.0 billion, compared with the estimated negative MXN 972 million for 2011 and neutral FCF for 2012. Urbis long-term plan is positive, but we prefer to focus on the delivery and consistency of its results to surpass ROE of 15% from the current average of 12%. Even if the company wants to move ahead and begin investing in 2012 for 2015, efficient growth seems more difficult in current conditions despite the continued government support.
1m 8.0 7.5
Company Performance
120 100 80

Cash-flow generation, reduction in short-term leverage and maintaining balanced revenue growth in housing and other related activities. Higher contribution from ongoing housing projects revenues and reduction in working capital cycle. A faster turnover obtained from Urbis Nova 2 technology could surpass growth estimates. Innovation in housing products and new schemes for serving the non-affiliated market. Continued higher-than-expected USD-
60 40
Dec-10
MEXBOL
URBI
Source: Ita BBA
denominated debt (71% of total) as the company generates revenues in USD. Increased derivative positions. Urbi is highly dependent on land sales that could pose a risk under a difficult economic scenario.

We have a YE12 fair value of MXN 19.0/share and a market-perform rating. Urbi is currently trading at premiums to GEO and Homex, of 11% and 1.0% in terms of EV/EBITDA, which we dont see as justified, as the company has decreased FCF generation guidance and has delivered a higher level of cash burn. We prefer to see some consistency of delivery in Urbis results before changing our view.

Source: Ita BBA
2010a 14,977 4,046 1,659 4,843 1.70 1,435 5.7 10.4 8.3 0 0 1.1
2011e 16,787 4,509 2,249 4,780 2.30 2,095 5.0 7.6 12.2 0 0 1.0
2012e 18,698 4,901 2,503 4,608 2.56 (2,757) 4.6 6.9 -16.0 0 0 0.8
2013e 20,425 5,531 2,893 4,300 2.96 960 4.0 5.9 5.6 0 0 0.7
2014e 22,389 6,090 3,486 3,977 3.57 900 3.6 4.9 5.2 0 0 0.6
2015e 24,593 6,733 4,155 3,241 4.26 (290) 3.1 4.1 -1.7 0 0 0.6
Ita BBA 188
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Steel & Mining and Pulp & Paper
Marcos Assumpo, CFA +55-11-3073-3021 marcos.assumpcao@itaubba.com Andr Pinheiro, CNPI +55-11-3073-3028 andre.pinheiro@itaubba.com
STEEL & MINING + PULP & PAPER

About the Sector
Brazilian commodity companies have lost competitiveness and profitability, mainly due to the BRL appreciation (+20% vs. USD in the past three years), which increased costs and import competitiveness. Results from more-industrialized sectors (Steels and Paper) deteriorated more relative to basic materials (Iron Ore and Pulp). The Steel and Paper sectors, which sell nearly 65%-80% of volumes domestically, suffered from increasing competition from imports. On the other hand, mining companies continue to post healthy EBITDA margins (above 50%), mainly driven by high prices generated by strong demand from China and emerging economies. For Pulp, margins have been under pressure, mainly because of lower prices. Hardwood pulp prices have remained relatively weak as the global cash cost curve flattened (nearly 60% of hardwood capacity is low-cost mainly Brazil, Chile and Indonesia). Also, pulp prices have become more volatile, as China, which has a volatile buying pattern, emerged as a relevant buyer (representing nearly 25% of global pulp demand in 2011 vs. 5% in 2000). Andr Pinheiro, CNPI +55-11-3073-3028 andre.pinheiro@itaubba.com Marcos Assumpo, CFA +55-11-3073-3021 marcos.assumpcao@itaubba.com

Our relative preference for mining is anchored on a tight supply-demand outlook for iron ore in 2012: i) limited supply additions (+90 million tons) because Chinese domestic production is peaking, India is reducing exports and junior mining companies are failing to deliver projects on schedule, and ii) moderate increase in global demand (+70 million tons), mainly from emerging-market economies. We forecast iron ore prices to average USD 144/ton in 2012 (-15% YoY), a still-healthy level. For copper, we forecast prices to average USD 8,000/ton (USD 3.6/pound) in 2012 (a 10% reduction YoY). Our bearish view on steels is based on: i) low (73%) global capacity utilization (not supportive of a price increase); ii) fierce import competition in Brazil; iii) low flat-steel domestic price premium at 5%-10% (versus the 20%-25% historical levels) in order to combat imports; and iv) unattractive valuation (Brazilian steel average EV/EBITDA 2012E at 7.2x, 30% above the historical average). In Brazil, we favor long steel over flat steel, mainly due to the stronger domestic demand outlook (long steel +8% annual growth, flat steel +5%) and lower import risk (5-10% import penetration in longs vs. flats at 15%). We have an out-of-consensus constructive view on the Pulp & Paper sector based on: i) increasing pulp prices in 2012, to USD 750/ton from the current USD 650/ton; ii) a considerable discount to Chinese replacement costs (Fibria -27% and Suzano -42%); and iii) the favorable technical position, with above-average short interest at ten days (Fibria) and eight days (Suzano).
Catalysts
Mining: growth Stronger-than-expected and/or quantitative Chinese easing. Pulp & Paper: Higher pulp prices and asset divestments would lead to a reduction in leverage risk. Equity offers from Suzano and Fibria could cause a short-term negative overhang but would solve liquidity issues.
Environmental license approval for new mining projects. Steels: Stronger-than-expected domestic
demand growth leading to a better sales mix. Weaker BRL or higher import tariffs.

Our preferred names in the sector are Vale, MMXM11 (port royalties), Ternium, Suzano and Southern Copper. Vale and MMXM11 are more defensive names in our commodity sector (Vale: 4.3x EV) and (MMXM11: low-risk dividend stream; 16% yield in BRL). Ternium is a more leveraged play in a globalgrowth recovery scenario, but with limited downside risk given its cheap valuation (4.0x EV/EBITDA 2012E). Suzano is an out-of-consensus call based on the recovery of pulp prices (+15% from current levels) and deleveraging through asset sales. We continue to avoid the flat steel names (Usiminas, CSN), given their: i) unattractive valuation (8.5x EV/EBITDA 2012E); ii) potential minority shareholder dilution for Usiminas; and iii) limited earnings growth for CSN (slower-than-expected increase in iron ore volumes). Southern Copper is a name that combines attractive valuation (5.5x EV/EBITDA 2012E) and a strong estimated dividend yield + buy-back in 2012 (+8.6%).
Ita BBA 190
Steel & Mining and Pulp & Paper

Iron Ore Price Curve and The Big-3 Iron Ore Volume Growth Guidance
164 Itu BBA IO Price Forecast (USD/ton) (mtpy) 1,200 800 400 0 10A 11E 12E 13E 14E 15E 16E
Source: BHP, Rio Tinto, Vale, World Steel Association and Ita BBA Note: IO Prices are CIF China (in USD, real terms). Rio Tinto and BHP volumes are equal to company guidance, while Vale estimates are equal to Ita BBA estimates
Idle Steel Capacity Structurally Impacting The Global Market

100%
140
91%
131 110 92 92
90% 80% 70% 60% 58% 50% Feb-08 Nov-08 Aug-09
If China is at 85%-90%, ....
73%
1,050 660 CAGR 10% CAGR 11% CAGR 5%
...then Rest of the World at 60%-65%. May-10 Feb-11 Nov-11
Avg Global Steel Capacity Utilization Rate (%)
Promised vs. Delivered Iron Ore Projects

(mn tons) 700 600 500 400 300 200 100 0 Announced for 2008-10
Certain Probable Possible
Forecasted Hardwood Pulp Price Cycle
Environmental Licenses; Funding; Rising Capex + Production Costs; Lack of Logistics/Infrastructure; Declining Ore Grades;
BHKP Europe Prices (USD/ton)
811 750 730 710 750
Completed by 2010
Rio Tinto Others
Hardwood Capacity Increases (ktons)
1,895 485 11E 270 12E 13E
2,770 300 14E 15E
Source: Rio Tinto, UNCTAD, Hawkins Wright and Ita BBA
Valuation Matrix
EV/EBITDA (x) 12E 13E STEEL CSN Gerdau Magnesita Ternium Usiminas MINING MMX Vale Grupo Mexico Southern Copper PULP & PAPER Fibria Klabin Suzano
Source: Ita BBA Note: P&P company P/E multiples are actually P/CE (Price/Cash Earnings).
P/E (x) 12E 13.0x 11.7x 14.8x 6.3x 22.7x n.m. 5.6x 7.8x 9.4x 10.1x 8.2x 11.1x 13E 8.0x 9.9x 8.4x 7.0x 13.1x 15.9x 5.2x 7.0x 10.5x 25.8x 7.3x 16.5x
Dividend Yield (%) 12E 13E 2.7% 2.3% 1.7% 4.1% 1.5% 0.4% 5.3% 3.8% 8.6% 0.0% 1.9% 2.3% 4.4% 2.7% 3.0% 4.1% 2.7% 1.6% 5.8% 4.3% 7.6% 0.8% 1.6% 0.0%
ND/EBITDA (x) 12E 13E 2.7x 1.1x 1.8x 1.3x 2.6x 5.7x 0.6x -0.3x 0.1x 4.1x 2.1x 6.0x 2.3x 0.9x 1.4x 1.0x 1.7x 2.7x 0.4x -0.7x 0.1x 4.4x 1.7x 6.3x
FCFE Yield (%) 12E 13E 1.0% 6.9% 6.5% 1.3% -8.4% n.m. 4.4% 12.2% 10.1% 6.9% 4.1% n.m. 5.6% 5.0% 5.2% 14.8% 9.8% n.m. 8.9% 14.6% 7.7% 4.0% 7.8% n.m.
6.4x 6.7x 5.8x 4.1x 8.5x 17.0x 4.2x 3.9x 5.5x 7.4x 8.1x 8.3x
5.5x 6.0x 4.5x 3.7x 6.0x 6.4x 3.7x 3.2x 6.1x 8.1x 7.4x 8.6x
Ita BBA 191
CSN ON Underperform
Company Description
CSN is a large corporation active in five main business segments: i) steel making (55% of revenues); ii) mining (35%); iii) cement; iv) logistics; and v) energy. In steels, the company has a slab production capacity of 5.6 mtpy and 5 mtpy of finished steels. In the mining segment, CSN has two large iron ore complexes (Casa de Pedra and Namisa) in the state of Minas Gerais, with a growth plan to 40 million tons by 2013). In cement, CSN currently has 2.4 million tons of grinding capacity and 0.8 million tons of clinker capacity. In logistics, the company has: i) a ~33% stake in MRS; ii) the Port of Itagua, with a current iron ore shipping capacity of 30 mtpy and coal and coke unloading capacity of 4 mtpy; and iii) a 66% stake in the Transnordestina railroad in Northeast Brazil.
CSNA3 BRL 27.0 SID USD 17.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 3.1 3.7 15.8 70.6 30.34/12.8 1,457,970 23,080 54.9 12m -41.8 -29.3
Investment Thesis
In our view, CSN will face compressed margins in its steel business (15%-20%, assuming it purchases iron ore at market prices), given low global steel pricing power (worldwide capacity utilization at 73%) and import risk in Brazil (imports represent 15% of apparent flat steel consumption). In mining, CSN will benefit from a still-healthy iron ore price scenario (2012E spot price of USD 144/ton), but volume growth will unlikely be significant (~10% in 2012). Additionally, CSNs current liquid position (cash of BRL 16 billion) raises concerns over the companys next strategic move. In 2011, CSN attempted to acquire a cement company and a long steel company in Europe and Usiminas in Brazil.
Company Performance
140 120

The main drivers are the potential sale of a stake in the mining business (according to our calculations, CDP could be worth BRL 20 billion), the delivery of the mining business project and improvement in iron ore and steel prices. An increase in domestic steel prices in 1Q12 would be welcomed by the market (every 5% price increase would increase steel EBITDA by BRL 400 million, or ~15%) Continued BRL depreciation throughout 2012 would positively affect CSNs export results and reduce steel import competition. An IPO or the sale of a stake in Casa de Pedra could unlock significant value for CSN (we estimate it could be worth BRL 20 billion). Selling its stake in Usiminas at market prices could trigger losses of nearly BRL 700 million. Further delays in CSNs mining operations would be viewed negatively by the market.
100 80 60 40
Ibovespa
CSNA3
Source: Ita BBA

We have an underperform rating on CSN, with a YE12 fair value of BRL 27.0/share. We have a cautious view on the company because: i) the valuation looks expensive (with its steel business trading at 8.5x EV/EBITDA 2012E, assuming that its mining business trades in line with Vale, at 4.3x); ii) the outlook for the Brazilian flat steel market is unappealing in the short term (CSN has limited room to increase domestic volumes and prices are likely to remain flat in 2012); and iii) CSN could post losses on its investment in Usiminas (BRL 700 million, or 4% of market cap). Additionally, CSN has an inefficient capital structure, with a strong cash position (mostly in USD) yielding lower returns according to our calculations, CSNs net financial expenses are totaling nearly BRL 1.5 billion per annum.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/E FCFE yield (%) DPS (BRL) Dividend yield (%)
Source: Ita BBA
2010a 14,451 6,355 2,516 9,851 1.7 5.2 9.2 0.2 0.8 4.9
2011e 15,532 6,283 2,548 16,237 1.7 6.3 9.1 -18.9 1.3 8.0
2012e 17,792 6,283 1,779 16,763 1.2 6.4 13.0 1.0 0.4 2.7
2013e 19,469 7,214 2,874 16,485 2.0 5.5 8.0 5.6 0.7 4.4
2014e 18,132 6,248 2,106 15,082 1.4 6.1 11.0 9.2 0.5 3.2
2015e 17,783 5,696 1,741 12,852 1.2 6.3 13.3 12.5 0.4 2.6
Ita BBA 192
Fibria ON Market Perform

Company Description
Fibria is the worlds largest market pulp producer. The company was created in 2009 as a result of the merger between VCP and Aracruz. It has nearly 1 million hectares of land and 600 thousand hectares of forest spread out across six Brazilian states, and operates four pulp mills (Aracruz, Jacare, Trs Lagoas and Veracel) with a total installed capacity of approximately 5.25 mtpy. The company recently divested from the paper segment and is now completely focused on pulp.
FIBR3 BRL 18.0 FBR USD 10.0
Stock Data
Investment Thesis
We expect global market pulp demand to grow by 2% p.a. for the next five years. Emerging market countries (45% of total demand) are expected to grow by 6% p.a., while demand from developed countries (55% of total demand) is expected to drop by -1%. On the operating side, Fibria continues to be well positioned with a low cash cost of USD 270/ton versus Canadas marginal cost of USD 580/ton. However, Fibria still has a highly leveraged balance sheet and is incurring high net financial expenses (BRL 500 million/year or 35% of EBITDA), which reduces its FCF and its capacity to deleverage.

Fibria is very leveraged to pulp prices and has a high FCF dependence on this variable. For every USD 50/ton rise in pulp prices, Fibrias EBITDA increases by BRL 360 million (or 18% vs. 2012 estimate). Other triggers for Fibria would be the sale of non-core assets like the Losango forest base (estimated value of BRL 600 million) and a saw mill (BRL 200 million), which would help Fibria reduce its leverage by BRL 800 million (or 0.4x EBITDA). Higher pulp prices; every USD 50/ton increases Fibrias EBITDA by BRL 360 million. Sale of non-core assets could total BRL 800 million and reduce leverage by 0.4x EBITDA. Sale of forests in the state of So Paulo could also reduce Fibrias leverage. An equity offer (which seems likely in 2012; we assume a +50% likelihood) would support the deleveraging process but create a shortterm overhang on the stock price. Further consolidation of the Brazilian pulp market could create positive synergies.
Company Performance
140 120 100 80 60 40
Ibovespa
FIBR3
Source: Ita BBA

We have a market-perform recommendation on Fibria with a YE12 fair value of BRL 18.0/share. Our cautious stance on the name is based on: i) weak expected pulp prices in 2012 (USD 750/ton vs. USD 810/ton in 2011); ii) considerable leverage risk (expected net/debt EBITDA at 4.1x by YE12); and iii) equity-offer risk (Fibria could opt to issue equity to reduce its leverage risk and accelerate future growth projects). The companys short-term results (mainly 4Q11) are expected to remain pressured by lower pulp prices.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/CE Adj FCFE yield (%) DPS (BRL) Dividend yield (%)
Source: Ita BBA
2010a 6,992 2,617 575 9,852 1.2 6.3 7.3 14.8 0.0 0.0
2011e 5,748 2,104 -1,192 9,469 -2.5 7.7 28.4 -0.2 0.6 3.9
2012e 5,617 2,011 1,079 8,206 2.3 7.4 10.1 6.9 0.0 0.0
2013e 5,495 1,819 221 7,995 0.5 8.1 25.8 4.0 0.1 0.8
2014e 5,499 1,747 174 7,849 0.4 8.3 n.m. 2.8 0.1 0.6
2015e 5,904 2,029 376 7,630 0.8 7.1 16.5 4.7 0.2 1.4
Ita BBA 193
Gerdau PN Market Perform

Company Description
Gerdau is the leading long steel producer in the Americas and one of the largest specialty long steel suppliers in the world. It has operations in the Americas, Europe and Asia, representing a combined installed capacity of over 25 million metric tons of steel. Its net revenue breakdown is as follows: Brazil (36%), North America (30%), Specialty Steel (22%) and Latin America (12%). Gerdau has the potential to benefit from strong infrastructure investments in Brazil over the next few years and from the potential demand recovery in the United States.
GGBR4 BRL 24.0 GGB USD 15.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 9.7 10.4 15.8 51.9 24.78/10.7 1,707,673 26,981 105.8 12m -33.2 -18.9
Investment Thesis
We believe that the outlook for Gerdau in the upcoming years is better than for flat steel producers. We forecast Brazilian long steel demand increasing by 8% per annum during the next five years, compared with 5% for flat steel, mainly because of heavier investments in infrastructure and real estate. Gerdau is also more protected on the raw material side, as it is 80% self-sufficient in scrap and less dependent on iron ore and coking coal. Gerdau also enjoys lower import risk (long steel imports only accounted for less than 10% of apparent consumption in 2011, compared with 15% for flat steel). Besides its presence in Brazil, Gerdau is exposed to U.S. growth and is therefore leveraged to a rebound in capacity rates (currently at ~70%) For every 5% increase in U.S. capacity utilization, Gerdaus EBITDA increases by BRL 150 million, or 4%).
Company Performance
140 120

Gerdaus main short-term drivers are: i) the announcement of the details of its iron ore project and its monetization strategy we estimate that it could be worth USD 3 billion; and ii) announcements of potential domestic price increases if the BRL depreciates and/or international prices improve. Gerdau is likely to announce the details of its iron ore expansion project and its strategic partner and monetization strategy in 1H12 (we estimate that the project could be worth ~USD 3 billion). Announcements of potential domestic price increases could trigger positive reactions in Gerdaus stock price (for every 5% increase in Brazilian prices, Gerdaus EBITDA increases by 11%). consolidated Stronger-than-expected demand in the U.S. could lead to higher capacity utilization and margins (for every 5% increase in capacity utilization, EBITDA increases by 4%). Higher prices for scrap in Brazil could lead to further margin compression, as scrap collectors could start to export and reduce domestic supply. Scrap prices in Brazil are 30% below international levels.
100 80 60 40
Ibovespa
GGBR4
Source: Ita BBA

We have a market-perform recommendation on Gerdau, with a YE12 fair value of BRL 24.0/share. Although we maintain our cautious view on Gerdau, given the weak outlook for the steel sector in the short term, we prefer the company among Brazilian flat steel players because of: i) its relatively attractive valuation of 6.7x EV/EBITDA 2012, compared with a peer average (CSN steel and Usiminas) of 8.5x; ii) the potential unlocking of value from its mining business (which according to our calculations could add BRL 2.8/share, or ~20% of market cap); and iii) Gerdaus accretive rolling-capacity projects (which could be worth BRL 2.3/share).

Source: Ita BBA
2010a 31,393 5,201 2,142 12,467 1.3 8.2 12.6 16.3 0.5 3.0
2011e 33,965 4,852 1,858 7,098 1.1 7.4 14.5 7.5 0.3 2.2
2012e 33,451 5,160 2,303 5,915 1.3 6.7 11.7 6.9 0.4 2.3
2013e 34,959 5,659 2,715 5,282 1.6 6.0 9.9 5.0 0.4 2.7
2014e 34,423 5,721 2,738 3,672 1.6 5.6 9.9 8.7 0.4 2.7
2015e 35,856 6,226 3,151 1,933 1.8 4.9 8.6 9.4 0.5 3.1
Ita BBA 194
Grupo Mexico Outperform

Company Description
Grupo Mexico is a holding company that owns: i) 80% of Southern Copper, the sixth-largest copper producer in the world with a capacity of more than 650 ktons per year; ii) 100% of Asarco, the thirdlargest copper producer in the U.S. with ~200 kton capacity; iii) a transportation division that includes a ~55% stake in Ferromex (the largest railroad company in Mexico) and a 75% stake in Ferrosur (a smaller Mexican railroad company); and iv) an infrastructure division. Grupo Mexico is listed on the Mexican Stock Exchange. The mining part of the business represents ~80% of the companys revenue, while transportation accounts for 19% and infrastructure for 1%.
GMEXICOB MXN 55.0
Stock Data
MXN m MXN m
36.9 49.1 50/30.42 7,785,000 287,111 381.0 12m -22.8 -19.3
Investment Thesis
Our constructive view on GMEX is supported by: i) its above-average copper production growth (+17% over the next three years) relative to global supply; ii) a strong expected FCF yield (12%) in 2012; and iii) a potential recovery in copper consumption in developed countries (namely the U.S.), which could benefit the company through Asarco, the countrys third-largest producer. We are also confident in the supply-demand dynamics for copper.
1m -1.5 -1.2

The main driver for GMEX would be higher copper prices, which represent nearly 80% of its revenue. The IPO of ITM would add value. The potential extraction of synergies between SCCO and Asarcos operations could also help reduce the discount to SOTP; however, this is not a given since the merger between the companies was cancelled. Higher copper prices; every USD 0.1/pound increases GMEXs EBITDA by 4%. The IPO of the railroad division (ITM) could unlock value we estimate ITM to be worth USD 2.8 billion, or 13% of GMEXs market cap. Additional investments in GAP (airport
103 93 83 73 63 53
Company Performance
Dec-10
Jun-11
Oct-11
Apr-11
operator) could lead to a widening discount to SOTP.
MEXBOL
GMEXICOB
Source: Ita BBA

We have an outperform recommendation on GMexico, with a YE12 fair value of MXN 55.0/share, based on its cheap valuation (3.9x EV/EBITDA 2012E). The current discount to SOTP is at 28%, above the historical average. In our view, the discount could narrow further through the IPO of ITM, which we believe is worth USD 2.8 billion in value for GMEX (or 13% of market cap). The current discount is justified because GMEX: i) is not a pure copper play; ii) has a lower daily liquidity (~USD 30 million) than SCCO (~USD 70 million); and iii) is more open to diversifying its business stream (GMEX already spent USD 600 million on the acquisition of GAP shares, 3% of its market cap).

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) Net debt (USD m) EPS EV/EBITDA P/E FCFE yield (%) DPS (USD) Dividend yield (%)
Source: Ita BBA
2010a 8,086 3,924 1,661 863 0.2 6.7 12.5 13.3 0.1 2.2
2011e 10,032 5,685 2,636 -281 0.3 4.4 7.9 9.3 0.1 3.8
2012e 10,463 5,822 2,661 -2,032 0.3 3.9 7.8 12.2 0.1 3.8
2013e 11,675 6,426 2,965 -4,182 0.4 3.2 7.0 14.6 0.1 4.3
2014e 11,957 6,371 2,926 -6,167 0.4 2.8 7.1 13.7 0.1 4.2
2015e 12,373 6,433 2,938 -8,334 0.4 2.4 7.1 14.6 0.1 4.2
Ita BBA 195
Dec-11
Feb-11
Aug-11
Klabin PN Market Perform

Company Description
Klabin is the largest paper and packaging producer and paper recycler in Brazil, with a 1.8-million-ton capacity. It operates 17 industrial plants in Brazil and one in Argentina. The company has operations in five different segments: cardboard (34% of revenue), Klabins highest-margin product with an EBITDA margin of above 30%; corrugated boxes (32% of revenue); kraftliner (14% of revenue); sacks (13% of revenue); and wood (7% of revenue). The companys EBITDA for 2011 will likely reach BRL 1.0 billion, and we expect 20% growth in 2012.
KLBN4 BRL 9.0
Stock Data
Investment Thesis
Klabin is perceived as a domestic-consumption play in the commodities sector, since nearly 80% of its revenues are generated in the domestic market. On a relative basis, Klabins core business (paper) is less cyclical than Fibria and Suzanos pulp. The recent change in Klabins management, coupled with the improving quarterly results (3Q11 EBITDA margin jumped to 28%, surpassing the 26% average for 2010), has increased investor interest in the story.

Klabins main trigger in 2012 will likely be the delivery of stronger results. We are already forecasting a 20% increase in EBITDA, to BRL 1.2 billion, fueled by cost-cutting initiatives and better price negotiations. Stronger-than-expected cost-cutting gains in the Corporate Center and SG&A; each 10% reduction in cash cost increases EBITDA by BRL 230 million. Brownfield de-bottleneck projects could add BRL 70 million to EBITDA in the short term. In our best-case pulp-price and cost/ton scenario, a potential flex pulp project announcement could unlock BRL 1.6/share (20%) for Klabin. A weaker-than-expected BRL in 2012 (our forecast is BRL 1.77/USD) could contribute to an improvement in results as export revenues increase and import competition eases.
Company Performance
140 120 100 80 60 40
Ibovespa
KLBN4
Source: Ita BBA

We have a market-perform recommendation on Klabin with a YE12 fair value of BRL 9.0/share because of: i) its unattractive valuation: Klabin is trading at 8.1x EV/EBITDA 2012E or 8.4x EV/EBITDA (considering consensus EBITDA), a premium to the historical average of 7.5x; ii) limited DCF upside only 13% upside after the 40% rally in the past 12 months; and iii) its negative technical position according to our recent conversation with investors, Klabin has become a consensus call, which is evidenced by its strong one-year outperformance over Suzano and Fibria (nearly 80%).

Source: Ita BBA
2010a 3,663 962 560 2,128 0.6 9.7 12.3 19.9 0.2 2.5
2011e 3,853 1,005 42 2,847 0.0 10.0 8.0 2.0 0.3 3.7
2012e 4,243 1,209 416 2,538 0.5 8.1 8.2 4.1 0.1 1.9
2013e 4,475 1,267 369 2,105 0.4 7.4 7.3 7.8 0.1 1.6
2014e 4,671 1,296 433 1,603 0.5 6.8 7.0 9.0 0.2 1.9
2015e 4,851 1,344 516 1,073 0.6 6.2 6.6 9.8 0.2 2.3
Ita BBA 196
Magnesita ON Market Perform

Company Description
Magnesita is a global refractory producer that mainly supplies the steel, cement and glass industries. Following the LWB acquisition in 2008, the company strengthened its efforts to reach other regions, including North America, Europe and Asia (~50% of revenues). The company is the leading operator in refractory products in Brazil. Magnesita has a leading market share in the steel (~75%) and cement (~85%) industries in South America.
MAGG3 BRL 10.0
Stock Data
Investment Thesis
In a fragmented and competitive global refractory market where China controls a large share of raw material supply (~50% of magnesite sinter and ~80% of graphite), Magnesita is poised to grow due to: i) its raw material integration projects, which could allow the company to reach 90% self-sufficiency (vs. the current level of 70% and the industry average of 30%); and ii) its large raw material reserve base (830 million tons of magnesite sinter and 57 million tons of graphite). Refractory volumes in the U.S. and Europe are expected to grow by ~5% (more than the industry average of 3%), given Magnesitas plan to gain market share through an aggressive business strategy (cost per performance model).

Magnesitas main value drivers will likely only materialize in the longer term: i) the Brumado magnesite expansion (expected to start up in 1Q12 and to be worth BRL 100 million); and ii) the Almenara graphite greenfield (expected to start up in 4Q12 and to be worth BRL 150 million, according to our calculations). However, we can see investors reacting to a few short-term catalysts, such as: i) the securing of financing for either project (expected to occur in 1Q12 and 2Q12 for Brumado and Almenara, respectively); and ii) the granting of an environmental license for Almenara (expected in 1Q12). Securing the financing resources and A further deceleration of the European and U.S. markets could have negative effects on Magnesitas results (every 5% decrease in Magnesitas export revenues reduces the EBITDA by BRL 20 million, or 5%). Refractory price increases in domestic market following further BRL depreciation could trigger positive reactions on the stock (for every +5% in refractory prices, Magnesitas EBITDA margin increases by 150 bps).
Company Performance
140 120 100 80 60 40
environmental licenses would likely reduce the risk of the raw material integration projects and would be viewed positively by investors. Higher long-term magnesite and graphite prices could increase the values of the raw material projects.
Ibovespa
MAGG3
Source: Ita BBA

We have a market-perform recommendation on Magnesita and a YE12 fair value of BRL 10.0/share, because: i) short-term results will remain under pressure due to the weak steel outlook, raw material cost pressure and an uncertain scenario in Europe (our 2012E EBITDA margin is 17%, vs. ~20% in the 2008-11 period); ii) the Brazilian market is still subject to import risk; and iii) the companys sinter and graphite raw-material integration projects will take some time to fully materialize (we estimate the projects total NPV at BRL 250 million, or 15% of Magnesitas market cap; however, the projects will only start to affect results materially in 2013).

