ICA BUY. ICA Reloaded: Setting 2004 Target, Upgrading to Buy (12/23/03) CURRENT PRICE: US$1.41/M$2.58 TARGET PRICE: US$1.75/M$3.30

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1 Latin American Equity Research ICA Mexico Cement & Construction Mexico City, December 26, 2003 ICA Reloaded: Setting 2004 Target, Upgrading to Buy Gonzalo Fernández (5255) BUY (12/23/03) CURRENT PRICE: US$1.41/M$2.58 TARGET PRICE: US$1.75/M$3.30 Company Statistics Bloomberg ICA 52-Week Range US$0.75-US$ E P/E Rel to IPC Index (x) E P/E Rel to Cement/Constr (x) Mexico IPC Index Yr CAGR (02-05E) NM Market Capitalization (US$ Mn) Float (%) 61% 3-Mth Avg Daily Vol (US$ Mn) 1.5 Shares Outst (ADR 6:1) 1,864.7 Net Debt/Equity (x) 0.34 Book Value per ADR (US$) 1.49 Estimates and Valuation Ratios E 2004E 2005E Net Earn (M$) (1,323) (1,110) Current EPS (2.13) (1.59) Net Earn (US$) (127) (99) 3 14 Current EPADR P/E (x) NM 31.2 EBITDA/ADR (x) FV/EBITDA (x) CE/ADR (x) P/CE (x) Div per ADR (US$) Div Yield (%) Relative Performance (12 Months) IPC ICA We are setting a year-end 2004 target price for ICA of US$1.75 per ADR (M$3.30 per share) and upgrading the stock from Hold to Buy. The main reason for the upgrade is the recent capitalization of the company, which is expected to raise US$220 million by mid-january 2004 (US$190 million have been already subscribed). According to ICA management, US$170 million would be used to pay down the US$96 million outstanding of the convertible bond maturing in March 2004 and other high-cost short-term debt, while the remainder would finance working capital needs. In our opinion, this capital increase eliminates the possibility of default on the convertible bond, would improve significantly ICA s financial situation, and would enable the company to participate more aggressively in future infrastructure projects. As of September 2003, ICA reported a backlog of US$1.14 billion, including US$735 million pertaining to the El Cajón hydroelectric plant, equivalent to 21 months of sales. However, ICA s main problems were its highly leveraged balance sheet, important debt maturities in the near term, and low operating margins. In our opinion, the recent capital increase will ease liquidity problems and reduce leverage significantly, as the expected proceeds are equivalent to 50% of ICA s outstanding debt. In our view, it will be key for the company to improve cost control on its projects to avoid cost overruns and losses incurred in the past and to improve profitability. We believe the increased participation of Grupo Inbursa and the Slim family as a result of the recent capital increase should improve cost control efforts. For 2004, we estimate sales of US$934 million, a 15% year-on-year increase, and believe that operating margin could increase from negative 0.7% in 2003 to positive 3.7% in Our target price of US$1.75 per ADR is based on a discounted free cash flow valuation with a 9.3% discount rate and a 1.5% terminal growth rate. Our new target offers 24% upside for 2004, 17% above our estimated upside for the Mexico IPC Index. Thus, we are upgrading the stock from Hold to Buy. 60 D-02 F-03 A-03 J-03 A-03 O-03 D-03 Sources: Bloomberg, Company Reports and Santander Central Hispano Investment estimates. All data in U.S. dollars in millions unless otherwise stated. CE/ADR Cash earnings per ADR. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

