Parque Arauco. Target Price Update. Investment Thesis. Target price: CLP Recommendation: Sell Risk: Moderate

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1 Parque Arauco Target price: CLP Recommendation: Sell Risk: Moderate March 4, 2013 Sector: Retail Analyst: M.Josefina Güell Z. T: Company Information Ticker: PARAUCO CI Closing price (CLP/stock): M Price range: 855, ,1 12M Daily volume (CLP MM): 1.017,82 Stock # (million): Maket Cap (USD million): 915,679 Stock / ADR: n/a Stock Performance YTD Target Price Update Investment Thesis Our target Price for parque Arauco is CLP per share for the end of 2013, with a sell recommendation and medium risk. Our target price involves a 1.5% potential reduction at the current closing price, and additionally, we calculate a 2% dividend yield for December Therefore, we expect 0,5% overall return. The consolidated model Parque Arauco shows in real estate business and in shopping malls management is the basis of our thesis. The Target Price Update includes a US$ 650 million Investment Plan % of this figure is destined to Colombia and Peru, and the remaining to Chile. By the end of 2013, the gross leasable area (GLA) would rise in 21%, thus reaching 1 million GLA by We consider a 76% CAPEX execution and a 5% delay in openings per year for modeling purposes, due to possible delays in the obtention of permits, mainly in Peru and Colombia. It would be posible to implement this plan, by the end of 2013 USD 400 million will have been invested, and between 2014 and 2016, only 40% of the investment will still need to be carried out. 85% of Parauco s revenues come from medium and long term lease contracts, meaning stable results for the company. On the other hand, the remaining 15% is directly linked to people s consumption, through a variable percentage of its customers sales. Therefore, by expecting a favorable growth in Chile, Peru and Colombia, with 4.5%- 6.5% expansions in GDP during , this would lead to a growth in expenditure for the region therefore higher revenues. Notwithstanding the above, we consider only a 1.5% per share of expected return, with a recommendation to sell, as during the year the return per share has been 11%, internalizing in its current price, both the new projects and the healthy economy of the region. A great part of the expected potential for the company is thus significantly achieved. Our recommendation may vary when the company completes preliminary studies, which would increase the expected revenues and profitability. Risks: Investment Plan: The value of the company may be favorably or adversely affected by the implementation of the plan. It will depend if it exceeds or falls short of our expectations. Competition Risk: The competitors in the business of developing malls have announced aggressive expansion plans, decreasing future growth opportunities, especially in Chile. Country Risk: These are political and economic changes that may occur in the different countries where Parque Arauco operates. The company s value would be affected by them, and consequently our target price and recommendation. Source: Bloomberg, CorpResearch.

