GRUPO AEROPORTUARIO DEL PACIFICO HOLD. Reaches Cruising Altitude; Downgrading to Hold

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1 Latin American Equity Research Mexico City, December 1, 2006 Company Report Mexico Airports GRUPO AEROPORTUARIO DEL PACIFICO Reaches Cruising Altitude; Downgrading to Hold Gonzalo Fernandez* HOLD Vivian Salomon* Mexico: Banco Santander, S.A. Mexico: Banco Santander, S.A. (5255) (5255) (11/28/06) CURRENT PRICE: US$39.01/M$43.09 TARGET PRICE: US$42.00/M$48.00 What s Changed Rating: From Buy to Hold Price Target YE2007: Introducing US$42.00 EBITDA Estimates (US$): 06 From 179 to 177 Mn 07 From 205 to 197 Mn 08 Introducing 229 Mn Company Statistics Bloomberg PAC 52-Week Range (US$) E P/E Rel to IPC (x) E P/E Rel to Airports (x) 1.00 IPC (US$) 2, Yr CAGR (05-08E) 21% Market Capitalization (US$ Mn) 2, Float (%) 85% 3-Mth Avg Daily Vol (US$000) 8.9 Shares Outst Mn Net Debt/Equity (x) 0.03 Book Value per Share (US$) Estimates and Valuation Ratios E 2007E 2008E Net Earn (M$) , ,290.1 Current EPS Net Earn (US$ Mn) Current EPADR P/E (x) P/Sales (x) P/CE (x) FV/EBITDA (x) FV/Sales (x) FCF Yield (%) 3.2% 3.5% 2.9% 4.0% Div per ADR (US$) Div Yield (%) 6.4% 3.0% 3.1% 2.8% Sources: Bloomberg, Company reports, and Santander Investment estimates. Investment Thesis: In this report, we are adjusting our estimates to reflect: (1) lower-than-expected passenger traffic growth for 2006; (2) the benefits of a recent positive ruling on taxes; and (3) additional investments in Los Cabos International Airport. As a result, we are setting a year-end 2007 target price of US$42.00/M$48.00 and downgrading the stock from Buy to Hold. (We will no longer refer to our year-end 2006 target of US$38.00.) While we continue to believe GAP should be one of the main beneficiaries of the development of lowcost carriers in Mexico, with the stock having risen 87% since its IPO on February 24, 2006, and now trading at a 16% premium to Asur on FV/EBITDA 2007E, GAP, in our opinion, has reached fair valuation levels. Reasons for Change to Rating/Price Target/Estimates: Considering traffic growth during January-October 2006, we are lowering our traffic growth forecast for full-year 2007 from 9.5% to 6.4%, because the partial suspension of Aerocalifornia affected traffic during We estimate traffic growth of 9.5% for 2007 and 9.6% for In addition, we are incorporating the fact that GAP got a positive tax ruling from a Mexican court, implying a one-off recovery of approximately US$60 million in taxes paid in previous years, which should reduce the effective tax rate to 7% in FY07. After this, the effective tax rate could decline from 42% in 2005 to 33% starting in Also, we are incorporating into our capex assumptions the US$60 million investment in Los Cabos International Airport, including the construction of a new terminal building. As a result, we are lowering our 2007 EBITDA estimate from US$205 million to US$197 million and our 2007 FCF estimate from US$112 million to US$74 million. Valuation and Risks to Investment Thesis: The main reason for lowering our recommendation on GAP is valuation. After an 87% increase in the stock price since the company s IPO on February , the stock is trading at an estimated FV/EBITDA of 10.6x for 2007, with a 16% premium compared with Asur. Based on our year-end 2007 target price, the stock offers a potential upside of 8% from current levels, 5% above our estimated upside for the IPC Index. Thus, we are lowering our rating to Hold. Risks to our investment thesis would include: lower-than-expected passenger traffic at GAP s airports; changes in regulations that imply lower passenger airport fees, or higher capital expenditures; changes in travel preferences; and terrorist or natural disasters that could affect airline traffic. * Employed by a non-us affiliate of Santander Investment Securities, Inc. and is not registered/qualified as a research analyst under NASD rules.