2 ICA Reloaded: Setting 2004 Target, Upgrading to Buy ICA S CAPITALIZATION PROCESS On October 31, 2003, ICA announced a capitalization process aimed at restructuring the company s financial situation. ICA offered 1.24 billion shares for subscription to current shareholders at a ratio of two new shares for each outstanding share at a price of M$2.00. In addition, ICA offered 83.2 million new shares for subscription at a ratio of 0.13 new shares for each outstanding share at a price of M$3.75 per share. The latter would replace the stock currently held in treasury for employee stock options programs. The initial period to exercise the subscription concluded on December 4, The main purpose was to increase ICA s capital by approximately US$220 million, and the proceeds would be used mainly to reduce debt, which currently amounts to US$467 million. Figure 1. ICA Capitalization Process Amount Shares (Mn) (US$ Mn) Stock offered for subscription (2x1 M$2.0 per share) 1, st subscription nd subscription Stocks pending subscription Stocks to replace treasury stock (M$3.75 per share) (0.13x1 M$2.0 per share) Sources: Company reports and Santander Central Hispano Investment estimates. Comments Offered to all shareholders except ADRs Subscribed by previous shareholders exercising preemptive rights Subscribed by third parties through Inbursa Information not available regarding the subscription At ICA s stockholders meeting, it was stipulated that the stock not subscribed by shareholders could be offered to Grupo Financiero Inbursa. This group agreed that, if requested by ICA, it would subscribe up to 250 million of newly issued shares at M$2.00 per share, in the event that shareholders do not exercise their preemptive rights. In addition, on a best-effort basis, it would have the right but not the obligation to subscribe up to an additional 500 million shares. Finally, Inbursa s obligation to subscribe the shares was conditioned on ICA s CEO, Bernardo Quintana, and his immediate family subscribing at least 75 million new shares..mr. Quintana held 15% of the outstanding shares before the subscription. In a filing to the SEC, the group led by Inbursa reported that Carlos Slim, his relatives, and the financial group held 17.6% of ICA s outstanding stock prior to the subscription. As of the date of this report, a total of 1.05 billion shares were subscribed, representing a capital increase of US$190 million. On December 11, ICA announced that, from 1.24 billion shares offered for subscription, million were subscribed by shareholders exercising their preemptive rights. This represents US$132 million. ICA also noted that, after this first stage, Grupo Inbursa and related parties (Carlos Slim) increased their position to 24% of ICA stock. Subsequently, on December 19, ICA announced that, based on its previous agreement with Inbursa, it placed an additional million shares from the million that were not subscribed originally. This implies an additional capital inflow of US$56.2 million for ICA. The company also informed the market that investors not related to Inbursa subscribed the additional shares. Thus, neither Inbursa nor the Slim family would increase its stake in ICA as a result of this operation. There are now million shares pending subscription, equivalent to US$33.3 million. The shares will continue to be offered to Inbursa, who could subscribe itself or sell them to third parties at the same price of M$2.00 per share until January 16, We believe these shares have a high probability of being subscribed. The capitalization process should be completed by the beginning of January 2004, raising US$220 million in additional capital for ICA. 2 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

3 As a result of this process, we estimate that the group led by Inbursa will end up with a participation in ICA of 20%, if the US$30 million pending subscription is bought by parties not related to Inbursa. The Quintana family will maintain its stake at 15%. The final stake of each party would be finalized by mid-january. Because the ICA trust (a trust established to promote education related to engineering) and the employee trust (this trust holds the shares of key management at ICA) must vote in line with the majority, Mr. Slim would effectively have a majority vote on ICA s board. However, at this point, is not clear if Mr. Slim will make changes in ICA s top management. According to guidance provided by ICA management, we believe that this is a friendly capitalization and that Mr. Bernardo Quintana and ICA s current top management will continue running the company. However, we could expect a higher involvement of Inbursa in terms of cost control and risk management in the projects in which ICA participates. In addition, the presence of Inbursa could facilitate negotiations regarding the refinancing of debt. Inbursa currently holds US$100 million of ICA s debt. The capitalization process would ease significantly liquidity constraints, which has been our major concern. The expected US$220 million cash inflow from the capital increase would represent almost one-half of the US$467 million in debt reported as of September More important, the resources would be enough to cover the US$134 million of debt maturing over the short term. Our main concern prior to the capitalization was the US$96 million outstanding of the convertible bond maturing in March 2004, which would be almost impossible to pay under ICA s previous financial condition. Management has stated that it would use US$170 million from the capitalization to pay this bond and another high-cost short-term debt, and US$50 million to finance working capital. Now that the company has the cash in hand, management does not rule out the possibility to try to extend the maturity of the convertible if current holders agree. In our opinion, once this short-term debt is paid or refinanced, the maturities over the next few years should not represent a major problem. Figure 2. ICA Debt Composition as of September 2003 (U.S. Dollars in Millions) $51 $96 $220 $100 Convertible bond Inbursa Banamex Other Sources: Company reports and Santander Central Hispano Investment. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

