GISSA Market Outperformer 12M FWD Price Target P$45.0 Price 31.4 12M Price Range 29.5/ 33.09 Shares Outstanding 356 Market Cap (Mill) 11,169 Float 19.5% Net Debt (Mill) 46 EV (Mill) 11,164 Dividend Yield 3.2% 2015 12M 2016e 2017e Revenues 11,275 12,865 14,068 14,959 EBITDA 1,393 1,729 2,175 2,246 Net Profit 645 849 976 1,050 Free CF 523 627 61 109 EPS 1.8 2.4 2.7 3.0 P/E 17.3 13.2 11.4 10.6 EV/EBITDA 6.2 6.3 5.2 5.3 P/BV 1.1 1.0 1.0 0.9 Lilian Ochoa Guerra lochoa@gbm.com.mx +52(81) 8152 4000 ext. 4014 Hector Vazquez Montoya hrvazquez@gbm.com.mx +52(55) 5480 5800 ext. 4528 Delivering strong operating performance. All good news at current price. We are reiterating our Market Outperformer recommendation with a 12M FWD price target of P$45.0, as the quarterly results reinforced our investment thesis and our optimism on the name, based on the following: An attractive valuation, trading at 5.2x EV/EBITDA 2016e, 34.4% and 20.0% discounts to our conglomerate sample, and GISSA s fiveyear average multiple. A robust balance sheet, with a net cash of P$46.5 million, A strong position in its auto parts division, which should continue to diversify its revenue mix to Europe with the integration of ACE, in addition to providing a new venture into higher valueadded operations aluminum machined parts and The recovery of the construction industry, which warrants doubledigit growth for the next years. 2Q16 Highlights: GISSA s top line supported by growth across all segments: (+8.9% YOY), thanks to the continuous improvement of Vitromex. (+70.1% YOY), totally benefiting from the consolidation of ACE, and the strong USD. s (+4.9%YOY), due to increased demand for Enamel Steel products. driving GISSA s profitability levels higher. Operating and EBITDA margins increased 150 and 180 bps YOY to 10.1 and 14.6%, respectively, mainly due to a favorable F/X fluctuation, greater efficiencies, and the consolidation of ACE which has higher margins than GISSA at the holding level within the auto parts segment. This was enough to offset the negative impact of the MXN depreciation on input costs for the rest of GISSA s segments. Bottom line expansion (+79.1% YOY) behind the strong operating performance, in addition to income gains from investment in associates. Solid FCF generation of around P$177.5 million, despite showing an increase of 99.4% YOY in CAPEX, mainly due to new equipment within the Vitromex business division. All in all, GISSA moved from a net debt to EBITDA ratio of 0.02x in 1Q16 to a net cash to EBITDA ratio of 0.02x. 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 12M FWD EV/EBITDA 12M PRICE PERFORMANCE VS. IPC P/E 07/15 09/15 11/15 01/16 03/16 07/16 6% 4% 2% 0% 2% 4% 6% 8% 10% 12% 07/15 09/15 GISSA IPC 01/16 03/16 07/16 25 23 21 19 17 15 13 11 9 7 5 07/15 09/15 11/15 01/16 03/16 07/16
Estimates vs. Official Results GBM's Estimates Official Results Revenues 29.0% 31.8% Op. Profit 52.5% 54.6% EBITDA 50.5% 49.8% Net profit 76.7% 79.1% Op. Margin 10.0% 10.1% EBITDA Margin 14.9% 14.6% Net Margin 7.0% 7.0% GISSA s quarterly results reinforced our optimism on the name. Hence, our investment thesis remains unchanged based on the following positives: An attractive valuation, trading at 5.2x EV/EBITDA 2016e, 34.4% and 20.0% discounts to our conglomerate sample, and GISSA s fiveyear average multiple. A robust balance sheet, with a net cash of P$46.5 million. A strong position in its auto parts division, which should continue to diversify its revenue mix to Europe with the integration of ACE, in addition to providing a new venture into higher valueadded operations aluminum machined parts. The recovery of the construction industry, which warrants doubledigit growth for the next years. As a result, after the adjustment of our economic assumptions, we are introducing our 12M FWD price target of P$41.0, and reiterating our Market Outperformer recommendation. Moving on to operating results The auto parts division acted as the main growth propeller. Consolidated revenues increased 31.8% YOY to P$3.5 billion, mainly benefited by the incorporation of ACE and the USD appreciation within the auto parts division. Moreover, the construction and housewares segments also contributed to growth. We should mention that excluding ACE s operations, total sales advanced 7.4% YOY. Braking down by business division, we see the following positives: The construction business division s top line (+8.9% YOY) benefited from the continuous improvement of Vitromex, which in turn was supported by the addition of new dealers, a better mix, and higher traffic of clients in its home centers. The auto parts segment (+70.1% YOY), totally benefiting from the consolidation of ACE, and the strong USD. The housewares segment (+4.9%YOY) due to increased demand for Enamel Steel products in the catalog and promotional channels.
