Company Note VITRO Market Outperformer 2017 Price Target P$88.5 Price 70.1 12M Price Range 36.3/ 66.7 Shares Outstanding (Mill) 483.1 Market Cap (Mill) 1,703 Float 20% Net Debt ( Mill) 273 EV Adj. (Mill) 1,978 Dividend Yield 1.1% 2016 2017e 2018e Revenues 1,049 2,239 2,482 EBITDA 259 461 510 Net Profit 190 218 247 FCF 111 0 96 EPS 0.4 0.5 0.5 P/E 9.0 7.8 6.9 EV/EBITDA 7.6 5.0 4.3 P/BV 1.4 1.2 1.1 Figures in P$ million Lilian Ochoa lochoa@gbm.com.mx +52(81) 8152 4000 ext. 4014 Alejandro Azar aazar@gbm.com.mx +52(81) 8152 4000 ext. 4016 VITRO completes acquisition of the OEM Business from PGW VITRO announced that it completed the acquisition of the OEM business from Pittsburgh Glass Works (PGW), a subsidiary of LKQ Corporation, for US$310.0 million, after the transaction was approved by the governing bodies of both companies and by the relevant regulatory authorities. Review of the transaction. The acquisition includes seven manufacturing plants, two satellite facilities and two float glass furnaces in the US, one manufacturing plant in Poland, and an equity share in two JVs located in Mexico and China. According to our estimates and considering the figures disclosed by VITRO, the transaction should take place at 4.7x EV/EBITDA 17 an attractive valuation considering VITRO and its peers trade at around 5.0 and 6.4x. Financing of the acquisition. The deal was funded with US$80.0 million in cash and a US$230.0 million bank loan with BBVA. Loan details were not disclosed; however, VITRO s last bank loan obtained in October 2016 had a 7-year maturity and an interest rate of LIBOR 1M + 415 bps. Additionally, VITRO continues to improve its capital structure, while maintaining a healthy financial position, with a net debt to EBITDA ratio of 1.3x by 2017e. Comments from VITRO s CEO. Adrian Sada Cueva mentioned that the transaction allows the company to increase its client base and strengthen its position as a global automotive player. Moreover, PGW s experience and cutting-edge technology should improve VITRO s technical, development and research capabilities. With the transaction, VITRO becomes the largest manufacturer and distributor of automotive glass in North America, being the leader in Mexico and the US. Meanwhile, after an active 2016 in terms of M&A, upcoming years for VITRO will be key not only for integration but also for the execution of organic projects, such as the expansions of its Float Glass furnaces in Monterrey & Mexicali in Mexico, and the CFT segment in Brazil. All in all, after the incorporation of these assets into our estimates, we decided to update our valuation, including: Synergies from the acquisition, related to logistics, production optimization, mainly qualities and colors, and best practices. Improved capital structure, allowing VITRO to lower its WACC to 11.2% (vs. 11.5% previously). Thus, we are increasing our 2017e price target to P$88.5 per share, while reiterating our Market Outperformer recommendation, supported by an attractive valuation trading at 5.0x EV/EBITDA 17, encouraging fundamentals, profitability improvements, and the accretive acquisitions of PPG and PGW assets.