4 ICA Reloaded: Setting 2004 Target, Upgrading to Buy Figure 3. ICA Debt Maturities as of September 30, 2003 (U.S. Dollars in Millions) Debt Capitalization Sources: Company reports and Santander Central Hispano Investment. Despite the capitalization, leverage should continue to be high; however, we believe liquidity is no longer a concern. We estimate that ICA will use US$170 million of proceeds from the capitalization to pay down debt, including US$96 million of the convertible bond. However, as the leader of the project, ICA will likely consolidate the banking debt that will be issued to finance the El Cajón project. We estimate that during 2004, ICA will consolidate US$200 million in debt from this project. However, the big difference is that this debt would be related to a specific project versus the current situation, where 57% of total debt is at the corporate level. In the future, ICA intends to try to link a major portion of its debt to specific projects. The debt related to El Cajón will be paid in 2007, when the company will receive the full payment once the project is delivered. Another difference is that as of September 2003, 71% of ICA s cash was held by its subsidiary, ICA-Fluor, in which the company has a 50% stake, thus limiting access to this cash. As a result of the capitalization, we estimate that ICA will have access to 70% of total cash by year-end In addition to the capitalization process, ICA will continue with the divestment of non-core assets in The company announced a divestment program of US$100 million for the period. As of September 2003, ICA had sold assets for US$43.5 million from this program. We estimate that during 2004, the remaining US$56.5 million could be sold and proceeds would be used for debt reduction. In our opinion, now that ICA s financial situation is less constrained, the company could sell these assets at better prices. Among the assets that the company could sell are machinery and equipment, land, water treatment plants, and participation in some subsidiaries, which operate ports, waste collection, and real estate, among other businesses. VALUATION We are setting a year-end 2004 target price of US$1.75 per ADR and upgrading ICA from Hold to Buy. Our target price is based on a discounted free cash flow valuation with a 9.30% discount rate and a 1.5% terminal growth rate. The stock offers 24% upside to our target price, 17% above the estimated upside for the Mexico IPC Index; thus, we are upgrading ICA to Buy. Although the upside is enough to justify a Strong Buy rating, we prefer to rate the stock as a Buy, because we still perceive ICA as a high-risk investment due to the risks related to the El Cajón project, the long history of losses and lawsuits of the company, and the recent change in the group of control (please see the Risks to Investment Thesis section). 4 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