2 GAP: Reaches Cruising Altitude; Downgrading to Hold Grupo Aeroportuario del Pacífico (GAP) has a 50-year renewable concession to operate 12 airports in Northwestern Mexico. GAP operates airports in two large metropolitan cities (Guadalajara and Tijuana), four tourist destinations (Puerto Vallarta, Los Cabos, La Paz, and Manzanillo), and six medium-sized cities (Hermosillo, Leon, Morelia, Mexicali, Aguascalientes, and Los Mochis). Half of GAP s airports are among the 10 busiest airports in Mexico in terms of passenger traffic, with Guadalajara being the third largest (5.6 million passengers in 2005) and Tijuana the fifth largest (3.5 million). During full-year 2005, GAP handled 19.1 million passengers and generated revenue of approximately M$2.6 billion (US$244 million), reported EBITDA of M$1.7 billion (US$162 million), and posted a net income of M$659 million (US$562 million). INVESTMENT THESIS We are updating our estimates and valuation for GAP, incorporating lower-than-expected passenger traffic for 2006, the benefits from a recently positive judiciary tax ruling, and the incorporation into our capex assumptions in regard to the recently announced US$60 million investment in Los Cabos International Airport over the next three years. As a result, we are changing our EBITDA estimate for 2007 from US$205 million to US$197 million and lowering our estimate of FCF from US$112 million to US$74 million. In addition, we are setting a year end 2007 target price of US$42.00 per ADR for GAP and lowering our recommendation from Buy to Hold. PASSENGER TRAFFIC During the first 10 months of 2006, total passenger traffic at GAP s airports rose 7.0% YoY, with domestic traffic increasing 6.2% and international traffic growing 8.2%. Furthermore, domestic traffic rose a solid 19% YoY in October, fulfilling our expectations of a positive impact on Gap from the operation of low-cost carriers (LCCs). Nevertheless, the suspension in April 2006 of regional airline Aerocalifornia, which represented 10% of traffic for Gap in full year 2005, has affected traffic, as its routes have been only gradually taken by other airlines. As a result, our initial estimate for 9.5% traffic growth for full-year 2006 would seem hard to reach at this point, and we are lowering our forecast for 2006 traffic growth to 6.4%. GAP reported that, as of September 2006, low-cost carriers represented 28% of domestic traffic at its airports. In addition, Mexico s Communications Ministry estimates that as of September 2006, LCCs after less than a year of starting operations have attained a market share of approximately 20% in domestic flights. Nevertheless, this positive development has not been enough to offset the negative impact of the suspension of Aerocalifornia on GAP. International traffic increased 8.2% YoY during the first 10 months of However, this growth trend has not been sustained, with international traffic decreasing 6.9% YoY for the month of October. We expect that this negative trend could continue during the year-end high season, because GAP s tourism destinations in 2005 benefited from the substitution effect, as Cancun was damaged by Hurricane Wilma in October As a result, we estimate total traffic growth of 6.4% for 2006, fueled by a 6.6% increase in domestic traffic and 6.1% growth in international. For 2007, we believe that the positive impact of LCCs will continue, and we are looking for a 9.1% increase in domestic traffic YoY. In addition, we expect that GAP will continue to benefit from the bilateral agreement with the U.S., which increases the number of U.S. airlines operating in Mexican airports from two to three. As a result, we forecast a 10% increase in international traffic in 2007, which would result in a 9.5% increase in total traffic for GAP. For 2008, we estimate a 9.6% increase in total traffic, fueled by an 8.0% increase in domestic traffic and 12% growth in international. 2

3 Figure 1. GAP Passenger Traffic (Thousands) Jan-Dec Airport Oct 05 Oct 06 Growth Jan-Oct 05 Jan-Oct 06 Growth 2006E Growth Guadalajara % 4, , % 6,259 11% Tijuana % 2, , % 3,699 7% Puerto Vallarta % 2, , % 2,995 9% Los Cabos % 2, , % 2,729 11% Hermosillo % 1, % 1,157-4% Bajio % % 1,160 4% Morelia % % 605-9% Mexicali % % 508-7% La Paz % % 430-5% Aguascalientes % % 386 9% Manzanillo % % 242 1% Los Mochis % % 193-5% Total 1, , % 15, , % 20, % Domestic % 9, , % 12, % International % 6, , % 8, % Sources: Company Reports and Santander Investment Estimates. Figure 2. GAP Operating Summary, E (in Millions of Passengers and Millions of M$) Traffic E 2007E 2008E Domestic Growth 1.1% 6.6% 9.1% 8.0% International Growth 24.8% 6.1% 10.0% 12.0% Total Growth 9.3% 6.4% 9.5% 9.6% Regulated Revenue 2,113 2,384 2,725 3,108 Commercial Revenue Real Growth 20.2% 7.6% 16.7% 13.4% ComRev per Passenger ComRev per Passenger US$ Sources: Company Reports and Santander Investment Estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

