Latin Finance - March/April 2009 - 48

Mexico coporates “The prevailing volatility is a synonym for opportunity,” says Arturo Hanono, director of investment at the 44.8 billion peso Invercap pension fund. “Mexican share prices, like in the rest of the world, are very cheap,” Hanono says. “You have to be in the market and have the vision and the capability to buy and wait for a recovery.” Infrastructure Dreams Construction and infrastructure companies seem well positioned. ICA and other building firms are already benefiting from the government’s counter-cyclical spending and president Calderón’s plan to spend 2.5 trillion pesos on infrastructure during his six-year term, ending in 2012. The aim is to spend roughly 500 billion pesos per year from 2008 to 2012. Much of this is expected to come from the private sector along with state development bank Banobras and a 270 billion peso infrastructure vehicle launched by the federal government last year. This year, for example, 570 billion pesos will go into roads, airports, petroleum facilities and other projects. ICA, as the nation’s largest infrastructure company, expects to win a good portion of them. A large part of the work ICA will do – and be paid for – in 2009 will include contracts the company already won but has yet to start, such as the $768 million La Yesca hydroelectric dam, a $725 million Mexico City drainage tunnel and the $470 million Rio de los Remedios toll highway. “We already have close to 4 billion pesos in contracts for this year,” ICA CFO Alonso Quintana tells LatinFinance. He predicts ICA’s sales will rise 20% and Ebitda will climb 10% this year versus 2008. Gonzalo Fernández, an analyst following ICA at Banco Santander, says it is probable Quintana’s targets will be reached. He estimates ICA will have 30 billion pesos in sales in 2009, up from an estimated 25.5 billion pesos in 2008, and 22.5 billion pesos the year before. Santander predicts 2009 Ebitda will be 3.5 billion pesos, up from an estimated 2.9 billion pesos in 2008 and 2.2 billion pesos in 2007. “ICA has reached a record number of contracts and projects in backlog,” Fernández says. “And the execution of these projects is accelerating.” ICA shares were hammered last year, plunging from 71 pesos on June 6 to 14 pesos on October 10. Since then, ICA shares have risen above 25 pesos as experts predict healthy earnings from government infrastructure spending. Fernández expects the share to close 2009 at 30 pesos, while analysts from IXE forecast it will hit 31 pesos. Actinver brokerage, meanwhile, says it will hit 50.6 pesos at year’s end. Jeremy Hellman, an analyst who follows ICA for Singular Research, says the company’s American depositary shares will jump to $10 by year’s end, up from $7 in early February. However, a key concern is the drying up of private financing for mega-infrastructure projects that have become ICA’s specialty. The recent postponement of the Punta Colonet project, a proposed $5 billion container port in Baja California, along with the possible delay of the 40 billion peso Farac II Pacific highway plan, indicate growing risk aversion in the private sector. The government, meanwhile, lacks resources. Another concern is growing competition: Carlos Slim’s infrastructure companies – IDEAL and Cicsa – have won lucrative deals in recent months and appear poised to take home more. Foreign firms have also won some high profile projects recently, with Spain’s OHL Concesiones taking the 15 billion peso Bicentenary Viaduct project, a second-level freeway outside the capital. France’s Alstom will work alongside ICA and Cicsa to build Line 12 of Mexico City’s Metro, a $1.69 billion project. However, it appears that government infrastructure goals – if implemented close to their totality – would exceed the capacity of any one company. “I believe that with as much investment they’re putting into infrastructure right now, there’s room for everyone,” says Fernández. Carlos González, an equity analyst for IXE, says ICA will probably still continue to win the most lucrative contracts because of size and experience. “ICA is one of my favorites for 2009, not just in the building sector but in the whole equities market,” González says. “I think it’s one of the few companies that has a good outlook for 2009.” Looking Better on TV Other sectors of the economy are more uncertain than infrastructure, but a number of well-positioned firms may deliver still deliver solid, if unspectacular, 2009 results. Televisa, Mexico’s dominant broadcaster and the world’s largest Hispanic media firm, will likely see revenue decline as advertisers cut costs during the downturn. But it is diversified enough to ensure a healthy flow of cash, experts say. “There’s going to be an impact [on income] but it’s not going to be too much,” says Fabiola Ortiz, credit analyst at S&P. She adds that growing income from pay TV, Internet and phone service could help compensate for falling advertising revenue. IXE expects Televisa shares will close 2009 at 63 pesos, up from around 40 pesos in early February. Martin Lara, who covers Mexican telecoms with Vector Casa de Bolsa, is more conservative, predicting the share will cost 48 pesos at year’s end. Advertising represents 40% of Televisa’s revenue. But even as ad revenue dips, Televisa subsidiaries Cablevision and Cablemas have a window of opportunity right now to increase sales by offering bundled video, Internet and telephone services before antitrust regulators allow Telmex to do the same. Telmex is by far Mexico’s leading fixed-line and Internet service provider. The triple play segment still represents only a small portion of Televisa’s total earnings, but it has increased exponentially in recent quarters as telecom competition gets started. However, taking market share from Telmex is not easy. Moody’s estimates that 25% of all clients who switch to Cablevision phone service switch back to Telmex within a year due to inconsistent call quality. In addition to improving telephone service, Televisa must also integrate disparate networks it bought from smaller, regional cable companies in recent years, says Nymia Almeida, a telecoms analyst at Moody’s. “Telecommunications in Mexico is really important, but I think it’s going to take more time than Televisa thinks,” Almeida says. She expects advertising revenue to decline 8%-10% in 2009 due to the downturn. Televisa declines to comment. While improving performance of triple play and cable units is Televisa’s key to growth in Mexico, the company’s prospects seem a bit brighter in a long-standing mission to make more cash 48 LATINFINANCE March/April 2009

Latin Finance - March/April 2009

Table of Contents for the Digital Edition of Latin Finance - March/April 2009