Source: Ita BBA
2010a 2,276 462 92 1,303 0.3 6.4 18.1 5.4 0.0 0.0
2011e 2,248 359 114 799 0.4 6.9 14.5 2.4 0.0 0.0
2012e 2,438 417 112 750 0.4 5.8 14.8 6.5 0.1 1.7
2013e 2,622 527 197 715 0.7 4.5 8.4 5.2 0.2 3.0
2014e 2,740 535 201 519 0.7 4.1 8.3 14.7 0.2 3.0
2015e 2,954 601 254 297 0.9 3.3 6.5 17.9 0.2 3.8
Ita BBA 197
MMX ON Outperform
Company Description
MMX is a greenfield mining company that consists of three mining systems: Sudeste, Corumb and Chile. MMX has a current production capacity of nearly 10 million tons of iron ore per year and is expected to reach around 45 million tons in the long term. MMX is controlled by EBX, Wuhan (one of the largest Chinese steel makers) and SK (a South Korean conglomerate). MMX is building a 50million-ton port in the state of Rio de Janeiro, which is a strategic asset given its scarcity value.
MMXM3 BRL 15.0
Stock Data
Investment Thesis
The iron ore sector will likely benefit from the industry trend of increasing cash cost and higher capex, which tend to push long-term iron ore prices higher (we estimate USD 90/ton, slightly below market consensus of USD 95/ton). MMX is poised to benefit from this scenario, as it owns the most advanced junior mining project in Brazil we expect it to reach full capacity by 2014 while other projects will come later. MMX is the only junior company to certify reserves (427 million tons). It has the preliminary environmental license for the mining project; it recently guaranteed the necessary logistics by signing a contract with MRS and is expected to complete port construction by 1Q13. MMX could also be seen as a take-over target given its relatively advanced project and unique port facility MMX is trading at an EV/ton of USD 240/ton. Similar deals were closed at EV/ton of USD 300/ton.
Company Performance

140
MMX will continue to de-risk its project through: i) granting the installation license for the mine project and ii) securing funding for the project. Potential catalysts in the longer term could be: i) the environmental license for doubling the Sudeste Port capacity to 100 million tons; ii) potential consolidation of other mining assets in the Serra Azul region at accretive terms a deal with Pau de Vinho mine (8 million tons expected capacity) added BRL 1/share; and iii) advancements in the Chilean project (we valued it at BRL 4/share; however, investors currently are not pricing it in, given its early stage of development.) Getting funding for Serra Azul expansion would de-risk the project as 75% of MMXs USD 4 billion capex will come through debt. Doubling Sudeste Port capacity to 100 million tons would boost MMXs export capacity and increase consolidation capabilities. M&A activity through unlock the value potential for MMX consolidation of other assets in the Serra Azul region could shareholders. The certification of Chiles resources/reserves could de-risk the project in the country and trigger a positive reaction on the stock, as investors arent paying for the project upfront.
120 100 80 60 40
Ibovespa
MMXM3
Source: Ita BBA

We have an outperform recommendation on MMX and YE12 fair value of BRL 15.0/share. Our constructive view on MMX is based on: i) a positive view of long-term iron ore prices (USD 90/ton, CIF China, real-terms, slightly below consensus at USD 95/ton) 70% of MMXs value comes from perpetuity; ii) the potential doubling of its strategic port asset to 100 million tons; and iii) MMX trading at EV/ton of USD 240/ton in 2015, which could be attractive for a strategic player interested in increasing its footprint in Brazil.

Source: Ita BBA
2010a 725 121 47 -926 0.1 26.3 89.9 -10.7 0.0 0.0
2011e 1,044 303 315 451 0.5 15.0 13.3 -32.7 0.1 1.9
2012e 1,171 364 73 2,074 0.1 17.0 n.m. -36.7 0.0 0.4
2013e 2,089 1,087 263 2,898 0.4 6.4 15.9 -17.3 0.1 1.6
2014e 3,494 1,545 485 3,553 0.8 5.0 8.6 -11.9 0.2 2.9
2015e 4,187 1,265 184 3,359 0.3 5.9 22.7 6.6 0.1 1.1
Ita BBA 198
Southern Copper Outperform

Company Description
Southern Copper Corporation (SCCO) is the sixth-largest global copper producer (>630 ktpy) with operations in Peru and Mexico. SCCO has the worlds largest copper reserves (~60 million tons) and the longest estimated mining life in the industry (~80 years). The companys main products are copper (~80% of sales), molybdenum, zinc and silver, and its production processes are fully integrated, from mining to product refinery and related transport and logistics operations. The companys production target is to reach 1 million tons of copper by 2015.
SCCO USD 46.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding USD % USD th USD m USD m 1m 0.4 31.0 48.4 48.87/22.58 850,000 26,350 72.6 12m -31.7
Investment Thesis
Our positive view on copper is mainly supported by the increasing supply constraints faced by the industry. We have seen a limited supply increase due to: i) mine depletion issues (e.g. Codelco is investing USD 15 billion over the next five years just to sustain capacity); ii) new reserves located in riskier countries, where logistics are unavailable and will take time to develop; and iii) continued industry actions that hurt the industry, mainly strikes. We believe that the chief differentiating factor for companies will be volume growth (expected volume growth of 320 ktons over the next five years, or CAGR of 9%) and cash cost (low-cost producers will be able to maintain a strong FCF yield and generate stronger dividend yields estimated at 8% over the next three years).
Company Performance
120

The main catalysts for the stock are volume growth, de-risking of new projects through the granting of environmental permits, and the announcement of new reserve discoveries. Higher copper prices are also expected to have a positive impact on the stock price (correlation 0.9). Higher copper prices; every USD 0.1/pound, increases SCCOs EBITDA by 4%. Positive news flow regarding the granting of environmental licenses for new projects in Peru; Tia Maria (120 ktons) and Toquepala (120 ktons) could increase SCCOs capacity by more than 35%. Positive developments on expansion projects in both Mexico and Peru.
100 80 60 40 20 0
Feb-11
Aug-11
Dec-10
Jun-11
Oct-11
Apr-11
SCCO
Source: Ita BBA

Our outperform rating (YE12 fair value of USD 46.0/share) on SCCO is based on: i) its attractive valuation of 5.5x EV/EBITDA 2012E; ii) its strong dividend yield and buyback (estimated at 8.6% in 2012), which will likely provide strong support for the stock; and iii) copper volume growth potential (+140 ktons, or 23% over the next three years). We also believe that the recent moves by the Peruvian government could reduce regulatory risk in the country and, in turn, increase investor confidence in new projects and volumes from the region.

Source: Ita BBA
2010a 5,150 2,907 1,554 568 1.8 9.3 17.0 5.6 1.7 5.4
2011e 7,230 4,298 2,485 733 2.9 6.3 10.7 7.3 2.5 8.0
2012e 7,706 4,838 2,832 312 3.3 5.5 9.4 10.1 2.7 8.6
2013e 7,243 4,382 2,530 302 3.0 6.1 10.5 7.7 2.4 7.6
2014e 7,842 4,568 2,619 706 3.1 6.0 10.1 6.4 2.5 7.9
2015e 8,284 4,753 2,692 854 3.2 5.8 9.8 7.6 2.5 8.1
Ita BBA 199
Dec-11
Suzano PNA Outperform

Company Description
Suzano Papel e Celulose S.A. is one of Latin Americas largest vertically-integrated producers of pulp and paper, with an annual production capacity of 1.9 million tons of pulp and 1.3 million tons of paper. It has four product lines: i) eucalyptus pulp (43% of revenue); ii) uncoated printing and writing paper (35% of revenue); iii) coated printing and writing paper (6% of revenue); and iv) paperboard and specialty paper (16% of revenue). Suzano offers a broad range of pulp-and-paper products in both the domestic and export market, with leadership positions in key Brazilian markets.
SUZB5 BRL 11.0
Stock Data
Investment Thesis
Suzano is an integrated pulp and paper producer in Brazil. Its paper business provides more earnings stability than a pure pulp company. Suzano has a strong growth pipeline on pulp with potential to increase current capacity of 1.9 million tons to 5.3 million tons in the next decade. In our view, Suzano is uniquely positioned on the technology front, as it recently acquired Futuragene (a biotech company) and is developing Suzano Energia Renovvel (an energy company based on wood pellets).

We view any measure to reduce Suzanos leverage as positive. In our view, Suzano has a handful of options to improve liquidity. Among them are the: i) sale of non-core assets (energy); ii) sale of forests; iii) sale of paper assets; iv) pre-sale of energy; v) sale of a stake in its renewable energy business; and vi) sale of a stake in the Maranho pulp project. Any announcement in this direction will likely ease investor skepticism regarding Suzanos capex and leverage risk. According to our estimates, Suzano could raise nearly BRL 1.6 billion through the divestment of non-core assets. We estimate Suzano's net debt/EBITDA to peak at 5.0x in December 2012 (considering asset sales), which is high but suitable to Suzanos balance sheet, given its comfortable debt-payment schedule and three-year grace period on Maranhos project debt. Higher pulp prices; each USD 50/ton rise in pulp prices increases EBITDA by BRL 240 million, or 18% of our 2012 estimate. Sale of non-core assets (energy, non-utilized land, forests in SP) could be worth more than BRL 1 billion. Sale of 100% of the paper assets could be worth BRL 3-4 billion. Sale of a stake in the Maranho pulp project would reduce capex needs by BRL 2.5 billion. Sale of a stake in Suzanos renewable energy business could unlock BRL 100 million. Capex outsourcing could reduce capex needs by BRL 400 million. Equity offering could reduce leverage risk but create a short-term overhang on stock price.
Company Performance
140 120 100 80 60 40
Ibovespa
SUZB5
Source: Ita BBA

We have an outperform rating on Suzano with a YE12 fair value of BRL 11.0/share. Our out-ofconsensus positive view on Suzano is based on: i) its attractive valuation after the recent 50% drop in share price in the past 12 months Suzano is trading at 6.2x EV/EBITDA 2012E (ex-growth capex) and at a 42% discount to Chinese replacement cost; ii) we expect Suzano's results to improve in 2012 fueled by: lower pulp cash cost/ton (8% expected decline) as the Mucuri plants production has stabilized and better paper margins driven by lower import competition and other cost cutting initiatives; and iii) leverage risk could be lowered by the sale of non-strategic assets (energy, forest and paper businesses) and even an equity offering.

Source: Ita BBA
2010a 4,514 1,703 769 3,421 1.6 3.9 3.3 59.8 0.4 6.1
2011e 4,659 1,122 -252 5,425 -0.5 7.6 8.5 -83.4 0.3 5.2
2012e 4,931 1,315 287 7,834 0.6 8.3 11.1 -80.4 0.2 2.3
2013e 4,964 1,351 -114 8,498 -0.2 8.6 16.5 -21.2 0.0 0.0
2014e 6,082 1,675 89 8,553 0.2 7.0 12.4 -1.0 0.0 0.7
2015e 7,027 2,038 375 8,459 0.8 5.7 7.5 6.0 0.2 3.0
Ita BBA 200
Ternium Outperform
Company Description
Ternium S.A. (TX US) is the largest steel producer in LatAm, with a total finished steel capacity of 9.6 million tons. Flat steel represents nearly 90% of the companys revenues, while long steel accounts for 10%. Its main operations are divided between Mexico (70% of total capacity) and Argentina (30% of total capacity). TX is controlled by the Techint group, which is also the controller of Tenaris (TS US). TX has iron ore mines in Mexico and is self-sufficient in its Mexican operation. TX recently acquired 28% of Usiminas voting shares, finally gaining exposure to the Brazilian market.
TX USD 31.0
Stock Data
Investment Thesis
We expect LatAm steel demand to expand by an average of 5% per annum over the next few years. TX is the most efficient steel operator in the region and is well positioned to take advantage of this growth, given: i) its low-cost operation in Mexico for HRC (USD 450/ton, vs. the Brazilian average of USD 600/ton); and ii) its resilient EBITDA/ton (expected to average USD 175 in 2012-15, in line with historical averages and well above Usiminas current EBITDA/ton of USD 75). Despite the fact that TX recently made a considerable investment in Usiminas (USD 2.2 billion), TX is still a low-leverage company (net debt/EBITDA at 1.3x).

Company Performance
In our view, the deal between TX and Usiminas could imply other strategic moves by the company. We believe that TX has only taken the first step in its growth initiative and that it will likely announce a second move, as it still hasnt solved its 3.5 million slab gap. We see two possible investment announcements that could occur in the short term: i) the construction of a greenfield slab plant at the Au Port (a USD 6/ADR dilution, according to our calculations) though, in our opinion, TX would likely split the bill with Usiminas minority shareholders and ii) a brownfield expansion at Cubato, with a slab supply guarantee. Stronger growth in U.S. steel demand could boost TXs results in 2012 (+10% in growth would increase EBITDA by ~USD 70 million, or 5%). The announcement of an investment in a greenfield/brownfield slab plant in Brazil would be negatively seen by investors, given Brazils high capex and opex per ton we estimate that the greenfield project in Au could be dilutive by USD 6/ADR. A lower HRC slab gap (currently at
118 108 98 88 78 68 58 48 38 28
Dec-10
Jun-11
Oct-11
Apr-11
TX
Source: Ita BBA
USD 100/ton) would negatively affect TXs results, since the company is dependent on third-party slab (slab gap = 3.5 million tons). An announcement that averages down the price paid for Usiminas voting shares could be well received by investors (and likely could be negative for Usiminas minority shareholders).

We have an outperform recommendation on Ternium and a YE12 fair value of USD 31.0/ADR. We believe TX is the most attractive LatAm steel play because of: i) its cheap valuation (EV/EBITDA 2012 at 4.1x); ii) its relatively low leverage (current net debt/EBITDA at 1.3x after Usiminas stake acquisition); and iii) its higher FCF yield (14% average over the next 3 years).

Years Net revenues (USD m) EBITDA (USD m) Net income (USD m) EPS EV/EBITDA P/E FCFE yield (%) DPS (USD) Dividend yield (%)
Source: Ita BBA
2010a 7,382 1,437 622 3.2 4.3 5.9 17.1 0.5 2.7
2011e 8,408 1,495 507 2.6 4.4 7.2 -5.7 0.8 4.1
2012e 8,445 1,490 583 3.0 4.1 6.3 1.3 0.8 4.1
2013e 8,490 1,528 521 2.7 3.7 7.0 14.8 0.8 4.1
2014e 7,854 1,532 520 2.7 3.2 7.0 27.5 0.8 4.1
2015e 7,302 1,509 520 2.6 2.8 7.0 26.3 0.8 4.1
Ita BBA 201
Dec-11
Feb-11
Aug-11
Usiminas PNA Underperform

Company Description
Usiminas is the largest steelworks complex producing flat steel in Latin America. Usiminas has a nominal production capacity of 9.5 million tons of slab and 8 million tons of finished steel capacity. Usiminas is developing its iron ore business with an estimated production of 6.5 million tons in 2011 and a target of reaching 29 million tons by 2015. The company has split its operations into four divisions: steelmaking, mining and logistics, steel transformation and capital goods. Usiminas holds 20% of the voting shares in MRS, a leading railroad company.
USIM5 BRL 15.0
Stock Data
Investment Thesis
The main theme for flat steels in Brazil will remain competition with imports, which will likely continue to limit price hikes. We consider the outlook for both flat steel and Usiminas in the next few quarters to be uninspiring, given: i) likely weak short-term results (we expect Usiminas to post a single-digit EBITDA margin in 4Q11); ii) soft domestic demand following a likely slowdown in Brazilian economic activity in 1H12 (GDP is likely to grow by only 2.7% in 2012); and iii) strong direct and indirect import competition indirect imports of cars, machinery and equipment are an increasing concern in Brazil, having reached nearly 5 million tons in 2011, equal to Usiminas sales volumes in the domestic market.

Positive triggers could come from the announcement of price increases in the domestic market, which would have a positive impact on earnings. The sale of non-core assets could also positively affect the stock, as it would reduce liquidity risk (we estimate YE12 net debt/EBITDA at 2.6x). The sale of non-core assets (land plots, Usiminas Automotiva) could raise BRL 700 million. Domestic price increases could be announced if international steel prices increase, import tariffs are hiked and the BRL depreciates; we do not assume any price increases in our model. The announcement of further investments in crude steel capacity in Brazil could be viewed negatively by investors (given Brazils high capex/ton and opex/ton). The announcement of potential synergies and cost-cutting measures by Ternium could be viewed positively by investors. (We are more skeptical on synergies.)
Company Performance
140 120 100 80 60 40
Ibovespa
USIM5
Source: Ita BBA

We have an underperform recommendation on Usiminas, with a YE12 fair value of BRL 15.0/share. Our negative view on Usiminas is supported by: i) its expensive valuation, as Usiminas is trading at 8.5x EV/EBITDA 2012, well above its historical average of 5x; ii) its negative FCF yield of -8% in 2012 (capex of BRL 2 billion will surpass EBITDA generation of BRL 1.8 billion); and iii) the limited room for domestic steel price increases in Brazil, since the premium to international prices is at 5%, a level which typically starts to encourage imports. We also see risks of dilution for Usiminas minority shareholders following Terniums recent acquisition of a stake in Usiminas controlling group at an elevated premium.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) Net debt (BRL m) EPS EV/EBITDA P/E FCFE yield (%) DPS (BRL ) Dividend yield (%)
Source: Ita BBA
2010a 12,962 2,650 1,572 3,588 1.6 5.4 6.5 28.8 0.6 5.9
2011e 12,209 1,314 582 3,637 0.6 10.9 17.6 -17.5 0.3 3.3
2012e 13,517 1,817 451 4,796 0.5 8.5 22.7 -8.4 0.2 1.5
2013e 15,104 2,461 782 4,162 0.8 6.0 13.1 9.8 0.3 2.7
2014e 15,054 2,409 829 2,991 0.8 5.7 12.4 15.4 0.3 2.8
2015e 14,419 2,351 810 1,812 0.8 5.3 12.7 16.6 0.3 2.8
Ita BBA 202
Vale PNA Outperform

Company Description
Headquartered in Brazil and with locations in over 35 countries, Vale is the second-largest mining company in the world. The company is the largest producer of iron ore fines (60% of revenue) and pellets (15%) and the second-largest in nickel production (10%). In 2010 and 2011, nearly 90% of Vales EBITDA came from its iron ore business. Vale is also focused on diversifying revenue, mostly in nickel, copper, coal and fertilizers.
Ticker (ADR) Fair Value (12) Ticker (local) Fair Value (12)
VALE.P USD 30.0 VALE5 BRL 53.0
Stock Data
Current price Upside (YE12) 52 Week high/low USD % USD th USD m USD m 1m -5.1 21.2 41.5 31.82/19.53 5,103,613 108,207 177.1 12m -27.3
Investment Thesis
Vale is well positioned to benefit from a tight global iron ore market in the coming years, given its low cost structure (production cash cost of USD 30/ton vs. Chinas marginal cost of USD 120/ton) and the fact that it possesses the largest reserve base (over 15 billion tons in reserves, equivalent to nearly 50 years at current production levels vs. BHPs 4.5 billion and Rio Tintos 2.5 billion). We expect Vale to generate a healthy cash flow in 2012 (EBITDA estimate of USD 31 billion), which will allow for a strong capex program (nearly USD 20 billion) and reasonable dividend of USD 6 billion (5% yield). Vale has a sizeable backlog of projects based on the growth capex for the past three years of USD 30 billion, which will likely yield increasing volumes in different sectors such as copper (+60 ktons; +20% YoY in 2012) and nickel (+40 ktons; +15% YoY in 2012).
Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute

In our view, there are three main triggers for Vale in 2012: i) higher iron ore spot prices Vales share price has a strong correlation (0.9) with spot prices; ii) the granting of the preliminary environmental license for Serra Sul, the worlds largest iron ore project; and iii) the IPO of Vales logistics assets. The elimination of some fiscal and regulatory overhangs could help share performance. Higher-than-expected iron ore prices could positively impact Vales results and positively affect the stock price. For each USD 10/ton increase in iron ore prices, Vales EBITDA rises by USD 2.5 billion (+8%). Serra Suls preliminary environmental license would reduce investor skepticism regarding Vales iron ore volume growth; the Serra Sul project (90 million tons) would increase Vales capacity by nearly 30%. Lower-than-expected royalty increase would be positive for Vale; every 1% increase in royalties reduces our fair value by 2.5% - our base case assumes royalties going up to 5% from 2%. The settlement of past fiscal litigation could ease concerns regarding Vales balance sheet; we currently assume USD 6 billion in potential losses from past fiscal disputes.
Company Performance
110 100 90 80 70 60
Mar-11
May-11
Jan-11
Jul-11
IBOV
VALE5
Source: Ita BBA

We have an outperform rating on Vale (YE12 fair value of USD 30/ADR, or BRL 53/share) and prefer it to the other commodity-based names we cover, such as steel and pulp companies. We continue to see Vale as a relatively defensive option in the commodities sector based on: i) consistently positive FCF yield prospects (7.5% average in 2012-15), given its low-cost asset base; ii) its low expected leverage (0.6x net debt/EBITDA 2012E); and iii) its relatively attractive multiples (see table below).

Source: Ita BBA
2010a 45,293 26,116 17,264 15,966 3.4 4.9 6.3 -9.5 0.6 2.8
2011e 58,262 35,325 20,855 17,310 4.1 3.7 5.2 10.4 2.4 11.1
2012e 57,234 31,462 19,288 18,058 3.8 4.2 5.6 4.4 1.1 5.3
2013e 63,079 34,881 20,810 14,595 4.1 3.7 5.2 8.9 1.2 5.8
2014e 62,058 32,544 18,780 9,534 3.7 3.8 5.8 9.9 1.1 5.2
2015e 59,080 28,482 15,554 3,509 3.0 4.1 7.0 9.1 0.8 3.6
Ita BBA 203
Nov-11
Sep-11
Jan-12
TMT
Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com Ricardo Cavanagh, CFA (Argentina) +54-11-5273-3593 ricardo.cavanagh@itau.com.ar
Gustavo Fingeret (Chile) +56-2-834-6295 gustavo.fingeret@itau.cl
TELECOMMUNICATIONS, MEDIA & TECHNOLOGY

About the Sector
The Brazilian TMT sector has gone through a major consolidation process in the past few years, and there are no more niche players. Companies either merged to expand their coverage and broaden their business segments (for example, Brasil Telecom and Telemar together originating Oi; Telesp and Vivo creating Telefnica Brasil; AMX buying out TMX and integrating its mobile, pay-TV and wireline businesses in Brazil; and Televisa acquiring Iusacell following its entry into the cable industry back in 2007), or they acquired single assets (as in the case of TIM, which bought Intelig in 2009 and recently acquired Atimus). This trend is no surprise in a capex-intensive sector in which waves of new technology demand constant investment in network upgrades and marketing. Contrary to what a consolidation scenario might suggest, competition continues to be fierce. Despite the Brazilian markets strong potential growth, the country remains a challenging market, given its five nationwide players and the presence of a regulator that is actively fostering competition. While the Mexican market is more polarized, with AMX enjoying the leading position in both the fixed and mobile segments, national regulator COFETEL clearly has a mandate to enhance competition. Ricardo Cavanagh, CFA (Argentina) +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Gustavo Fingeret (Chile) +56-2-834-6295 gustavo.fingeret@itau.cl Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com

Following the wave of mergers in the sector, the materialization of synergies arising from these deals in the short-to-medium term has likely become a key driver. The sooner companies begin to cross-sell products and services boosting top-line growth, stimulating operating improvements and generating margin expansion the easier it will be for investors to identify winners. The right marketing position is key in the current competitive environment. While most of the TMT companies are betting on combining several services within the same plan the so-called combos TIMs strategy is to be best of breed in each of the segments in which it operates. It is hard to predict which approach will produce the biggest payoff. But it is worth noticing that TIM has been a vanguard player in its marketing approach in the past few years, pursuing successful strategies like its unlimited usage offerings. Lastly, as an inherent characteristic of the sector, regulation will continue to play an important role. Rulings from COFETEL and Anatel may lead to higher levels of competition.
Catalysts
The main drivers of stock performance are likely to be: i) regulatory decisions; ii) new marketing initiatives; and iii) the telcos ability to monetize synergies following the sectors consolidation. Rules for the 4G auction in Brazil (auction format, minimum coverage requirement). AMX getting a pay-TV license in Mexico. In Brazil, the General Competition Plan to promote fair competition in the industry. Monetization of synergies (VIV and TIM).

We favor Brazilian telcos over Mexican, mainly due to valuation. The Mexican telcos trade at higher multiples, with limited upside to our fair value levels (AMX, VIV and TIM trade at 5.5x, 4.8x and 4.1x EV/EBTDA 2012, respectively, while TV trades at 7.6x EV/EBITDA 2012, vs. the media sector average of 6.8x). Although we have an outperform recommendation on both TIM and VIV, TIM is our top pick, for three main reasons: i) valuation: TIM trades at 4.1x EV/EVITDA, with a 5-year CAGR of 11%, without considering potential synergies, while VIVT trades at 4.8x, with a 5-year CAGR of 5%, including synergies; ii) momentum: TIMs numbers are likely to be revised upwards in the medium term as TIM Fiber synergies materialize (2H12), while VIVTs weak 3Q11 results have raised questions about the companys ability to post EBITDA margins above 37%; iii) marketing position: TIM has led the market with its unlimited usage plans, giving it at least a 1.5-year advantage the structure behind these plans is being copied by other telcos, including VIV, but at different levels. Having said that, we acknowledge VIV would be a better investment alternative in a bear market, mainly supported by a stronger FCF and dividend yield, coupled with an already established presence in its three business areas.
Ita BBA 205
Telecom Sector Charts

Market Share, November 2011 Monthly Market Share of Net Adds
60% 50% 40% 30% 20% 10% 0% -10% May-10 Jul-10 Sep-10Nov-10Jan-11 Mar-11May-11 Jul-11 Sep-11Nov-11
Telefnica Brasil
Source: Anatel and Ita BBA
TIM
Claro
Oi
Telef nica Brasil
TIM
Claro
Oi
Market Share of Net Revenues

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q09 2Q09 3Q09 4Q09 Tim
Source: Ita BBA
27% 27% 26% 26% 26% 25% 25% 26% 26% 26% 26% 34% 33% 33% 33% 33% 34% 34% 34% 34% 33% 34% 05% 18% 06% 18% 07% 17% 08% 17% 08% 17% 08% 17%
Wireless Density vs. Net Additions
09% 16%
10% 15%
10% 16%
11% 14%
10% 15%
6,000 5,000 4,000 3,000
130 120 110 100 90 80 70 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11
Net Adds (000 Subs) Density (Accesses/100 hab)
16%
16%
16%
16%
16%
16%
16%
16%
15%
15%
15%
2,000 1,000 0 Sep-09
1Q10 2Q10 3Q10 Vivo Claro
4Q10 1Q11
2Q11 3Q11
Oi
Nextel
Brazilian Operators ARPU Performance

60.0 140.0 50.0
Mobile Revenue Growth vs. Mobile Data Revenue Growth

25,000 48% 20,000 43% 35% 15,000 37% 37% 34% 33% 60% 50% 40% 30% 10,000 12% 15% 13% 11% 14% 14% 18% 20% 10% 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Mobile Service Gross Revenues Mobile Gross Revenue YoY Growth % Gross Data Revenue Gross Data Revenue Growth YoY
30.0 20.0 10.0 0.0 1Q09 Tim 2Q09 3Q09 Oi 4Q09 1Q10 2Q10 3Q10 4Q10 Total 1Q11 2Q11 3Q11 Vivo Claro Nextel
BRL Thousand
92.0 40.0
5,000
Source: Ita BBA
Source: Ita BBA
Ita BBA 206
Amrica Mvil Market Perform

Company Description
Amrica Mvil is the fifth-largest telecommunication group in the world, with a market capitalization of approximately USD 97 billion. With operations in Brazil, Latin America and the U.S., AMX provides a complete range of mobile and fixed-line services totaling 298 million accesses as of the end of 3Q11, of which 241 million are wireless subscribers, 29 million are landlines, 15 million are broadband accesses and 12 million are pay-TV units. The companys core markets are Mexico (Telcel and Telmex) and Brazil (Claro, Net and Embratel), which together represent over 70% of its total service revenue.
AMXL MXN 18.9 AMX USD 31.7
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding MXN % MXN th MXN m MXN m 1m -5.2 -5.0 15.5 22.0 18.8/13.48 79,496,000 1,231,393 1,204.3 12m -12.2 -8.2
Investment Thesis
Having Mexico and Brazil as its core markets assures AMX of both revenue resilience (Mexico accounts for 43% of total revenue) and growth (Brazil is 28% of the consolidated top line). In Mexico, the companys leadership in both wireless (70% market share) and wireline (63% market share), combined with still-weak (though growing) competition, guarantees enough cash-flow generation (9.0% FCFE yield) to face the increasing competition in Brazil. Integrating and leveraging on its triple platform in Brazil, made up of Net, Embratel and Claro, will likely be a key market differentiator for AMX, allowing it to expand its combined offering and extract operating synergies. AMX has a predictable top line, as the fixed segment is a significant part of its revenue (42%), and sustainable top-line growth potential that offers a 2011-14 CAGR of 5.7%. The increasing competition in certain markets, most notably Brazil, has been compressing margins to the high thirties (from the previous low forties), but we do not expect this trend to continue. In our model we assume a 2011-2014 consolidated EBITDA CAGR of 7.7%, slightly above the bottom end of the guidance provided by AMX.
Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Mexbol
Company Performance
120 110 100 90

Following the recently-concluded TMX delisting, AMXs main challenge going forward is to combine its assets in Brazil, cross-selling products and sharing infrastructure to generate synergies. The continuation of the share-buyback The payment (or not) of Cofecos MXN 12 billion fine. (We believe it is highly unlikely.) EBITDA trend in Mexico (we expect AMX to continue to pursue growth as competition Claros participation (or not) in the Brazilian 4G auction, which might trigger an upwards revision in capex for 2012 and the years ahead. Auction price and rules are not public yet. The declining EBITDA trend in Brazil (we anticipate margins remaining in the high twenties, decreasing from the low thirties). Obtaining a license for and entering the pay-TV segment in Mexico, which would enable AMX to leverage on its current fixedline subscriber base. evolves, keeping margins at 50% in the medium term).
80 70
Jun-11
Aug-11
Dec-10
Feb-11
Oct-11
Apr-11
MEXBOL
AMXL
Source: Ita BBA
program after the conclusion of the TMX delisting. (We expect the dividend yield to remain at 7% in 2012.)