4 GAP: Reaches Cruising Altitude; Downgrading to Hold Figure 3. GAP Income Statement, E (Millions of Pesos) E 2007E 2008E Total Revenues 2,591 2,918 3,371 3,865 Real Growth 14.5% 8.5% 11.4% 11.0% Operating Costs Cost of Services Technical Assistance Fee Concession Fees Depreciation Amortization Depreciation & Amortization Total Costs 1,489 1,646 1,765 1,917 % of Sales 57.5% 56.4% 52.4% 49.6% Oper Profit 1, , , ,948.5 Oper Margin 42.5% 43.6% 47.6% 50.4% EBITDA 1, , , ,634.9 EBITDA Margin 66.4% 66.8% 67.3% 68.2% CIF & Other Income Tax Provision Tax Rate 41% 39% 24% 33% Net Income ,204 1,290 Sources: Company Reports and Santander Investment Estimates. LOW-COST CARRIERS As we mentioned earlier, the evolution of LCCs in Mexico during their first year of operations has been positive. According to the Communications Ministry, the market share of LCCs has increased from 3.9% in January 2006 to 13.6% in June and 20.0% in September. Changes from our initial expectations include the launch in December 2006 of Viva Aerobus, a joint venture between Ryanair and Estrella Blanca, one of the largest bus transportation companies in Mexico, which will be based in Monterrey. However, the Brazilian carrier Gol has delayed the start-up of operations in Mexico because it is currently evaluating the competitive market conditions of the Mexican market. A Volar, based at the Tijuana airport, has been particular important to GAP. 4

5 Figure 4. Low-Cost Carriers in Mexico Initial Investment Carrier Partners (US$ Mn) Initial Fleet Hubs Initial Routes Status Volaris Protego Televisa Carlos Slim TACA US$100 7 Airbus Toluca Monterrey, Guadalajara, Tijuana and Cancun Interjet Miguel Aleman NA 17 Airbus A-320 Toluca - Puebla Veracruz Oaxaca Cancun Click Mexicana NA 3-10 Fokker 100 Mexico City Huatulco, Mérida, Oaxaca and Villahermosa Started operating on March 18, 2006 Started Operating in Dec 2005 Already existed A Volar Jorge Nehme US$ Boeing 737 Tijuana NA Started Operating in 2005 Viva Aerobus Ryanair and Alcantara family NA NA Monterrey Mexico To start operating in December 2006 Gol Mexico Gol Fernando Chico Pardo NA 7 Boeing Cancun NA Evaluating market conditions Note: Destinations in bold managed by GAP. NA not available. Sources: Company reports, press reports, and Santander Investment. FAVORABLE TAX RULING FOR GAP On October 20, 2006, GAP announced that two Mexican courts ruled in its favor (against Mexico s Ministry of Finance, SHCP), regarding the calculation of the asset tax paid by GAP on its airport concessions. As result, the fiscal authorities would be obligated to accept GAP s proposal to calculate the asset tax based only on the amount paid by the 15% controlling stake of the concession instead of including the value of improvements at the airports and rights purchased by third parties. Although SHCP has not delivered a final resolution, this would imply a significant reduction in the taxes paid by GAP. Management said during GAP s 3Q06 conference call that this would imply a one-time recovery of taxes of approximately US$60 million, which, if confirmed, would reduce the effective tax rate to close to zero in full-year After this, the effective tax rate could be reduced from 42% in 2005 to 33% starting in As a result of this ruling, we are reducing our estimated tax rate for GAP from 39% in 2006 to 24% in 2007 and 33% in 2008, and our DCF valuation considers a 7% cash tax rate in CAPITAL EXPENDITURES As a result of changes in and additions to GAP s capital expenditure program, we are modifying our capex estimate for the period. On October 27, 2006, GAP announced a M$650 million investment in Los Cabos International Airport that would include the construction of a new terminal (Terminal 4), an improvement in the existing terminals, a new general aviation building, and the expansion of the commercial and general aviation platforms. This investment is in addition to the M$2,273 million mandatory capex considered in the Master Development Plan. Terminal 4 is to consist of 22,000 m 2, 5,000 m 2 of which will be commercial space. Construction is expected to begin in early According to GAP s press release, an annual average growth rate in traffic in excess of 18% over the last three years justifies this investment. Because this investment was not considered in the five-year master development plan approved by the Mexican Communications U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

