IENOVA, S.A.B. DE C.V.

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1 IENOVA, S.A.B. DE C.V. Upgrading to BUY from HOLD; Long-term investment opportunity Equity Research Energy February 11, 2015 BUY Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other IENOVA High Liquidity Last Price: P$ 71.1 Target Price 2015: P$ % Return Figures in millions of pesos 2013 L12m 2014e 2015e We are upgrading our recommendation to BUY from HOLD based on the 24% potential return to our new 2015E target price of MP 88.0 (from MP 85.0). Following our conversation with the company, we have a stronger long-term outlook on IEnova as the Mexican government pursues its goal to reach 100 thousand kilometers (km) of gas pipelines in the following 5 to 8 years from having today 11 thousand km. Our target price is based on a Discounted Cash Flow (DCF) model which assumes an 8% WACC (cost of equity of 9.9% and Beta of 0.7), and a perpetual 5.5% growth in nominal terms. We project strong EBITDA growth potential with a 20% CAGR during period mainly supported by the Sonora & Los Ramones-I pipelines and the wind energy farm project. We are expecting strong 4Q14 results mainly derived from the warmer weather in California in 4Q14 vs. 4Q13 (67.6 F vs F), which results in higher prices and demand for the combined cycle power plant of 625 Mega-watts. We are upgrading our recommendation to BUY from HOLD Following our conversation with the company, we have an even more positive long-term outlook on IEnova as the Mexican government pursues its goal to reach 100 thousand km of gas pipelines in the following 5 to 8 years from having today 11 thousand km. For the aforementioned reason, we are taking into account a higher perpetual growth rate in our DCF model by adding 50 basis points to 5.5%. While the 5.5% perpetuity may seen high, we note that growth in the next 10 years could reach double digits. Sales 8,745 10,266 10,864 12,283 EBITDA 2,929 3,641 3,916 5,052 Margin 33.5% 35.5% 36.0% 41.1% Growth YoY -5% 23.1% 33.7% 29.0% Net Profit 1,821 2,038 2,473 3,182 Margin 20.8% 19.9% 22.8% 25.9% Growth YoY -28.3% 16.4% 35.8% 28.7% Total Assets 41,662 45,046 45,981 51,534 Cash 4,062 1,597 1, Total Liabilities 11,397 12,710 14,573 19,156 Debt 5,712 7,974 7,907 10,903 Equity 30,264 32,336 31,408 32,378 Majority 30,264 31,201 31,408 32,378 Multiples EV/Sales 0.7x 0.7x 0.7x 0.7x EV/EBITDA 28.6x 24.3x 22.6x 18.3x P/E 45.1x 40.3x 33.2x 25.8x ROE 8.9% 8.9% 8.0% 10.0% ROA 6.3% 6.6% 5.6% 6.5% Net Debt/ EBITDA 0.6x 1.8x 1.6x 2.0x Dividend Yield 2.5% 4.6% 2.7% 2.7% Market Data: Mkt. Cap (mn) USD 5,658 Firm Value (mn) USD 6,131 1yr. High low MP MP Float 19% IENOVA vs IPC (Feb 2014 = 100) Natural gas infrastructure in Mexico and the US 90 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 IENOVA IPC If Mexico expects to grow at 5% GDP levels in the future, there is a fundamental need to expand the current national gas pipeline system Future Mexico s GDP level depends, to a significant extent, on the development of natural gas pipelines to serve the industrial, manufacturing, infrastructure, among other sectors, which rely heavily in energy consumption. Federico Robinson Bours Enrique Octavio Camargo Energy, Petrochemicals Industrials frobinson actinver.com.mx ecamargod actinver.com.mx Actinver Corporate Headquarters Guillermo Gonzalez Camarena 1200, 11th Floor, Centro de Ciudad Santa Fe D.F., Mexico Actinver s Equity Research 1

2 Future tenders for natural gas pipelines CFE will announce more than USD 11 billion project tenders over the next 2 years: Project Name CFE Estimated CapEx Commercial (USD millions) Operations Date San Isidro - Samalayuca 50 1Q 2017 Tuxpan - Tula 393 1Q 2017 Samalayuca - Sásabe 825 2Q 2017 Colombia - Escobedo 368 2Q 2017 Mérida - Cancún 457 3Q 2017 Texas - Tuxpan 2,947 2Q 2018 Tula - Villa de Reyes 413 2Q 2017 Jaltipán - Salina Cruz 635 4Q 2017 Los Ramones - Cempoala 1,986 4Q 2017 Villa de Reyes - Aguascalientes - Guadalajara 545 4Q 2017 La Laguna - Centro 884 4Q 2018 Natural Gas to Baja California Sur 589 2Q 2017 Lázaro Cárdenas - Acapulco Salina Cruz - Tapachula Total announced projects to be tendered 10,978 Strong EBITDA growth potential with a 20% CAGR during period IEnova s projects will boost sales and EBITDA with 13%/20% CAGR during period, mainly supported by the following projects: i) Sonora pipeline which will have a total length of 835 km and will represent a total investment of USD 1 billion; ii) Sierra Juarez wind project with an installed capacity of 155 Mega-watts, representing an investment of USD 300 million; and, iii) Los Ramones-1 with a total length of 110 km (48 inches in diameter, 2.1 Bcf/d), representing an investment of USD 500 million. Actinver s Equity Research 2