2 Company Description Parque Arauco is a real estate company focused in shopping malls management, with operations in Chile, Perú and Colombia. It was the pioneer of this retail format Chile, opening the first mall in the country in It now has 457 th. m2 GLA in Chile divided between 8 malls, 181 th. m2 GLA in Perú, and 34 th. M2 GLA in Colombia. The average occupancy rate is over 90%. 85% of the company's revenue comes from the lease of land to stores, while the remaining 15% comes from a share of the store's sales. Ownership 4Q12 26% Income Distribution 4Q12 6% 24% 15% Mutual Funds Pension Funds Family Said Yarur 18% 15% 9% 8% 70% 3% Chile Peru Colombia 6% Investment Funds Family Abumohor Stockbrokers Profit & Loss Statement (USD Million) E 2013E 2014E 2015E 2016E Operating Income Gross Margin Gross Margin % 80,7% 79,8% 82,2% 83,3% 84,0% 84,3% Operating Income Operating Income % 68,2% 69,2% 70,7% 71,8% 72,5% 72,8% EBITDA EBITDA Margin % 70,9% 71,1% 72,6% 73,7% 74,4% 74,7% Net Financial Expenses (11.674) (11.986) (21.981) (19.623) (20.381) (19.480) Non-Operating Result (9.926) (2.817) (15.356) (6.575) (7.333) (6.432) Controller s Share Net Income (Controller s) % 47,2% 36,2% 40,7% 47,5% 47,9% 48,7% EPS (USD/share) Balance Sheet (USD Million) E 2013E 2014E 2015E 2016E Cash & Equivalents Other Current Assets PP&E Other Non-Current Assets Total Assets Financial Debt Total Liabilities Total Equity Minority Interest Cash Flow (USD Million) E 2013E 2014E 2015E 2016E Operating Result Adjusted Taxes (11.779) (13.916) (16.105) (18.512) (20.421) (21.438) Depreciation & Amortization (1.900) (2.124) (2.164) (2.449) (2.676) (2.798) Capex ( ) (94.400) ( ) (56.640) (2.676) (2.798) Δ Working Capital (8.767) (26.696) (24.821) (23.815) Free Cash Flow (97.304) (49.625) (63.396) (11.738) Equity Raised Dividends (21.810) (18.354) (18.088) (20.880) (27.549) (30.365) Debt Issuance (39.822) Peers P / U EV/EBITDA Ratios E 2013E 2014E 2015E 2016E Cencosud 25,63 14 Stock Price (CLP) Falabella 37,26 22,9 P / E (x) 14,60 25,47 19,99 15,15 13,75 12,93 Parauco 25,35 15,74 Liabilities / Equity (x) 0,96 1,00 1,00 0,95 0,91 0,80 Ripley 28,419 20,997 EV / EBITDA (x) 13,07 16,69 15,74 13,82 12,15 11,19 BRMalls 12,162 10,61 EBITDA / Financial Expenses (x) 3,84 3,65 2,64 3,02 3,26 3,26 Net Financial Debt / EBITDA (x) 3,34 3,71 4,52 4,06 3,30 2,76 ROA (%) 4,33% 3,39% 3,72% 4,71% 4,97% 5,25% β (vs IPSA): 1,05 ROE (%) 8,97% 7,49% 7,45% 9,17% 9,47% 9,45% WACC PROM.: 9,35 Dividend Yield (%) 3,7% 2,0% 1,9% 2,3% 3,0% 3,3% * Average WACC used in the assessment rates for parties *Exchange rate CLP 472,02 ( ) Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

3 Parque Arauco SA is a real estate company dedicated to developing and operating shopping malls and strip centers in Chile, Peru and Colombia. In December 2012, it had M2 GLA. The company has announced a US$ 650 million investment plan, in which there are only defined projects for US$ 480 million. The rest of the investment has not been allocated to specific projects, therefore it has not been considered in our valuation. It is worth stressing that Parque Arauco announces the building of a new shopping center when the contract has already been signed by the anchor stores, of the small shops, and 20% of the investment has been made (in addition to the value of land). Furthermore, Parque Arauco owns 60 hectares in Chile; which implies an investment of US$ 106 million in strategic areas for the development of shopping centers. Consequently, the development of future company projects is ensured. The average shopping mall penetration in Colombia is 74.7 M2 per one thousand inhabitants; Peru has 45.8 M2, while LATAM s average rises to 82.2 M2. The low penetration in department store formats and shopping centers, coupled with positive economic perspectives, especially in Peru and Colombia, have led to a significant growth opportunity for Parque Arauco. Colombia s GDP per capita will rise 14% during , reaching USD At the same time, Peru s GDP per capita will rise 17%, reaching USD during the same period. The above, together with shopping centers penetration projections, indicate that Colombia has an average of 74.7 M2 per one thousand inhabitants; Peru has 45.8 M2, while LATAM s average rises to 82.2 M2 and Chile s to 149 M2. This allows is to project solid growth in the next years. We believe that the company holds a strong financing position to carry out the aggressive expansion plan during the period The estimated ratios NFD/Financial Resources 2013E is 0.60x and EBITDA/ Financial expenditures 4.52x, which show flexibility in relation to the covenants of the company s bonds (NFD/Equity <1.4x and EBITDA/Financial Expenditures > 2.375x). this compares favorably with the ratios of the country s main mall operator, Mall Plaza, which has DFN/Equity of 0.49x and EBITDA/G.F 7.25x. Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