6 GAP: Reaches Cruising Altitude; Downgrading to Hold Ministry, the additional investment would not imply an increase in regulated tariffs. In addition, a M$333-million investment in baggage screening equipment originally scheduled for 2006 will be included in the capex forecast for This investment is in order to comply with the additional safety regulations established by the U.S. authorities since However, this investment was delayed because of the lack of agreement between airport operators and airlines regarding the ultimate responsibility for baggage screening. According to our estimates, GAP s internal cash flow generation will be enough to finance these additional capital investments without the need for incurring debt. Therefore, we are maintaining our assumption of zero leverage for GAP. However, in the 3Q06 conference call, management opened the possibility of financing the investments in Los Cabos International Airport with debt, looking for tax benefits and a more efficient capital structure. We are not assuming this scenario until it is confirmed by the company. We believe that GAP s strong FCF generation should enable the company to continue its dividend policy; thus, we are estimating cash dividends of US$75 million per year in both 2007 and 2008, which would imply a dividend yield of close to 3%, based on the current stock price. Figure 5. GAP EBITDA and Capex, 2006E-2010E (U.S. Dollars in Millions*) E 2007E 2008E 2009E 2010E EBITDA CAPEX Sources: Company reports and Santander Investment Estimates. ESTIMATE REVISIONS Figure 6. GAP Estimate Revisions, 2006E-2008E (U.S. Dollars in Millions*) 2006E 2007E 2008E Previous Current Change Previous Current Change Introducing Revenue % % 336 Op. Profit % % 169 Op. Margin 45.3% 43.6% -1.7% 49.3% 47.6% -1.7% 50.4% EBITDA % % 229 Net Income % % 112 EPS % % 2.01 *Except per share data. NA Not available. Sources: Company reports and Santander Investment estimates. Positives GAP should benefit from increased air travel in Mexico as a consequence of the structural changes in the industry. A clear and friendly regulatory framework. Strong free cash flow generation, zero debt, and an attractive dividend policy. Concerns An economic slowdown in the U.S and/or Mexico would affect air travel and traffic for GAP. Changes in tourist preference destinations. Terrorist acts and natural disasters could affect air traffic. Changes in regulation could affect profitability. 6

7 VALUATION While we continue to have a positive view of GAP as a way to benefit from the development of air travel in Mexico, particularly the increased participation of LCCs and the bilateral agreement with the U.S., we are lowering our recommendation from Buy to Hold. The main reason for our downgrade is valuation. After an 87% increase in the stock price since the company s IPO on February 24, 2006, GAP is trading at a 16% premium to Asur on FV/EBITDA 2007E. Thus, in our opinion, GAP is close to reaching fair valuation levels. Furthermore, based on our YE07 target price, the stock offers a potential upside of 8% from current levels, 5% above our estimated upside for the IPC Index, which is consistent with a Hold recommendation under our rating system. Our target price is based on a discounted free cash flow valuation, with a 10.6% discount rate and a 2.5% terminal growth rate and implies a target FV/EBITDA multiple of 11.4x for 2007E, similar to the current multiple for 2006E. Our WACC calculation considers a 5.0% riskfree rate, an 80-basis-point country risk spread for Mexico, and a 5.5% equity risk premium. We also use a beta of 0.87% and a 100% equity capital structure. It is important to mention that the company has expressed its intention to finance the US$60 million investment in the expansion of Los Cabos International Airport with debt. If confirmed, the leverage of the company would lower our cost of capital figure and have a positive impact on GAP s DCF valuation. Figure 7. GAP Free Cash Flow, 2008E-2016E (U.S. Dollars in Millions) 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E EBITDA Cash Taxes Capex Terminal Value Working Capital FCF ,353 Source: Santander Investment Estimates. Figure 8. GAP Discounted FCF, 2008E-2016E (U.S. Dollars in Millions*) 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal Value Present Value ,229 Firm Value 2,254 Net Cash 83 Market Cap 2,337 No. Shares Mn Target Price Current Price Upside 8% Dividend Yield 3% Total Return 11% *Except per share data. Source: Santander Investment Estimates. COMPARATIVE VALUATION TABLE Currently, GAP is trading at an estimated 2007E FV/EBITDA of 10.6x and 9.3x for 2008E, with premiums of 16% and 19%, respectively, compared with our multiple estimates for Asur for the same periods. In terms of P/E, the stock is trading in line with that of Asur for U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