5 At our target price, the stock would be trading at an estimated FV/EBITDA of 12.1 times for 2004, down from an estimated FV/EBITDA of 23.2 times for P/E ratio is not meaningful because the company currently has net losses, and we expect only a modest profit in Our target P/BV ratio is 1.12 times by year-end 2004, slightly above the current ratio of 0.95 times (including the capitalization). In our opinion, the best way to value ICA is through the DCF method. FV/EBITDA and P/E ratios are currently distorted, in our view, because 2004 should represent an inflection point for ICA. The company likely will end 2003 with an operating margin close to zero and should report significant net losses. Despite this, we expect higher profitability starting in 2004; however, the improvement should not be enough to bring those ratios to significantly low levels. Particularly, the FV/EBITDA ratio should be distorted in 2004 and 2005, because net debt in both years will include the financing for El Cajón while EBITDA will not include profits from this project. Eliminating this effect, the FV/EBITDA ratio estimated for 2004 would be 7.0 times instead of 10 times unadjusted, and our target FV/EBITDA ratio would be 9.0 times. Because of the impact of the El Cajón project, ICA should present a highly unusual free cash flow pattern. On March 14, 2003, ICA announced that Mexico s CFE awarded the El Cajón hydroelectric project, worth US$750 million, to the consortium led by ICA. As the project leader, ICA consolidates 65% of this project. El Cajón is the first EPC contract awarded for the complete execution of a hydroelectric project under the financed public works scheme in Mexico (PIDIREGAS). Under this scheme, the winning consortium finances the total amount of the project with debt. Once the project is completed and delivered, Mexico s CFE pays the financial agent. Under this scheme, the financial agent provides working capital, and ICA assumes the execution risk. The winning consortium would absorb any cost overrun and would be penalized for delays in the completion of the project. At present, ICA is in the final stages of launching a US$200 million bond to finance the first stage of the project; the remainder will be financed by a syndicated loan. As a result, we expect significant negative working capital for ICA during the construction phase, because all the revenues will be accounted for as accounts receivable, with no impact on cash. Once the project is delivered in 2007, ICA will collect all the accumulated receivables. With the proceeds, ICA will liquidate the debt and keep its profit. As a result of this scheme, we expect negative free cash flow over the period and a significant cash inflow in In our opinion, the DCF valuation is the only method that fairly captures the impact of this project. For more details on this project, see our report El Cajón Award Positive but High Risk, dated March 21, Figure 4. El Cajón Financial Scheme During the Construction Phase Construction $ Financial ICA Project Agent % of Completion Receivables reports On Completion $ Financial Agent Receivables $ Receivables ICA CFE Plant in operation Source: Santander Central Hispano Investment. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

6 ICA Reloaded: Setting 2004 Target, Upgrading to Buy Figure 5. ICA Discounted Free Cash Flow Valuation (U.S. Dollars in Millions) 2004E 2005E 2006E 2007E 2008E Sales 934 1,129 1,298 1,467 1,562 EBIT EBIT Margin 3,7% 4,3% 5,0% 6,0% 7,0% Cash Taxes Depreciation Capex Changes in Working Capital Free Cash Flow (30) (33) (4) Present Value (30) (30) (3) NPV 808 Non-Consolidated Subs 122 Firm Value 780 Net Debt 210 Minority Interest 24 Equity Value 545 # of ADRs (Mn) 311 Target Price ADR (US$) (6:1) 1,75 Current ADR Price (US$) 1,41 Upside Potential 24% Sources: Company reports and Santander Central Hispano Investment estimates. Keep in mind the following: Capex for 2004 includes the sale of US$56.5 million of non-core assets. Working capital in reflects the increase in accounts receivable from the El Cajón project. The significant inflow in 2007 reflects the collection of receivables at completion. Despite significant losses, ICA currently pays high cash taxes because the company is subject to the asset tax, which substitutes for income tax in companies with losses. We estimate a gradual recovery of tax credits starting in Net debt considers that 30% of cash will be held by ICA s subsidiary, ICA-Fluor, by yearend RISKS TO INVESTMENT THESIS In our opinion, with the recent capital increase, ICA has reduced significantly its financial risk, which was the inability to refinance its debt maturing in 2003 and One of ICA s remaining main risks is the execution of the El Cajón project. Given the significant proportion of backlog that this project represents (64% of the total as of September 2003), the fact that ICA will arrange financing for the project (US$750 million), and given that CFE will pay only upon completion, a correct execution of this project is key in our valuation. Under the EPC scheme, the winning consortium fixes the cost and obtains financing for the project, while the client pays upon the delivery of the plant and the corresponding testing period. Any cost overruns would be absorbed by ICA (in proportion to its 65% stake in the consortium) and could result in significant losses for the company. ICA won the contract with a cost proposal of US$750 million and a 1,620-day completion period (4.4 years). A delay in the delivery of the project could also result in fines levied against ICA. Our estimates assume that ICA delivers the project on time and at the estimated cost, thus obtaining an estimated operating margin of 7.0%. 6 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