3 Mar '10 Jun '10 Sep '10 Dec '10 Mar '11 Jun '11 Sep '11 Dec '11 Mar '12 Jun '12 Sep '12 Dec '12 Mar '13 Jun '13 Sep '13 Dec '13 Mar '14 Jun '14 Sep '14 Dec '14 We are expecting strong 4Q14 results mainly derived from the warmer weather registered in California We are expecting strong 4Q14 results mainly derived from the warmer weather in California in 4Q14 vs. 4Q13 (67.6 F vs F), which results in higher prices and demand for the combined cycle power plant of 625 mega-watts. IEnova s sales will likely increase 20% YoY to USD 188 million due mainly to the aforementioned higher prices and demand for the combined cycle power plant. EBITDA will rise 29% to USD 70 million as a result of lower natural gas prices during the quarter with 3.6 USD/MMBtu in average (from having 3.9 USD/MMBtu in 4Q13). The natural gas is used as raw material for the combined cycle power plant. For the quarter, we estimate an EPS of USD 0.03 from having a USD in 4Q13. The company will likely report a net debt to EBITDA of 1.6x in 4Q14 (compared to 0.6x in 4Q13). Natural gas will continue to be CFE s fuel of choice for new and existing electricity generation Even at current oil prices, natural gas continues to be far cheaper than fuel oil. For this reason, CFE will continue to focus on natural gas for electricity generation. Price Comparison between Fuel Oil* & Natural Gas** (USD/Mmbtu) Natural Gas Fuel Oil Source: Bloomberg * Gulf Coast 3% sulfur #6 fuel oil price FOB ** Houston Ship Channel Spot Price Actinver s Equity Research 3

4 Our target price is based on a Discounted Cash Flow (DCF) model which assumes an 8% WACC (cost of equity of 9.9% and Beta of 0.7), and a perpetual 5.5% growth in nominal terms. IENOVA, S.A.B. de C.V. Discounted Cash Flow Model ( E) Millions of Pesos 2016E 2017E 2018E 2019E 2020E Perp. EBIT 4,410 4,940 5,483 6,031 6,574 7,153 Effective Tax rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax Effect On EBIT (1,323) (1,482) (1,645) (1,809) (1,972) (2,146) NOPLAT 3,087 3,458 3,838 4,222 4,602 5,007 Depreciation 1,138 1,365 1,625 1,917 2,243 2,602 Working Capital Changes CAPEX (4,860) (3,612) (3,720) (3,832) (3,947) (4,026) FCFE (520) 1,349 1,907 2,501 3,125 3,847 Perpetuity Grow th Rate 5.5% Present Value of Explicit Period ( E) 6,196 Perpetuity Value 165,827 Present Value of Perpetuity Value 105,553 Theoretical Firm Value 111,749 Net Debt 10,209 Minority Interest Theoretical Market Value 101,540 Number of shares (Mn) 1,154 Theoretical Price / Share $ 88.0 Current Market Price $ Potential Return 24% Average Cost of Debt 3% Long Term Tax Rate 30.0% After-Tax Cost of Debt 2.1% Cost of Capital 9.9% Market Risk Premium 5.5% Risk Free Rate + Country Risk Premium 6.0% Beta 0.70 % Total Debt 26% % Capital 74% WACC 8% Source: Actinver Actinver s Equity Research 4

5 Equity, Economic, Quantitative and Fixed Income Research Departments Equity Research Gustavo Terán Durazo, CFA Senior Analysts Martín Lara Head of EquityResearch (52) x1193 Telecommunications, Media and Financials (52) x1840 Carlos Hermosillo Bernal Consumption (52) x4134 Pablo Duarte de León FIBRAs (REITs) (52) x4334 Pablo Abraham Peregrina Minería, metales, papel y Conglomerados (52) x1395 pabraham@actinver.com.mx Ramón Ortiz Reyes Cement, Construction and Concessions (52) x1835 rortiz@actinver.com.mx Federico Robinson Bours Carrillo Junior Analysts Juan Ponce Energy, Conglomerates, Industrial and Mining Telecommunications, Media and Financials (52) x4127 frobinson@actinver.com.mx (52) x1693 jponce@actinver,com.mx Ana Cecilia González Rodríguez FIBRAs (REITs) (52) x4136 acgonzalezr@actinver.com.mx Enrique Octavio Camargo Delgado Energy, Conglomerates, Industrial and Mining (52) x1836 ecamargod@actinver.com.mx José Antonio Cebeira González Consumption (52) x1394 jcebeira@actinver.com.mx Economic and Quantitative Research Ismael Capistrán Bolio Head of Economic and Quantitative Research (52) x6636 icapistran@actinver.com.mx Jaime Ascencio Aguirre Economy and Markets (52) x1100 jascencio@actinver.com.mx Santiago Hernández Morales Quantitative Research (52) x4133 shernandezm@actinver.com.mx Roberto Ramírez Ramírez Quantitative Research (52) x1672 rramirezr@actinver.com.mx Roberto Galván González Technical Research (52) x5039 rgalvan@actinver.com.mx Fixed Income Research Araceli Espinosa Elguea Head of Fixed Income Research (52) x6641 aespinosae@actinver.com.mx Jesús Viveros Hernández Fixed Income Research (52) x6649 jviveros@actinver.com.mx Mauricio Arellano Sampson Fixed Income Research (52) x4132 marellanos@actinver.com.mx Actinver s Equity Research 5