8 GAP: Reaches Cruising Altitude; Downgrading to Hold 2007E and at a 9% premium for 2008E. In our opinion, GAP should trade at a premium to Asur because, for GAP, there is a better diversification of traffic among airports, which reduces risk. However, we believe that the current premium is too high. Furthermore, we forecast better traffic growth momentum for Asur starting in 4Q06, because Cancun will have a very low comparison base in 4Q06 due to the damage caused by Hurricane Wilma in October In contrast, as tourism moved from Cancun to destinations using GAP airports, GAP benefited a year ago from this substitution and its 4Q06 will have a high comparison base. Figure 9. Comparative Valuation of Mexican Airport Groups US$/ADR YE07 Target Upside/ P/E FV/EBITDA Mkt Cap Company Rec. 11/24 Price Down 2007E 2008E 2007E 2008E US$ Mn GAP Hold % ,172 Asur Buy % ,246 GAP/Asur -3% 9% 16% 19% Source: Santander Investment Estimates. Figure 10. Mexico Select Economic Projections, F E 2007F 2008F Real GDP (%) 3.0% 4.8% 4.0% NA CPI Inflation (%) 3.3% 3.8% 3.7% NA US$ Exchange Rate (Year-End) NA US$ Exchange Rate (Average) NA Interest Rate (Year-End) 8.2% 7.0% 6.5% NA Interest Rate (Average) 9.2% 7.2% 6.7% NA Fiscal Balance (% of GDP) -0.2% 0.0% 0.0% NA Current Account Balance (% of GDP) -0.6% -0.3% -0.8% NA International Reserves (US$ Bn) NA Total External Debt (% of GDP) 16.8% 13.3% 12.8% NA NA not available. Source: Santander Investment historicals and forecasts. RISKS TO INVESTMENT THESIS In our opinion, the saturation of the Mexico City and Toluca airports could present a bottleneck for the expansion of LCCs based at these airports. According to several recent reports in the local press, Volaris and Interjet, both based at the Toluca airport, have delayed the expansion of their fleets because of the saturation at this airport. At present, the Mexican government is working on the expansion of both airports in order to allow for further growth of these airlines. Expansion is expected to be completed during However, we believe that the saturation of these airports could be a positive for GAP because this situation could encourage other airlines to base at the Tijuana or Guadalajara airports, which are far from reaching saturation levels. Traffic at GAP s airports is not controlled directly by the company and could be affected by changes in the economic conditions, particularly in the U.S. and Mexico. Changes in leisure travel preferences, consumer spending, exchange rates, and comparative costs of international tourism also could affect traffic to GAP s tourist destinations. In addition, air travel is highly sensitive to terrorist acts and natural disasters such as hurricanes and earthquakes, etc. GAP also could be affected by the economic health of domestic and international airlines, which could be influenced by declining air traffic, increased fare competition, higher fuel prices, and labor costs, among other factors. Following the negative effects on air travel related to the September 11, 2001 disaster, the worldwide airline industry, including Mexican airlines, has staged a significant financial recovery. However, should the industry be rocked by another wave of financial turbulence, this could result in a reduction in the number of routes flown and flight frequencies, and lower traffic at GAP s airports. 8

9 In our opinion, the launch of low-cost airlines in Mexico should be a positive for GAP, as the increased competition should lead to an increase in domestic air travel. The low-cost nature of these carriers could put some pressure on the fares that GAP currently charges. The continued increases in fuel costs could hurt profitability of both low-cost and regular airlines. This could imply increases in air fares or lower frequencies, which could result in lower traffic for GAP. As GAP operates under a concession granted by the Mexican government, its business is regulated. The government sets the maximum fee that GAP can charge and a minimum capital expenditure program under a five-year master development plan. A negative revision of GAP s fees charged and capex could impact its financial results and FCF generation going forward. The government approved GAP s master development plan for the period at the end of 2003, setting what we believe are favorable terms for GAP. The next revision is set to be made in So far, GAP has only invested its cash flow in making improvements at the airports it operates in accordance with the mandatory capex program stipulated in the Master Development Plan defined by the federal government, and the excess cash has been distributed to shareholders in the form of dividends. However, there is no assurance in the future that controlling shareholders will not invest in other airports or related businesses. These investments could alter GAP s current profitability, growth, and valuation, and could imply changes to its dividend policy and/or its zero-debt policy. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