Despite AMXs defensive characteristics (dividend yield of 6.0% and free cash flow yield of 8.1%), there is a lack of potential events in the short term that could justify an additional premium over international peers and support a richer valuation (currently 5.5x EV/EBITDA 2012, vs. the LatAm sector average of 4.0x EV/EBITDA). This lack of catalysts, combined with the potential deterioration in the competitive landscape in both Brazil and Mexico, justifies our market-perform recommendation on AMX with a fair value of MXN 18.9/AMXL.

Years Net revenues (MXN m) EBITDA (MXN m) Net income (MXN m) EV/EBITDA P/E
Source: Ita BBA
Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com 2010a 607,855 247,450 90,822 5.8 13.6 2011e 644,664 250,308 98,439 5.8 12.5 2012e 686,773 271,465 110,666 5.5 11.1 2013e 726,568 292,281 121,175 5.0 10.2 2014e 764,782 313,007 133,138 4.6 9.2 2015e 802,027 333,865 146,341 4.2 8.4 Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com
Ita BBA 207
Dec-11
Brasil Telecom PN Market Perform

Company Description
Brasil Telecom (new Oi SA) is the entity that will result from the companys shareholder restructuring process, which we assume will be approved by the beginning of 2012. The company operates in the wireless and wireline segment nationwide, except in So Paulo, where it currently offers only mobile services. Oi TV is the companys pay-TV service, which is still incipient, with a subscriber base reaching 330,000 in 3Q11. However, the company added Globo channels to its content and intends to leverage the product to help retain fixed telephony subscribers. In the mobile segment, Oi currently has 42.9 million users, or an 18.6% market share of total subscribers, and generates 14.9% of total revenues.
BRTO4 BRL 14.8 BTM USD 27.8
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m -1.0 -0.4 11.4 30.3 17.1/9.95 1,739,450 19,760 7.7 12m -12.1 6.8
Investment Thesis
After several attempts to simplify its ownership structure, Oi is finally close to concluding the process. The restructuring will change Ois investment case: not only will it unlock value by improving corporate governance and transparency, better aligning interests between controlling and minority shareholders (currently, controlling shareholders own an equity stake of below 15%; after the reorganization, this stake should increase to at least 34%), but it will also allow management to focus on operations rather than on the internal reorganization. Led by its new CEO, Francisco Valim, who has a solid track record of executing turnarounds in the sector, Oi will likely undergo an operational restructuring which may increase margin pressures. After the BRL 9 billion in EBITDA expected for 2011, the company anticipates 2012 EBITDA ranging between BRL 8.5 billion and BRL 9 billion, followed by a strong rebound in 2013, to BRL 10 billion; in our model, we assume flat numbers for next year and the following year. The results of Ois turnaround will therefore only become evident in 2013.
Company Performance
140 120 100

Brasil Telecoms ownership restructuring is the single most important trigger for Oi. Once the restructuring is concluded, the market will likely shift its attention to Ois operating metrics. Quarterly results, which will be closely Official dividend policy parameters: though it gave no details, Portugal Telecom made it clear that such parameters would be a condition of it becoming a shareholder of Oi. While dividends may provide support for the stock price, Oi is unlikely to have much free cash flow to distribute in the medium term. (Assuming 2012 EBITDA of BRL 9 billion and capex of BRL 5 billion, less financial expenses of BRL 3 billion, not much will be left to distribute after paying taxes at a 34% rate.) Ois participation (or not) in the 4G auction.
80 60 40
Dec-10
Oct-11
Apr-11
Ibovespa
BRTO4
Source: Ita BBA
watched to monitor the progress of Ois visibility (in the short term) and operational turnaround (in the medium term). The EBITDA margin is currently in the mid-thirties range, but it is heavily affected by non-recurring expenses, which are very volatile. Pay-TV subscriber-base growth and service effectiveness as a retention tool for fixed-line subscribers could trigger upwards revisions.

Ois ownership-structure simplification will be a game-changer, ensuring alignment between controlling and minority shareholders and paving the way for Ois operational turnaround. The challenge ahead of the company is considerable, and the results of Ois endeavor will only be seen in the medium term (after 2013, when we expect it to start delivering recurring results). The low visibility of Ois operating performance in a highly competitive market, combined with its valuation (the new entity will be born trading at 3.7x EV/EBITDA), justifies our fair value of BRL 14.8/BRTO4 and our market-perform recommendation on the name.

Years Net revenues (BRL m) EBITDA (BRL m) EV/EBITDA P/E
Source: Ita BBA
Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com 2010a 29,470 10,285 3.7 11.1 2011e 28,444 8,987 4.0 n.m. 2012e 27,727 9,142 3.7 15.3 2013e 27,675 9,475 3.4 9.4 2014e 27,856 9,865 3.2 6.8 2015e 28,149 10,025 3.0 5.5 Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com
Ita BBA 208
Aug-11
Dec-11
Feb-11
Jun-11
Entel Market Perform

Company Description
Entel is one of the largest telecommunications companies in Chile, providing mobile telephony, data and information technology services to more than 8.6 million customers, and Internet access, fixed-line telephony and long-distance services to nearly 0.2 million clients. Entel plans to expand its business in the residential segment, where it currently has almost no presence. Investing in fixed telephony and broadband and developing its satellite pay-TV business could position Entel as a quad-play operator. The company also has a small operation in Peru, where it provides wireline services through its subsidiary Americatel Peru.
ENTEL CLP 11,100.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization CLP % CLP th CLP m CLP m 1m -1.6 -3.5 9,604.8 15.6 10450/7134.77 236,524 2,271,763 3,420.8 12m 22.9 43.6
Investment Thesis
Entel will be one of the strongest players in what is likely to be a tough market in 2012-13 in the mobile business (78% of total EBITDA), given its first-mover strategy in Chile, its reputation for high-quality service and its favorable subscriber mix. The company is expected to generate at least USD 339 million in free cash flow as of 2012, providing sufficient cash to finance the expansion of its the residential segment. In addition, the companys solid balance sheet gives it flexibility with regard to potential organic and inorganic growth in IT services, mobile broadband services and/or investments in 3G and 4G technology.
Company Performance

The year 2012 onwards is likely to be an even tougher environment, with changes in regulation (e.g., number portability) and new participants in the market (e.g., VTR and Virgin Mobile). The key factors that will likely drive Entels EBITDA at 2.9% CAGR over the next five years include the following: Mobile customer base is expected to rise 2.8% CAGR in 2012-16, helping EBITDA in the mobile segment to rise at a 3.6% CAGR over the next five years. In the fixed-line business, we expect growth of 7.5% in corporate IT revenues and 5.8% in the residential customer base. Solid balance sheet, its with high 0.6x cash net flow
Source: Ita BBA
133 123 113 103 93 83 73 63
Jan-11
Jul-11
Mar-11
May-11
debt/EBITDA
given
IPSA
ENTEL
generation, should help Entel to pursue further M&A. Dividend yield of 6.2% for 2012 and 8.0% for 2013 based on a payout ratio of 80% on net income. These yields compare favorably with Chiles low sovereign rates of 5.0%.

We have a market-perform recommendation on Entel and a YE12 fair value of CLP 11,100/share based on a DCF valuation. After the failure of Entels bid to merge with the local fixed-line and pay-TV operator Grupo GTD, management decided to reinforce its organic growth strategy, aiming to take the lead in Chiles highly competitive telecommunications industry. We are confident of Entels strategy and ability to sustain cash flow generation in what could be a tough environment in 2012-13, with changes in regulation and new entrants likely to increase competition in this market.

Years Net revenues (CLP m) EBITDA (CLP m) Net income (CLP m) Net debt (CLP m) EPS FCFE (CLP m) EV/EBITDA P/E FCFE yield (%) DPS (CLP) Dividend yield (%) P/BV
Source: Ita BBA
2010a 1,088,309 447,922 172,971 275,614 731.31 472,671 5.7 13.1 20.8 449.8 4.7 3.1
2011e 1,252,277 548,692 211,309 267,312 893.39 492,890 4.6 10.8 21.7 595.3 6.2 3.0
2012e 1,353,353 573,402 225,436 280,852 953.12 501,870 4.5 10.1 22.1 598.9 6.2 2.6
2013e 1,409,838 590,893 222,973 297,552 942.71 519,490 4.3 10.2 22.9 780.6 8.1 2.5
2014e 1,473,500 609,027 224,908 327,116 950.89 538,404 4.3 10.1 23.7 772.1 8.0 2.4
2015e 1,521,374 619,141 224,528 352,849 949.28 550,103 4.2 10.1 24.2 778.8 8.1 2.3
Gustavo Fingeret +56-2-834-6295 gustavo.fingeret@itau.cl Susana Salaru +55-11-3073-3009 susana.salaru@itaubba.com
Ita BBA 209
Nov-11
Sep-11
Jan-12
Televisa Market Perform

Company Description
Televisa is the largest media conglomerate in Mexico, with a presence in many segments, including broadcasting, production and the distribution of content, as well as pay-TV and broadband services. Given its size and scope, Televisa enjoys a natural potential for cross-synergies among its different businesses. Following its diversification strategy, the companys recent move into the wireless segment further leverages its current assets and assures its entry into the wireless data market. In the broadcasting segment, its main top-line contributor, Televisa holds a comfortable leadership position and has managed to successfully recover from the loss of Grupo Carso, its largest advertiser. Televisas main driver of revenue growth, the pay-TV business, is a fairly competitive environment for both satellite and cable. The current environment could deteriorate if Telmex receives authorization to participate in the pay-TV market.
TLEVISACPO MXN 4.3 TV USD 27.2
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. MXN % MXN th MXN m MXN m 1m 4.4 4.6 58.8 9.4 63.15/46.43 2,827,800 166,275 229.7 12m -6.7 -2.4
Investment Thesis
Despite the fact that broadcasting remains the main contributor to Televisas revenue and EBITDA (contributing 38.5% and 46%, respectively), Televisa aims to position itself as an integrated media and telco operator, as evidenced by its recent entrance into the wireless market with the acquisition of Iusacell (once approved, TV will likely convert USD 1.6 billion of debt into equity) and by its increasing participation in the cable industry. Although Televisas presence in the mobile segment is still incipient, pay-TV already represents 39% of revenue and EBITDA through its dual platform of satellite and cable.
Performance (%) Absolute Vs. Mexbol
Company Performance
110 100

Televisas ability to increase the distribution of its content through different platforms (broadcasting, pay-TV network, programming exports), leveraging its unique Spanish content, along with its entry into new businesses will likely drive the stocks performance in the medium term. Broadcasting revenues, which positively The recently announced multi-year contentlicensing agreement with Netflix, combined with Univisions new royalty agreements, will likely have a positive impact on Programming Exports revenue (already seen in 3Q11). We expect Programming Exports to deliver higher Cofecos approval of the Iusacell deal, which the company expects to obtain in 2H12, and the subsequent turnaround effort. (Currently, Iusacell has a 4% market share and an EBITDA margin below 20%.) top-line growth (high teens) and EBITDA margin expansion in the low fifties, as royalty revenue does not incur additional costs. AMX obtaining a pay-TV license in Mexico and entering this segment could change the competitive landscape significantly.
90 80 70 60
Jun-11
Aug-11
Dec-10
Feb-11
Oct-11
Apr-11
MEXBOL
TLEVISACPO
Source: Ita BBA
surprised in 3Q11, could continue their recovery from the loss of Grupo Carsos advertising (company guidance 0%-0.5% revenue growth in 2011). is for

Televisa is trading at 7.8x EV/EBITDA 2012 (above its international peers average of 6.8x EV/EBITDA 2012), with limited upside (9.4%) to our DCF fair value of MXN 4.3/TLEVISACPO in the short to medium term. The outcome of TVs strategic decision to invest in wireless telecommunications and the implications for the companys valuation will likely yield questionable rates of return, justifying our market-perform recommendation.

Years Net revenues (MXN m) EBITDA (MXN m) Net income (MXN m) EV/EBITDA P/E
Source: Ita BBA
Ita BBA 210
Dec-11
Telefnica Brasil PN (Vivo) Outperform

Company Description
Telefnica Brasil is the entity that resulted from Telesps incorporation of Vivo, which occurred during 2011. The new company is a unique asset that was already at a mature stage when it was born, combining solid cash flow generation (7% free cash flow yield in 2012) from the fixed-line segment (44% of total revenue, with a 2011-16 CAGR of -0.5%) with strong revenue growth from the mobile segment (56% of total revenue, with a 2011-16 CAGR of 7.8%). In the mobile segment, the company is the number-one player in terms of subscriber base (29.5% in 3Q11) and revenue share (34% in 3Q11), primarily because it offers better service quality and better coverage than its competitors (Telefnicas 3G coverage reaches 2,000 cities, while second-best Claro covers only 600 cities). In the fixed-line segment, Telefnicas operations are focused in the state of So Paulo, where along with fixed telephony services it offers fixed broadband and pay-TV services and is prepared to compete for both low-end subscribers and high-end clients.
VIVT4 BRL 63.2 VIV USD 36.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 4.5 5.1 50.5 25.2 53.1/37.29 1,125,602 56,820 36.5 12m 41.6 72.0
Investment Thesis
VIVT offers a combination of stable and predictable cash flow generation (8.0% FCFE yield in 2012) with a compelling dividend yield (9.2% for next year) and attractive valuation (4.8x EV/EBITDA). While we are likely to see operating synergies gradually materializing (contributing BRL 3.8/share to our fair value), fiscal synergies are already evident in the tax shield resulting from the interest on own capital payment (accounting for BRL 7.0/share of our fair value) and the amortization of goodwill (adding BRL 1.4 to our fair value). In our model, we maintain our conservative stance on goodwill amortization because the Brazilian fiscal authorities could rule that only 40% of the total amount (the minority shareholders stake in the final entity) is eligible for amortization. In the event of a favorable ruling allowing Telefnica to amortize 100% of the goodwill, we would revise our numbers upward.
Company Performance
140 120 100 80 60 40
Dec-10
Oct-11
Apr-11

Likely triggers for the stock are subscribers response to the recent launch of the Vivo Sempre and Vivo Ilimitado plans through which Telefnica, unlike other operators, continues to bet on charging users on a per-minute basis and the materialization of operating synergies. Mobile broadband revenue growth, the main revenue driver, for which we are currently modeling a 2011-16 CAGR of 16.8%. VIVTs participation (or not) in the 4G auction could trigger upward revisions in capex for 2012 and the years ahead. Auction price and rules are not public yet. The percentage of goodwill amortization allowed by Brazilian fiscal authorities. Competitive positioning and its impact on EBITDA margin. Telefnica Brasils 3Q11 results showed compressed margins (34.1%), a trend which is likely to continue in the following quarter and 2012, due to the launch of its unlimited usage plans combined with higher levels of marketing expenses brought about by increasing competition. The continuation of high dividend payments (9% in 2012).
Ibovespa
VIVT4
Source: Ita BBA

We have a fair value of BRL 63.2/VIVT4 and an on outperform recommendation on Telefnica, supported by: i) its inexpensive valuation of 4.8x EV/EBITDA; ii) its compelling upside to our fair value (25%); and iii) its defensive characteristics, including high dividend yield (9.2% for 2012) and strong and predictable cash flow generation (8.0% free cash flow yield). In a volatile market, such a combination becomes particularly appealing.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) EV/EBITDA P/E
Source: Ita BBA
Ita BBA 211
Aug-11
Dec-11
Feb-11
Jun-11
Telecom Argentina Outperform

Company Description
Telecom Argentina is one of the leading telecommunication companies in Argentina, serving 17.8 million mobile customers, 4.1 fixed lines in service and 1.5 million broadband accesses. The companys mobile unit generates 80% of consolidated EBITDA. Telecom Argentina has a 33.3% market share in this segment, up 270 bps in the last two years as the company has been capturing more than 50% of net adds and selling one out of every two smartphones in the country. Valued-added services (VAD) are driving growth, prompted by the expansion of SMS and 3G applications. VAD represents 47% of mobile revenues, up from 34% in 2009. The mobile business is free to set pricing conditions. The companys fixed-line business one of only two major operators in the country operates with tariffs that have been unchanged since 2001 and represents 12% of aggregated revenues. Broadband and data transmission are dynamic businesses and contribute 12% of revenues. Ncleo, a mobile subsidiary in Paraguay, generates 4% of total revenues. The companys controlling shareholders are Telecom Italia and the Werthein Group from Argentina.
TEO USD 27.0
Stock Data
Investment Thesis
Telecom Argentina is a cash-flow generation machine with modest growth prospects, when measured in dollars, but high dividend yield. The companys net cash position was USD 481 million as of 3Q11. We expect EBITDA to rise by 4.0% in USD over the next four years, prompted by expansions of 6.2% and 4.0% in the mobile and broadband client bases, respectively, and stable dollar ARPU. Smartphone usage accounts for only 10% of the total mobile base and has significant room to expand. The competitive landscape in Argentina is quite friendly, with only three large players in mobile: Telecom Argentina, Telefnica de Espaa and Amrica Mvil. However, number portability will be implemented in March 2012, likely intensifying competitive pressure. The government plans to hold a frequency auction next year, which could be an opportunity as well as a competitive threat. Inflation is also likely to put significant pressure on margins in 2012.
Company Performance
109 99 89 79 69 59
Dec-10

A significant value driver for the company is sovereign risk compression, which augments DCF by allowing for a lower discount rate assumption. Likely company-specific drivers are increases in smartphone usage and slowing, but still positive, growth in the mobile client base. We expect value-added services to rise by more than 30%-35% by the end of 2013. We expect the mobile and broadband client bases to rise by 6.2% and 4.0%, respectively, per year through 2015. We project a divided yield of 10.0% at the current stock price. The frequency auction expected for March 2011 could make it easier for the company to expand mobile services.
TEO
Source: Ita BBA

We have an outperform recommendation on Telecom Argentina. However, we are reducing our fair value to USD 27.0/ADS from USD 30/ADS after conducting a DCF analysis using a 13.8% WACC, which incorporates a sovereign risk premium of 800 bps, up from 600 bps previously, based on the lower likelihood that Argentina will re-access the credit market, driving sovereign spread compression. The DCF would be USD 20.6, or 14% above the current stock price, if we used an 18.2% WACC incorporating a sovereign risk premium of 1,000 bps (close to the current level) and zero leverage. Telecom Argentina trades at YE12 multiples of 2.5x EV/EBITDA and 7.8x P/E, among the lowest values in the region. Potential government-imposed constraints on companies freedom to pay dividends is one of the main risks.

Years Net Revenues (USD m) EBITDA (USD m) EBITDA Mg. Net Debt (USD m) EPADS EV/EBITDA P/E DPADS Dividend yield Average FX Net Revenues (USD m)
Source: Ita BBA
2009a 3263 1041 31.9% -125 1.90 3.2x 10.0x 0.00 0.0% 3.75 2009a 3263
2010a 3748 1163 31.0% -312 2.36 2.9x 8.1x 1.36 7.1% 3.92 2010a 3748
2011e 4391 1308 29.8% -675 2.92 2.5x 6.5x 1.11 5.8% 4.18 2011e 4391
2012e 4721 1363 28.9% -746 2.97 2.4x 6.4x 1.81 9.5% 4.72 2012e 4721
2013e 4968 1447 29.1% -827 3.29 2.3x 5.8x 1.79 9.4% 5.46 2013e 4968
2014e 5037 1487 29.5% -838 3.47 2.2x 5.5x 1.99 10.4% 6.34 2014e 5037
Ricardo Cavanagh, CFA +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com
Ita BBA 212
Dec-11
Jun-11
Aug-11
Feb-11
Oct-11
Apr-11
Tim Participaes S/A ON Outperform

Company Description
TIM is not only the second-largest Brazilian mobile provider, with a subscriber market share of 26.0% and a revenue share of 29.0%, it is also the fastest-growing company in the sector (with an estimated 2011-16 top-line CAGR of 10%, vs. VIVTs 5% and Ois 1%). This success is due to an operational turnaround that included the launch of its innovative Infinity and Liberty plans, which leveraged TIMs long-distance network, Intelig, while fostering unlimited on-net usage (outgoing MOU has increased by 90%, to 117 minutes, since 2009). TIM Fiber, a strategic asset acquired in 2011, will be the pillar supporting both the companys growth in the mobile segment and its exploration of the fixed broadband market in So Paulo and Rio de Janeiro.
TIMP3 BRL 12.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. BRL % BRL th BRL m BRL m 1m 10.2 10.9 9.6 25.7 10.07/6.83 2,416,000 23,073 36.3 12m 44.2 75.1
Investment Thesis
TIM has consistently delivered operating improvement by successfully following the three-step plan it introduced in 2009 after the launch of its unlimited usage plans: subscriber-base growth (+41%), voice usage (total MOU increase of 58%) and data utilization (14% of services revenue, up from 11%). The strategic acquisition of Atimus will enable TIM to offer a wider range of unique promotions and will ensure its entry into the unexplored market of residential and SME broadband in So Paulo and Rio de Janeiro (with a network of 8 million residences, including 4.5 million in the A and B income classes, and 550,000 companies), besides fostering its existing business. Our current model assumes BRL 1.1 billion in capex/opex synergies over three years (vs. the BRL 4.8 billion guidance for total synergies), so TIMs delivery of the expected broadband subscriber base growth would justify an upward revision in our numbers even if we were to assume lower margins. (TIM anticipates its residential broadband business yielding margins above 50%, resulting in an NPV of BRL 2.5 billion, out of total synergies of BRL 4.8 billion, which we believe is aggressive. In our preliminary exercise, we assumed a 40% EBITDA margin and reached an NPV of BRL 1.6 billion.) We will likely have better visibility on TIM Fibers potential in 2H12, as it plans to make a soft launch in the second quarter.
Company Performance
160
140 120 100 80 60 40
Dec-10
Aug-11
Ibovespa
TIMP3

Tims entry into the broadband market as well as the synergies likely to arise from the new network will be the key triggers for the stock. Mobile broadband revenue growth (likely to increase after the Atimus acquisition), which is already incorporated in our models 2011-16 CAGR of 15.2%. Fixed broadband subscriber-base growth and EBITDA margin. We are not modeling any impact on TIMPs top line or margin. TIMs participation in the 4G auction. Revenue growth for Intelig (likely to increase after the Atimus acquisition). Currently, we are not considering this growth in our model, assuming that Inteligs revenue will continue to grow at a low-twenties rate. Capex from 2011-14 (likely to remain flat at BRL 3.9 billion).
Source: Ita BBA

TIM is our top pick in the sector, as it combines discounted multiples (4.1x EV/EBITDA 2012), potential positive earnings revisions in the medium term (TIM Fiber) and unique positioning with a presence in the three telecommunication markets most likely to deliver continuous growth: mobile voice (2011-14 CAGR of 2%), mobile broadband (2011-14 CAGR of 47%) and fixed broadband (2011-14 CAGR of 16%). Although TIM Fiber is still incipient and the size of potential synergies is debatable, the stock price does not seem to be incorporating these drivers, leaving room for positive surprises. We rate the company outperform, with a YE12 fair value of BRL 12.0.

Years Net revenues (BRL m) EBITDA (BRL m) EV/EBITDA P/E
Source: Ita BBA
2010a 14,457 4,194 5.7 10.4
2011e 17,026 4,568 5.2 18.0
2012e 19,614 5,373 4.1 13.4
2013e 21,291 5,962 3.3 10.5
2014e 22,922 6,598 2.7 8.6
2015e 24,080 7,006 2.2 7.1
Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com
Ita BBA 213
Dec-11
Feb-11
Jun-11
Oct-11
Apr-11
Totvs ON Outperform
Company Description
Totvs is the leading integrated management software developer and marketer in Brazil and Latin America and the sixth-largest company in the world in its sector, according to Gartner. The companys products include software for enterprise resource planning (ERP), business intelligence (BI) and supplychain management (SCM). Its main focus is on providing integrated corporate management software solutions, with value-added technology and services, to companies of different sizes and in different segments that are operating in Brazil. Together, Totvs software commercialization operations and related services have over 26,200 active clients, reflecting the consistent demand for reevaluating processes and strategies.
TOTS3 BRL 44.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m -1.3 -0.7 31.0 42.5 36/24.03 158,685 4,911 16.2 12m -4.4 16.0
Investment Thesis
Totvs offers a unique investment vehicle in the Brazilian software market: a leader in the high-growth SME market that is consolidating itself into a strong-growth, top-brand company in an underpenetrated market (7% penetration). The companys advantage is its deep knowledge of Brazils complex and constantly changing fiscal system; capillarity is a key characteristic of the SME segment. Proximity to the final client and an exclusive payment model in which customers pay according to the savings derived from implementing Totvs software ensure a strong partnership between Totvs and its base. As a result of its business model, Totvs can count on predictable, inflation-protected cash flow generation (with a top-line 5-year CAGR of 12%), yielding an EBITDA margin in the mid-twenties, which we expect to expand to 30% by 2016 (we assume slightly lower EBITDA growth, to 29%).
Company Performance
140 120

Totvs is an alternative vehicle for gaining exposure to the booming Brazilian consumer market, providing diversification from the traditional retail players. The company has undertaken several initiatives not fully incorporated in our model: R&D expenses are expected to decline to 12% of net revenues from the current 13.7% by 2016 (already considered in our model). The Plano Brasil Maior currently being studied by the Brazilian congress is likely to lower personnel expenses, with a potential 5% impact on EBITDA (BRL ~20 million). But depending on the terms of its approval, the consequences for wage negotiations could reduce this benefit. The handling of wage readjustments (labor costs are 60% of Totvs total costs). The phase-out of third-party technology in Datasuls products (progress) could add 250 bps to EBITDA margin when fully adopted by the client base. The international expansion plan is currently being revised. Despite being initially expected to reach 5% of revenues by 2015, it has had a negative impact on margins so far. Higher effective tax rate (to the high twenties from the current 21%), due to a combination of the end of goodwill amortization for large acquisitions (Logocenter and RM) and the revision of the MP do Bem, making tax benefits for R&D expenses more selective.
100 80 60 40
Dec-10
Oct-11
Apr-11
Ibovespa
TOTS3
Source: Ita BBA

Totvs defensive business model, combined with its prospective opportunities that are not yet incorporated in our model but which will likely help expand margins and top-line growth in a sustainable way, supports our outperform recommendation on the stock and our fair value of BRL 44.1/TOTS3.