4 Proyected Revenues (CLP MM) Chile: By December 2012, Parque Arauco has a leasable surface of 467 thousand M2, distributed in 8 shopping centers. We estimate that Chile s revenues will increase a 33% by December 2013, as a consequence of the GLA s expansion in 17%, with the opening of 2 new shopping centers and 2 Strip Centers. Within the USD 325 million allocated to this country, US$ 50 million were assigned to the building of mall Arauco Quilicura, which is expected to open the 1Q13. The new shopping center has 33 thousand M2 GLA, which would increase the leasable surface of the company by 4,8% in December We estimate a 70% EBITDA Margin for the first year, increasing gradually to 73% in 2015, when we think it would attain maturity. On the other hand, a portion of the 325 USD million will be assigned to the expansion and remodeling of the already existent shopping centers. US$ 24 million will be invested in the incorporation of M2 in mall Parque Arauco Kennedy, and US$ 20 million will be destined for remodeling El Roble Chillán, which we expect will incorporate 12.5 thousand M E 2013E 2014E 2015E 2016E Source: Company Reports, CorpResearch In 2011, Parque Arauco signed an agreement with investment society AURUS to develop the Strip Centers format in the country. This new society is controlled by Parque Arauco with a 51% of the property, while the remaining 49% is owned by AURUS. The society currently controls 7 Strip Centers, which in total amount to approximately 12 thousand M2, with a related investment of USD 30 million in total. The society s aim is to build at least five Strip Centers per year, which would be located in different zones along the country. 75% 74% 73% Peru: We expect an increase of a 33% in M2 GLA by 2013, as a result of the opening of three new shopping centers, Mega Express Cañete with 16.8 thousand M2 GLA, Mega Express Barranca with 8 thousand M2 GLA, and Mega Express Chincha with 7.5 thousand M2 GLA, in addition to Megaplaza Norte s expansion in a 32%. The reasons explained above would be the main cause for the increase in the company s revenues by 31% during % 71% 70% In January 2013, Parque Arauco announced the strategic association with Raffo Group to carry out the Strip Center business in Peru. This group owns 100 thousand M2 of privileged land for the shopping centers development in Lima alone. In addition, it has vast experience in the business, which would facilitate the obtention of permits and licenses for the business development. This adds to the 2011 agreement signed with Cencosud, which allows the latter to be part of every project launched by Parque Arauco during the next ten years. It means an excellent opportunity for the company, given an increase in competitiveness and good economic prospects in the country. 69% E 2013E 2014E 2015E 2016E EBITDA (CLP MM) EBITDA Margin % Source: Company Reports, CorpResearch Colombia: It is one of the countries with better investment perspectives due to its attractive growth rates and low penetration of shopping centers. Because of this, Colombia is one major focus of interest for Parauco, although it only has 34 thousand M2 GLA in Mall Parque Arboleda. The opening of a second shopping center is programmed by 2013, Bucamaranga, with 30 thousand M2 GLAS, and an investment of USD 100 million. In spite of not having more specific projects in the country, we expect that the investment destined to Colombia will increase significantly, as detailed in the company s investment plan. Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