10 GAP: Reaches Cruising Altitude; Downgrading to Hold FINANCIAL STATEMENTS Figure 11. GAP Income Statement, Balance Sheet, and CF Statement, E (U.S. Dollars in Millions) Income Statement 2005 % 2006 % 2007E % 2008E % Sales % % % % Cost of Sales NM NM NM NM NM NM NM NM Gross Profit NM NM NM NM NM NM NM NM Oper. and Adm. Expenses % % % % Operating Profit % % % % Depreciation 58 24% 62 23% 58 20% 60 18% EBITDA % % % % Financing Costs 1 0% - 2-1% - 2-1% - 2-1% Interest Paid NA NA NA NA NA NA NA NA Interest Earned NA NA NA NA NA NA NA NA Monetary Gain/Loss NA NA NA NA NA NA NA NA FX Gain/Loss - 0% - 0% - 0% - 0% Other Financial Operations - 0% - 0% - 0% - 0% Profit before Taxes % % % % Tax Provision 43 18% 45 17% 33 11% 55 16% Profit after Taxes 60 25% 73 27% % 0 0% Subsidiaries - 0% - 0% - 0% - 0% Extraordinary Items - 0% - 0% - 0% - 0% Minority Interest - 0% - 0% - 0% - 0% Net Profit 62 25% 69 26% % % Balance Sheet 2005 % 2006E % 2007E % 2008E % Assets 2, % 2, % 2, % 2, % Short-Term Assets 120 5% 135 6% 122 5% 172 7% Cash and Equivalents 85 4% 97 4% 80 3% 123 5% Accounts Receivable 34 1% 37 2% 41 2% 47 2% Inventories - 0% - 0% - 0% - 0% Other Short-Term Assets 2 0% 2 0% 2 0% 2 0% Long-Term Assets 2,169 95% 2,170 94% 2,199 95% 2,272 93% Fixed Assets 2,087 91% 2,079 90% 2,111 91% 2,183 89% Deferred Assets 66 3% 75 3% 72 3% 73 3% Other Assets 16 1% 16 1% 16 1% 17 1% Liabilities 27 1% 29 1% 32 1% 37 2% Short-T. Liabilities 22 1% 24 1% 26 1% 30 1% Suppliers NA NA NA NA NA NA NA NA Short-Term Loans NA NA NA NA NA NA NA NA Other ST Liabilities NA NA NA NA NA NA NA NA Long-Term Loans 5 0% 5 0% 6 0% 7 0% Deferred Liabilities - 0% - 0% - 0% - 0% Other Liabilities - 0% - 0% - 0% - 0% Majority Net Worth 2,263 99% 2,276 99% 2,290 99% 2,407 98% Net Worth 2,263 99% 2,276 99% 2,290 99% 0 0% Minority Interest - 0% - 0% - 0% - 0% Cash Flow E 2007E 2008E Net Majority Earnings Non-Cash Items Changes in Working Capital Capital Increases/Dividends Capital Expenditures Net Cash Flow Beginning Treasury Ending Treasury NA not available. NM not meaningful. Sources: Company reports and Santander Investment estimates. 10