GISSA s revenues mix 2Q15 2Q16 12% 10% 50% 38% 42% 48% Despite the presence of higher fixed costs and the devaluation of the Mexican Peso, which affected profitability results in the construction and houseware sectors, consolidated operating and EBITDA margins showed expansions of 150 and 180 bps, respectively, to 10.1 and 14.6% in the same order. The latter can be explained by the higher average exchange rate and a better efficiency and productivity in the auto parts segment. As a result, operating profit and EBITDA increased 54.6 and 49.8% YOY, respectively. We should mention that without considering ACE s acquisition, operating profit and EBITDA would have increased 18.2 and 18.3% YOY. Going into the segment s specifics Delving into the construction segment, we saw an increase of 8.9% YOY in revenues. As we have mentioned in our previous reports, easy comparisons for this business division are over. Additionally, we believe we should continue to see positive figures as the company is taking action in the Vitromex turnaround, where we should see new products launched during 2016 with better technology leading to a better product mix within the business division. Moreover, we believe that GISSA relies on a solid top management, which has focused on commercial strategies across all of its segments, proving high aggregate value to accomplish positive results in this business division. In detail: Ceramic tile business. As a result of the company s strategy of focusing on new products with higher value added operations, the ceramic tile business managed to increase revenues by 14.3% YOY. As we have mentioned before, Vitromex should continue with its positive trend as the company s turnaround strategy is bearing fruit. The water heater business (+1.3% YOY) was supported by the expansion of the commercial structure, focusing on different point of sales mainly in the US and additional volume particularly in the instant category. Pipe fitting business posted a 4.3% YOY decrease due to an intensely competitive price environment, which has been affected by the devaluation of the MXN. F/X headwinds keep denting the construction business profitability. Operating and EBITDA margins showed a contraction of 170 and 160 bps to 2.7 and 5.8%, respectively, mainly explained by: Higher fixed costs as a result of the investment made in commercial networks. The negative impact of the MXN depreciation over the dollarized inputs.
As a result, operating profit and EBITDA declined by 33.9 and 14.3% YOY, respectively. The auto parts division maintains its positive momentum. Although automotive sales and production growth have slowed in the last three months, the auto parts segment s revenues increased 70.1% YOY to P$1.7 billion, mainly thanks to the incorporation of ACE, combined with the USD appreciation, higher capacity utilization, and a better product mix. Additionally, more good news came from a slight sequential recovery of steel prices and the lower fuel prices in the US, which may boost automotive demand in the following quarters. Excluding the ACE contribution, revenues increased 4.4% YOY, as the higher volumes were partially offset by the transfer of volumes to Evercast and a decrease in pricing due to the indexation of some raw materials. F/X fluctuations and efficiencies boosted profitability. Operating and EBITDA margins expanded 60 and 30 bps, respectively, to 17.0 and 22.7%, in the same order, mainly benefited by the greater volumes and higher average exchange rate, coupled with greater efficiencies and productivity. As a result, operating profit and EBITDA rose 76.7 and 72.6% YOY. Scrap Prices 390 340 290 240 190 140 08/12 10/12 12/12 02/13 04/13 06/13 08/13 10/13 12/13 02/14 04/14 06/14 08/14 10/14 12/14 02/15 04/15 06/15 Scrap USD/Metric ton US and Mexican Automotive Production Figures in thousands of units US and Mexican Automotive Sales Figures in thousands of units 350,000 14,000 180 1,800 300,000 250,000 200,000 12,000 10,000 8,000 160 140 120 100 1,600 1,400 1,200 1,000 150,000 6,000 80 800 100,000 4,000 60 600 50,000 06/12 08/12 10/12 12/12 02/13 04/13 06/13 08/13 10/13 12/13 02/14 04/14 06/14 08/14 10/14 12/14 02/15 04/15 06/15 MX Production US Production 2,000 40 20 02/13 04/13 06/13 08/13 10/13 12/13 02/14 04/14 06/14 08/14 10/14 12/14 02/15 04/15 06/15 MX Sales US Sales 400 200 Within the housewares segment, revenues increased by 4.9% compared to the same period last year. The latter was mainly attributed to the higher sales of Enamel steel products in the catalog and promotional channels. We should mention that sales within this business division are subject to client programs that are not seasonal, recurring, or repeatable.