7 Any deviation could affect our valuation and investment thesis. ICA is also entering the oil platform construction business, which could imply an additional risk in terms of cost control, delivery, and the like. In the past, ICA has incurred significant losses in some projects and currently is facing legal claims from some clients. During the third quarter of 2003, ICA registered extraordinary charges of M$214 million at the operating level. These charges included provisions for M$110 million from accounts receivable and completion costs for the San Juan Coliseum in Puerto Rico, and M$104 million in additional costs related to the startup of the Andrés electricity plant in the Dominican Republic. Below the operating line, there were also extraordinary charges that resulted in a net loss of M$563 million. Among these charges we note a M$99 million loss in the sale of investments and assets, a M$112 million cancellation of deferred tax credits, and M$114 million in the investment in the Caracas-La Guaira toll road. Finally, on November 24, 2003, ICA announced that it had received an arbitration claim by Compañía de Nitrógeno de Cantarell (CNC) against ICA and its partners related to the nitrogen construction facility built by a consortium led by ICA-Fluor Daniel and completed in CNC alleges defects in the nitrogen production facility and claims damages for US$76.5 million to the consortium led by ICA. The project was for US$779 million, and ICA-Fluor Daniel executed approximately 80% of the contract value. The outcome of this lawsuit is uncertain and could imply significant losses for ICA. There is no assurance that the company will not make further writeoffs in the future or face additional legal claims. ICA did not allow holders of ADRs to participate in the recent capital increase, which was offered at a significant discount to the market price, and there were limitations made on foreign holders of the local stock. ICA used an exclusion-of-foreigners clause of its bylaws to limit foreign participation in the capitalization. We consider this to be a significant negative in terms of corporate governance and an unfair treatment of minorities. There is no assurance that this behavior will not repeat in the future. The entrance of Inbursa in the controlling group could introduce changes not seeing before in ICA. EARNINGS OUTLOOK Despite the fact that greater financial flexibility and higher participation of Inbursa could increase the access to future infrastructure projects, we are not changing significantly our estimates at the operating level, remaining on the conservative side. The main changes in our estimates were derived from the incorporation of the capital increase, the additional shares, and the financing of the El Cajón project. During 2003, ICA increased significantly its level of backlog with the award of the El Cajón project, the Chiapas Bridge, oil platforms, and others. On November 24, 2003, ICA signed a US$250 million contract for the construction of a liquefied natural gas terminal in the Mexican port of Altamira. This contract is a lump sum, turnkey agreement, and the estimated construction period is 36 months. As of September 2003, ICA reported a backlog of US$1.15 billion, equivalent to 21 months of sales, a comfortable level, in our opinion. In Figure 5, we present ICA s main construction projects. We estimate that the company could be awarded an average of US$1.0 billion in new contracts per year. Among the most important bids expected are water treatment plants for US$250 million, six refineries for Pemex for US$1.5 billion, thermoelectric plants for US$1.0 billion, and road projects for US$100 million. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

8 ICA Reloaded: Setting 2004 Target, Upgrading to Buy After the recent failure of fiscal reform in Mexico, we assign a low probability to the approval of an energy reform that would open the investment in oil and electricity to private investors. As a result, we expect that projects for Pemex and CFE will continue to be financed by internal resources and the PIDIREGAS scheme, where the winning consortium obtains financing for the projects and is paid after the completion of the work. In our opinion, the recent capital increase will allow ICA to participate more aggressively in upcoming projects. An eventual approval of the energy reform would increase the availability of electricity and oil projects in Mexico. We expect that the current projects in backlog will enter into more intense construction phases during 2004 and As a result, we estimate a 15% increase in sales in 2004 and 21% in 2005, in U.S. dollar terms. Figure 6. ICA Main Projects in Backlog (U.S. Dollars in Millions) Project Amount El Cajón Hydroelectric 734 Thermoelectric La Laguna 119 Chicontepec Oil Field 105 Reynosa Criogenic 53 Oil Platforms May A and May B 49 Rodio 33 Nuevo Necaxa Bypass 25 Chiapas Bridge 8 Other Pemex 3 Altamira LNG Terminal * 250 Other 15 Source: Company reports. * Shared project with ICA-Fluor Daniel and Ishikawajima Harima Heavy Industries; the amount corresponding to ICA has not been disclosed. One of the key assumptions we have for ICA is that it will return to positive operating margins in 2004 with the elimination of extraordinary charges. During the first half of 2003, ICA reported an operating margin of 1.7%. However, in the third quarter of 2003, ICA registered extraordinary charges of M$214 million, which turned the operating margin to negative 0.6% during the first nine months of As a result, we estimate a negative operating margin of 0.7% for full-year We expect no losses or writeoffs going forward, and that the main projects will enter into more intense construction phases during As a result, we estimate that operating margins could reach positive 3.7% in 2004 and 4.3% in Note that because of the nature of the El Cajón project, the operating margin will be distorted. This is because ICA will account for the sales and not the profit during the construction phase, and will register the full amount of the profit once the project is completed in We also expect a 37% decrease in interest paid during 2004, reflecting the reduction in debt. 8 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