11 Figure 12. GAP Income Statement, Balance Sheet, and CF Statement, E (Millions of Mexican Pesos) Income Statement 2005 % 2006 % 2007E % 2008E % Sales 2, % 2, % 3, % 3, % Cost of Sales NM NM NM NM NM NM NM NM Gross Profit NM NM NM NM NM NM NM NM Oper. and Adm. Expenses 1,489 57% 1,646 56% 1,765 52% 1,917 50% Operating Profit 1,102 43% 1,271 44% 1,606 48% 1,948 50% Depreciation % % % % EBITDA 1,720 66% 1,950 67% 2,271 67% 2,635 68% Financing Costs 11 0% % % -23-1% Interest Paid NA NA NA NA NA NA NA NA Interest Earned NA NA NA NA NA NA NA NA Monetary Gain/Loss NA NA NA NA NA NA NA NA FX Gain/Loss 0 0% 0-0% 0-0% 0-0% Other Financial Operations 0 0% 0-0% 0-0% 0-0% Profit before Taxes 1,092 42% 1,293 44% 1,628 48% 1,971 51% Tax Provision % % % % Profit after Taxes % % 1,248 37% % Subsidiaries 0 0% 0-0% 0-0% 0-0% Extraordinary Items 0 0% 0-0% 0-0% 0-0% Minority Interest 0 0% 0-0% 0-0% 0-0% Net Profit % % 1,204 36% 1,290 33% Balance Sheet 2005 % 2006E % 2007E % % % Assets 24, % 25, % 26, % 28, % Short-Term Assets 1,281 5% 1,489 6% 1,409 5% 1,978 7% Cash and Equivalents 899 4% 1,062 4% 917 3% 1,416 5% Accounts Receivable 362 1% 407 2% 471 2% 540 2% Inventories 0 0% 0 0% 0 0% 0 0% Other Short-Term Assets 19 0% 20 0% 21 0% 21 0% Long-Term Assets 23,065 95% 23,870 94% 25,294 95% 26,132 93% Fixed Assets 22,191 91% 22,871 90% 24,277 91% 25,099 89% Deferred Assets 702 3% 820 3% 831 3% 842 3% Other Assets 172 1% 178 1% 185 1% 191 1% Liabilities 285 1% 321 1% 370 1% 425 2% Short-T. Liabilities 233 1% 262 1% 303 1% 347 1% Suppliers NA NA NA NA NA NA NA NA Short-Term Loans NA NA NA NA NA NA NA NA Other ST Liabilities NA NA NA NA NA NA NA NA Long-Term Loans 52 0% 59 0% 68 0% 78 0% Deferred Liabilities 0 0% 0 0% 0 0% 0 0% Other Liabilities 0 0% 0 0% 0 0% 0 0% Majority Net Worth 24,061 99% 25,039 99% 26,332 99% 27,685 98% Net Worth 24,061 99% 25,039 99% 26,332 99% 1 0% Minority Interest 0 0% 0 0% 0 0% 0 0% Cash Flow E 2007E 2008E Net Majority Earnings Non-Cash Items Changes in Working Capital Capital Increases/Dividends Capital Expenditures Net Cash Flow Beginning Treasury Ending Treasury NA not available. NM not meaningful. Sources: Company reports and Santander Investment estimates. U.S. investors inquiries should be directed to Santander Investment Securities Inc. at (212) /(212)

12 GAP: Reaches Cruising Altitude; Downgrading to Hold IMPORTANT DISCLOSURES GAP 12-Month Relative Performance (U.S. Dollars) GAP IPC Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Sources: Bloomberg and Santander Investment. 12

13 Key to Investment Codes IMPORTANT DISCLOSURES (CONTINUED) Rating Definition % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Strong Buy Expected to outperform the local market more than 15%. Buy Expected to outperform the local market 5%-15% % 77.78% Hold Expected to perform within a range of 5% above or below the local market % 16.67% Underperform Expected to underperform the local market 5%-15%. Sell Expected to underperform the local market more than 15% % 5.56% The numbers above reflect our Latin American universe. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2006 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53 rd Street, 17 th Floor (Attn: Research Disclosures), New York, NY USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for establishing Argentina recommendations is our forecast of the year-end Argentina IFCI index. For the Andean countries, our benchmark is the simple average of the country risk of each country plus the 10 year U.S. T-Bond yield plus 5.5% of equity risk premium. For additional information about our rating methodology, please call (212) This report has been prepared by Santander Investment Securities Inc. ( SIS ) (a subsidiary of Santander Investment S.A., which is wholly owned by Banco Santander Central Hispano, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Santander Central Hispano S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SIS, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed, that their recommendations reflect solely and exclusively their personal opinions, and that such opinions were prepared in an independent and autonomous manner, including as regards the institution to which they are linked, and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report, since their compensation and the compensation system applying to Grupo Santander and any of its affiliates is not pegged to the pricing of any of the securities issued by the companies evaluated in the report, or to the income arising from the businesses and financial transactions carried out by Grupo Santander and any of its affiliates: Gonzalo Fernandez, Vivian Salomon. Grupo Santander receives non-investment banking revenue from the subject companies, with the exception of Asur. Santander Investment Securities Inc. had a non-investment banking securities-related services client relationship with the subject companies during the past 12 months, with the exception of Asur. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice. Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States by Santander Investment Securities Inc. All Rights Reserved. 2006