Years Net revenues (BRL m) EBITDA (BRL m) Net income (BRL m) EV/EBITDA P/E
Source: Ita BBA
Susana Salaru, CNPI +55-11-3073-3009 susana.salaru@itaubba.com 2010a 1,129 290 165 17.1 29.3 2011e 1,286 306 181 15.9 26.7 2012e 1,446 368 256 12.6 18.8 2013e 1,619 431 318 10.2 15.2 2014e 1,804 502 395 8.2 12.2 2015e 2,003 581 480 6.5 10.1 Carlos Constantini, CNPI +55-11-3073-3001 carlos.constantini@itaubba.com
Ita BBA 214
Aug-11
Dec-11
Feb-11
Jun-11
Utilities
Marcos Severine, CNPI +55-11-3073-3011 marcos.severine@itaubba.com Mariana Coelho, CNPI +55-11-3073-3024 mariana.coelho@itaubba.com Andr Rezende, CNPI +55-11-3073-3014 andre.rezende@itaubba.com Ricardo Cavanagh, CFA (Argentina) +54-11-5273-3593 ricardo.cavanagh@itau.com.ar
UTILITIES
About the Sector
2012 could be another great year for utility stocks. Despite the outstanding performance by utility stocks in 2011, which beat the Bovespa Index by an impressive 41.4%, we expect another great performance by the sector in 2012. We believe that uncertainties regarding the crisis in both the Euro zone and the U.S. will generate high global-market volatility and help sustain investor interest in the earning stability of LatAm utility stocks. LatAm utilities have a major advantage over DM utilities: Growth. Experience has taught us that the most common mistake made by investors (both local and foreign) is to underestimate the growth prospects of LatAm utilities. While we agree that growth is not a standard feature of utility companies in the developed markets, it is a significant aspect of the LatAm Utilities investment thesis, in addition to its traditional defensive features. We are talking about a region (Brazil, Chile, Peru, Colombia and Argentina) that will be forced to expand its generation capacity at a rate of ~8.0 GW per year. We prefer Brazilian utilities over Chilean. We favor Brazilian utility stocks over Chilean because: i) Brazilian utilities continue to trade at cheaper multiples; ii) they pay much higher average dividend yields (see table on next page); iii) they have a significantly lower exposure to hydrological fluctuations, due to the specific characteristics of the generation model in Brazil; and iv) we believe that Brazilian companies are better positioned to be consolidators. Andr Rezende, CNPI +55-11-3073-3014 andre.rezende@itaubba.com Ricardo Cavanagh, CFA (Argentina) +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Mariana Coelho, CNPI +55-11-3073-3024 mariana.coelho@itaubba.com Marcos Severine, CNPI +55-11-3073-3011 marcos.severine@itaubba.com

Consolidation is just around the corner. In our opinion, we are about to witness a new period of M&As involving LatAm utilities that will prompt a revival of the 90s, when the privatization program adopted by a large number of LatAm countries propelled the sector into the spotlight. This time, however, the movement will likely be fueled by: i) the crisis in the Euro zone and the U.S., which is likely to induce leveraged utility companies to divest their LatAm assets; ii) the dramatic drop in greenfield generation and transmission returns in Brazil over the past couple of years (except in the wind generation segment); and iii) the third tariff reviews for Brazilian distribution companies. Wind generation in Brazil and consolidation in LatAm are the best growth opportunities. We believe that a few Brazilian groups, such as CPFL and Cemig, are the best positioned to be consolidators, both in the renewable-generation business and for assets outside Brazil.
Catalysts
The likely renewal of generation, transmission and distribution concessions in Brazil is, no doubt, the most anticipated event of 2012 (expected in 1Q12). Although it would affect the entire sector, it will be particularly relevant for Cesp, Eletrobras and ISA Cteep, the companies most affected by this issue. We believe that M&A activity will be a big market mover for LatAm utilities in 2012. Higher or lower hydrology will likely affect the performance of most Chilean GenCos. The third tariff reviews for Brazilian DisCos will likely drive the performance of DisCos.

Names to buy: CPFE3, CMIG4, ENBR3, CESP6, E-CL and MPXE3. With the exception of Cesp, which is driven by concession renewal, we believe these companies are best positioned to deliver growth and add value for shareholders, both through greenfield projects (CPFL, EDP Brasil, E-CL and MPX) and brownfield acquisitions (Cemig, CPFL and MPX). Names to avoid: SBSP3, COCE5 and CLSC6. The market has built up very positive expectations for Sabesps first tariff review. However, we see a big risk of disappointment because it is scheduled for September 2012, at the same time as the municipal elections. Both Coelce and Celesc will undergo third tariff reviews in 2012, which we do not believe is a risk worth taking. We forecast a -10.5% and 2.0% tariff reduction, respectively.
Ita BBA 216
Ranking Utility Stocks in Accordance With Their Levels of Defensiveness and Optionality
4.5 GenCos 4.0 ENBR3 GETI4 3.5 ELPL4 3.0 GETI3 TRPL4 EQTL3 TBLE3 LIGT3 2.5 COCE5 2.0 CESP6 ECL CPLE6 GENER CPFE3 CMIG4 DisCos TransCos Integrated Water
Defensiveness Score
For this score we took into account four features:
Stock liquidity: three-month average daily trading volume. Dividend yield: we took the estimated aggregate threeyear dividend yield (2011 2013), excluding the dividends already paid in 2011. Dividend sustainability: this is a measure of steadiness over the years for the projected dividends. Management / Disclosure: practices and disclosure. quality of managerial
Defensiveness Score
SBSP3
ENDESA COLBUN
MPXE3
Optionality Score
For the optionality score we also considered four features:
1.5
ELET6 ELET3
RNEW11 PAM
1.0 CLSC6
5-Year EBITDA CAGR: between 2016 and 2011. Growth / Privatization: here we considered the growth prospects which were not included into our estimates, and the privatization upside in the case of Cesp. Political risk: the higher the risk, the lower the score. State-controlled companies ranked the lowest in this category. Regulatory risk: DisCos ranked the lowest.
0.5
0.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Optionality Score
Source: Ita BBA
Ranking the Stocks: Liquidity, Dividend Yield, Dividend Sustainability, Disclosure, Growth, Political Risk and Regulatory Risk
Defensiveness Score
Defensive Features Com pany AES Tiet PN Cesp MPX Tractebel Renova AES Gener Colbn E-CL Endesa ISA Cteep Celesc Coelce Eletropaulo EDP Eletrobras ON Equatorial Cemig Copel CPFL Light Sabesp Ticker GETI4 CESP6 MPXE3 TBLE3 RNEW11 GENER COLBUN ECL ENDESA TRPL4 CLSC6 COCE5 ELPL4 ENBR3 ELET3 EQTL3 CMIG4 CPLE6 CPFE3 LIGT3 SBSP3 3m ADTV (USD th) 5,034 13,513 6,101 8,719 105 1,646 3,230 2,745 6,260 4,572 147 913 13,415 12,292 9,880 1,212 27,912 12,660 7,103 10,972 6,352 Stock Liquidity (25%) 2.0 3.8 2.5 2.4 0.0 1.3 1.5 1.3 2.5 2.0 0.0 0.0 4.3 4.0 2.5 1.0 5.0 3.5 2.3 3.0 2.5 Dividend Yield (30%) 4.5 2.5 0.0 3.0 0.0 2.0 0.0 2.0 0.5 5.0 1.0 3.8 3.8 3.2 0.8 5.0 2.5 1.0 2.5 3.3 1.5 Overall Dividend Managem ent Defensiveness Sustainability / Disclosure Score (20%) (25%) 5.0 3.5 3.6 3.5 2.0 3.0 0.0 5.0 2.0 3.0 0.0 3.5 2.0 4.0 2.0 5.0 1.0 1.0 0.5 3.8 1.8 2.5 3.0 2.0 5.0 3.3 2.0 4.0 4.0 4.0 4.0 4.0 2.5 3.0 1.3 4.0 3.5 3.8 0.0 5.0 3.0 2.0 5.0 3.0 2.0 3.1 1.0 2.6 1.9 2.7 1.9 3.6 0.8 2.2 3.2 3.7 1.3 3.3 3.5 2.2 3.6 3.1 2.0
Com pany Ticker
Optionality Score
Optionality Features Grow th / 5Y EBITDA Political Risk CAGR Score* Privatization (15%) (35%) (35%) 0.5 0.0 5.0 2.5 5.0 1.5 5.0 2.0 3.0 2.0 3.0 0.3 0.0 0.0 0.0 2.5 2.3 2.0 3.0 2.0 2.2 3.0 3.0 5.0 4.0 2.5 5.0 4.0 4.0 4.0 2.0 1.5 0.0 0.0 0.0 3.0 5.0 2.0 5.0 1.5 4.5 3.3 1.5 2.0 5.0 5.0 5.0 5.0 5.0 5.0 4.0 4.0 1.0 5.0 5.0 4.0 1.0 5.0 2.5 2.0 5.0 2.5 2.0 Regulatory Risk (15%) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 2.5 1.0 1.0 1.0 3.0 3.0 1.3 3.5 3.0 3.0 3.0 1.0 Overall Optionality Score 1.5 3.5 4.5 2.8 4.9 3.5 3.8 3.5 3.0 1.6 0.3 0.9 0.9 3.0 3.1 2.3 3.7 2.0 3.5 3.0 2.0
AES Tiet PN Cesp MPX Tractebel Renova AES Gener Colbn E-CL Endesa ISA Cteep Celesc Coelce Eletropaulo EDP Eletrobras ON Equatorial Cemig Copel CPFL Light Sabesp
GETI4 CESP6 MPXE3 TBLE3 RNEW11 GENER COLBUN ECL ENDESA TRPL4 CLSC6 COCE5 ELPL4 ENBR3 ELET3 EQTL3 CMIG4 CPLE6 CPFE3 LIGT3 SBSP3
Source: Ita BBA
The Currently High Level of Uncertainty Surrounding Equity Markets Forces Us to Analyze Several Scenarios
Bearish Scenario
World % U.S. % Euro zone % China % Japan % Brazil % Chile % Argentina % Mexico % 2011 3.8 1.7 1.6 9.2 -0.8 2.7 6.4 5.8 3.7 2012 -2.0 -2.7 -6.6 5.8 -6.2 -2.7 -0.5 -8.0 -7.3 World % U.S. % Euro zone % China % Japan % Brazil % Chile % Argentina % Mexico %
Base Case Scenario

2011 3.8 1.7 1.6 9.2 -0.8 2.7 6.4 5.8 3.7 2012 (High 3.0 1.5 -0.4 8.0 1.7 3.5 4.0 2.7 2.0
Bullish Scenario
World % U.S. % Euro zone % China % Japan % Brazil % Chile % Argentina % Mexico % 2011 3.8 1.7 1.6 9.2 -0.8 2.7 6.4 5.8 3.7 2012 (Low 3.0 1.5 -0.4 8.0 1.7 3.5 4.0 2.7 2.0
Sector Allocation = Overweight

Brazil
Sector Allocation = Market Weight

Brazil
Sector Allocation = Underweight

Brazil
CPFL Energia (CPFE3) Tractebel (TBLE3) ISA Cteep (TRPL4) AES Tiet (GETI4) Energias do Brasil (ENBR3)
CPFL Energia (CPFE3) Cemig (CMIG4) Cesp (CESP6) Energias do Brasil (ENBR3)
MPX Energia (MPXE3) Cesp (CESP6) Cemig (CMIG4)
Chile
Chile
Endesa Chile (ENDESA)
E-CL (ECL) AES Gener (GENER)
Chile
E-CL (ECL)
Source: Ita BBA
Ita BBA 217
AES Eletropaulo PN Outperform

Company Description
AES Eletropaulo is the largest pure distribution company in Brazil. Its concession area is in the metropolitan region of So Paulo (6.1 million consumers), which stands out for the high concentration of residential and commercial consumers, responsible for a respective 43.9% and 31.3% of the companys total electricity sales (35,434 GWh reported in 2010). These segments have been reporting some of the highest electricity consumptions in Brazil (4.8% and 6.6% in 2011, respectively). As a privatelycontrolled electric utility company, Eletropaulo is directly controlled by Brasiliana (holding company controlled by AES Brasil 50.01% and BNDES 49.99%), which owns 76.45% of its ON shares and 34.87% of total shares.
ELPL4 BRL 40.0
Stock Data
Investment Thesis
Despite the recent reduction in the companys payout policy (to 50% from 100%), we continue to see AES Eletropaulo as one of the best dividend stories in the sector, with an impressive historical dividend yield (20.4% in 2009, 26% in 2010 and an estimated 13.3% for 2011) and sustainable double-digit organic growth (14.8% EBITDA CAGR 2012-17). Although we foresee a sharp reduction over the next two years (dividend yield of 4.0% and 4.5%, respectively) due to the negative impact of the third tariff reset cycle (-7.5% effective January 1), we estimate a remaining dividend yield of 8.3% (50% payout) in 2H11. However, we do not discard the possibility of a higher payout policy in 2H11, which could raise the companys dividend yield to 16.6%. This possibility is gaining momentum, given the recent comments by Aneel regarding the possible implementation of a simultaneous tariff review and tariff readjustment.
Company Performance
160 140 120 100 80 60 40

Eventual increase in the payout policy to 100% would likely boost the 2H11 dividend to BRL 6.09 /share, from BRL 3.21/share. The legal dispute between Eletropaulo and Eletrobras over a potential liability in the order of BRL 1.1 billion (already incorporated into our fair value).
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
ELPL4
Source: Ita BBA

Given the stocks strong performance over the past few weeks (12.97% vs. -0.21% Bovespa Index) and the poor catalysts for 2012, we believe that ELPL4 is now trading within a fair price range (BRL 3437/share). Bearing in mind the limited upside potential (8.84%) and the likely challenge in the year ahead, one could argue that Eletropaulo is a bad investment opportunity. For those who share this view, we note that the company is likely to announce a double-digit dividend yield (8.3%), which could easily be raised to 16.6% if the company decides to return to a 100% payout policy. We have an outperform rating on Eletropaulo with a YE12 fair value of BRL 40.0/share.

Source: Ita BBA
2010a 9,697 2,413 1,348 2,452 8.05 1,453 3.6 4.6 23.6 9.6 26.0 1.6
2011e 9,905 2,783 1,465 2,461 8.76 1,161 3.1 4.2 18.9 4.9 13.3 1.7
2012e 9,704 1,059 236 3,079 1.41 105 8.7 26.0 1.7 1.5 4.0 1.7
2013e 11,370 1,216 269 3,676 1.61 181 8.1 22.9 2.9 1.7 4.5 1.7
2014e 13,102 1,873 686 3,814 4.10 556 5.3 9.0 9.0 4.3 11.6 1.7
2015e 14,044 2,022 751 3,536 4.49 667 4.8 8.2 10.9 4.7 12.7 1.7
Marcos Severine, CNPI +55-11-3073-3011 marcos.severine@itaubba.com Mariana Coelho, CNPI +55-11-3073-3024 mariana.coelho@itaubba.com Andr Rezende, CNPI +55-11-3073-3014 andre.rezende@itaubba.com
Ita BBA 218
Dec-11
AES Gener Outperform

Company Description
AES Gener is the second-largest generation company in Chile, with a 21% market share and a total installed capacity of 3,456 MW in that country: 2,362 MW in Chiles SIC system and 1,184 MW on Chiles SING grid. The company also has a key presence in Colombia through a 1,000-MW hydropower plant that represents a 7% market share. AES Gener also participates in the Argentine electricity market, having exported ~270 avg. MW to the SADI (Interconnected Argentine System) in 2010 through its Termoandes plant located on the SING grid. The company operates 7,702 km of transmission lines. AES Geners major shareholder is the AES Group, with 70.7% of the total shares. Chilean pension funds also own a major 14.1% stake in the company.
GENER CLP 325.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IPSA CLP % CLP th CLP m CLP m 1m 1.0 -1.2 276.0 17.8 296/220.28 8,069,699 2,227,237 1,176.5 12m 9.7 32.1
Investment Thesis
AES Gener is a genuine growth play in the Chilean generation industry, but what makes its strategy unique is its geographical diversification. The companys current installed capacity is already one of the most diversified among the Chilean GenCos we cover, both geographically (51% of Geners capacity is located on the SIC, 26% on the SING and 22% in Colombia) and in terms of plant/fuel type (39% coal, 28% hydro, 22% gas, 10% diesel and 1% biomass). The company plans to continue pursuing growth through diversification. We believe this is an advantage over peers because it improves earnings stability (through lower hydrology exposure and less concentrated sales) and makes way for largerscale growth opportunities. AES Gener was already granted environmental licenses for two new power plant projects in Chile (not yet included in our fair value). These include the Alto Maipo hydropower plant (531 MW) to supply the SIC grid and the Cochrane coal-fired thermal plant (560 MW) to supply the SING grid. We believe these projects are likely to be implemented in the short to medium term.
Company Performance
120 110 100 90 80

The companys decision to invest in new projects (Alto Maipo and Cochrane) could raise our YE12 fair value to ~CLP 117/share and drive share performance. Confirmation of poor hydrology in 2012 would likely help the stocks momentum. The Eurozone and U.S. crisis could potentially trigger the sale of Latin American assets by European and American companies. This would be a driver for AES Gener if AES Corp. decides to take part in these transactions, either buying or selling assets.
70 60
Jan-11
Jul-11
May-11
IPSA
GENER
Source: Ita BBA

Our outperform rating, with a YE12 fair value of CLP 325/share, on AES Gener is based on the companys earnings stability (through geographical and generation source diversification product diversification) and its limited hydrology exposure. The Chilean Electricity sector has faced one of its driest periods in the past two years, which pressured spot prices upward and put clear downward pressure on hydro-generator EBITDA margins. Because of its limited exposure, however, Gener is spared is this scenario. The outlook for 2012 hydrology is still uncertain, and the risk that the La Nia effect hits Chilean hydrology again cannot be ruled out. So, owning stock that is less exposed to such weather conditions is, in our view, a wiser decision in these turbulent times. But we also like Gener because of its outstanding growth prospects and its appealing dividends (see our estimates below), especially on a relative basis to its Chilean peers Endesa and Colbn.

Source: Ita BBA
2010a 1,802 383 166 1,937 0.02 -224 16.4 26.3 -5.1 0.0 3.9 1.7
2011e 2,326 824 442 1,939 0.05 -38 7.6 9.9 -0.9 0.0 5.1 1.6
2012e 2,443 680 305 2,055 0.04 144 9.4 14.3 3.3 0.0 4.2 1.5
2013e 2,715 755 352 1,859 0.04 420 8.2 12.4 9.6 0.0 4.8 1.5
2014e 2,856 780 380 1,641 0.05 470 7.7 11.5 10.8 0.0 5.2 1.4
2015e 3,047 821 414 1,352 0.05 559 7.0 10.5 12.8 0.0 7.6 1.4
Ita BBA 219
Nov-11
Sep-11
Mar-11
Jan-12
AES Tiet PN Market Perform

Company Description
AES Tiet (GETI4) is the second-largest pure-generation company in Brazil, with 2,660 MW of installed capacity, which represents 2.3% of Brazils total installed capacity. The company is directly controlled by Brasiliana (holding company controlled by AES Brasil 50.01% and BNDES 49.99%), which owns 71.35% of its ON shares and 52.55% of total shares. Companys generation portfolio includes 17 hydropower plants, most of them located in So Paulo state, with a total electricity output of 14,006 GWh and 14,582 GWh in 2010 and 2009, respectively. The company operates through a long-term PPA contract (Power Purchase Agreement) with AES Eletropaulo at BRL 173.68/MWh (Sep 2011), which will expire in December 2015.
GETI4 BRL 27.6
Stock Data
Investment Thesis
As a pure-generation company, the main driver for AES Tiets shares is the trend for long-term power prices in Brazil (Ita BBA estimates of BRL 140/MWh vs. market consensus estimates of BRL 115/MWh). This topic is even more significant for GETI4, because the company will have to re-contract its assured energy before December 2015, when its single PPA contract with AES Eletropaulo expires. Even considering our positive assumption for power prices, we foresee a -10.9% EBITDA decrease in 2016. Another theme that has been brought to the spotlight throughout 2011 is related to the obligatory capacity expansion (400 MW). We tend to believe that the state of So Paulo will demand the fulfillment of this agreement, which could bring some negative surprises, with potential unexpected results throughout 2012. Although it is premature to suppose that the company would be forced to invest in a low-return greenfield generation project in order to fulfill the contracts privatization clause, we believe that the market is likely to price this risk into the stock. AES Tiet has a 550-MW natural-gas project that could potentially participate in these auctions and which would most likely face strong competition from MPX and Petrobras (for which we estimate IRRs between 4% and 6%), potentially forcing its IRR down. A more accretive expansion option for AES Tiet would be, in our opinion, the acquisition of biomass projects with signed PPAs, combined with the development of small hydropower projects.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
GETI4
Source: Ita BBA

Stable cash flow and high DY (10.3% FCFY and 10.6% DY in 2012). M&A activities involving its controlling group which could trigger tag-along rights. Better outlook on long-term energy prices. M&A activities in order to comply with the expansion-plan agreement made with So Paulo state.

We have a market-perform rating on GETI4 and a YE12 fair value of BRL 27.6/share, implying a 3.6% upside potential. Although GETI4 is a by-the-book defensive dividend play with strong fundamentals, we see better options in the Utilities sector at this point.

Source: Ita BBA
2010a 1,754 1,320 737 357 1.93 0 8.0 13.8 0.0 2.4 8.9 5.1
2011e 1,869 1,447 839 464 2.20 730 7.3 12.1 7.2 2.5 9.5 5.7
2012e 2,060 1,599 949 458 2.49 1,041 6.6 10.7 10.3 2.8 10.6 5.9
2013e 2,169 1,690 1,043 335 2.74 1,173 6.2 9.7 11.6 3.1 11.6 6.2
2014e 2,278 1,783 1,113 171 2.92 1,280 5.8 9.1 12.6 3.3 12.3 6.5
2015e 2,392 1,876 1,187 -2 3.11 1,346 5.4 8.6 13.3 3.5 13.1 6.8
Ita BBA 220
Dec-11
Cesp PNB Outperform

Company Description
Cesp is a pure generation company controlled by the state government of So Paulo, which holds 94.1% of the voting shares (36% of the total capital). The companys generation portfolio includes six hydropower plants located in the state of So Paulo with a combined total installed capacity of 7,455 MW, which represents 7% of Brazils total capacity. Cesps revenues are currently broken down into: 63.2% sales in the regulated market, 34% sales in the free market, and 2.8% in the spot market.
CESP6 BRL 37.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 1.8 2.4 32.1 15.3 34.43/26 327,503 10,513 15.2 12m 11.1 34.9
Investment Thesis
Because it is a pure generation company, one of the main drivers for Cesps shares has typically been the market expectation of long-term energy prices, which we assume at BRL 140/MWh, or BRL 65/MWh for generation concessions expiring between 2015 and 2017. However, the main driver for the stock has for some time been the likely renewal of its generation concessions, given that 67% of the companys generation capacity expires in July 2015. In 2008, the So Paulo state government tried to privatize the company through an auction, which highlighted the problem of expiring concessions. However, the auction failed because there was no clear solution for the concessions, and there was consequently no bidder. Since then, CESP6 is recognized as a pure event-driven story, and we believe that this event (concessions renewal) will be followed by Cesps privatization, as the So Paulo state government has given several signals that Cesp is not a strategic asset for the state. In our view, the companys privatization will unlock significant value for Cesp shareholders, as CESP6 is entitled to 100% tag-along rights. In our view, a final decision on concession renewals could occur in 1H12, reducing the stocks volatility. Our valuation for Cesp incorporates a price cap for the energy subject to the concession renewal issue of BRL 65/MWh and results in a YE12 fair value of BRL 37.0/share. In the privatization scenario (not assumed in our model), we estimate that the stock could reach BRL 46.6/share.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

Concession renewals are expected to be announced by 1H12. Our model assumes a price cap of BRL 65/MWh. Cesps privatization, which would trigger 100% tag-along rights on CESP6, is expected to follow the concession renewal. Raising dividends is also likely to drive CESP6s performance (see table below for our estimated dividend yields). FX variation usually affects Cesps results, as 30% of its debt is denominated in USD.
Ibovespa
CESP6
Source: Ita BBA

We have an outperform rating on CESP6 (YE12 fair value of BRL 37.0/share), not only because we expect a positive outcome from the concession-expiration imbroglio, which we believe will be followed the companys privatization (with 100% tag along), but also because we see three other drivers for the stock: i) strong cash flow generation (FCEE yields of 13.2% in YE12 and 16.6% in YE13); ii) increasing dividend yields (7.1% and 11.4% for 2012 and 2013, respectively); and iii) attractive multiples (14.3x 2012P/E and 5.1x 2012EV/EBITDA).

Source: Ita BBA
2010a 2,905 1,465 93 3,924 0.28 734 9.9 n.m. 7.0 0.7 2.3 1.0
2011e 3,145 1,909 488 3,338 1.49 1,074 7.3 21.5 10.2 1.9 5.9 1.0
2012e 3,414 2,144 736 2,605 2.25 1,392 6.1 14.3 13.2 2.3 7.1 1.0
2013e 3,801 2,455 1,082 1,928 3.30 1,744 5.1 9.7 16.6 3.7 11.4 1.0
2014e 4,558 3,124 1,653 1,003 5.05 2,289 3.7 6.4 21.8 4.9 15.3 1.0
2015e 3,515 2,075 914 607 2.79 1,675 5.4 11.5 15.9 2.7 8.5 1.0
Ita BBA 221
Dec-11
Celesc PNB Underperform

Company Description
Celesc is a state-owned utility company in Brazil. The companys main business is distribution (19,300 GWh in 2010), but it also has operations in generation (83 MW of installed capacity), transmission and natural-gas distribution (over 1.7 mm m / day). The distribution business is responsible for 92.4% of Celescs revenues. The other 7.6% of the companys EBITDA is split among the generation and transmission (3.1%) and natural-gas distribution businesses (4.5%). Celescs main shareholder is Santa Catarina state, which holds 50.2% of ON shares (20.2% of total shares).
3
CLSC6 BRL 41.3
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 2.9 3.5 32.6 26.8 45/31.8 38,572 1,256 0.7 12m -10.0 9.3
Investment Thesis
Celesc is one of the less-efficient distribution companies under our coverage. The company has consistently been operating above the regulatory manageable expenses (personnel, material, services and other) defined by ANEEL. The PMSO per client is BRL 344 (2010 basis), the highest among the companies we follow. We have been more optimistic about potential improvements on the operational front and more pro-market behavior since Mr. Antonio Gavazzoni was named CEO at the beginning of 2011. Note that Celescs tariff review will take place only in 2013 and we estimate an EBITDA decrease of 7.1% in 2013. The company has recently made some statutory reforms, which included reducing the number of directors from 11 to 9 and improving of the cost control system among others. While it is too early to measure the impact of these measures on the companys balance sheet, we believe that it is in line with the markets expectation of improved corporate governance at Celesc.
Company Performance
140

Implementation of an efficient cost-control system. Increase of stock liquidity from the current BRL 0.6 million daily. Increase the participation of the generation business in the companys EBITDA.
120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
CLSC6
Source: Ita BBA

Our underperform rating on the name (YE12 fair value of BRL 41.3/share) is based on i) the lack of clarity regarding the companys voluntary layoff program and other potential measures to improve cost controls; ii) the stocks poor daily liquidity of BRL 0.6 million; and iii) our negative stance on the distribution business due to the impending third tariff-reset cycle, which will likely put pressure on the companys results (7.2% EBITDA decrease in the tariff-revision year). Also, the upside potential is very limited and, due its poor cash-flow generation (FCFE Yield of 7.6% in 2011, FCFE Yield of 12.4% in 2012), the dividends are not appealing (6.7% 2011, 4.5% 2012). However, we have seen positive signs since the new CEO, Mr. Antonio Gavazzoni, assumed the role at the beginning of 2011, including: i) the renegotiation of receivables from the state of Santa Catarina; ii) the intent to strengthen the generation business; iii) the improvement in company communications; and iv) the companys recent statutory reform. We believe that these indicate Mr. Gavazzonis intention to bring Celesc closer to the market and implement a consistent operational turnaround. We advise investors to monitor CLSC6 closely in the months ahead.