VITRO s Revenue Breakdown before and after the recent acquisitions. Sales Breakdown by Segment* Sales Breakdown with PPG & PGW* Glass Containers 23.4% Chemical 16.7% Others 0.5% OEMs 21.5% Construction 29.7% AGR Market 8.2% Construction 36.4% Others 0.2% Chemical 6.6% Glass Containers 9.2% OEM 44.4% AGR Market 3.2% Country Breakdown* Foreign Subsidiaries 3.1% Country Breakdown with PPG & PGW* Exports 29.6% Mexico 67.3% PPG & PGW 60.0% Mexico 26.9% Exports 11.9% Foreign Subsidiaries 1.2% *GBM Estimates
Estimates variations and changes in valuation assumptions: Including consolidation of PGW assets, starting in March 2017. A minor decrease in our WACC to 11.2% (vs. 11.5% previously), given its new and improved capital structure. A minor increase in VITRO s beta to 1.2 (vs. 1.1 previously), considering a global unlevered beta for construction and auto-parts companies, and leveraging it onto VITRO s capital structure. Financials (US$ mill) 2017 2018 2019 Old New Old New Old New P&L Revenue 1,584 2,239 1,682 2,482 1,787 2,583 Var (%) 1 113.4% 0 10.8% 0 4.1% Operating Profit 315 358 343 407 370 440 Var (%) 56.5% 78.1% 8.9% 13.6% 8.0% 8.3% Operating Mg. 19.9% 16.0% 20.4% 16.4% 20.7% 17.1% EBITDA 397 461 425 510 455 547 Var (%) 53.3% 77.9% 7.1% 10.7% 7.0% 7.2% EBITDA Mg. 25.1% 20.6% 25.3% 20.6% 25.5% 21.2% Interest -28-36 -25-40 -15-35 Taxes -97-110 -107-125 -119-137 Net Profit 193 218 214 247 237 271 Var (%) 1.5% 14.6% 10.8% 13.4% 10.9% 9.7% Net Mg. 12.2% 9.7% 12.7% 10.0% 13.3% 10.5% Balance Sheet* Cash 240 240 240 240 240 240 Accounts Receivable 212 212 201 231 215 248 Inventory 184 184 172 202 184 216 Fixed Assets 978 993 1,070 1,112 1,149 1,218 Total Assets 2,347 2,347 2,512 2,512 2,687 2,687 Accounts Payable 119 119 127 127 136 136 Debt 479 513 355 417 168 254 Total Liabilities 998 978 991 945 978 904 Equity 1,349 1,369 1,520 1,567 1,710 1,784 FCF Operating Profit 315 358 343 407 370 440 Depreciation 82 103 83 104 85 106 Interests -26-62 -24-60 -15-47 Cash tax -82-103 -89-110 -92-118 Working Capital -61-80 -56-75 -49-68 CAPEX -194-215 -132-170 -112-151 Free Cash Flow 34 0 124 96 187 163 *Without PGW assets
VITRO s 2017e DCF Valuation Figures in US$ million 2017e 2018e 2019e 2020e 2021e Perpetuity CF EBITDA 461 510 547 570 583 510 Taxes 103 110 118 131 134 110 CAPEX 215 170 151 138 121 120 Change in working capital 80 75 68 60 54 FCF to the firm 63 155 210 240 273 281 DCF 63 140 170 175 179 2,025 Theoretical Mkt Cap NPV 2,752 WACC 11.2% Net debt 583 Theoretical mkt cap 2,169 # Shares (Million) 484 Price Target $88.5 Current price $70.1 Discount (Premium) 26.2% WACC Equity Weight 69.7% Debt Weight 30.3% Risk Free Rate 7.3% Market Risk Rate 12.3% Beta 1.2 Cost of Equity** 14.4% Weighted Cost of Equity 10.0% Interest rate* 5.3% Tax rate 30.0% Cost of Debt 3.7% Weighted Cost of Debt 1.1% WACC 11.2% *Estimated cost of Debt **Cost of Equity includes a size premium
Investment Risks In addition to the risks related to macroeconomic aspects, we believe the most relevant risk in the Mexican market is: during the last couple of years, there has been a significant flow of global funds into the Mexican market in search of new investment opportunities. There is no guarantee that, going forward, these flows will remain at current levels. Some other risks pertaining to VITRO include, but are not limited to: 1) economic factors of the US, Bolivia, Colombia, Costa Rica, Guatemala, Panama, in which the company has operating facilities; 2) market prices of energy inputs such as natural gas and electric power have a direct impact on the cost of goods sold; 3) substitution trends in the glass containers industry may adversely affect its business; 4) High exposure to the auto and construction industry which are cyclical activities. Stock Price Performance vs Analyst Estimates 01/03/2016 69.00 M arket Outperformer 29/07/2016 73.00 M arket Outperformer 04/08/2016 82.00 M arket Outperformer 14/12/2016 77.00 M arket Outperformer 01/03/2017 88.50 M arket Outperformer 95.0 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Price Price Target Important 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.