9 Figure 7. ICA Operating Assumptions (U.S. Dollars in Millions) E 2004E 2005E Initial Backlog New Contracts Sales (Construction) Closing Backlog ,174 1,510 1,500 Months of Sales Sales Construction Other Segments Total Sales ,129 Domestic Exports Operating Income Construction Other Segments Operating Profit Operating Margin -9.9% 1.9% -0.7% 3.8% 4.3% Sources: Company reports and Santander Central Hispano Investment estimates. One important issue for ICA is taxes. Despite the fact that the company has reported significant losses since 2000, ICA paid US$54 million in taxes in 2002, and we estimate it will pay US$40 million in This situation is explained by the fact that ICA is currently paying the asset tax, which is a minimum tax that companies pay even if they have losses, equivalent to 2% of fixed assets. This provisional tax is recovered once the company starts to generate income tax. The asset tax is even more negative for ICA, because the company signed an agreement with the tax authorities to pay the tax based on the average fixed assets for the last four years. As a consequence, despite the significant sale of non-core assets over the last three years, ICA continues paying the tax based on the high asset base of the past. The huge amount of taxes will continue affecting the bottom line through 2004 and As a result, ICA s P/E ratio should remain very high. We expect this situation to reverse gradually, once ICA starts to generate fiscal profits. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

10 ICA Reloaded: Setting 2004 Target, Upgrading to Buy FINANCIAL STATEMENTS IN U.S. DOLLARS Figure 8. ICA Income Statement (U.S. Dollars in Millions) Growth (%) E 2004E 2005E 03vs02 04vs03 05vs04 Sales , Cost of Goods Sold , Depreciation (19) (6) (8) Gross Profit (25) Gross Margin 14.0% 9.9% 10.2% 10.6% NM NM NM EBITDA (51) EBITDA Margin 7.0% 3.2% 6.9% 6.7% NM NM NM Operating Expenses (8) (29) 17 Expense Ratio 12.1% 10.5% 6.5% 6.3% NM NM NM Operating Profit 14 (5) (138) (746) 38 Operating Margin 1.9% -0.7% 3.7% 4.3% NM NM NM Integral Financing Cost (18) (54) 46 Interest Paid (22) (37) 4 Interest Earned (31) 0 26 Exchange Loss (Gain) (50) (71) 383 Monetary (Gain) Loss (12) (5) (2) (2) (58) (53) (34) Other Fin. Expense (Gain) (43) (39) (3) Pre-Tax Profit (48) (53) (123) 54 Income Tax and Profit Share (27) (9) (14) Net Income (127) (99) 3 14 (22) (103) 337 Net Margin -16.6% -12.2% 0.3% 1.3% NM NM NM Sources: Company reports and Santander Central Hispano Investment estimates. NM Not meaningful. Figure 9. ICA Balance Sheet (U.S. Dollars in Millions) Growth (%) E 2004E 2005E 03vs02 04vs03 05vs04 Total Assets 1,357 1,397 1,448 1, Current Assets Cash & Investments (2) 7 Accounts Receivable Inventories (7) Other Current Assets (12) 3 0 Fixed Assets (6) (16) (12) Deferred Assets (4) 3 0 Total Liabilities (8) 3 7 Current Liabilities Accts Payable Loans Payable (1) (3) Tax Payable (31) 3 0 Other Current Liabilities (19) (1) (3) Long-Term Liabilities (23) 6 15 Other Liabilities Total Equity Majority Equity Minority Equity Sources: Company reports and Santander Central Hispano Investment estimates. 10 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