Source: Ita BBA
2010a 4,037 422 274 1,266 7.09 41 6.0 4.6 3.2 1.9 5.9 n/a
2011e 4,179 648 339 1,618 8.79 95 4.4 3.7 7.6 2.2 6.7 0.6
2012e 4,502 537 227 1,555 5.89 156 5.2 5.5 12.4 1.5 4.5 0.5
2013e 4,747 497 183 1,376 4.75 244 5.3 6.8 19.4 1.2 3.7 0.5
2014e 5,047 608 252 1,124 6.54 305 3.9 5.0 24.3 1.6 5.0 0.5
2015e 5,442 673 294 819 7.63 376 3.1 4.3 30.0 7.6 23.4 0.5
Ita BBA 222
Dec-11
Cemig PN Outperform
Company Description
Cemig is the largest integrated utility group in Brazil, with operations in generation (7% market share), distribution (12% market share), transmission (10% market share) and power trading (17% market share). These segments account for EBITDA of 44% (generation), 36% (distribution), 18% (transmission) and 1% (power trading). The company operates in 23 Brazilian states and runs a transmission line in Chile. Cemig is controlled by the state government of Minas Gerais, which holds 51.0% of the voting shares (22.3% of total capital), but it is also controlled by the construction company Andrade Gutierrez, which holds 33.0% of the voting shares (14.4 % of total shares).
CMIG4 BRL 42.5 CIG USD 25.8
Stock Data
Investment Thesis
The core of Cemigs business strategy ever since the PSDB party took power in the state of Minas Gerais (in January 2003) has been to consolidate the Brazilian Utility sector. The company has built a successful track record of acquisitions (with Light, Terna, Abengoa, etc.), so that today, we see Cemig as a big private equity company, whose strategy is to: i) acquire utility assets; ii) implement a turnaround in the acquired assets and extract synergies with Cemigs assets; and iii) list the acquired asset on the stock exchange (if it is not already listed). We believe this strategy maximizes value for Cemigs shareholders because the listing of acquired assets forces the market to consider the sum-ofthe-parts valuation for Cemig, which, in our view, yields a higher valuation than the consolidated assessment. In its existing operations, Cemig stands out as a generator and trader, being one of the largest players selling energy in the free-market. In the transmission business, the company has been a successful consolidator, having raised Taesas (formerly Ternas) EBITDA margin by more than 10 pp (to 90% from 80%). As the most liquid stock in the Brazilian Utility universe, CMIG4 provides: i) accretive growth (mostly through acquisitions); ii) inflation protection (generation and transmission businesses are fully indexed to inflation; and iii) attractive dividends (see table below).
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

New M&A transactions are potential triggers for the stock. We expect Cemig to be actively involved in transactions in Brazil and other LatAm countries. Taesas IPO, expected for the first half of 2012, will likely be a catalyst for CMIG4. The potential early settlement of the CRC receivables (~BRL 5.3 billion), currently under negotiation between Cemig (creditor) and Minas Gerais state (debtor), would potentially increase our fair value for CMIG4 to ~BRL 3.8/share. This is expected in 1H12.
Ibovespa
CMIG4
Source: Ita BBA

Cemig, which we rate as outperform, ranks as one of our top picks in the Utility sector because it is one of the few we believe can provide accretive growth (mostly through acquisitions), combined with highly defensive features (inflation protection, stable earnings and attractive dividends). Furthermore, the stock is currently trading at cheap multiples and with an attractive upside potential to our YE12 fair value of BRL 42.5/share.

Source: Ita BBA
2010a 12,863 4,542 2,258 12,086 3.31 615 7.6 10.0 2.7 1.7 5.0 2.0
2011e 16,280 5,321 2,301 11,313 3.37 292 6.4 9.8 1.3 1.6 4.9 1.8
2012e 17,976 5,644 2,606 10,575 3.82 2,919 5.9 8.6 13.0 1.9 5.8 1.6
2013e 18,122 5,293 2,489 10,163 3.65 2,269 6.2 9.0 10.1 3.5 10.5 1.6
2014e 19,845 5,580 2,707 8,921 3.97 2,638 5.6 8.3 11.7 2.0 6.0 1.5
2015e 21,619 6,259 3,261 7,039 4.78 3,185 4.7 6.9 14.2 2.4 7.2 1.3
Ita BBA 223
Dec-11
Coelce PNA Underperform

Company Description
Coelce is a pure distribution company in Brazil. Its concession area is in the state of Cear (2.8 million consumers), which stands out for the high concentration of residential consumers, including the lowincome segment that represents 34% of the companys total electricity sales (8,815 GWh reported in 2010); industrial clients represent 16%, commercial 19% and rural 10%. As a privately-controlled electric utility company, Coelce is directly controlled by Endesa Brasil (58.9% stake).
COCE5 BRL 35.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 3.4 4.0 34.5 1.4 35.57/28 77,855 2,686 1.6 12m 36.8 66.1
Investment Thesis
Despite its low liquidity and upside, Coelce can be an attractive dividend play. Its aggressive payout policy gives the company one of the sectors highest dividend yields, which we estimate at 11.9% for 2011. However, we foresee a sharp reduction over the next two years (dividend yield of 2.3% and 3.3%, respectively), due to the negative impact of the third tariff reset cycle (-12.3% effective January 1). According to our estimates, the tariff review will generate a 50.1% decrease in Coelces EBITDA. The impact could be slightly lower (44.0%) if Aneel decides to implement the tariff review and tariff readjustment simultaneously. Another relevant issue for Coelce is related to M&A activities, which are expected to start heating up in the near to medium term and lead distribution companies to a consolidation process in search of operational synergies and higher returns. While we do not have a clear view of Endesas strategy in Brazil (target or acquirer), we note that in case of divestment, Coelces minority shareholders do not have tag-along rights; which, in our opinion, reduces the attractiveness of the stock.
Company Performance
140 120 100 80 60 40

Aneel to postpone the implementation of the tariff review; M&A activity in the Northeastern region could create synergy gains for Coelce. Above-estimate electricity volume growth; we assume 4.0% in 2011 and 4.0% in 2012.
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
COCE5
Source: Ita BBA

Our underperform rating on Coelce is based on its low 1.4% upside potential, which is below the 25% sector average and indicates that the companys appealing dividends have already been priced in. Despite the companys clean balance sheet, low debt and outstanding dividend 2011E DY of 11.9%, its poor liquidity continues to be a major drawback (~BRL 1.6 million/day). Our YE12 EV/EBITDA of 12.9x times is 37% above the distribution companies average. Our YE12 fair value for Coelce is BRL 35.0/share

Source: Ita BBA
2010a 2,850 807 472 776 6.06 301 4.3 5.7 11.2 4.3 12.4 2.0
2011e 2,611 739 473 299 6.08 482 4.0 5.7 17.9 4.1 11.9 2.1
2012e 2,351 282 95 938 1.21 13 12.9 28.4 0.5 0.8 2.3 2.1
2013e 2,807 406 134 959 1.72 42 9.0 20.0 1.5 1.1 3.3 2.0
2014e 3,190 470 175 959 2.25 89 7.8 15.3 3.3 1.5 4.3 1.9
2015e 3,479 574 252 927 3.24 148 6.3 10.6 5.5 2.3 6.6 1.8
Ita BBA 224
Dec-11
Colbn Market Perform

Company Description
Colbn is the second-largest generation company operating in the Chilean SIC grid (22% market share in the SIC), with a total installed capacity of 2,620 MW as of June 2011, all of it in the SIC. The output of Colbns plants is highly dependent on the Chilean hydrological regime because most of the companys thermal capacity (52% of total capacity) is composed of costly fuel back-up plants. Colbn also operates 824 km of transmission lines. The company is controlled by the Matte Group, which holds a 49% stake in the company through its subsidiaries Minera Valparaso and Floresta Cominco. The Matte Group is one of the leading corporate groups in Chile, with investments in energy, real estate and telecommunications, among others.
COLBUN CLP 160.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IPSA CLP % CLP th CLP m CLP m 1m 1.4 -0.7 127.9 25.1 148.5/103 17,536,168 2,241,999 1,767.3 12m -2.7 17.1
Investment Thesis
Colbn is a pure generation company with operations in a market with booming power demand: the Chilean central grid, also called the SIC grid, for which we estimate a 10-year demand CAGR of 6.0%. The company has two generation projects for which environmental licenses have already been granted: i) the Santa Maria II coal-fired thermal project, with 350 MW, to supply the SIC grid; and ii) the San Pedro hydropower project, with 150 MW, also to supply the SIC grid. Neither of these projects have been incorporated into our fair value for the stock yet, but we believe it highly probable that the company will succeed in implementing them and that they could represent a 19.1% growth in its total installed capacity. According to our estimates, together these projects could add CLP 34/share to our current YE12 fair value of CLP 160/share for the stock. However, despite our positive medium- to longterm bias in favor of the companys growth prospects, we believe that its short- to medium-term stock performance will be dictated by the effects of the La Nia weather pattern on Chilean hydro generation throughout 2012. In fact, we see Colbn as having two important disadvantages relative to its Chilean peers: i) its poor geographical diversification, as it operates only in the SIC grid; and ii) its very high hydrology exposure (48% of total capacity), which results in significant earnings volatility.
Company Performance
120 110 100 90 80 70 60
Jul-11
Nov-11
Jan-11
May-11

Weather forecasts are among the most important drivers for the stock. A clearer outlook regarding La Nias effects on 2012 hydrology could be a market-mover. The companys potential decision to resume construction on the San Pedro project could be a catalyst, potentially adding CLP 20/share to our YE12 fair value for the stock. The potential signing of PPAs for the Santa Maria II project would also be a trigger, possibly adding CLP 34/share to our YE12 fair value. M&A transactions involving generation assets, triggered by the euro zone and U.S. crises, which could prompt the sale of LatAm assets by European and American companies.
IPSA
Source: Ita BBA

We believe that our market-perform rating on Colbn is justified because, despite the companys very positive growth prospects based on greenfield projects, we believe that hydrology risk in 2012 will keep investors away from the stock at least until April, when a better weather forecast will be possible. In any case, we favor companies that can provide earnings stability in 2012, which further justifies our market-perform recommendation on Colbn (YE12 fair value of CLP 160.0/share).

Source: Ita BBA
2010a 1,024 260 116 1,037 0.01 -217 20.8 37.9 -4.9 0.0 0.8 1.3
2011e 1,304 152 1 1,182 0.00 -107 36.7 n.m. -2.4 0.0 0.0 1.3
2012e 1,213 581 332 1,218 0.02 -36 9.6 13.2 -0.8 0.0 4.7 1.2
2013e 1,300 525 276 1,048 0.02 374 10.4 15.9 8.5 0.0 4.8 1.2
2014e 1,465 753 469 762 0.03 496 6.8 9.3 11.3 0.0 10.2 1.2
2015e 1,514 668 400 700 0.02 508 7.6 11.0 11.6 0.0 8.7 1.2
Ita BBA 225
Sep-11
Mar-11
COLBUN
Jan-12
CPFL ON Outperform
Company Description
CPFL Energia is the largest privately-controlled electric company in Brazil, with operations in the distribution (13.0% market share), generation (2.0% market share) and commercialization (11.4% market share) segments; which currently represent 62%, 31% and 7% of the companys EBITDA, respectively. The companys operations are located in the Southeastern and Southern states of So Paulo, Minas Gerais, Rio Grande do Sul and Paran, which are the major economic and industrial centers in Brazil. CPFLs main shareholders are the private construction company Camargo Corra (25.7%) and Previ, Banco do Brasils pension fund (31.0%).
CPFE3 BRL 29.0 CPL USD 33.1
Stock Data
Investment Thesis
The companys business strategy is based on growing and integrating its three business segments to maximize shareholder value. In the distribution business, CPFL is known for its successful focus on cost efficiency and growth through acquisitions. But what has recently become the core factor in CPFLs investment story is its strategy in the generation business. The company recently pioneered the booming renewable energy business in Brazil through the creation of CPFL Renovveis in August 2011, constituted through the merger of CPFLs renewable-generation assets (wind, biomass and small hydro plants) with ERSA, and the acquisition of SIIFs renewable assets. CPFL Renovveis has 1,435 MW in renewable energy plants and projects (whose energy sale has already been guaranteed through longterm PPAs) and 3.0 GW in projects to be developed; CPFL holds a 63% stake in the subsidiary. We consider CPFLs generation strategy to be the best among the companies we cover because: i) it focuses on the only type of power plant that continues to provide appealing returns in Brazil, wind farms; and ii) its growth is not strictly dependent on the regulated-market energy auctions (in which energy prices tend to be lower). CPFL has the largest commercialization company in Brazil (with an 11.4% market share), which can provide CPFL Renovveis with long-term PPAs and sell the energy to the special free consumers in CPFLs distribution concession areas.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

The upcoming energy auctions could be catalysts for CPFE3 if the company succeeds in selling energy from its renewable projects. The announcement of the signing of PPAs between CPFL Renovveis and CPFL Brasil (trading company) could be a trigger at any time. The CPFL Renovveis IPO is expected sometime in 2012, and could be a strong catalyst for CPFE3, as it would likely trigger a more thorough assessment of CPFL Renovveis. M&A transactions involving the acquisition of distribution companies (like Rede Energia, for instance) could also be a powerful trigger.
Ibovespa
CPFE3
Source: Ita BBA

We have an outperform recommendation on CPFL and YE12 fair value of BRL 29.0/CPFE3. The company is currently one of our top picks in the Utilities sector because, in addition to its stable cash flows and appealing dividends, we believe that the market has not yet properly priced in the value generated by the creation of CPFL Renovveis in August 2011. We expect CPFLs stock to present a strong performance in 2012 as the relatively new business begins to gain visibility among investors, a process that we believe will be accelerated by the IPO of CPFL Renovveis in 2012.

Source: Ita BBA
2010a 12,024 3,431 1,560 8,424 1.62 -22 9.8 16.0 -0.1 1.3 4.9 3.8
2011e 12,620 3,772 1,481 10,683 1.54 -457 9.5 16.9 -1.8 1.5 5.8 4.1
2012e 14,553 4,194 1,606 11,615 1.67 410 8.8 15.6 1.6 1.6 6.1 4.1
2013e 15,248 4,014 1,286 11,961 1.34 851 9.3 19.4 3.4 1.3 4.9 4.0
2014e 16,345 4,485 1,557 11,229 1.62 1,695 8.2 16.0 6.8 1.5 5.9 4.0
2015e 17,758 5,099 2,010 10,535 2.09 2,209 7.1 12.4 8.8 2.0 7.6 3.9
Ita BBA 226
Dec-11
Copel PNB Market Perform

Company Description
Copel is the third-largest publicly-controlled electric utility company in Brazil, with operations in distribution (5.6% market share) and generation and transmission (4.5% market share), which currently account for 38.1% and 61.9% of Copels EBITDA, respectively. The remaining stake is related to telecom segment with 3.4% of Copels EBITDA. Copel is an integrated company with 4,549 MW of installed capacity and 21,303 MWh in the distribution segment in 2010. The companys operations are predominantly located in the state of Paran, which is the third-largest industrial center in Brazil. Copels main shareholders are the State of Paran (58.6% of ON shares) and BNDES (26.4% of ON shares).
CPLE6 BRL 48.0 ELP USD 29.1
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 4.2 4.8 38.2 25.7 46.71/31.82 273,655 10,454 22.8 12m -7.2 12.7
Investment Thesis
Since early 2011, when new management took over, Copel has been redefining its growth strategy. Today Copels stands out as a company focused on the development of greenfield projects in the hydro-generation and transmission segments, with a modest appetite for brownfield acquisitions in the renewable-generation business (wind power plants). With robust cash position (BRL 2,017 billion in September 2011) and a very low debt level (YE12 net debt/EBITDA of 0.5), Copel is now willing to speed up growth through acquisitions, which could include acquisitions in the distribution business and the generation and transmission businesses. Although this appetite for growth may be considered positive for some investors, the fact is that there is growing concern about how much value Copel would be able to add through a more aggressive growth strategy. Another recurrent question is related to the companys low payout policy (35%-40%), which differs unfavorably from its main peers, including Cemig (50% by law). There is no doubt that a more aggressive dividend policy would make investors happier here, which would partially offset concerns over the growth strategy.
Company Performance
140 120 100 80 60 40

The performance of Copels management was a problem in 2011. When the company regains the markets confidence, it will likely be a trigger for the stock. A sustainable and more aggressive dividend policy (above 50%). A clearer, value-driven growth strategy in the new energy and transmission auctions. M&A transactions involving renewable
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
CPLE6
Source: Ita BBA
generation assets and eventually distribution companies.

Despite Copels great upside potential and the attractive multiples, we recently downgraded Copel to market-perform (YE12 fair value of BRL 48.0/share; USD 29.1/share), given the managements problems in effecting an operational turnaround and a more aggressive dividend policy. Furthermore, the outlook for Copel in 2012 remains challenged, not only because the company needs to restore investor confidence, but also because its results will inevitably take a hit during the third tariff reset cycle in June.

Source: Ita BBA
2010a 6,901 1,476 988 65 3.61 630 7.1 10.6 6.0 0.9 2.4 0.9
2011e 7,629 2,085 1,324 736 4.84 -66 5.4 7.9 -0.6 1.6 4.2 0.9
2012e 7,954 2,019 1,176 961 4.30 222 5.7 8.9 2.1 1.6 4.3 0.8
2013e 8,997 2,056 1,178 962 4.30 435 5.6 8.9 4.2 1.6 4.3 0.8
2014e 10,527 2,857 1,687 372 6.16 1,010 3.8 6.2 9.7 2.3 6.1 0.7
2015e 11,793 3,445 2,104 -814 7.69 1,786 2.8 5.0 17.1 3.7 9.6 0.7
Ita BBA 227
Dec-11
E-CL Outperform
Company Description
E-CL is the largest electric generation company operating in the Chilean northern transmission grid (SING). It has an installed capacity of 2,062 MW, which currently corresponds to 48% of the systems total installed capacity. Because the area covered by the SING grid has virtually no water, the majority of its energy generation is thermoelectric, fired by coal, diesel and natural gas. For this reason, over 99% of E-CLs capacity is thermal. In addition to its generation business, E-CL operates 1,059 km of transmission lines and controls the gas pipelines Gasoducto Norandino Argentina and Gasoducto Norandino Chile. E-CLs controlling shareholder is the International Power-GDF Suez group, which owns 52.8% of the companys shares. Another 13.6% are in the hands of Chilean pension funds.
ECL CLP 1550.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. IPSA CLP % CLP th CLP m CLP m 1m 6.7 4.4 1,430.0 8.4 1430/1050 1,053,310 1,506,233 1,349.1 12m 23.2 48.2
Investment Thesis
As the largest GenCo in the Chilean northern transmission grid (SING), where power consumption is driven by the thriving Chilean mining industry, E-CL is one of the best positioned to benefit from growth opportunities in the area. Another important characteristic of E-CLs investment story, which we regard as desirable in times of global market turbulence, is the companys earnings stability; which is based on a steady thermal-generation regime (over 99% of the companys capacity is thermal) as opposed to the volatile hydropower output of some of its peers in Chiles central grid (SIC), like Endesa, Colbn and, to a lesser extent, AES Gener. Furthermore, in a stress scenario of strong global retraction, we believe that Chile and Colombia would suffer the least in Latin America, with the SING market retracting less than the SIC market. In this sense, E-CL stands out as a defensive play among Chilean Utilities.
Company Performance
130 120 110 100 90 80

The signing of new long-term PPAs would trigger the construction of new coal thermal plants; the company licenses for already two has environmental plants. 375-MW The eventual connection of the northern (SING) and central (SIC) Chilean transmission grids could be negative for E-CL, as it would likely increase competition in E-CLs market, possibly pressuring energy prices downward. Increased stock liquidity could result from an eventual divestment by the Chilean pension funds.
70 60
Jul-11
Nov-11
Jan-11
May-11
IPSA
Sep-11
Mar-11
ECL
Source: Ita BBA
Growing energy demand from the Chilean mining industry could put upward pressure on electricity prices and have a positive impact on E-CLs valuation.

E-CL is our favorite Chilean utility company (outperform rating and YE12 fair value of CLP 1550.0) because we believe it provides an appealing combination of defensive features and growth positioning. With over 99% of its 2-GW capacity coming from thermal plants, E-CLs electric generation is not subject to fluctuations in hydrological conditions, as is the case for the hydropower plants connected to the SIC grid. We therefore regard E-CLs earnings as probably the most stable within the Chilean Utilities universe. Growth-wise, the company is likely the best positioned in Chile, given its high exposure to the copper mining industry, whose electric consumption is expected to nearly double over the next ten years.

Source: Ita BBA
2010a 1,121 340 200 668 0.19 70 10.6 14.7 2.4 0.1 3.4 1.8
2011e 1,279 341 173 610 0.16 9 10.4 17.1 0.3 0.1 3.8 1.8
2012e 1,476 411 220 515 0.21 181 8.4 13.4 6.2 0.1 4.5 1.7
2013e 1,589 445 255 374 0.24 273 7.5 11.6 9.3 0.1 5.2 1.6
2014e 1,647 456 270 236 0.26 291 7.0 10.9 9.9 0.2 5.5 1.5
2015e 1,672 456 279 94 0.26 304 6.7 10.6 10.3 0.2 6.6 1.5
Ita BBA 228
Jan-12
Eletrobras ON Outperform
Company Description
Eletrobras is the largest publicly-controlled electric utility company in Brazil, with operations in distribution (4.3% market share), generation (32% market share) and transmission (46% market share). These segments respectively account for 68%, 29% and 3% of Eletrobras EBITDA. Eletrobras is an integrated company with 42,080 MW of installed capacity and 54,105 km of transmission lines. Its main shareholders are the Brazilian federal government (50.9% of ON shares) and BNDES (16.6% of ON shares).
ELET3 BRL 42.3 EBR USD 28.4
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 1.9 -1.0 17.6 139.9 25.55/15.23 1,352,634 23,847 15.5 12m -18.9 -4.8
Investment Thesis
With a leading position in the Brazilian electricity market in all three segments (generation, transmission and distribution), Eletrobras investment thesis is highly dependent on a turnaround in operations and management. The company owns attractive generation and transmission assets that are not well operated, as well as problematic distribution companies (with an average energy loss of 33%) with very poor managerial practices (EBITDA margin has shrunk by ~2,000 bps over the past nine years, with EBITDA dropping to BRL 6.9 billion from BRL 8.4 billion) and high political interference. The current management has adopted better practices (though still without concrete results) and a more aggressive growth strategy based on investments in greenfield projects in Brazil and brownfield acquisitions abroad. Over the past five years, Eletrobras has been used by the federal government as the main vehicle for investment in greenfield generation and transmission projects (total capex compromised of approximately BRL 30 billion, or 20 GW of installed capacity adjusted for tits stake), through partnerships with private players. Although Eletrobras holds a minority stake in most of these projects (ranging between 20%-49%), investors have consistently questioned: i) the internal rates of return obtained (only an 8.2% equity IRR in real terms, according to our assessment); and ii) the companys debt levels after the completion of these projects, which we estimate at 4.9x net debt/EBITDA.
Company Performance
120 110 100 90 80 70 60

The sale of distressed distribution subsidiaries (Amazonas, Eletroacre, Ceron, Cepisa, to cite a few) could help to dispel skepticism about Eletrobras. Better communication and disclosure policy. The renewal of the expiring concessions on good terms (price cap above BRL 80/MWh). Setting performance goals for its subsidiaries.
IBOV
ELET3
Source: Ita BBA

Our recommendation is now challenged. We have consistently pointed to Eletrobras as a promising operational-turnaround and growth-related story in the Brazilian Utilities sector. Even though we acknowledge that some improvements have been made during 2011, especially in the efforts of the new management to introduce better corporate practices, we admit that the results are still poor. It stands to reason that restoring investor confidence in Eletrobras will take longer and will require a clear indication that things are going to improve. We fear not only the slow pace of the change, but even whether it will happen during President Dilmas administration. Despite the attractive multiples and huge upside potential (see table below), we would say that our outperform recommendation and YE12 fair value of BRL 42.3/share for ELET3 are currently strained.

Source: Ita BBA
2010a 26,749 5,334 2,553 11,483 1.89 0 6.6 9.3 0.0 1.3 7.2 0.3
2011e 27,921 7,792 3,452 18,499 2.55 -3,117 5.5 6.9 -13.1 0.9 5.2 0.3
2012e 26,956 6,521 2,060 24,286 1.52 -2,350 7.4 11.6 -9.9 0.5 3.0 0.3
2013e 29,597 7,899 2,579 31,745 1.91 -1,818 7.1 9.2 -7.6 0.7 3.8 0.3
2014e 31,880 9,154 3,040 34,551 2.25 -1,215 6.4 7.8 -5.1 0.8 4.5 0.3
2015e 32,555 8,925 2,745 37,583 2.03 -1,160 6.9 8.7 -4.9 0.7 4.0 0.3
Ita BBA 229
Endesa Chile Market Perform

Company Description
Endesa Chile is a privately-held electric generation company majority-owned by Enel, with a total installed capacity of 13.8 GMW; it has leading positions in Chile (35% market share), Colombia (21%), Peru (26%) and Argentina (13%). The company also holds a 38.88% stake in Endesa Brasil, which controls two Brazilian DisCos (Coelce and Ampla) and 987 MW in generation plants. Energy generation in Chile accounts for 55% of its gross revenue, decreasing from 63% in 2008, but still reflects a large exposure to the country. The company has also invested in increasing the power capacity of its existing plants and creating new capacity through Bocamina II (installed capacity of 370 MW) and Quintero (257 MW) in Chile, El Quimbo (~400 MW) in Colombia, and Santa Rosa (189-MW capacity thermal-power plant) in Peru.
ENDESA CLP 984.0 EOC USD 61.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization CLP % CLP th CLP b CLP b 1m -0.4 -2.5 769.0 28.0 908/700.01 8,201,755 6,307,149 2,910.1 12m -11.6 6.4
Investment Thesis
We believe that Endesa Chile is in a very challenging position in terms of the growth and consolidation of its LatAm operations. Although, we are convinced that the company could easily play the consolidator role in LatAm, based on its leading position in the region, its strong cash-flow generation (YE12 FCFE yield of -9.6%), unleveraged balance sheet (1.5x YE12 net debt /EBITDA) and the healthy financial situation of its controlling shareholder. However, we note that the lack of a unified growth strategy in the region could hinder the realization of this scenario. Endesa Chile apparently intends to remain solely focused on organic growth, which is becoming increasingly restricted due to legal market-share limits in Peru (25%), Colombia (25%) and possibly Chile (where government authorities recently declared the possible implementation of a 20% market-share limit). Consequently, any significant acquisition will likely be carried out directly by Enel Power, or by its subsidiary Enel Green Power. In short, it seems that Endesa Chile is likely to miss out on what we believe to be an imminent and attractive consolidation movement in Latin America.
Company Performance
120 110 100 90 80 70 60

Source: Ita BBA
IPSA
ENDESA
Rainfall is a key factor for EOC, given its high exposure to hydro-generation (58.4%).
A real tariff increase in Argentina would be an unexpected and key catalyst for the stock.

We initiated coverage on Endesa with a market-perform rating (and YE12 fair value of CLP 984.0/share) because, despite the appealing upside potential, we saw no short- or medium-term catalysts for the stock. We believe that the company is stuck in a very challenging position in terms of growing and consolidating its operations in LatAm. Because it is the regions most geographically diverse electric utility, it is only natural that investors would see the stock as an investment vehicle in the LatAm electricity infrastructure, in order to capture the appealing growth rates that emerging markets are expected to provide. However, the legal market-share restrictions in Peru and Colombia (and possibly Chile), the unwelcoming investment environment in Argentina, and Enel Powers plan to concentrate on renewable-energy growth through another vehicle (Enel Green Power), seem to be strong impediments to EOCs growth at this point.

Years Net revenues (CLP b) EBITDA (CLP b) Net income (CLP b) Net debt (CLP b) EPS FCFE (CLP b) EV/EBITDA P/E FCFE yield (%) DPS (CLP) Dividend yield (%) P/BV
Source: Ita BBA
2010a 2,435,382 1,070,438 533,555 1,489,445 65.05 551,144 8.0 11.8 8.7 39.1 5.1 2.7
2011e 2,503,159 773,418 345,666 1,540,091 42.15 105,544 11.2 18.2 1.7 18.6 2.4 2.5
2012e 2,678,250 1,031,545 508,242 1,514,433 61.97 291,196 8.5 12.4 4.6 29.4 3.8 2.4
2013e 2,789,122 1,112,235 551,579 1,700,455 67.25 173,260 8.2 11.4 2.7 31.9 4.2 2.3
2014e 2,902,368 1,190,117 572,806 1,507,441 69.84 543,378 7.7 11.0 8.6 33.2 4.3 2.2
2015e 3,013,960 1,259,247 624,348 1,168,543 76.12 702,501 7.1 10.1 11.1 39.8 5.2 2.1
Ita BBA 230
Energias do Brasil ON Outperform

Company Description
Energias do Brasil (ENBR3) is an integrated Brazilian utility company that operates in the generation (51% of EBITDA), distribution (45%) and commercialization (4%) segments. In the generation business, the company has a total capacity of 1,889 MW, 81% of which is hydro and 19% coal-fired thermal. In the distribution business, Energias do Brasil has two concessions with a combined total market share of 4.7%: Bandeirante in the state of So Paulo and Escelsa in the state of Esprito Santo. The companys controlling shareholder is the Portuguese utility EDP, with a 51% stake. EDPs major shareholder was the Portuguese government, but its 21.35% stake was recently sold to the giant Chinese utility Three Gorges.
ENBR3 BRL 56.5
Stock Data
Investment Thesis
Energias do Brasil stands out for its combination of high quality assets (generation and distribution), skilled management, consistent dividend story (6.4% in 2009, 6.1% in 2010), appealing multiples and well-balanced EBITDA (51% generation, 45% distribution and 4% trading). The biggest drawback to Energias do Brasils investment story has been the companys modest delivery of greenfield growth. We believe that ENBRs conservativeness was a reflection of the high debt leverage of its parent company, EDP (4.5x net debt/EBITDA in September 2011). However, this could change significantly going forward, with Chinese banks supporting EDPs debt rollover. The recent acquisition of the Portuguese governments 21.35% stake in EDP for EUR 2,693 million (EUR 3.45/share) by the Chinese utility giant Three Gorges (22 GW) will probably bring a wide variety of growth opportunities to ENBR3. According to the announced strategic plan, Three Gorges has also guaranteed financial support in the amount of EUR 4.0 billion (in addition to the EUR 4.0 billion funding offer from Chinese banks) in order to aid the companys debt rollover in the coming years. We believe that ENBRs growth strategy, which is focused on the generation business (particularly after its recent debut in the wind energy segment), could be accelerated by Three Gorges entry in EDPs capital.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

Source: Ita BBA
Ibovespa
ENBR3
The stock enjoys one of the richest liquidities in the sector (BRL 22.6 million/day), and has a good chance of being added to the Bovespa Index (Ibov) in 1H12. Likely increased participation in the MSCI and IBRx indexes.
Only 50% of its EBITDA has exposure to the third tariff reset cycle. The impact of the tariff reset will also be offset by the Pecm I startup in 2012. Three Gorges financial aid to EDP could propel ENBRs growth.