Profitability remains hurt in the housewares division. Operating and EBITDA margins suffered a drop of 90 and 70 bps, each, to 5.3 and 8.5%, in that order. These figures were mainly affected by an unfavorable sales mix and higher fixed costs, combined with the negative impact of the higher exchange rate over dollarized inputs. As a result, operating profit and EBITDA declined by 10.0 and 3.3% YOY, respectively. EBITDA breakdown by 2Q16 GISSA s EBITDA margin by division by 2Q16 25% 23% 17% 6% 20% 15% 77% 10% 5% 6% 8% 0% EBITDA breakdown by 2Q15 GISSA s EBITDA margin by division by 2Q15 25% 23% 8% 20% 15% 26% 66% 10% 7% 9% 5% 0% Strong operating performance drives bottom line expansion. Despite the lower comprehensive financial gain on a yearly basis (P$2.7 vs. P$5.7 million last year), net income increased 79.1% YOY, mainly benefited by the following: GISSA s strong operating performance, including the consolidation of ACE, and A P$1.8 million income gain from investments in associates (vs. a PS$21.9 million loss last year). Surprising FCF generation. During the quarter, the company managed to post a FCF generation of around P$177.5 million, despite showing an increase of 99.4% YOY in CAPEX due to new equipment within the Vitromex business division. Thus, considering the F/X fluctuations and the dividend payment, GISSA moved from a net debt of P$25.9 to a net cash position of P$46.5 million, which in turn translates into a net cash to EBITDA ratio of 0.02x.
DCF VALUATION APROACH Figures in thousands of pesos 3Q4Q16e 2017e 2018e 2019e Perpetual CF EBITDA 1,227,190 2,526,916 2,694,748 2,821,544 2,906,190 WORKING CAPITAL 313,347 43,010 23,969 8,032 TAXES 218,336 837,990 854,750 803,465 827,569 OPERATING CASH FLOW 1,322,201 1,645,916 1,816,029 2,010,047 2,078,622 CAPEX 1,092,219 1,204,430 1,023,766 870,201 355,000 FREE CASH FLOW FIRM 229,982 441,486 792,264 1,139,847 1,723,622 20,496,107 WACC 11.3% g 3.0% DCF 242,633 418,467 674,689 872,106 14,089,114 TOTAL PRESENT VALUE 16,297,009 Net Debt 2Q16 256,610 Minority Part. @P/BV 41,050 Equity Value (P$) 15,999,349 Shares Outstanding (000's) 355,826 THEORETICAL PRICE PER SHARE 45.0 *Source: GBM GBM Fact Sheet Financials (US$ Mill) 2015 TTM 2016e 2017e 2018e Valuation 2015 TTM 2016e 2017e 2018e P&L EPS 1.81 2.39 2.74 2.95 3.19 Revenue 11,275 12,865 14,068 14,959 15,573 P/E 17.3x 13.2x 11.4x 10.6x 9.8x Var (%) 16.1% 9.3% 6.3% 4.1% EV/EBITDA 6.2x 6.3x 5.2x 5.4x 5.2x Gross Profit 3,169 3,776 4,152 4,488 4,672 P/B 1.1x 1.0x 1.0x 0.9x 0.9x Gross Mg. 28.1% 29.3% 29.5% 30.0% 30.0% P/Sales 1.0x 0.9x 0.8x 0.7x 0.7x Operating Profit 931 1,176 1,435 1,566 1,694 Operating Mg. 8.3% 9.1% 10.2% 10.5% 10.9% Return 2015 TTM 2016e 2017e 2018e EBITDA 1,393 1,729 2,175 2,246 2,351 ROA 3.9% 5.0% 5.8% 6.2% 6.5% Var (%) 30.9% 25.8% 3.3% 4.7% ROE 6.5% 8.0% 9.2% 9.4% 9.6% EBITDA Mg. 12.4% 13.4% 15.5% 15.0% 15.1% ROIC 5.3% 6.7% 8.8% 9.0% 9.3% Interest 16 (55) 61 62 64 FCF Yield 4.7% 5.6% 0.5% 1.0% 2.1% Taxes 345 422 421 434 475 Dividend Yield 0.0% 2.0% 3.2% 4.5% 4.4% Net Profit 645 849 976 1,050 1,136 Buyback Yield 2.1% 0.1% 0.1% 0.1% 0.1% Var (%) 49.3% 15.0% 7.5% 8.2% Net Mg. 5.7% 6.6% 6.9% 7.0% 7.3% Leverage 2015 TTM 2016e 2017e 2018e Balance Sheet Debt/Equity 0.2x 0.2x 0.0x 0.0x 0.0x Cash 2,370 2,221 2,322 2,213 2,445 Net Debt/EBITDA 0.2x 0.0x 0.1x 0.4x 0.5x Accounts Receivable 2,787 3,109 3,066 3,158 2,445 Interest Coverage 35.7x 21.3x 43.3x 43.0x 45.1x Inventory 1,892 2,037 1,866 2,026 2,067 Fixed Assets 7,148 6,569 7,376 7,506 7,638 Turnover (Days of) 2015 TTM 2016e 2017e 2018e Total Assets 16,339 16,974 16,894 17,047 17,515 Accounts Receivable 89 87 78 76 57 Accounts Payable 2,199 2,199 2,075 2,279 2,208 Inventory 90 73 68 70 68 Debt 2,122 2,174 475 491 416 Payables 70 62 53 55 51 Total Liabilities 6,390 6,429 5,909 5,012 4,344 Cash Conversion 109 98 93 91 74 Equity 9,950 10,544 10,632 11,183 11,827 FCF Liquidity 2015 TTM 2016e 2017e 2018e Operating Profit 931 1,176 1,435 1,566 1,694 Current Ratio 2.1x 2.1x 2.2x 2.0x 2.2x +Depreciation 462 553 740 680 658 Quick Ratio 0.7x 0.6x 0.0x 0.0x 0.0x Interests 26 55 (33) (36) (38) Cash tax (266) (266) (742) (1,072) (1,034) Working Capital 145 (45) (61) (43) (24) CAPEX (774) (2,100) (1,401) (1,204) (1,024) Free Cash Flow* 523 (627) (61) (109) 232