5 Valuation: M2 Parque Arauco % 5% % 25% 29% % % 70% 63% E Chile Peru Colombia Source: Compañy Reports, CorpResearch. We have valued Parque Arauco the company using the discounted cash-flow method (DCF). Due to the good economic prospects of the region and the low development of shopping centers in Colombia and Peru, we agree that these countries offers an attractive potencial for Parque Arauco to invest in its different formats. This is why we have distributed a 50% of Capex, assigned for both countries during , thus expanding to 31% the total M2 GLA by 2016, compared with year end We expect that the company s revenues to increase by 46.5% in 2013, thus reaching CLP million in Sales per square meter will rise from CLP149 thousand gradually over time, as a cause of the shopping centers 2-year-maturity period, accompanied by a dynamic economy, reaching CLP 176 thousand in We expect that the SGA will rise in 50 basis points compared to December 2012, as a consequence of opening 6 shopping centers and 2 Strip centers in the region. This will happen because the newly leased area will not beginoperations at full capacity but operating expenditures will increase in order to manaje the new space, generating greater fixed costs for the company. This will derive in a slower growth of EBITDA Margin, reaching 70.7% in 2013 and at the beginning of We expect that, by the middle of 2015, the consolidation of the operations will be finished in the second biggest country in Latin America, Colombia, as well as in Peru and Chile. This would lead to a better operational efficiency for the company, and to a gradual GAV decrease, until reaching its historic levels of 12%. Additionally, it would allow to increase its EBITDA Margin to 74.7% in All of the above will lead to a rise in profits, reaching levels of CLP million in Parauco S.A s share, according to its current price, shows a 2013E EV/EBITDA multiple at 14,6x, in line with the historic average of the last three years of 14,22x and a 2013E P/E ratio of 21.0x, which is over the company s historic average 18.3 x. Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

6 Glossary Term Definition / Translation Calculation EBITDA EBITDAR Earnings Before Interests, Taxes, Depreciation and Amortization Earnings Before Interests, Taxes, Depreciation, Amortization and Rents Operational Income plus Depreciation and Amortization Operational Income plus Depreciation and Amortization plus rent of fixed assets. It is used the at transport industries to reverse the rent of airplanes or ships. EV Enterprise Value Market capitalization plus Net Financial Debt plus Minority Interest EV/EBITDA Valuation multiple. While greater it is, more expensive it is the stock EV divided by Ebitda FCF Free Cash Flow Operational Income plus Depreciation and Amortization minus tax minus capital expenditures plus (minus) working capital variation. Free-float Margin Operational Ebitda Net Percentage of stocks that can be freely traded in the market Percentage of sales Percentage of stock that does not belong to controller s shareholders. Operational Income / Revenue Ebitda / Revenue Net Income / Revenue P/E Price / Earnings Market Price divided by EPS P/B Price to Book value ratio Market price divided by the accounting value of the stock. Dividend Yield The return in terms of dividends of investing in equities FCF yield Free Cash Flow Return. FCF / Market Price Dividends distributed in a year divided by the market price. ROA Return on Assets Net Income / Total Assets ROE Return on Equity Net Income / Accounting capitalization EPS Earnings Per Share Net Income / Shares outstanding YtD Year to Date Percentage variation year to date x Times Stocks recommendations are established according to the stock yield relative to the IPSA Index. We recommend Hold when we expect the share to have a yield in line with the IPSA; Buy, when the yield expected for the share is above to that expected for the IPSA; and Sell, when the yield expected for the share is below to that expected for the IPSA. We define a yield to be In line with the IPSA when it is within a range whose scope is equivalent to a third of the variation expected for the index, with a 5% minimum. Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

7 CorpResearch Álvaro Donoso Director CorpResearch Economic Research Sebastián Cerda Executive Director CorpResearch & Economic Studies Nicolás Birkner Senior Economic Analyst Natalie Charles Investment Analyst Equities Research Cristobal Lyon Director of Strategies Vicente Meschi Senior Analyst. Sectors: Banking, Forestry Sergio Zapata Senior Analyst. Sector: Energy Pedro Letelier Analyst. Sectors: Transport, Telecommunications and Food & Beverages Josefina Güell Analyst. Sector: Retail Patricio Acuña Analyst. Rosario Norte 660, 17 th floor, Las Condes, Santiago. T: IMPORTANT US REGULATORY DISCLOSURES ON SUBJECT COMPANIES This material was produced by CorpResearch, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44 th Street, Suite 1700, New York, NY 10036). Parque Arauco Target Price Update - M. Josefina Güell Z. March 7,

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