Cheap valuation and multiples: time to catch up with sector peers. Our YE12 fair value of BRL 56.5/share for ENBR3 indicates an impressive 37% upside potential. The stock is trading at quite appealing multiples (6.9x YE12 EV/EBITDA and 10.7x YE12 P/E) and a reasonable discount (24%) to its main peer CPFL Energia. Furthermore, ENBR3 is likely to pay interesting dividend yields going forward, which we estimate at 6.4% in 2011, 6.7% in 2012 and 7.4% 2013, even considering a conservative payout policy of 50%. Finally, the stock enjoys one of the richest liquidities in the sector and has a good chance of being added to the Bovespa Index (Ibov) in 1H12. We recently upgraded ENBR3, on which we have an outperform rating, to top-pick in the sector.

Source: Ita BBA
2010a 5,034 1,523 583 2,476 3.67 -128 5.9 11.2 -2.0 2.2 5.4 1.4
2011e 5,420 1,555 630 2,454 3.97 412 7.1 10.4 6.3 2.6 6.4 1.4
2012e 5,684 1,541 612 2,054 3.85 709 6.9 10.7 10.8 2.8 6.7 1.3
2013e 6,227 1,624 684 1,566 4.31 772 6.3 9.6 11.8 3.1 7.4 1.3
2014e 6,876 1,712 785 1,010 4.95 864 5.7 8.3 13.2 3.5 8.5 1.2
2015e 7,802 2,252 1,131 342 7.12 1,087 4.1 5.8 16.6 4.0 9.8 1.1
Ita BBA 231
Dec-11
Equatorial ON Underperform
Company Description
Equatorial is a privately-controlled electric utility company in Brazil. It is primarily engaged in distribution, but the company also has generation and commercialization operations. Equatorial is the holding company of Cemar, the electricity distribution company in Maranho state, which contributes 95.2% of Equatorials EBITDA. The other 4.8% of the companys EBITDA comes from its generation segment, which consists of a 25% stake in Geranorte, a 330 MW diesel-fired power plant. Recently, the company created a subsidiary called Sol Energias, a trading company. Equatorials main shareholder is PCP Latin America Power fund, with 53.7% of total shares.
EQTL3 BRL 12.9
Stock Data
Investment Thesis
Equatorial stands out because of its ability to extract efficiencies from its operations, which in our view can be attributed to its skilled management. Cemars PMSO per client was equivalent to BRL 103 in 2010, 40% lower than the regulatory level of BRL 173 and below the average for the main companies that we cover in the sector. Cemar has set the benchmark for manageable expenses, and because of that, we believe that there is not much room for additional improvement aside from margin gains (26.5% EBITDA margin in 2010, vs. 21% for the segment). Another remarkable achievement was the sharp drop in Cemars energy loss, which decreased to 30% from 15.3% (a 14.7-bp reduction) from 2009 until 3Q11. Equatorials original business plan of becoming a consolidator has been postponed after the incorporation of several distressed distribution companies in Brazils north and northeast regions by Eletrobras. Since then, Equatorial has been much more of a dividend play than a growth story. However, with the recent announcement of Grupo Rede controllers interest in divesting from the company, the possibility of Equatorial becoming involved in M&A activities came back into the spotlight. Our assessment of Grupo Rede shows a highly leveraged company (4.5x net debt/EBITDA) with an equity value of BRL 1.3 billion.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

Acquisition of distribution companies, which could allow Equatorial to extract synergies and improve operational efficiency. Solid dividends (11.6% DY in 2012, 13.8% DY in 2013). Increased number of contracts at its new subsidiary, Sol Energias, a trading company. Measures to increase current stock liquidity (BRL 1.8 million/day).
Ibovespa
EQTL3
Source: Ita BBA

Fairly priced after the strong performance year-to-date. Our underperform rating (YE12 fair value of BRL 12.9/share) is based on three main points: i) our belief that Equatorial is currently priced fairly, after its strong performance in the last few months (20%); ii) the combination of limited room for brownfield acquisitions in the distribution segment and the lack of a growth strategy for the generation business; and iii) very poor stock liquidity. On the other hand, we highlight the companys very-aggressive dividend policy, which points to double-digit dividend yields for the coming years (11.6% and 13.8% for 2012 and 2013, respectively).

Source: Ita BBA
2010a 1,885 488 179 919 1.64 -76 5.1 7.8 -5.4 1.1 8.9 1.6
2011e 1,885 488 179 919 1.64 -76 5.1 7.8 -5.4 1.1 8.9 1.6
2012e 1,977 530 212 1,150 1.94 -222 5.3 6.6 -15.9 1.5 11.6 1.5
2013e 2,023 665 253 1,423 2.31 -65 4.9 5.5 -4.7 1.8 13.8 1.4
2014e 2,264 581 206 1,313 1.89 60 5.6 6.8 4.3 1.6 12.7 1.4
2015e 2,518 613 215 1,279 1.97 27 5.4 6.5 1.9 1.7 13.2 1.3
Ita BBA 232
Dec-11
ISA Cteep PN Market Perform

Company Description
ISA Cteep is a pure transmission company controlled by the Colombian utility ISA, with 89.4% of the voting shares (37.9% of total shares). ISA is one of the largest electrical transmission groups in Latin America, with assets in Brazil, Colombia, Peru and beyond. ISA Cteep was created through the spin-off of Cesp back in 1999. With 18,687 km of transmission lines and 106 substations, it is the second largest TransCo in Brazil (16% market share in Brazil).
TRPL4 BRL 57.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization 3-mth avg daily vol. Performance (%) Absolute Vs. Ibovespa BRL % BRL th BRL m BRL m 1m 16.2 16.9 59.4 (3.1) 59.96/42.15 151,829 9,011 7.7 12m 16.8 41.8
Investment Thesis
As a pure transmission company, Cteep has one of the most predictable earnings among Brazilian Utilities. Its Annual Permitted Revenue is fixed for the entire concession period and is only adjusted for inflation (mostly IGPM) every July. Such stability is what puts the stock in the spotlight every time the market grows risk-averse. This bond-like stock also provides periodic dividend payments, almost every two months, and yearly double-digit dividend yields (see table below). But this is not a risk-free stock: the company is exposed to the expiring-concession issue, with 75.8% of its revenue coming from a concession that expires in July 2015. We do expect this concession to be renewed by the federal government sometime in 1H12. However, we also expect that the renewal will be contingent upon a sharp reduction in the companys Annual Permitted Revenue. In our model, we assume a 30% revenue reduction, but there is risk of a sharper drop. Another risk is the companys involvement in a legal battle with Eletrobras and Eletropaulo, in which Eletrobras is requiring the payment of a ~BRL 1.2 billion debt (Sept 2011), but it is not clear whether this should be paid by Cteep or Eletropaulo. Our view and the consensus view is that Eletropaulo is the debtor, but this will keep TRPL4 volatile.
Company Performance
140 120 100

Announcement of the concession-renewal conditions for transmission revenues. M&A activity: we tend to see ISA Cteep as more of a target than a consolidator. Decreasing returns from greenfield transmission auctions has kept Cteep from growing. Adoption of IFRS has boosted the companys earnings, eventually allowing for the payment of higher dividends.
80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
TRPL4
Source: Ita BBA

ISA Cteep has strong fundamentals that include: i) appealing dividend yield (see table below); ii) strong cash flow generation (see table below); iii) low indebtedness (1.2 YE12 net debt/EBITDA); iv) very high earnings predictability; and v) almost no downward earnings revisions caused by a possible decline in Brazilian GDP in 2012. However, our market-perform rating on the stock is justified by: i) TRPL4 is currently fully valued (-3.1%%) compared to our YE12 fair value of BRL 57.5/share; ii) the companys poor growth prospects, given the sharp drop in transmission greenfield returns (4% real equity IRR in the last transmission-line auction); and iii) its exposure to the concession-renewals (70% of total revenues approximately).

Source: Ita BBA
2010a 2,256 1,152 812 1,373 5.35 1,090 9.0 11.1 12.1 5.1 8.6 2.0
2011e 3,115 1,934 1,268 1,532 8.35 1,260 5.5 7.1 14.0 6.3 10.6 1.9
2012e 2,560 1,709 1,144 2,137 7.53 1,143 6.5 7.9 12.7 7.5 12.7 1.9
2013e 2,562 1,837 1,198 2,757 7.89 1,194 6.4 7.5 13.2 7.9 13.3 1.9
2014e 2,632 2,011 1,280 2,879 8.43 1,276 5.9 7.0 14.2 8.4 14.2 1.9
2015e 2,425 1,836 1,146 3,117 7.55 1,143 6.6 7.9 12.7 7.5 12.7 1.9
Ita BBA 233
Dec-11
Light ON Market Perform

Company Description
Light is a privately-controlled electric utility company in Brazil. Distribution is Lights main business, accounting for 79.2% of its EBITDA, but the company also has operations in the generation and commercialization segments, which generate 19.5% and 1.3% of the companys EBITDA, respectively. Lights main shareholder is Cemig, which holds 32.5% of total shares (26.06% directly and 6.4% indirectly). Although Cemig is responsible for Lights management, the companys shareholder structure was built such that Light cannot technically be considered a state-controlled company (although it does carry political risk), which would, among other restrictions, prompt the early maturity of a big parcel of its debt (due to the lending limits BNDES imposes on state-controlled companies).
LIGT3 BRL 41.5
Stock Data
Investment Thesis
Light is widely known for its problematic electricity distribution concession in Rio de Janeiro, which has one of the highest levels of electricity losses in Brazil. Recently, the company has intensified its efforts to improve this situation, betting on the success of the favela pacification program in Rio and on heavy investments in the adoption of electronic meters. While we have a positive view of the companys capacity to extract value by reducing non-technical energy losses in its concession area, we note that the results of this program are coming much slower than we had anticipated. On the generation front, Light has made two important moves recently: i) acquiring a 2.49% stake in the Belo Monte hydropower plant (279.9 GW); and ii) acquiring a 25.9% stake in Renova Energia (35.1% of ON shares), a generation company focused in wind energy. In our view, Lights investment in Belo Monte reveals that the stock does carry political risk, as such an investment cannot be justified on an economic basis (high risk, low return). The investment in Renova, on the other hand, was a very wise one, we think, as Renova is an outstanding vehicle for fast growth in the only segment still providing accretive returns in Brazil: wind energy.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

Acceleration in energy-loss reduction could boost the stocks performance. A decrease in bad-debt provisions arising from Lights loss-reduction program would be a catalyst for the stock. The signing of new PPAs for Renovas wind projects. Increase in electricity demand due to the World Cup and Olympic games.
Ibovespa
LIGT3
Source: Ita BBA

We have been strong supporters of Lights investment case since November 2010, with a bullish view on the companys energy-loss reduction plan, the favela-pacification program in Rio and, more recently, the companys decision to acquire a 26% stake in Renova. Our market-perform rating on the stock (YE12 fair value of BRL 41.5/share) reflects our negative view regarding the companys decision to invest in the Belo Monte project. We believe that this move has changed the markets risk perception regarding LIGT3, prompting a re-rating in order to incorporate political risk. We believe that only an acceleration of energy-loss reduction could put the company back in the spotlight of the Utilities sector.

Source: Ita BBA
2010a 6,509 1,594 575 2,975 2.82 609 5.7 10.5 10.1 2.1 7.1 1.8
2011e 6,842 1,277 364 3,832 1.78 -265 7.7 16.7 -4.4 2.1 7.2 1.9
2012e 7,559 1,640 585 4,094 2.87 -25 6.2 10.4 -0.4 2.3 7.7 1.8
2013e 8,935 2,234 955 4,189 4.68 372 4.6 6.3 6.1 3.7 12.6 1.7
2014e 9,131 1,810 627 4,437 3.08 517 5.8 9.7 8.5 2.5 8.3 1.6
2015e 9,832 2,023 743 4,398 3.64 541 5.2 8.2 8.9 2.9 9.8 1.6
Ita BBA 234
Dec-11
MPX Energia ON Outperform

Company Description
MPX is chiefly a pre-operational generation company with 2,061 MW in coal and gas-fired thermal plants currently under construction in Brazils Northeast region, all with long-term PPAs (power purchase agreement). The company also has a large portfolio of thermal generation projects, including a 2.1-GW coal-fired plant in Chile. Furthermore, MPX has a sizeable project in the mining business (CCX), comprised of thermal-coal mines in Colombia with potential resources of 810 million tons per year. The company has an integrated structure in the gas-fired generation business, through its 23.3% stake in the gas-exploration company OGX Maranho. MPXs controlling shareholder is EBX (owned by the entrepreneur Eike Batista), which holds 73% of the total shares.
MPXE3 BRL 65.0
Stock Data
Investment Thesis
MPX is the only pure-growth story in our coverage universe. The company has successfully signed long-term PPAs for 1,429 MW in coal and gas thermal plants through regulated-market energy auctions; it has also recently acquired contracts from the Bertin group for another 631.4 MW in gas thermal plants, all at quite attractive energy prices. Going forward, MPX will likely be the only privately controlled company capable of growing its gas-fired generation capacity due to its integrated business structure, which combines the gas generation and gas production businesses through its 23.3% stake in the gas exploration company OGX Maranho. This allows the company to access cheap natural gas with no fuel-transportation cost, as the power plants are being developed close to the gas basin. In the power generation business, MPX has a very competitive 2.1-GW coal project in Chile, the Castilla project; it has already been granted an environmental license, but is not yet included in our valuation for MPX. In Colombia, the company owns coal mines with potential resources of up to 810 million tons. Although the project is still in the early development stages, an IPO as a separate company (CCX) is planned for 2H12. The recently announced deal with E.ON will likely bring further upside on MPXs investment story, because E.ON is clearly attributing value to MPXs portfolio of projects without PPAs.
Company Performance
190 160 130 100 70 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11

Announcement of additional natural resources in the Parnaba Basin. gas Certification of additional coal resources in Colombia. CCX IPO expected in 2H12. Signing of a long-term PPA in Chile for the Castilla project energy.
Ibovespa
MPXE3
Source: Ita BBA
The creation of regional energy auctions would allow MPX to sell the energy from its coal projects in the Southern region.

MPX Energia is a pure growth story with experienced management. Our outperform rating on the name is based on our view that the company is very well positioned to grow through its integrated natural gas generation business (high return rates) and large optionality (coal plant project in Chile, mining project in Colombia, etc.). Our YE12 fair value of BRL 65.0/share (or BRL 61/share fully diluted considering 100% debentures conversion) only incorporates the generation projects with signed PPAs (2,061 MW), and considers a 58% discount to our NAV estimate for the mining project.

Source: Ita BBA
2010a 94 -170 -245 1,835 -1.79 -1,624 n.m. n.m. -24.0 0.0 0.0 4.1
2011e 102 -64 -296 5,137 -2.16 -2,306 n.m. n.m. -34.1 0.0 0.0 4.9
2012e 883 393 -63 5,795 -0.46 -2,104 32.1 n.m. -31.1 0.0 0.0 2.5
2013e 1,755 831 134 6,657 0.98 -1,666 16.2 n.m. -24.7 0.0 0.0 2.4
2014e 2,048 1,017 10 7,996 0.07 -1,542 14.5 n.m. -22.8 0.0 0.0 2.4
2015e 2,766 1,335 81 8,688 0.59 -380 11.6 n.m. -5.6 0.0 0.0 2.3
Ita BBA 235
Dec-11
Pampa Energa Market Perform

Company Description
Pampa Energa is a holding company with 2,200 MW of generation capacity. It co-controls Transener, which operates 95% of the national high-voltage transmission grid, and controls distribution subsidiaries that meet 26% of Argentinas electricity demand. It is expected to co-control TGS, which is the largest gas-transportation company in the country, in the near future. Pampa Energas main earnings drivers are defined by governmental policies. The bottom line is negative, but EBITDA is positive for all units. Consolidated free cash flow is small and will need higher tariffs to improve.
PAM USD 13.0
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding USD % USD th USD m USD m 1m -6.6 11.1 26.0 19.18/10.03 59,040 656 0.8 12m -35.3
Investment Thesis
We believe that Pampa Energas best asset is its management, which is among the most dynamic in the country. The companys vision is to capture significant capital gains once the Argentine utilities sector normalizes. The average electric bill for one week in the city of Buenos Aires until January was ARS 6. The government has recently cut subsidies, so bills are likely to increase, but the tariffs received by utility companies will remain at their current paltry levels. For 2012, we expect Pampa Energa to generate EBITDA of USD 239 million and to post a bottom-line loss of USD 112 million. We believe, however, that down the road regulations will have to shift significantly, as the prevailing scheme is completely inconsistent with the long-term going-concern status of the Argentine utility companies. Electricity demand is growing at a brisk pace, and investment is not strong enough to bring suppliers out of the zero-reserve-margin area, even as operational costs and subsidies snowball.
Company Performance
121 111 101 91 81 71 61 51
Feb-11 Aug-11 Dec-10 Jun-11 Oct-11 Apr-11 Dec-11

While there is no indication of any plan for electricity-tariff normalization in Argentina, we believe that snowballing subsidy costs and the need to provide additional capacity will eventually provoke change. We expect tariffs to rise by 26.5% in 2012 before rising at double the rate of inflation in the following two years. Government allowing approval of the to transaction become a Projected inflation of 26.5% in 2012 will likely put pressure on margins and free cash flow generation, unless tariffs increase. We believe that a 15% devaluation of the Argentine peso in 2012 would also be costly for Pampa, which bases its capex and debt service in USD. As of September 2011, net debt was USD 799.8 million.
PAM
Source: Ita BBA
Pampa
Energa
shareholder of TGS (it is currently a creditor) could generate some positive momentum.

We have a market-perform recommendation on Pampa Energa, with a new YE12 fair value of USD 13.0/ADS, reduced from USD 14/ADS after we discounted projected dollar cash flows by incorporating a sovereign risk premium of 800 bps, up from 600 bps previously. Earnings visibility is weak due to a lack of momentum on tariffs. Pampa trades at close to a 50% discount to its estimated asset break-up value of USD 20.1/ADS, assuming replacement cost for the generation assets and market value for the distribution and transmission subsidiaries, which are close to the low end of the historical range for Edenor. Pampa Energa trades at a YE12 multiple of 11.0x EV/EBITDA, and the dividend yield is insignificant.

Years Net Revenues (USD m) EBITDA (USD m) Net Income (USD m) Net Debt excluding minority int. (USD m) FCFE (USD m) Average ARS/USD ratio EV/EBITDA (includes PUREE proceeds) P/E FCFE yield (%) P/BV
Source: Ita BBA
2010a 1,243 166 (12) 389 62 3.91 7.7 n.m. 9.2% 0.8
2011e 1,590 172 (94) 882 53 4.16 7.5 n.m. 7.9% 1.0
2012e 1,760 168 (112) 921 1 4.73 7.8 n.m. 0.1% 1.3
2013e 1,952 221 (74) 910 57 5.48 6.5 n.m. 8.5% 1.9
2014e 2,175 302 5 819 115 6.23 5.1 137.1 17.3% 2.1
2015e 2,392 379 85 668 187 6.84 4.2 7.8 28.0% 1.8
Ricardo Cavanagh, CFA +54 11 5273 3593 ricardo.cavanagh@itau.com.ar Marcos Severine, CNPI +55-11-3073-3011 marcos.severine@itaubba.com
Ita BBA 236
Renova Energia UNIT Market Perform

Company Description
Renova has earned a leading position in Brazil as a pure renewable-generation company (second only to CPFL Renovveis), focusing on wind power and small hydropower plants (SHPs). It is the first of its kind to be listed on the Bovespa. The company is currently implementing Brazils largest wind farm, with a total capacity of 1.1 GW. In the SHP segment, the only operational plants, Renova has gained expertise in developing projects from scratch and obtaining environmental licenses as well as Aneels authorization. In this segment, the company owns three operational SHPs (42 MW). Combining both segments, Renovas total installed capacity contracted through long-term power purchase agreements (PPAs) is 1.1 GW.
RNEW11 BRL 34.5
Stock Data
Investment Thesis
We see Renova Energia as one of the best growth stories in the LatAm electricity sector because it combines triple-digit growth (115% 5-year EBITDA CAGR, considering only the projects with signed PPAs) and very accretive internal rates of return (average equity IRR in real terms is 17% for the projects with signed PPAs). As the leader in the burgeoning Brazilian wind power industry (responsible for 10% of the total wind power capacity contracted in the regulated market), Renova stands out for its ability to identify and develop greenfield projects and then capture the full origination value of new projects until they are fully operational. We believe that the risk associated with the full execution of a new project is paid off through higher returns (17% real equity IRRs, versus 6% to 9% for greenfield hydropower plants or 10% for brownfield acquisitions of wind projects) and a large, competitive pipeline of renewable-generation projects (3.0 GW). The company can also take advantage of the potential synergies and economies of scale offered by the geographic proximity of its plants.
Company Performance
170 150 130 110 90 70 50

Large project-portfolio: 1.5 GW of wind plants; and 1.5 GW of small hydropower plants. Wide variety of advantages: i) tax breaks; ii) sector-charge exemptions; iii) attractive Strategic partnership with Light unlocks fast generation growth in the special free market. funding conditions; and iv) 50% discount on transmission and distribution costs. Renovas strategy, focused on wind projects, clearly takes advantage over the increasing complexity of the environmental licensing process for large hydropower plants.
Jan-11
Jul-11
May-11
Ibovespa
RNEW11
Source: Ita BBA

Renovas portfolio of wind farms and small hydro plants offers a unique combination of: i) high load factors (average of 51%); ii) competitive power prices (average price of BRL 119/MWh); iii) low operating costs; iv) a wide range of sector-charge exemptions for small hydro plants and tax benefits; v) advantageous funding conditions (BNDES and BNB lines); and vi) possible free-market access through the partnership with Light and Cemig. These key drivers, in addition to the companys expertise in developing greenfields, have been decisive in the expansion of Renovas portfolio through accretive projects with high internal rates of return. Despite the outstanding growth story relative to its peers, we have chosen to rate the stock market perform (YE12 fair value of BRL 34.5/share) based purely on the very limited stock liquidity (BRL 283 thousand/day).

Source: Ita BBA
2010a 35 16 1 114 0.02 0 n.m. n.m. 0.0 0.0 0.0 5.9
2011e 36 12 -18 572 -0.28 -950 n.m. n.m. -56.1 0.0 0.0 2.6
2012e 123 82 -16 1,447 -0.25 -875 38.4 n.m. -51.6 0.0 0.0 2.7
2013e 247 187 25 2,040 0.39 -580 20.0 n.m. -34.2 0.0 0.0 2.7
2014e 374 295 65 2,646 1.00 -567 14.7 26.2 -33.5 0.0 0.0 2.7
2015e 513 408 111 2,948 1.73 -230 11.4 15.2 -13.6 0.0 0.0 2.7
Ita BBA 237
Nov-11
Sep-11
Mar-11
Jan-12
Sabesp ON Underperform
Company Description
Sabesp is the largest water-utility company in Brazil, providing water services to 23.8 million people and sewage services to 20.2 million people. It covers 363 municipalities in the State of So Paulo, plus the So Paulo Metropolitan area, which currently is responsible for 73.6% of the companys revenues. Additionally, Sabesp provides treated water on a wholesale basis to 7 municipalities in the state of So Paulo (3.6 million inhabitants). Sabesp is controlled by the So Paulo state government, which holds a 50.3% stake. The companys revenues are currently derived 55.2% from the water segment and 44.8% from the sewage segment. Sabesp is also licensed to operate in other states and countries and provides drainage, urban cleaning, solid waste management and energy services.
SBSP3 BRL 51.0 SBS USD 55.9
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding BRL % BRL th BRL m BRL m 1m 7.8 8.4 53.5 (4.7) 55.11/39 227,837 12,189 11.7 12m 20.3 46.0
Investment Thesis
As for all sanitation companies in Brazil, Sabesps challenge is to achieve and maintain 100% coverage of water and sewage services in its concession area. Although the companys coverage of its area is very good when compared with water utilities in the rest of the country (100% of water and 81% of sewage collection 78% of the collected sewage is treated), this does not prevent the company from being considered capex intensive (we forecast yearly investments in the order of BRL 2.0 billion.) In terms of regulation, the Brazilian sanitation sector took big steps after 2007, with the establishment of a Federal regulatory framework (Law 11,445) and the creation of regional regulatory agencies (ARSESP in So Paulo state). But the redesign of Sabesps tariff regulation, as implemented by ARSESP over the past couple of years, will only hit the companys tariffs in September 2012, when, after several delays, Sabesps first tariff review is scheduled to occur. The ROA-based model adopted by ARSESP is expected to guarantee that Sabesps capex will be properly remunerated (the regulatory return was already fixed at 8.06%), but the uncertainties surrounding the definition of Sabesps regulatory asset base and attaining an efficient cost structure are still very high. Although we estimate a double-digit tariff review of 14.7%, we see a big risk that Municipal elections in October 2012 could put political pressure on this process. The election campaign could be even more critical to the discussion of the potential pass-through to tariffs of the concession fee that Sabesp has agreed to pay to the City of So Paulo, which corresponds to 7.5% of the companys revenues in the city (~BRL 300 million/year).
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
SBSP3
Source: Ita BBA

The definition of Sabesps regulatory asset base in 1H12 will likely be a driver. We estimate it at BRL 35 billion. New municipalities could demand the payment of concession fees, putting pressure on Sabesps margins. The decision by ARSESP on whether or not concession fees will be passed through to tariffs is expected in 2012. Our YE12 fair value would jump to BRL 70.2/share (from BRL 51.0) if a 100% pass-through were granted, but this is an unlikely scenario. Municipal elections in October 2012 could be a barrier to a high tariff readjustment.

Our underperform rating on SBSP3/SBS is based on: i) Sabesp is currently fully valued (-4.7%) compared to our YE12 fair value of BRL 51.0/share; ii) the high level of uncertainty regarding the unknown parameters of Sabesps tariff review in September 2012; and iii) the risk that municipal election campaigns in October 2012 could negatively affect the result of Sabesps tariff review.