11 Figure 10. ICA Cash Flow Statement (U.S. Dollars in Millions) Growth (%) 2002E 2003E 2004E 2005E 03vs02 04vs03 05vs04 Profit before Mins. (114) (103) (6) 5 (10) (94) (185) Depreciation & Non-Cash (32) (51) 23 Internal Cash Flow (25) (41) NM NM NM Change in Working Capital (78) (101) (51) (62) NM NM NM Dec (Inc) in Accounts Rec l 130 (59) (47) (64) (145) (19) 37 Dec (Inc) in Inventories 12 4 (19) (33) (67) (562) 71 Inc (Dec) in Accounts Pay'l (220) (47) NM NM NM Cash from Operations (103) (143) (28) (12) 38 (80) (56) External Financing (89) NM NM NM Internal Financing NM NM NM Cash from Financing (89) (360) (92) 154 Cash from Investing 118 (34) (9) (16) (129) (75) 86 Inc (Dec) in Cash & Inv. (74) 55 (17) 21 (174) (131) (226) Opening Cash & Inv (23) 24 (5) Closing Cash & Inv (2) 7 Sources: Company reports and Santander Central Hispano Investment estimates. NM Not meaningful. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

12 ICA Reloaded: Setting 2004 Target, Upgrading to Buy FINANCIAL STATEMENTS IN MEXICAN PESOS Figure 11. ICA Income Statement (Mexican Pesos in Millions) Real Growth (%) E 2004E 2005E 03vs02 04vs03 05vs04 Sales 7,984 9,086 10,559 13, Cost of Goods Sold 6,865 8,189 9,480 11, Depreciation (17) (8) (8) Gross Profit 1, ,080 1,389 (23) Gross Margin 14.0% 9.9% 10.2% 10.6% NM NM NM EBITDA (49) EBITDA Margin 7.0% 3.2% 6.9% 6.7% NM NM NM Operating Expenses (5) (31) 16 Expense Ratio 12,1% 10,5% 6,5% 6,3% NM NM NM Operating Profit 149 (61) NM NM 38 Operating Margin 1.9% -0.7% 3.7% 4.3% NM NM NM Integral Financing Cost (15) (55) 45 Interest Paid (19) (39) 4 Interest Earned (29) (3) 26 Exchange Loss (Gain) (49) (72) 381 Monetary (Gain) Loss (125) (56) (27) (18) (57) (55) (35) Other Fin. Expense (Gain) (41) (41) (4) Pre-Tax Profit (503) (594) NM 54 IncomeTax and Profit Share (24) (12) (14) Net Income (1,323) (1,110) (19) NM 335 Net Margin -16.6% -12.2% 0.3% 1.3% NM NM NM Sources: Company reports and Santander Central Hispano Investment estimates. NM Not meaningful. Figure 12. ICA Balance Sheet (Mexican Pesos in Millions) Growth (%) E 2004E 2005E 03vs02 04vs03 05vs04 Total Assets 14,162 15,652 16,366 17, Current Assets 6,701 8,203 8,889 10, Cash & Investments 2,888 3,620 3,570 3, (5) 7 Accounts Receivable 2,348 3,236 3,761 4, Inventories 1,353 1,346 1,558 1,933 (4) Other Current Assets 3,597 3,384 3,516 3,637 (10) 0 0 Fixed Assets 1,323 1,337 1,127 1,028 (3) (19) (12) Deferred Assets 2,652 2,728 2,834 2,932 (1) 0 0 Total Liabilities 10,317 10,146 10,556 11,604 (5) 0 6 Current Liabilities 6,064 6,563 6,678 6,987 4 (2) 1 Accts Payable 1,038 1,133 1,244 1, Loans Payable 1,123 2,053 2,053 2, (4) (3) Tax Payable (29) 0 0 Other Current Liabilities 3,753 3,265 3,265 3,265 (16) (4) (3) Long-Term Liabilities 3,957 3,257 3,500 4,146 (21) 3 15 Other Liabilities Total Equity 3,845 5,506 5,810 6, Majority Equity 3,693 5,233 5,522 6, Minority Equity Sources: Company reports and Santander Central Hispano Investment estimates. 12 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

