BofA Merrill Lynch Global Research
An Equity Strategy Report from Carlos Peyrelongue-Monday, 08 April 2013
Mexico Core Portfolio
Mexican equities: how to play energy & fiscal reforms
Economic benefits of passing fiscal & energy reforms
We reiterate our belief that Congress will pass in 4Q13 both a fiscal & an energy reforms. We expect fiscal reform to increase Mexico’s tax payer base through a VAT on food & medicine that we estimate should increase tax collection as a % of GDP by about 1.5% to 2%. As for energy reform, we expect Congress to approve a reform that would allow Pemex to do JV’s with private companies allowing profit sharing, while opening gas exploration to the private sector. The economic implication of these reforms could be: 1) Mexico’s sovereign debt rating should increase by one or two notches, 2) Mexican peso should appreciate below Ps12/US$, 3) President EPN should increase further infrastructure spending, and 4) Investments in oil, gas, & petrochemicals should increase several fold.
Four stocks to play the reforms: CX, ICA, OHL, & GMexico
Despite a solid performance in the last 12M, we reiterate our positive view held since 1Q12 on ICA, OHL, GMexico & CX, while maintaining a sizeable combined overweight on these four names within our Mexico Core Portfolio (32% vs. a 14% weight in Mexico’s IPC. Key drivers of these four stocks are:
Cemex: 1) Sizeable recovery of US housing taking CX’s US EBITDA from $43mn in 2012 to $1.2bn in 2016E. 2) An expected 2013 9% appreciation of the Mexican peso vs. USD, note while CX’s results are measured in USD by investors, CX generates 43% of its EBITDA in pesos, while having 83% of its total debt in dollars and 2% in pesos! 3) Large expected investments in infrastructure and in the energy sector should drive cement demand in Mexico from 2014 to 2018.
GMexico: Don’t underestimate GMexico’s willingness and financial capacity (with close to $2.8bn in FCF per year before expansion capex) to become the most aggressive Mexican company in terms of new investments in rail, concessions, drilling, electricity, and infrastructure construction over the next six years.
ICA and OHL: 1) Large expected investments in infrastructure should drive civil construction (light trains, new Mexico City airport, ports, water, highways), 2) large investments in oil, gas and petrochemicals should drive industrial construction, and 3) higher economic growth & a manufacturing boom should drive highway traffic and tolls of highway concessions.
Key sections within this Mexico Core Portfolio (MCP) report:
1) Gmexico: deep pockets to invest in rail, energy & infrastructure, pg 2. 2) Why we remain bullish on CX, pg 5. Note: we expect 1Q13 weak cement vols. 3) Mexico’s labor cost in USD are now lower than China’s, hence we expect further investments by multinationals in Mexico, play this theme through Mexican REIT, Fibra Macquarie, which today has 100% of its real estate properties in industrial assets and should drive growth through acquisitions, pg 11.
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