Source: Ita BBA
2010a 9,231 3,224 1,630 8,079 7.16 124 6.3 7.5 1.0 2.0 3.7 1.3
2011e 9,458 3,373 1,707 7,548 7.49 852 5.9 7.1 7.0 2.1 4.0 1.1
2012e 10,391 3,841 1,912 7,054 8.39 684 5.0 6.4 5.6 2.5 4.7 1.0
2013e 11,556 4,507 2,633 6,172 11.56 1,371 4.1 4.6 11.2 3.4 6.4 0.9
2014e 12,178 4,809 2,931 4,990 12.87 1,799 3.6 4.2 14.8 3.8 7.1 0.8
2015e 12,937 5,156 3,185 3,761 13.98 1,941 3.1 3.8 15.9 6.8 12.7 0.7
Ita BBA 238
Dec-11
Tractebel ON Outperform
Company Description
Tractebel is a pure generation company controlled by GDF Suez, which owns 68.7% of its total shares. GDF Suez is one of the largest utilities in the world, with a strong presence in Europe. Tractebels generation portfolio is mostly based on hydropower plants (79.2% of total portfolio), but it also owns some coal-fired thermal power plants (18.3% of total portfolio). Regarding renewable energy, the company has 49 MW of biomass-fired power plants in operation, 44 MW of wind energy generation capacity currently in operation, and 145 MW under construction. Together, this amount implies 6,473 MW of installed capacity, representing 6.1% of Brazils total capacity. Tractebels revenues currently break down into 64.2% sales to the regulated market and 26.4% sales to the free market. The remaining amount is related to energy sale in the spot market and energy exports.
TBLE3 BRL 35.5
Stock Data
Current price Upside (YE12) 52 Week high/low Shares outstanding Market capitalization BRL % BRL th BRL m BRL m 1m 8.0 8.7 30.7 15.7 31.15/24 652,742 20,033 13.8 12m 20.8 46.7
Investment Thesis
As a pure generation company, Tractebel has an investment case that is significantly dependent on long-term energy prices, which we estimate at BRL 140/MWh (December 2010) in our model. A unique characteristic of Tractebels growth model that differentiates it from all of its Brazilian peers is that Tractebels controlling shareholder, GDF Suez, invests directly in greenfield generation projects and then sells them to Tractebel when the projects are close to completion. The price paid by Tractebel for the projects is approved by an independent committee (eliminating conflicts of interest) but usually incorporates a premium over the projects original capex (in the case of the Estreito project, the premium was 15.5%), in order to remunerate GDF Suez for taking the construction risk. While we acknowledge that this growth model mitigates capex overrun risk, we point out that Tractebel does not capture the total return of the project. The next project to be sold to Tractebel is GDF Suezs 50.1% stake in the Jirau hydropower plant (3,750 MW), expected to be sold in 2H12. This is an event that will likely be closely monitored by investors, because Jirau has been a very low-return project. In our view, Tractebels most important competitive advantage is its remarkable expertise in energy trading. In 2008, when electricity spot prices reached their highest level (above BRL 500/MWh), Tractebel was the company that benefited the most from this abnormal scenario.
Company Performance
140 120 100 80 60 40
Jun-11
Feb-11
Aug-11
Dec-10
Oct-11
Apr-11
Ibovespa
TBLE3
Source: Ita BBA

Signing of new PPAs in the free market. Changes in the outlook for energy prices. A-3 and A-5 energy auctions. Potential acquisition of Cesp, if Cesp is privatized. Potential investments in wind projects.

Our outperform rating on TBLE3 (YE12 fair value of BRL 35.5/share) is based on our view that Tractebel is a premium generation company with skilled management and attractive dividends (see dividend yields in the table below). However, we have recently become less optimistic about the companys growth outlook, given its strategy of focusing on hydro generation projects, which have yielded decreasing IRRs in recent auctions (between 7% and 9% in real terms). We would rather see the company focusing on the booming wind-energy segment (which has equity IRRs between 13% and 17%). It is important to say that, despite having an outperform recommendation on TBLE3 since November 2010, we have not recently included the stock among our favorites, as we foresee no shortterm triggers.

Source: Ita BBA
2010a 4,100 2,611 1,212 3,797 1.86 -479 9.1 16.5 -2.4 0.0 0.0 3.9
2011e 4,367 2,848 1,351 3,094 2.07 1,514 8.1 14.8 7.6 2.0 6.4 3.9
2012e 4,853 3,194 1,580 3,334 2.42 1,756 7.3 12.7 8.8 2.3 7.5 3.8
2013e 5,040 3,390 1,664 2,966 2.55 2,021 6.8 12.0 10.1 2.4 7.9 3.8
2014e 5,196 3,633 1,845 2,548 2.83 2,156 6.2 10.9 10.8 2.7 8.7 3.7
2015e 5,458 3,872 2,019 2,101 3.09 2,346 5.7 9.9 11.7 2.9 9.6 3.6
Ita BBA 239
Dec-11
Analyst and Stock Directory

Com pany A. Del Centro A. Del Pacfico A. Del Sureste Abc Brasil Abril Educao Adecoagro AES Tiete Aliansce Ambev America Movil Amil Anhanguera Arcos Dorados Arezzo Autometal B2W Varejo Banco Chile Banco do Brasil Banco Macro Bancolombia Banrisul BBVA Banco Frances BCI BHG Bicbanco BMF Bovespa BR Malls Par BR Properties Bradesco Brasil Telec Braskem BRF Foods Brookfield CC Des Imob CCR Celesc Cementos Argos Cemex Cemig Cencosud Cesp Cetip Chedraui Cia Hering CICSA Cielo Coelce Colbun Comgas Consorcio Ara Copel Corporacin GEO Cosan CPFL Energia Cremer CSN Cyrela Realty Dasa Daycoval Direcional Duratex ECL Ecopetrol Ecorodovias Eletrobras Eletropaulo Embraer Endesa Entel Energias do Brasil Equatorial Estacio Even Eztec Falabella Fer Heringer FIBRIA Fleury Gafisa Gener Gerdau Gmexico Ticker OMAB GAPB ASURB ABCB4 ABRE11 AGRO GETI4 ALSC3 AMBV4 AMXL AMIL3 AEDU3 ARCO ARZZ3 AUTM3 BTOW3 CHILE BBAS3 BMA PFBCOLOM BRSR6 FRAN BCI BHGR3 BICB4 BVMF3 BRML3 BRPR3 BBDC4 BRTO4 BRKM5 BRFS3 BISA3 CCIM3 CCRO3 CLSC6 CEMARGOS CX CMIG4 CENCOSUD CESP6 CTIP3 CHDRAUIB HGTX3 CICSAB1 CIEL3 COCE5 COLBUN CGAS5 ARA CPLE6 GEOB CSAN3 CPFE3 CREM3 CSNA3 CYRE3 DASA3 DAYC4 DIRR3 DTEX3 ECL EC ECOR3 ELET3 ELPL4 ERJ ENDESA ENTEL ENBR3 EQTL3 ESTC3 EVEN3 EZTC3 FALAB FHER3 FIBR3 FLRY3 GFSA3 GENER GGBR4 GMEXICOB Rating MP MP OP OP OP OP MP OP MP MP MP OP OP OP OP MP UP OP OP MP OP MP MP OP MP MP OP OP OP MP MP MP MP MP OP UP OP MP OP OP OP OP UP OP OP OP UP MP MP UP MP OP OP OP MP UP MP MP MP OP MP OP MP OP OP OP MP MP MP OP UP OP OP OP OP OP MP OP MP OP MP OP Sector Infrastructure Infrastructure Infrastructure Banking & Financial Services Healthcare + Education Agribusiness Utilities Real Estate Food & Beverage Telecommunications, Media & Technology Healthcare + Education Healthcare + Education Consumer Goods & Retail + Food & Beverage Consumer Goods & Retail + Food & Beverage Transportation & Logistics + Industrials Consumer Goods & Retail + Food & Beverage Banking & Financial Services Banking & Financial Services Banking & Financial Services Banking Banking & Financial Services Banking & Financial Services Banking & Financial Services Real Estate Banking & Financial Services Banking & Financial Services Real Estate Real Estate Banking & Financial Services Telecommunications, Media & Technology Oil, Gas & Petrochemicals Food & Beverage Real Estate Real Estate Transportation & Logistics + Industrials Utilities Construction Real Estate Utilities Consumer Goods Utilities Banking & Financial Services Consumer Goods Consumer Goods & Retail + Food & Beverage Infrastructure Banking & Financial Services Utilities Utilities Oil, Gas & Petrochemicals Real Estate Utilities Real Estate Agribusiness Utilities Healthcare + Education Steel & Mining + Pulp & Paper Real Estate Healthcare + Education Banking & Financial Services Real Estate Transportation & Logistics + Industrials Utilities Oil, Gas & Petrochemicals Transportation & Logistics + Industrials Utilities Utilities Transportation & Logistics + Industrials Utilities Telecommunications, Media & Technology Utilities Utilities Healthcare + Education Real Estate Real Estate Consumer Goods Agribusiness Steel & Mining + Pulp & Paper Healthcare + Education Real Estate Utilities Steel & Mining + Pulp & Paper GMEXICOB Country Mexico Mexico Mexico Brazil Brazil Argentina Brazil Brazil Brazil Mexico Brazil Brazil Brazil Brazil Brazil Brazil Chile Brazil Argentina Colombia Brazil Argentina Chile Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Colombia Mexico Brazil Chile Brazil Brazil Mexico Brazil Mexico Brazil Brazil Chile Brazil Mexico Brazil Mexico Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Chile Colombia Brazil Brazil Brazil Brazil Chile Chile Brazil Brazil Brazil Brazil Brazil Chile Brazil Brazil Brazil Brazil Chile Brazil Mexico Leading Analyst Vivian Salomon Vivian Salomon Vivian Salomon Regina Longo Sanchez Marcio Osako Giovana Arajo Marcos Severine David Law ant Alexandre Miguel Susana Salaru Marcio Osako Marcio Osako Juliana Rozenbaum Juliana Rozenbaum Renata Faber Juliana Rozenbaum Nicols Chialva Regina Longo Sanchez Nicols Chialva Regina Sanchez Regina Longo Sanchez Nicols Chialva Nicols Chialva David Law ant Regina Longo Sanchez Regina Longo Sanchez David Law ant David Law ant Regina Longo Sanchez Susana Salaru Paula Kovarsky Alexandre Miguel David Law ant David Law ant Renata Faber Marcos Severine Vivian Salomon Vivian Salomon Marcos Severine Barbara Angerstein Marcos Severine Regina Longo Sanchez Renato Salomone Juliana Rozenbaum Vivian Salomon Regina Longo Sanchez Marcos Severine Marcos Severine Paula Kovarsky Vivian Salomon Marcos Severine Vivian Salomon Giovana Arajo Marcos Severine Marcio Osako Marcos Assumpo David Law ant Marcio Osako Regina Longo Sanchez David Law ant Renata Faber Marcos Severine Paula Kovarsky Renata Faber Marcos Severine Marcos Severine Renata Faber Marcos Severine Gustavo Fingeret Marcos Severine Marcos Severine Marcio Osako David Law ant David Law ant Barbara Angerstein Giovana Arajo Marcos Assumpo Marcio Osako David Law ant Marcos Severine Marcos Assumpo Marcos Assumpo Tel +52-55-5262-0672 +52-55-5262-0672 +52-55-5262-0672 +55-11-3073-3042 +55-11-3073-3040 +55-11-3073-3036 +55-11-3073-3011 +55-11-3073-3037 +55-11-3073-3020 +55-11-3073-3009 +55-11-3073-3040 +55-11-3073-3040 +55-11-3073-3035 +55-11-3073-3035 +55-11-3073-3017 +55-11-3073-3035 +54-11-5273-3503 +55-11-3073-3042 +54-11-5273-3503 +55-11-3073-3042 +55-11-3073-3042 +54-11-5273-3503 +54-11-5273-3503 +55-11-3073-3037 +55-11-3073-3042 +55-11-3073-3042 +55-11-3073-3037 +55-11-3073-3037 +55-11-3073-3042 +55-11-3073-3009 +55-11-3073-3027 +55-11-3073-3020 +55-11-3073-3037 +55-11-3073-3037 +55-11-3073-3017 +55-11-3073-3011 +52-55-5262-0672 +52-55-5262-0672 +55-11-3073-3011 +56-2-834-6297 +55-11-3073-3011 +55-11-3073-3042 +52-55-5262-0674 +55-11-3073-3035 +52-55-5262-0672 +55-11-3073-3042 +55-11-3073-3011 +55-11-3073-3011 +55-11-3073-3027 +52-55-5262-0672 +55-11-3073-3011 +52-55-5262-0672 +55-11-3073-3036 +55-11-3073-3011 +55-11-3073-3040 +55-11-3073-3021 +55-11-3073-3037 +55-11-3073-3040 +55-11-3073-3042 +55-11-3073-3037 +55-11-3073-3017 +55-11-3073-3011 +55-11-3073-3027 +55-11-3073-3017 +55-11-3073-3011 +55-11-3073-3011 +55-11-3073-3017 +55-11-3073-3011 +56-2-834-6295 +55-11-3073-3011 +55-11-3073-3011 +55-11-3073-3040 +55-11-3073-3037 +55-11-3073-3037 +56-2-834-6297 +55-11-3073-3036 +55-11-3073-3021 +55-11-3073-3040 +55-11-3073-3037 +55-11-3073-3011 +55-11-3073-3021 +55-11-3073-3021 e-m ail vivian.salomon@itaubba.com vivian.salomon@itaubba.com vivian.salomon@itaubba.com regina.sanchez@itaubba.com marcio.osako@itaubba.com giovana.araujo@itaubba.com marcos.severine@itaubba.com david.law ant@itaubba.com alexandre.miguel@itaubba.com susana.salaru@itaubba.com marcio.osako@itaubba.com marcio.osako@itaubba.com juliana.rozenbaum@itaubba.com juliana.rozenbaum@itaubba.com renata.faber@itaubba.com juliana.rozenbaum@itaubba.com nicolas.chialva@itau.com.ar regina.sanchez@itaubba.com nicolas.chialva@itau.com.ar regina.sanchez@itaubba.com regina.sanchez@itaubba.com nicolas.chialva@itau.com.ar nicolas.chialva@itau.com.ar david.law ant@itaubba.com regina.sanchez@itaubba.com regina.sanchez@itaubba.com david.law ant@itaubba.com david.law ant@itaubba.com regina.sanchez@itaubba.com susana.salaru@itaubba.com paula.kovarsky@itaubba.com alexandre.miguel@itaubba.com david.law ant@itaubba.com david.law ant@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com vivian.salomon@itaubba.com vivian.salomon@itaubba.com marcos.severine@itaubba.com barbara.angerstein@itau.cl marcos.severine@itaubba.com regina.sanchez@itaubba.com renato.salomone@itaubba.com juliana.rozenbaum@itaubba.com vivian.salomon@itaubba.com regina.sanchez@itaubba.com marcos.severine@itaubba.com marcos.severine@itaubba.com paula.kovarsky@itaubba.com vivian.salomon@itaubba.com marcos.severine@itaubba.com vivian.salomon@itaubba.com giovana.araujo@itaubba.com marcos.severine@itaubba.com marcio.osako@itaubba.com marcos.assumpcao@itaubba.com david.law ant@itaubba.com marcio.osako@itaubba.com regina.sanchez@itaubba.com david.law ant@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com paula.kovarsky@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com marcos.severine@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com gustavo.fingeret@itau.cl marcos.severine@itaubba.com marcos.severine@itaubba.com marcio.osako@itaubba.com david.law ant@itaubba.com david.law ant@itaubba.com barbara.angerstein@itau.cl giovana.araujo@itaubba.com marcos.assumpcao@itaubba.com marcio.osako@itaubba.com david.law ant@itaubba.com marcos.severine@itaubba.com marcos.assumpcao@itaubba.com marcos.assumpcao@itaubba.com
Source: Ita BBA
Ita BBA 240
Analyst and Stock Directory

Com pany Gol Grupo Financiero Galicia Guararapes Homex HRT Hypermarcas ICA IDEAL Iguatemi Inds Romi Iochpe-Maxion ISA Cteep Klabin S/A Kroton Light S/A Localiza Lojas Americ Lojas Renner Lopes Brasil Lupatech Magazine Luiza Magnesita SA Marcopolo Marfrig Marisa Metal Leve MILLS Minerva MMX Miner MPX Energia MRV Multiplan Natura Odontoprev Ogx Petroleo OHL Brasil OSX P.Acucar-CBD Pacific Rubiales Pampa Energia PDG Realt Petrobras PortX Profarma QGEP RaiaDrogasil Randon Part Renova Rossi Resid Sabesp Santander Santander Chile Santos Brasil Sao Carlos Sao Martinho Sare SLC Agricola Sonae Sierra Soquimich Soriana Southern Copper Souza Cruz Suzano Papel Technos Tecnisa Tegma Telecom Argentina Telefonica Brasil Televisa Tenaris Ternium Tim Part S/A Totvs Tractebel Ultrapar Urbi Usiminas VALE Valid Walmex Weg Wilson Sons YPF Ticker GOLL4 GGAL GUAR3 HOMEX HRTP3 HYPE3 ICA IDEALB1 IGTA3 ROMI3 MYPK3 TRPL4 KLBN4 KROT11 LIGT3 RENT3 LAME4 LREN3 LPSB3 LUPA3 MGLU3 MAGG3 POMO4 MRFG3 AMAR3 LEVE3 MILS3 BEEF3 MMXM3 MPXE3 MRVE3 MULT3 NATU3 ODPV3 OGXP3 OHLB3 OSXB3 PCAR4 PRE PAM PDGR3 PETR4 MMXM11 PFRM3 QGEP3 RADL3 RAPT4 RNEW11 RSID3 SBSP3 SANB11 BSAN STBP11 SCAR3 SMTO3 SAREB SLCE3 SSBR3 SQM SORIANAB SCCO CRUZ3 SUZB5 TECN3 TCSA3 TGMA3 TEO VIVT4 TLEVISACPO TS TX TIMP3 TOTS3 TBLE3 UGPA3 URBI USIM5 VALE.P VLID3 WALMEXV WEGE3 WSON11 YPF Rating MP OP OP OP MP MP OP OP MP UP OP MP MP OP MP OP MP OP OP MP OP MP OP OP OP OP OP MP OP OP OP OP MP OP OP OP OP MP OP MP OP MP OP MP OP OP OP MP MP UP MP UP OP MP OP UP MP OP OP MP OP UP OP OP MP OP OP OP MP OP OP OP OP OP OP MP UP OP OP MP UP MP OP Sector Transportation & Logistics + Industrials Banking & Financial Services Consumer Goods & Retail + Food & Beverage Real Estate Oil, Gas & Petrochemicals Consumer Goods & Retail + Food & Beverage Infrastructure Infrastructure Real Estate Transportation & Logistics + Industrials Transportation & Logistics + Industrials Utilities Steel & Mining + Pulp & Paper Healthcare + Education Utilities Transportation & Logistics + Industrials Consumer Goods & Retail + Food & Beverage Consumer Goods & Retail + Food & Beverage Real Estate Oil, Gas & Petrochemicals Consumer Goods & Retail + Food & Beverage Steel & Mining + Pulp & Paper Transportation & Logistics + Industrials Consumer Goods & Retail + Food & Beverage Consumer Goods & Retail + Food & Beverage Transportation & Logistics + Industrials Transportation & Logistics + Industrials Consumer Goods & Retail + Food & Beverage Steel & Mining + Pulp & Paper Utilities Real Estate Real Estate Consumer Goods & Retail + Food & Beverage Healthcare + Education Oil, Gas & Petrochemicals Transportation & Logistics + Industrials Oil, Gas & Petrochemicals Consumer Goods & Retail + Food & Beverage Oil, Gas & Petrochemicals Utilities Real Estate Oil, Gas & Petrochemicals Steel & Mining + Pulp & Paper Healthcare + Education Oil, Gas & Petrochemicals Consumer Goods & Retail + Food & Beverage Transportation & Logistics + Industrials Utilities Real Estate Utilities Banking & Financial Services Banking & Financial Services Transportation & Logistics + Industrials Real Estate Agribusiness Real Estate Agribusiness Real Estate Agribusiness Consumer Goods Steel & Mining + Pulp & Paper Consumer Goods & Retail + Food & Beverage Steel & Mining + Pulp & Paper Consumer Goods & Retail + Food & Beverage Real Estate Transportation & Logistics + Industrials Telecommunications, Media & Technology Telecommunications, Media & Technology Telecommunications, Media & Technology Oil, Gas & Petrochemicals + Agribusiness TX Telecommunications, Media & Technology Telecommunications, Media & Technology Utilities Oil, Gas & Petrochemicals Real Estate Steel & Mining + Pulp & Paper Steel & Mining + Pulp & Paper Banking & Financial Services Consumer Goods Transportation & Logistics + Industrials Transportation & Logistics + Industrials Oil, Gas & Petrochemicals + Agribusiness Country Brazil Argentina Brazil Mexico Brazil Brazil Mexico Mexico Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Colombia Argentina Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Brazil Chile Brazil Brazil Brazil Mexico Brazil Brazil Chile Mexico Peru Brazil Brazil Brazil Brazil Brazil Argentina Brazil Mexico Argentina Mexico Brazil Brazil Brazil Brazil Mexico Brazil Brazil Brazil Mexico Brazil Brazil Argentina Leading Analyst Renata Faber Nicols Chialva Juliana Rozenbaum Vivian Salomon Paula Kovarsky Juliana Rozenbaum Vivian Salomon Vivian Salomon David Law ant Renata Faber Renata Faber Marcos Severine Marcos Assumpo Marcio Osako Marcos Severine Renata Faber Juliana Rozenbaum Juliana Rozenbaum David Law ant Paula Kovarsky Juliana Rozenbaum Marcos Assumpo Renata Faber Juliana Rozenbaum Juliana Rozenbaum Renata Faber Renata Faber Juliana Rozenbaum Marcos Assumpo Marcos Severine David Law ant David Law ant Juliana Rozenbaum Marcio Osako Paula Kovarsky Renata Faber Paula Kovarsky Juliana Rozenbaum Paula Kovarsky Ricardo Cavanagh David Law ant Paula Kovarsky Marcos Assumpo Marcio Osako Paula Kovarsky Juliana Rozenbaum Renata Faber Marcos Severine David Law ant Marcos Severine Regina Longo Sanchez Nicols Chialva Renata Faber David Law ant Giovana Arajo Vivian Salomon Giovana Arajo David Law ant Giovana Araujo Renato Salomone Marcos Assumpo Juliana Rozenbaum Marcos Assumpo Juliana Rozenbaum David Law ant Renata Faber Ricardo Cavanagh Susana Salaru Susana Salaru Paula Kovarsky Marcos Assumpo Susana Salaru Susana Salaru Marcos Severine Paula Kovarsky Vivian Salomon Marcos Assumpo Marcos Assumpo Regina Longo Sanchez Renato Salomone Renata Faber Renata Faber Ricardo Cavanagh Tel +55-11-3073-3017 +54-11-5273-3503 +55-11-3073-3035 +52-55-5262-0672 +55-11-3073-3027 +55-11-3073-3035 +52-55-5262-0672 +52-55-5262-0672 +55-11-3073-3037 +55-11-3073-3017 +55-11-3073-3017 +55-11-3073-3011 +55-11-3073-3021 +55-11-3073-3040 +55-11-3073-3011 +55-11-3073-3017 +55-11-3073-3035 +55-11-3073-3035 +55-11-3073-3037 +55-11-3073-3027 +55-11-3073-3035 +55-11-3073-3021 +55-11-3073-3017 +55-11-3073-3035 +55-11-3073-3035 +55-11-3073-3017 +55-11-3073-3017 +55-11-3073-3035 +55-11-3073-3021 +55-11-3073-3011 +55-11-3073-3037 +55-11-3073-3037 +55-11-3073-3035 +55-11-3073-3040 +55-11-3073-3027 +55-11-3073-3017 +55-11-3073-3027 +55-11-3073-3035 +55-11-3073-3027 +54-11-5273-3593 +55-11-3073-3037 +55-11-3073-3027 +55-11-3073-3021 +55-11-3073-3040 +55-11-3073-3027 +55-11-3073-3035 +55-11-3073-3017 +55-11-3073-3011 +55-11-3073-3037 +55-11-3073-3011 +55-11-3073-3042 +54-11-5273-3503 +55-11-3073-3017 +55-11-3073-3037 +55-11-3073-3036 +52-55-5262-0672 +55-11-3073-3036 +55-11-3073-3037 +55-11-3073-3036 +52-55-5262-0674 +55-11-3073-3021 +55-11-3073-3035 +55-11-3073-3021 +55-11-3073-3035 +55-11-3073-3037 +55-11-3073-3017 +54-11-5273-3593 +55-11-3073-3009 +55-11-3073-3009 +55-11-3073-3027 +55-11-3073-3021 +55-11-3073-3009 +55-11-3073-3009 +55-11-3073-3011 +55-11-3073-3027 +52-55-5262-0672 +55-11-3073-3021 +55-11-3073-3021 +55-11-3073-3042 +52-55-5262-0674 +55-11-3073-3017 +55-11-3073-3017 +54-11-5273-3593 e-m ail renata.faber@itaubba.com nicolas.chialva@itau.com.ar juliana.rozenbaum@itaubba.com vivian.salomon@itaubba.com paula.kovarsky@itaubba.com juliana.rozenbaum@itaubba.com vivian.salomon@itaubba.com vivian.salomon@itaubba.com david.law ant@itaubba.com renata.faber@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com marcos.assumpcao@itaubba.com marcio.osako@itaubba.com marcos.severine@itaubba.com renata.faber@itaubba.com juliana.rozenbaum@itaubba.com juliana.rozenbaum@itaubba.com david.law ant@itaubba.com paula.kovarsky@itaubba.com juliana.rozenbaum@itaubba.com marcos.assumpcao@itaubba.com renata.faber@itaubba.com juliana.rozenbaum@itaubba.com juliana.rozenbaum@itaubba.com renata.faber@itaubba.com renata.faber@itaubba.com juliana.rozenbaum@itaubba.com marcos.assumpcao@itaubba.com marcos.severine@itaubba.com david.law ant@itaubba.com david.law ant@itaubba.com juliana.rozenbaum@itaubba.com marcio.osako@itaubba.com paula.kovarsky@itaubba.com renata.faber@itaubba.com paula.kovarsky@itaubba.com juliana.rozenbaum@itaubba.com paula.kovarsky@itaubba.com ricardo.cavanagh@itau.com.ar david.law ant@itaubba.com paula.kovarsky@itaubba.com marcos.assumpcao@itaubba.com marcio.osako@itaubba.com paula.kovarsky@itaubba.com juliana.rozenbaum@itaubba.com renata.faber@itaubba.com marcos.severine@itaubba.com david.law ant@itaubba.com marcos.severine@itaubba.com regina.sanchez@itaubba.com nicolas.chialva@itau.com.ar renata.faber@itaubba.com david.law ant@itaubba.com giovana.araujo@itaubba.com vivian.salomon@itaubba.com giovana.araujo@itaubba.com david.law ant@itaubba.com giovana.araujo@itaubba.com renato.salomone@itaubba.com marcos.assumpcao@itaubba.com juliana.rozenbaum@itaubba.com marcos.assumpcao@itaubba.com juliana.rozenbaum@itaubba.com david.law ant@itaubba.com renata.faber@itaubba.com ricardo.cavanagh@itau.com.ar susana.salaru@itaubba.com susana.salaru@itaubba.com paula.kovarsky@itaubba.com marcos.assumpcao@itaubba.com susana.salaru@itaubba.com susana.salaru@itaubba.com marcos.severine@itaubba.com paula.kovarsky@itaubba.com vivian.salomon@itaubba.com marcos.assumpcao@itaubba.com marcos.assumpcao@itaubba.com regina.sanchez@itaubba.com renato.salomone@itaubba.com renata.faber@itaubba.com renata.faber@itaubba.com ricardo.cavanagh@itau.com.ar
Source: Ita BBA
Ita BBA 241
DISCLAIMER
Ita BBA is a brand name of Ita Corretora de Valores S.A.
Ratings: Definitions, Dispersion and Banking Relationships

Ratings (1) Definition (2) The analyst expects the stock to perform better than market average. The analyst expects the stock to perform in line with market average. The analyst expects the stock to perform below market average. Coverage (3) Banking Relationship (4) 49% 31% 8%
Outperform Market Perform Underperform
55% 35% 9%
1. The ratings used herein (Outperform, Market Perform and Underperform) correspond approximately to Buy, Hold and Sell, respectively. 2. Ratings reflect the analysts assessment of the stock price performance in the medium term compared with market average. Recommendations will remain valid until the analyst changes the rating, which may happen as a result of news or simply due to a change in the stock price (there is no defined time horizon). Companies are grouped into industries, according to their similarities. The industries are: (i) Banking & Financial Services, (ii) Consumer Goods & Retail + Food & Beverage, (iii) Healthcare + Education, (iv) Steel & Mining + Pulp & Paper, (v) Oil, Gas & Petrochemicals + Agribusiness, (vi) Real Estate, (vii) Telecommunications, Media and Technology, (viii) Transportation, Manufacturing and Logistics, (ix) Utilities, and (x) Equity Strategy. 3. Percentage of companies covered by Ita Corretora de Valores S.A. within this rating category. 4. Percentage of companies within this rating category, for which Ita Unibanco S.A. or any of its affiliated companies provided investment banking services over the last 12 (twelve) months, or which may be provided during the next 3 (three) months.
Third Party Disclosures