13 Figure 13. ICA Cash Flow Statement (Mexican Pesos in Millions) Growth (%) 2002E 2003E 2004E 2005E 03vs02 04vs03 05vs04 Profit before Mins. (1,193) (1,152) (67) 58 (7) (94) NM Depreciation & Non-cash (30) (52) 22 Internal Cash Flow (261) (462) NM 112 Change in Working Capital (814) (1,135) (581) (727) 34 (51) 21 Dec (Inc) in Accounts Rec l 1,353 (656) (533) (750) NM (22) 36 Dec (Inc) in Inventories (216) (380) (66) NM 70 Inc (Dec) in Accounts Pay'l (2,296) (525) (78) NM 133 Cash from Operations (1,075) (1,596) (315) (142) 43 (81) (56) External Financing (931) NM Internal Financing - 2, NM (100) NM Cash from Financing (931) 2, NM (92) 153 Cash from Investing 1,236 (386) (97) (186) NM (76) 85 Inc (Dec) in Cash & Inv. (771) 614 (191) 249 NM NM NM Opening Cash & Inv. 3,659 3,006 3,762 3,693 (21) 20 (5) Closing Cash & Inv. 2,888 3,620 3,570 3, (5) 7 Sources: Company reports and Santander Central Hispano Investment estimates. NM Not meaningful. U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

14 ICA Reloaded: Setting 2004 Target, Upgrading to Buy ICA Three-Year Stock Performance (U.S. Dollars) H $1.45 B $1.40 B $1.50 H $ Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR:Under Review 0.50 H $ N-01 F-02 M-02 A-02 N-02 F-03 M-03 A-03 N-03 ICA (L Axis) IPC (R Axis) Source: Santander Central Hispano Investment. 14 U.S. investors inquiries should be directed to Santander Central Hispano Investment at (212)

15 LOCAL OFFICES New York Bogotá Buenos Aires Caracas Tel: Tel: Tel: Tel: Fax: Fax: Fax: Fax: Lima Mexico City Santiago São Paulo Tel: Tel: Tel: Tel: Fax: Fax: Fax: Fax: Madrid Lisbon London Hong Kong Tel: Tel: Tel: Tel: Fax: Fax: Fax: Fax: Tokyo Sydney Tel: Tel: Fax: Fax: Key to Investment Codes % of Companies Covered with This Rating % of Companies Provided Investment Banking Services in the Past 12 Months Rating Definition Strong Buy Expected to outperform the local market more than 15% % 20.00% Buy Expected to outperform the local market 5%-15% % 46.67% Hold Expected to perform within a range of 5% above or below the local market % 33.33% Underperform Expected to underperform the local market 5%-15%. 9.48% -- Sell Expected to underperform the local market more than 15%. 5.17% -- The numbers above reflect our Latin America 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 2004 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 Central Hispano 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. 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 Central Hispano Investment Securities Inc. ( SCHI ) (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. SCHI, Santander London, and SCH Bolsa are members of Grupo Santander. I, Gonzalo Fernandez, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject companies and their securities. I also certify that I have not been promised compensation, either directly or indirectly, for expressing the recommendations in this report. Within the past 12 months, Grupo Santander has received compensation for investment banking services from ICA. In the next three months, Grupo Santander expects to receive or intends to seek compensation for investment banking services from ICA. 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. From time to time, Grupo Santander and/or any of its officers or directors may have a long or short position in, or otherwise be directly or indirectly interested in, the securities, options, rights or warrants of companies mentioned herein. 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 SCHI, 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. U.S. recipients of this report should be advised that this research has been produced by a non-member affiliate of SCHI and, therefore, by rule, all disclosures required under NASD Rule 2711 do not apply by Santander Central Hispano Investment Securities Inc. All Rights Reserved e