Investment Risks In addition to the risks related to the macroeconomic aspects in the US and Mexico, we believe the most relevant risks for the company s divisions are: 1) In the division, the imports of used cars from the US market, which could hinder the national market s develop, 2) If Mexico s currency strengthens and Chinese production becomes more cost efficient, expected growth could be lower than originally forecasted, and 3) as for the US, one of the main risks is any cut in the government aid for consumers that could adversely affect their purchasing power. Regarding the construction segment, the biggest housing companies in Mexico that hold 30% of market share have record high levels of debt and they could significantly slowdown production to start deleveraging. Also, the amounts of credits granted for construction have shown a decrease in the last years and this trend could continue. Stock Price Performance vs Analyst Estimates 50.0 45.0 40.0 35.0 GISSA 22/10/2015 41.50 M arket Outperformer GISSA 18/12/2015 43.00 M arket Outperformer GISSA 25/04/2016 43.00 M arket Outperformer GISSA 22/07/2016 45.00 M arket Outperformer 30.0 25.0 20.0 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Price Price Target Important Disclosures: As of this date, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa together with its affiliates beneficially own, directly or indirectly, over 1% of the equity of GISSA. Other Disclosures: The analyst or analysts involved in the creation of this document hereby certify that the views expressed in this document accurately reflect their personal opinions and that they have not and will not receive direct or indirect compensation for expressing specific recommendations or views in this report. This report has been prepared by GBM and is subject to change without notice. GBM and employees shall have no obligation to update or amend any information contained herein. This report is for informational purposes only, based upon publicly available information, which we believed is reliable, but its accuracy and completeness cannot be guaranteed. GBM makes no express or implied representations or warranties that such information is accurate or complete and, therefore, GBM and employees shall not in any way be liable for related claims. This report does not constitute an offer to buy or sell any security or participate in any trading strategy. The information and analyses contained herein are not intended as tax, legal, or investment advice and may not be suitable for your specific circumstances. Each investor shall make their own determination of the suitability of an investment of any securities referred to herein and should consult their own tax, legal, investment, or other advisors, to determine such suitability. This report may discuss numerous securities, some of which may not be qualified for sale in certain countries or states therein and may therefore not be offered to investors in such countries or states. This report or any portion hereof may not be reproduced, reprinted, sold or distributed without the written consent of GBM. The current document is not issued with the purpose of ensuring a future business relationship with the Issuer; thereby, said document constitutes no promise or guarantee.