Company Banking ABC Brasil PN Banco do Brasil ON Bradesco PN BCI BICBANCO PN Banco Macro Banrisul PNB Santander Chile Banco de Chile Daycoval PN BBVA Banco Frances Grupo Financiero Galicia Bancolombia Santander Financial Services BMF Bovespa ON Cielo ON Cetip ON Valid ON Consumer Marisa ON Ambev PN Arcos Dorados Arezzo ON Minerva BRF Foods ON B2W Varejo ON Chedraui Souza Cruz ON Falabella Guararapes ON Cia Hering ON Hypermarcas ON Lojas Americanas PN Lojas Renner ON Magazine Luiza ON Marfrig ON Natura ON Po de Aucar PN Raia Drogasil ON Soriana Technos ON Walmex Cencosud Education Abril Educao AMAR3 AMBV4 ARCO ARZZ3 BEEF3 BRFS3 BTOW3 CHDRAUIB CRUZ3 FALAB GUAR3 HGTX3 HYPE3 LAME4 LREN3 MGLU3 MRFG3 NATU3 PCAR4 RADL3 SORIANAB TECN3 WALMEXV CENCOSUD CI ABRE11 CBD BRFS ON ON ON ON B ON CI ON ON ON PN ON ON ON ON PN ON B ON V Chile Retail UNIT X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X ABV ON PN X X X X X X X X X X X X X BVMF3 CIEL3 CTIP3 VLID3 ON ON ON ON X X X X X X X X ABCB4 BBAS3 BBDC4 BCI BICB4 BMA BRSR6 BSAN CHILE DAYC4 FRAN GGAL PFBCOLOM SANB11 CIB UNIT X X BRF B SAN BCH BBD PN ON PN CI PN B PNB CI CI PN X X X X X X Ticker ADR 1 2 3 4 5 6
Ita BBA 242
Anhanguera ON Estcio ON Kroton Healthcare Amil ON Cremer ON Dasa ON Fleury ON OdontoPrev ON Profarma ON Agribusiness Adecoagro Cosan ON Cosan Ltd Fosfrtil PN Fer Heringer ON SLC Agricola ON So Martinho ON SQM Oil & Gas Braskem PNA Comgs PNA Ecopetrol HRT ON Lupatech ON OGX Petrleo ON OSX ON Petrobras PN Pacific Rubiales QGEP ON Tenaris Ultrapar ON YPF ADR Real Estate Aliansce ON Consorcio Ara BHG ON Brookfield ON BR Malls Par ON BR Properties ON CC Des Imob ON Cemex Cyrela Realty ON Direcional ON Even ON Eztec ON Corporacin GEO Gafisa ON Homex Iguatemi ON Lopes Brasil ON MRV Engenharia ON Multiplan ON PDG Realty ON Rossi Resid ON Sare Sao Carlos ON Sonae Sierra ON Tecnisa ON Urbi Steel Sid Nacional ON Gerdau PN Gmexico Magnesita ON Ternium Usiminas PNA Mining MMX Minerao ON Portx ON Southern Copper Vale ADR Vale R Doce PNA Pulp & Paper Fibria ON Klabin PN Suzano Papel PNA
AEDU3 ESTC3 KROT11 AMIL3 CREM3 DASA3 FLRY3 ODPV3 PFRM3 AGRO CSAN3 CZLT11 FFTL4 FHER3 SLCE3 SMTO3 SQM BRKM5 CGAS5 EC HRTP3 LUPA3 OGXP3 OSXB3 PETR4 PRE QGEP3 TS UGPA3 YPF ALSC3 ARA BHGR3 BISA3 BRML3 BRPR3 CCIM3 CX CYRE3 DIRR3 EVEN3 EZTEC3 GEOB GFSA3 HOMEX IGTA3 LPSB3 MRVE3 MULT3 PDGR3 RSID3 SAREB SCAR3 SSBR3 TCSA3 URBI CSNA3 GGBR4 GMEXICOB MAGG3 TX USIM5 MMXM3 MMXM11 SCCO VALE.P VALE5 FIBR3 KLBN4 SUZB5 ALLL3 AUTM3 CCRO3 RIO_P FBR SID GGB HXM UGP PBR.A BAK CZZ
ON ON UNIT ON ON ON ON ON ON ADR ON ON A PN ON ON ON
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PNA PNA ADR ON ON ON ON PN ADR ON ADR ON ADR ON ORD ON ON ON ON ON ADR ON ON ON ON B ON ORD ON ON ON ON ON ON B ON ON ON ORD ON PN B ON ADR PNA ON ON COM ADR PNA ON PN PNA ON ON ON
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Transportation & Logistics + Industrials ALL Amer Lat ON Autometal ON CCR Rodovias ON
Ita BBA 243
Duratex ON Ecorodovias ON Embraer GOL PN Metal Leve ON LLX ON LogIn ON Mills Iochpe Maxion ON OHL Brasil ON Marcopolo PN Randon Part PN Localiza ON Romi ON Santos Brasil Tegma ON Weg ON Wilson Sons ON Infrastructure A. Del Sureste Cementos Argos CICSA A. Del Pacfico Empresas ICA IDEAL A. Del Centro Utilities CESP PNB Celesc PNB Cemig PN Coelce PNA Colbn CPFL Energia ON Copel PNB Copasa ON E-CL Eletrobras ON Eletrobras PNB Eletropaulo PN Energias do Brasil ON Endesa Equatorial ON AES Gener AES Tiete PN Light ON MPX Energia ON Pampa Energia Renova Energia ON Sabesp ON Tractebel Energia ON Tran Paulist PN America Movil Axtel Brasil Telecom ON Brasil Telecom PN Entel Megacable Nii Holdings Telmex Telecom Argentina TIM Participaes ON Televisa Telesp PN Telemar Norte Leste PNA Telemar ON Telemar PN
DTEX3 ECOR3 ERJ GOLL4 LEVE3 LLXL3 LOGN3 MILS3 MYPK3 OHLB3 POMO4 RAPT4 RENT3 ROMI3 STBP11 TGMA3 WEGE3 WSON11 ASURB CEMARGOS CICSAB1 GAPB ICA IDEALB1 OMAB CESP6 CLSC6 CMIG4 COCE5 COLBUN CPFE3 CPLE6 CSMG3 ECL ELET3 ELET6 ELPL4 ENBR3 ENDESA EQTL3 GENER GETI4 LIGT3 MPXE3 PAMPA RNEW11 SBSP3 TBLE3 TRPL4 AMXL AXTELCPO BRTO3 BRTO4 ENTEL MEGACPO NIHD TELMEXL TEO TIMP3 TLEVISACPO VIVT4 TMAR5 TNLP3 TNLP4 TNE VIV BTM BTM SBS PAM CAIGY CPL ELP CIG OMAB PAC ASR
ON ON PN ON ON ON ON ON ON PN PN ON ON UNIT ON ON ON B B1 B ORD B1 B PNB PNB PN PNA CI ON PNB ON ON PNB PN ON ON CI PN ON ON UNIT ON ON PN CPO CPO ON PN CPO ADR CPO ADR ON CPO PN PNA ON PN
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TOTVS ON TOTS3 ON X 1 Ita Corretora de Valores S.A. and/or its affiliated companies have managed or co-managed a public offer for the companies analyzed in this report in the last 12 (twelve) months, for which they received compensation. 2. Ita Corretora de Valores S.A. and/or its affiliated companies received compensation for the investment banking services provided to the companies analyzed in this report in the last 12 (twelve) months, and expect to receive or intend to seek compensation for such services to be provided to companies analyzed in this report in the next 3 (three) months. 3. Ita Corretora de Valores S.A. and/or its affiliated companies were acting as market makers for the companies analyzed in this report at the time this report was issued. 4. Ita Corretora de Valores S.A. and/or its affiliated companies have acted as an underwriter of securities issued by the companies analyzed in this report within the last 5 (five) years. 5. Ita Corretora S.A. and/or its affiliated companies, and funds, portfolios and investment clubs managed by Ita Corretora de Valores S.A. beneficially own, directly or indirectly, 1% (one percent) or more of any class of common shares issued by the companies analyzed in this report as of the end of last month. 6. The analyzed issuer(s) have a relevant interest in companies of the Ita Unibanco Group.
Ita BBA 244
Relevant Information
1. This report has been produced by Ita Corretora de Valores S.A (Ita BBA), a subsidiary of Ita Unibanco S.A., regulated by the Securities and Exchange Commission of Brazil (CVM), and distributed by Ita BBA or one of its affiliates (altogether, Ita Unibanco Group). Ita BBA is the brand name used by Ita Corretora de Valores S.A., by its affiliates or by other companies of the Ita Unibanco Group. This report aims at providing information only and does not constitute, and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell any financial instrument, or to participate in any particular trading strategy in any jurisdiction. The information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. Ita Unibanco Group does not make any express or implied representation or warranty as to the completeness, reliability or accuracy of such information, nor does this report intend to be a complete statement or summary of the investment strategies, markets or developments referred to herein. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which it was issued and are, therefore, subject to change without notice. Prices and availability of financial instruments are indicative only and subject to change without notice. Ita Unibanco Group has no obligation to update, modify or amend this report and inform the reader accordingly, except when terminating coverage of the issuer of the securities discussed in this report. The analyst responsible for the production of this report hereby certifies that the views expressed herein accurately and exclusively reflect his or her personal views and opinions about any and all of the subject issuers or securities and were prepared independently and autonomously, including from Ita BBA, Banco Ita BBA S.A and other group companies. Because personal views of analysts may differ from one another, Ita BBA, its subsidiaries and affiliates may have issued or may issue other reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. The analyst responsible for the production of this report is not registered and/or qualified as a research analyst with the NYSE or FINRA and is not associated with Itau BBA USA Securities, Inc. and, therefore, may not be subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 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The financial instruments discussed in this report may not be suitable for all investors. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Investors wishing to purchase or otherwise deal in the securities covered in this report should obtain relevant documents relating to the financial instruments and exchanges and confirm their contents. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision based on the information herein. Final decision on investments must be made by each investor considering various risks, fees and commissions. If a financial instrument is denominated in a currency other than an investors currency, changes in exchange rates may adversely affect the price or value of, or the income derived from the financial instrument, and the reader of this report assumes all foreign exchange risks. Income from financial instruments may vary, and therefore their price or value may rise or fall, either directly or indirectly. Past performance does not necessarily indicate future results, and no representation or warranty, express or implied, is made herein regarding future performance. Ita Unibanco Group does not accept any liability whatsoever for any direct or consequential loss arising from the use of this report or its content, and the investor using this report undertakes to irrevocably exempt the Ita Unibanco Group from any claims, complaints and/or demands. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of Ita BBA. Additional information on the financial instruments discussed in this report is available upon request. As required by the Brazilian Securities and Exchange Commission rules, the analysts responsible for this report indicate potential conflict situations in the table below of Relevant Information.
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Additional Note to reports distributed in: (i) U.K. and Europe: Itau BBA UK Securities Limited, authorised and regulated by the Financial Services Authority (FSA), is distributing this report to investors who are Eligible Counterparties and Professional Clients, pursuant to FSA rules and regulations. If you do not, or cease to fall within the definition of Eligible Counterparty or Professional Client, you should not rely upon the information contained herein and should notify Itau BBA UK Securities Limited immediately. The information herein does not apply to, and should not be relied upon by retail customers. Investors wishing to purchase or otherwise deal in the securities covered in this report should contact Itau BBA UK Securities Limited at Level 20 The Broadgate Tower, 20 Primrose Street, London EC2A 2EW, UK; (ii) U.S.A: Itau BBA USA Securities, Inc., a FINRA/SIPC member firm, is distributing this report and accepts responsibility for the content of this report. Any US investor receiving this report and wishing to effect any transaction in any security discussed herein should do so with Itau BBA USA Securities, Inc. at 767 Fifth Avenue, 50th Floor, New York, NY 10153; (iii) Asia: This report is distributed in Hong Kong by Ita Asia Securities Limited, which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities) regulated activity. Ita Asia Securities Limited accepts all regulatory responsibility for the content of this report. In Hong Kong, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Ita Asia Securities Limited at 29th Floor, Two IFC, 8 Finance Street Central, Hong Kong; (iv) Japan: This report is distributed in Japan by Ita Asia Securities Limited Tokyo Branch, Registration Number (FIEO) 2154, Director, Kanto Local Finance Bureau, Association: Japan Securities Dealers Association; (v) Middle East: This report is distributed by Ita Middle East Limited. Related financial products or services are only available to wholesale clients with liquid assets of over $1 million and who have sufficient financial experience and understanding to participate in financial markets in a wholesale jurisdiction. The information herein does not apply to, and should not be relied upon by retail customers. Ita Middle East Limited is regulated by the Dubai Financial Services Authority (DFSA). In the Middle East, any investors wishing to purchase or otherwise deal in the securities covered in this report should contact Ita Middle East Limited, at Al Fattan Currency House, Suite 305, Level 3, DIFC, PO Box 482034, Dubai, United Arab Emirates; (vi) Brazil: Ita Corretora de Valores S.A., a subsidiary of Ita Unibanco S.A authorized by the Central Bank of Brazil and approved by the Securities and Exchange Commission of Brazil, is distributing this report. If necessary, contact the Client Service Center: 4004-3131* (capital and metropolitan areas) or 0800-722-3131 (other locations) during business hours, from 9 a.m. to 8 p.m., Brasilia time. If you wish to re-evaluate the suggested solution, after utilizing such channels, please call Itas Corporate Complaints Office: 0800-570-0011 (on business days from 9 a.m. to 6 p.m., Brasilia time) or write to Caixa Postal 67.600, So Paulo-SP, CEP 03162-971. * Cost of a local call.
Ita BBA 245
Relevant Information Analysts

Analysts Alexandre Miguel Alexandre Spada Andr Pinheiro Andr Rezende Antonio Barreto Barbara Angerstein Carlos Constantini Cida Souza David Lawant Enrico Trotta Diego Mendes Enrico Trotta Florian Tanzer Francine Martins Giovana Arajo Gustavo Fingeret Antonio Barreto Juliana Rozenbaum Marcio Osako Marcos Assumpo Marcos Severine Mariana Coelho Nicolas Chialva Paula Kovarsky Pedro Maia Regina Longo Sanchez Renata Faber Renato Salomone Ricardo Cavanagh Rodrigo Correa Susana Salaru Thiago Bovolenta Batista Thiago Macruz Vivian Salomon 1. 2. 3. 4. 5. Disclosure Items 1 2 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 4 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 5 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
The investment analysts involved in the preparation of this report are related to an individual who works for the issuer object of this analysis report. The nature of this relationship is .... The investment analysts, their spouses or companions, have a direct or indirect stake, in their names, in the capital stock and/or other securities issued by the companies object of their analysis. The Investment analysts, their spouses or companions, are directly or indirectly involved in the purchase, sale, disposal or trading of securities that are the object of this report. The investment analysts, their spouses or companions, have a direct or indirect financial interest in the issuing company of the securities analyzed in this report. The investment analysts, their spouses or companions, deal with shares of mutual funds which concentrate their investments in the analyzed company or in the companys industry, or in which they can directly or indirectly influence their management or administration
Ita BBA 246
Equities
Christian Egan - Global Head of Equities & ETD
Research
Carlos Constantini, CNPI - Head Equity Strategy Carlos Constantini, CNPI - Head Susana Salaru, CNPI Florian Tanzer (LatAm) Pedro Maia, CNPI Argentina Research Ricardo Cavanagh, CFA Nicols Chialva, CFA Chile Research Barbara Angerstein Gustavo Fingeret Agribusiness Giovana Arajo, CNPI Antonio Barreto, CNPI Banking & Financial Services Regina Longo Sanchez, CNPI - Sector Head Thiago Bovolenta Batista, CFA Alexandre Spada, CFA Nicols Chialva, CFA, Argentina & Chile Consumer Goods & Retail Juliana Rozenbaum, CFA - Sector Head Francine Martins, CNPI Barbara Angerstein, Chile Renato Salomone, CNPI Food & Beverage Alexandre Miguel, CFA Renato Salomone, CNPI Healthcare + Education Marcio Osako, CFA +55-11-3073-3001 carlos.constantini@itaubba.com Oil, Gas & Petrochemicals Paula Kovarsky, CNPI - Sector Head Diego Mendes, CNPI carlos.constantini@itaubba.com susana.salaru@itaubba.com Real Estate florian.tanzer@itaubba.com.br David Lawant, CNPI - Sector Head pedro.maia@itaubba.com Vivian Salomon, Mexico & Colombia Enrico Trotta, CNPI ricardo.cavanagh@itau.com.ar Steel & Mining + Pulp & Paper nicolas.chialva@itau.com.ar Marcos Assumpo, CFA - Sector Head Andr Pinheiro, CNPI barbara.angerstein@itau.cl Telecommunications, Media & Technology gustavo.fingeret@itau.cl Susana Salaru, CNPI - Sector Head Carlos Constantini, CNPI Ricardo Cavanagh, CFA, Argentina giovana.araujo@itaubba.com Gustavo Fingeret, Chile antonio.barreto@itaubba.com Industrials + Transportation & Logistic Renata Faber, CNPI - Sector Head regina.sanchez@itaubba.com Thiago Macruz, CNPI thiago.batista@itaubba.com alexandre.spada@itaubba.com Utilities nicolas.chialva@itau.com.ar Marcos Severine, CNPI - Sector Head Mariana Coelho, CNPI Andr Rezende, CNPI juliana.rozenbaum@itaubba.com francine.martins@itaubba.com Economics barbara.angerstein@itau.cl Guilherme da Nobrega, CNPI - Head renato.salomone@itaubba.com Mauricio Oreng Luiz Gustavo Cherman alexandre.miguel@itaubba.com Retail Strategy renato.salomone@itaubba.com Rodrigo Correa, CNPI Cida Souza, CNPI Marcello Rossi, CNPI marcio.osako@itaubba.com Fbio Perina, CNPI +55-11-3073-3027 +55-11-3073-3029 paula.kovarsky@itaubba.com diego.mendes@itaubba.com
+55-11-3073-3001 +55-11-3073-3009 +55-11-3073-3025 +55-11-3073-3065
+55-11-3073-3037 +52-55-5262-0672 +55-11-3073-3064
david.lawant@itaubba.com vivian.salomon@itaubba.com enrico.trotta@itaubba.com
+54-11-5273-3593 +54-11-5273-3503
+55-11-3073-3021 +55-11-3073-3028
marcos.assumpcao@itaubba.com andre.pinheiro@itaubba.com
+56-2-834-6297 +56-2-834-6295
+55-11-3073-3036 +55-11-3073-3060
+55-11-3073-3009 +55-11-3073-3001 +54-11-5273-3593 +56-2-834-6295
susana.salaru@itaubba.com carlos.constantini@itaubba.com ricardo.cavanagh@itau.com.ar gustavo.fingeret@itau.cl
+55-11-3073-3042 +55-11-3073-3043 +55-11-3073-3004 +54-11-5273-3503
+55-11-3073-3017 +55-11-3073-3034
renata.faber@itaubba.com thiago.macruz@itaubba.com
+55-11-3073-3011 +55-11-3073-3024 +55-11-3073-3014
marcos.severine@itaubba.com mariana.coelho@itaubba.com andre.rezende@itaubba.com
+55-11-3073-3035 +55-11-3073-3039 +56-2-834-6297 +52-55-5262-0674
+55-11-3708-2715 +55-11-3708-2807 +55-11-3708-2713
gcnobrega@itaubba.com.br moreng@itaubba.com.br lgcherman@itaubba.com.br
+55-11-3073-3020 +52-55-5262-0674
+55-11-3073-3040
+55-11-3073-3023 +55-11-3073-3038 +55-11-3073-3006 +55-11-3073-3431
rodrigo.correa@itaubba.com cida.souza@itaubba.com marcello.rossi@itaubba.com fabio.perina@itaubba.com
Equity Sales & Trading

Carlos Maggioli - Head Latin America Sales - Latin America Carlos Maggioli - Head Mrcia Sadzevicius Rodrigo Pace Juliana Luk Carlos Carvalho Lima (Macro) Sales Trading - Brazil Aureo Bernardo Pedro H. Rocha Sauma Carlos Faria Lucas Gonalves Trading - Brazil Cristiano Soares - Head Srgio Rocha Thiem Hauenschild Bruno Campos Pedro Feres +55-11-3073-3300 carlos.maggioli@itaubba.com North America Sales - North America Adam Cherry - Head Kahlil Adam, CFA Flavia Stingelin, CFA Carina Cassab Carreira Europe, Middle East & Asia Sales - Europe Mark Fenton - Head Aneli Gonzalez, CFA Andr Luiz Dreicon Fabio Faraggi
+55-11-3073-3300 +55-11-3073-3330 +55-11-3073-3330 +55-11-3073-3310 +55-11-3073-3330
carlos.maggioli@itaubba.com marcia.sadzevicius@itaubba.com rodrigo.pace@itaubba.com juliana.luk@itaubba.com carlos.carvalho-lima@itaubba.com
+1-212-710-6766 +1-212-710-6767 +1-212-710-6768 +1-212-710-6790
adam.cherry@itaubba.com kahlil.adam@itaubba.com flavia.stingelin@itaubba.com carina.carreira@itaubba.com
+55-11-3073-3330 +55 11 3073-3330 +55-11-3073-3310 +55-11-3073-3310
aureo.bernardo@itaubba.com pedro.sauma@itaubba.com carlos.faria@itaubba.com lucas.goncalves@itaubba.com
+44-20-7663-7845 +44-20-7663-7845 +55-11-3073-3330 +44-20-7663-7839
mark.fenton@itaubba.com aneli.gonzalez@itaubba.com andre.dreicon@itaubba.com fabio.faraggi@itaubba.com
+55-11-3073-3330 +55-11-3073-3330 +55-11-3073-3310 +55-11-3073-3310 +55-11-3073-3149
Sales - Japan cristiano.soares@itaubba.com Masayoshi Yazawa sergio.rocha@itaubba.com thiem.von@itaubba.com Sales - Hong Kong bruno.campos@itaubba.com Caio Galvo pedro.feres@itaubba.com Sales Trading - North America Kevin Hard - Head Eric Krall Fernando Lasalvia James Tallarico Brad Marra
+813-3539-3850
masayoshi.yazawa@itausecurities.com
+852-3657-2398
caio.galvao@itausecurities.com
+1-212-710-6780 +1-212-710-6780 +1-212-710-6780 +1-212-710-6780 +1-212-710-6780
kevin.hard@itaubba.com eric.krall@itaubba.com fernando.lasalvia@itaubba.com james.tallarico@itaubba.com brad.marra@itaubba.com
Futures, Derivatives & Stock Lending

Carlos Maggioli - Head Futures Desk Eduardo Barcellos - Head Fabio Herdeiro Alan Eira Alexandre Rizzo Celso Azem Jos Dezene Thierry Decoene Hernan Livore Bruno Giusti Guilherme Michetti +55-11-3073-3300 carlos.maggioli@itaubba.com Derivatives Fabiano V. Romano - Head Rafael Americo eduardo.barcellos@itaubba.com Raphael Lie fabio.herdeiro@itaubba.com Marcio Caires alan.eira@itaubba.com alexandre.rizzo@itaubba.com FX Spot celso.azem@itaubba.com Manoel Gimenez jose.dezene@itaubba.com Haroldo Vasconcellos thierry.decoene@itaubba.com hernan.livore@itaubba.com Stock Lending bruno.giusti@itaubba.com Joo Victor Caccese guilherme.michetti@itaubba.com Leandro Muniz +55-11-3073-3310 +55-11-3073-3310 +55-11-3073-3310 +55-11-3073-3310 fabiano.romano@itaubba.com rafael.americo@itaubba.com raphael.lie@itaubba.com marcio.caires@itaubba.com
+55-11-3073-3320 +55-11-3073-3320 +55-11-3073-3350 +55-11-3073-3350 +55-11-3073-3350 +55-11-3073-3350 +55-11-3073-3320 +55-11-3073-3320 +55-11-3073-3320 +55-11-3073-3320
+55-11-3073-3340 +55-11-3073-3340
manoel.gimenez-neto@itaubba.com haroldo.vasconcellos@itaubba.com
+55-11-3073-3211 +55-11-3073-3211
joao.caccese@itaubba.com leandro.muniz@itaubba.com
Private Banking Desk

Carlos Maggioli - Head Private Banking Sales - High Felipe Beltrami - Head Caio Felipe Zanardo Val Marco Antnio Gomes Natlia Mnaco Private Banking Sales - Ultra Sergio Fonseca Rosa - Head Edgard Claussen Vilela Robinson Minetto Thiago de Freitas Ribeiro +55-11-3073-3300 carlos.maggioli@itaubba.com Private Banking Sales - Special Marcelo Ferri - Head Guilherme Rudge Simes Patrick Kalim Ricardo Guntovitch Ricardo Julio Costa
+55 11 3073-3110 +55 11 3073-3292 +55 11 3073-3148 +55 11 3073-3297
felipe.beltrami@itaubba.com caio.val@itaubba.com marco.gomes@itaubba.com natalia.monaco@itaubba.com
+55 11 3073-3110 +55-11-3073-3150 +55-11-3073-3145 +55-11-3073-3149 +55 11 3073-3297
marcelo.ferri@itaubba.com guilherme.simoes@itaubba.com patrick.kalim@itaubba.com ricardo.guntovitch@itaubba.com ricardo.costa@itaubba.com
+55 11 3073-3110 +55 11 3073-3291 +55 11 3073-3290 +55-11-3073-3290
sergio.rosa@itaubba.com Private Banking - Strategy edgard.vilela@itaubba.com Lucas Tambellini robinson.minetto@itaubba.com thiago.freitas-ribeiro@itaubba.com
+55 11 3073-3110
lucas.tambellini@itaubba.com
Ita Securities' Global Offices

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Regulated by the Securities and Futures Commission in Hong Kong
NEW YORK Itau BBA USA Securities Inc. 767 Fifth Avenue, 50th Floor New York, NY 10153 TOKYO Itau Asia Securities Limited Tokyo Branch NBF Hibiya Bldg. 12F 1-1-7 Uchisaiwai-cho, Chiyoda-ku Tokyo, 100-0011, Japan
LONDON Itau BBA UK Securities Limited The Broadgate Tower 20th Floor - 20 Primrose Street London EC2A 2EW DUBAI Itau Middle East Limited
29/F, Two International Finance Centre 8 Finance Street - Central, Hong Kong
Al Fattan Currency House (DIFC) 3rd floor room 305 (P.O. Box: 65703)
Dubai, United Arab Emirates
Itas Complaints Officer (Ouvidoria Corporativa Ita) may be contacted at 0800 570 0011 (calls from Brazil), on business days, from 9 a.m. to 6 p.m. (So Paulo, Brazil time) or P.O. BOX 67.600, Zip Code 03162-971. The information herein is believed to be reliable but Ita Corretora de Valores S.A. does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. Banco Ita S.A. may have a position from time to time. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for purchase or sale of any financial instrument. This report is prepared by Ita Corretora de Valores S.A. and distributed in the United States by Itau BBA USA Securities, Inc., and Itau BBA USA Securities, Inc. accepts responsibility for its contents accordingly. Any US persons receiving this research and wishing to effect transactions in any security discussed herein should do so only with Itau BBA USA Securities, Inc. Analysts who are not CNPI only provide the team with technical support, not issuing personal opinions.

Itaú Latam Big Book 2012

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BIG BOOK

The LatAm Big Book 2012 January 19, 2012

Carlos Constantini Chief Strategist and Global Head of Research

The LatAm Big Book 2012 January 19, 2012

EQUITY STRATEGY .............................................................................................. 16

SECTOR VIEWS .................................................................................................... 45

BANKING AND FINANCIAL SERVICES.............................................................................55

CONSUMER GOODS & RETAIL .........................................................................................76

The LatAm Big Book 2012 January 19, 2012

HEALTHCARE & EDUCATION ......................................................................................... 103

INDUSTRIALS + TRANSPORTATION & LOGISTICS ...................................................... 116

OIL, GAS AND PETROCHEMICALS ................................................................................ 143

REAL ESTATE .................................................................................................................. 159

The LatAm Big Book 2012 January 19, 2012

STEEL & MINING + PULP & PAPER ................................................................................ 189

TELECOMMUNICATIONS, MEDIA & TECHNOLOGY ..................................................... 204

UTILITIES .......................................................................................................................... 215

ANALYST AND STOCK DIRECTORY ................................................................ 240

The LatAm Big Book 2012 January 19, 2012

Outlook 2012 Equities

The LatAm Big Book 2012 January 19, 2012

Outlook 2012 Fixed Income

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

Outlook 2012 Investment Banking

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

Outlook 2012 Corporate Banking

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

Real Interest Rates

The LatAm Big Book 2012 January 19, 2012

Positive Environment for Regional Stock Markets

MSCI 12m Forward P/E

MSCI Trailing P/B

MSCI World MSCI Brazil

MSCI EM MSCI Mexico

Source: Ita BBA and Bloomberg

MSCI World MSCI Brazil

MSCI EM MSCI Mexico

The LatAm Big Book 2012 January 19, 2012

The LatAm Big Book 2012 January 19, 2012

WORLD EM LATAM BRAZIL MEXICO CHILE PERU COLOMBIA EUROPE USA

Bloomberg, weekly correlations 06/01/2011 - 01/01/2012, MSCI (USD)

EUR FRA/OIS SPRD 3M

The LatAm Big Book 2012 January 19, 2012

Italian Sovereign Bond Yield (2y)

Italian Sovereign Bond Yield (10y)

4.0 3.0 2.0

5.0 4.5 4.0

Long-Term (External) Headwinds

The LatAm Big Book 2012 January 19, 2012

Talking About Tides

The LatAm Big Book 2012 January 19, 2012

Asset Prices in Japan Nikkei

Credit Crunch Time Also for Brazilian FDI and Funding?

Inflows Bovespa (YTD)

1000.0 500.0 (500.0)

(1000.0) (1500.0) Foreign Investors