6 Disclaimer Guide for recommendations on investment in the companies under coverage included or not, in the Mexican Stock Exchange main Price Index (IPC) StrongBuywith an extraordinary perspective. According to the analyst, in the next twelve months, the valuations of stock and/or prospects for the sector are EXTREMELY FAVORABLE Buy. According to the analyst, in the next twelve months, the stock s valuation and / or prospects for the sector are VERY FAVORABLE Neutral. According to the analyst, in the next twelve months, the valuation of stock and / or sector ARE NEUTRAL OR FAVORABLE but with a similar perspective to the IPC Belowmarket. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NOT POSITIVE Sell. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NEGATIVE, or likely to worsen In reviewwith positive outlook In review with negative or unfavorable perspective ImportantStatements. a) Of theanalysts: The analysts in charge of producing the Analysis Reports: Jaime Ascencio Aguirre; Mauricio Arellano Sampson; Enrique Octavio Camargo Delgado; Ismael Capistrán Bolio; José Antonio Cebeira González, Pablo Enrique Duarte de León; Araceli Espinosa Elguea; Roberto Galván González; Ana Cecilia González Rodríguez; Carlos Hermosillo Bernal; Santiago Hernández Morales; Martín Roberto Lara Poo; Ramón Ortiz Reyes; Pablo Abraham Peregrina; Juan Enrique Ponce Luiña; Federico Robinson Bours Carrillo; Gustavo Adolfo Terán Durazo; Jesús Viveros Hernández, declare : 1. "All points of view about the issuers under coverage correspond exclusively to the responsible analyst and authentically reflect his vision. All recommendations made by analysts are prepared independently of any institution, including the institution where the services are provided or companies belonging to the same financial or business group. The compensation scheme is not based or related, directly or indirectly, with any specific recommendation and the remunerationis only received from the entity which the analysts provide their services. 2. "None of the analysts with coverage of the issuers mentioned in this report holds any office, position or commission at issuers underhis coverage, or any of the people who are part of the Business Group or consortium to which they belong. They have neither held any position during the twelve months prior to the preparation of this report. " 3. "Recommendations on issuers, made by the analyst who covers them, are based on public information and there is no guarantee of their assertiveness regarding the performance that is actually observed in the values object of the recommendation" 4. "Analysts maintain investments subject to their analysis reports on the following issuers: AC, ALFA, ALPEK, ALSEA, AMX,AZTECA, CEMEX, CHDRAUI, FEMSA, FIBRAMQ, FINDEP, FUNO, GENTERA, GFREGIO, GRUMA, ICA, IENOVA, KOF, LAB, LIVEPOL, MEXCHEM, OHLMEX,POCHTEC, TLEVISA,SORIANA, SPORTS, VESTA, WALMEX. b) On Actinver Casa de Bolsa, S.A. de C.V. Grupo Financiero Actinver 1. Actinver Casa de Bolsa, S.A. de C.V. GrupoFinanciero Actinver, under any circumstance shall ensure the sense of the recommendations contained in the reports of analysis to ensure future business relationship. 2. All Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver business units can explore and do business with any company mentioned in documents of analysis. All compensation for services given in the past or in the future, received by Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver by any company mentioned in this report has not had and will not have any effect on the compensation paid to the analysts. However, just like any other employee of Actinver Group and its subsidiaries, the compensation being enjoyed by our analysts will be affected by the profitability gained by Actinver Group and its subsidiaries. 3. At the end of each of the previous three months, Actinver Casa de Bolsa, SA de C.V. Actinver Financial Group, has not held any investments directly or indirectly in securities or financial derivatives, whose underlying are Securities subject of the analysis reports, representing one percent or more of its portfolio of securities, investment portfolio, outstanding of the Securities or the underlying value of the question, except for the following: * AEROMEX, BOLSA A, FINN 13, FSHOP 13, SMARTRC Certain directors and officers of Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver occupy a similar position at the following issuers: AEROMEX, MASECA, AZTECA, ALSEA, FINN, MAXCOM, SPORTS, FSHOP and FUNO. This report will be distributed to all persons who meet the profile to acquire the type of values that is recommended in its content. To see our analysts change of recommendations click here. Actinver s Equity Research 6