August 16th, 2016.

GRUPO LAMOSA, S.A. B. DE C.V.

LAMOSA* / BMV

Initial coverage: Expanding operations with solid financials.

Investment recommendation: MARKET PERFORM.

Actual price: $36.40 MXN. IPC SmallCap: 507.40 IPC: 48,351.96 MSCI MX SmallCap: 602.73

Burkenroad Reports are produced by a select group of students at EGADE Business School, Monterrey. This report is

based on information available to the public and does not purport to be a complete statement of all data relevant to the

securities mentioned and its accuracy cannot be guaranteed. Furthermore, this report is not an offer to buy or sell the

securities mentioned.

We are initiating the coverage of Grupo Lamosa with a MARKET PERFORM rating and a target price

of $39.73 MXN at December 2016, which offers a 9.15% upside from the current stock price.

Grupo Lamosa is a Mexican company which operates in the wall and floor tiles segment, representing 71% of

its revenues and the adhesive and waterproofing segment, constituting the remaining 29%. From the MXN

$10,636 million reported sales in 2015, 14% ($851 million MXN) were due to foreign sales.

The company has international presence exporting its products to the United States and 15 countries in South

and Central America; with this, Grupo Lamosa continues diversifying its revenues from different markets.

Lamosa has more than a century of history, now is the world’s largest ceramic tile manufacturer with an

installed capacity of 130 million square meters and leading brands such as Porcelanite, luxury brand Firenze on

the wall and floor tiles segment and Crest on the Adhesives segment.

In 2007, Grupo Lamosa acquired its main wall and floor tiles competitor, Porcelanite, in a USD $807 million

transaction that consolidated its position as a sector leader, increasing its installed capacity.

In 2015, Grupo Lamosa finished the sale of its sanitary ware division. We consider this will allow it to focus on

its core businesses: tiles and adhesives with very small revenues from the real state division.

Grupo Lamosa has 24 production centers: 10 dedicated to the manufacturing of ceramic tiles plus one under

construction in the state of Guanajuato, Mexico (which will increase the capacity in 8 million square meters)

and 13 to adhesive products. Lamosa has invested more than USD $100 million in the last 5 years to maintain

its global leadership and expansion.

In July of 2016, Lamosa signed a contract to purchase Ceramica San Lorenzo in South America to the Belgian

Etex group, this transaction involves the acquisition of six subsidiaries with operations in Chile, Colombia, Peru

and Argentina. This operation represents an increase of 40% in the installed production capacity. The

transaction was for USD $230 million, due to the favorable conditions of leverage, Lamosa plans to make the

acquisition through debt.

Valuation 2015a 2016E 2017E

EPS* $2.34 $2.59 $3.34

P/E 15.10x 15.35x 11.90x

EBITDA/Share* 5.90 6.66 8.90

P/EBITDA 5.93x 6.18x 4.62x

EV/EBITDA 8.32x 7.32x 6.12x

*EPS and EBITDA from last 12 months.

Company profile.

Location: The headquarters are located in San Pedro Garza Garcia, N.L. Mexico at the following address: Ave.

Pedro Ramírez Vázquez #200-1 – 8th floor, C.P. 66269.

Sector: Construction

Subsector: Construction materials

Economic activity: Mexican company with over 120 years of experience in the construction industry. World leader

in the production of ceramic coatings, produces and distributes about 1,000 products.

Webpage: www.lamosa.com

Analysts: Tutor:

Abraham de Leija de Llano María Concepción del Alto Hernández PhD

Eleazar Catalan Ceballos

Stock information

52 weeks range $28.50 -38.00 Outstanding shares (millions) 382.76

12 months return 12.60% Market capitalization (MMXN) $13,932

Dividend yield 1.17% Enterprise Value (MMXN) $18,737

Average daily volume (1000) 49.71 Beta 0.60

Source: Bloomberg.

Burkenroad Reports

EGADE Business School

Grupo Lamosa

Construction Materials Burkenroad Reports

'

'

'

'

'

'

'

'

Wall and floor

tiles

71%

Adhesives and

waterproofing

29%

Figure 3: Sales by segment

Source: Company website.

In 1951, Grupo Lamosa began

listing its stock on the BMV

(Mexican Stock Exchange).

In 1963, Lamosa incorporated

Sanitary Ware into its

portfolio of products.

In 1957, Lamosa ventured into

the adhesives business,

establishing a small factory

under the name of “Crest”.

The group fortifies its

adhesives segment with the

acquisition of Industrias Niasa

S.A. de C.V. in 2001.

In 2015, the group sold its

sanitary ware business

segment to the Colombian

multinational Corona.

Figure 4: Timeline

The company begins its

history in 1890 with a small

brick factory; then known as

Compañía Manufacturera de

Ladrillos de Monterrey.

020040060080010001200140016001800

28

30

32

34

36

38

Jun-1

5

Jul-

15

Aug-1

5

Sep

-15

Oct

-15

Nov-1

5

Dec

-15

Jan-1

6

Feb

-16

Mar

-16

Apr-

16

May

-16

Jun-1

6

Figure 1. Share price and volume

Volume (1000) LAMOSA*

Source: Bloomberg

90

95

100

105

110

115

120

125

Jul-

15

Au

g-1

5

Sep

-15

Oct

-15

No

v-1

5

Dec

-15

Jan

-16

Feb

-16

Mar

-16

Ap

r-1

6

May

-16

Jun

-16

Figure 2. Share performance base 100

= Jul 15

LAMOSA* IPCSMALLSource: Bloomberg

Table 1: Historical dividends

Year DPS (MXN) Total dividend

2013 0.20 73.56

2014 0.27 100.31

2015 0.29 108.81

2016 0.40 151.59

Source: Company reports.

Table 2: Historical

Investment amounts

Year Amount

(Million MXN)

2012 241

2013 494

2014 395

2015 975

2016* 879

Source: Company reports.

* First semester

Source: Reported by the company, 2016 second quarter.

In July 2016, Grupo Lamosa,

signed a contract to purchase

Ceramica San Lorenzo in South

America to the Belgian Etex

Group.

In 2007, Grupo Lamosa sold some

properties. Also marked by the year

of the acquisition of Porcelanite,

further strengthening its ceramics

business segment.

Company description.

Lamosa started operations in 1890 with a small brick factory in Monterrey, N.L., Mexico called then

“Compañía Manufacturera de Ladrillos de Monterrey” sponsored by a group of US investors, the business

started with 75 workers producing 20 million bricks per year. In 1929, the company is acquired by Mr.

Bernardo Elosúa Farías and Mr. Viviano L. Valdés, who changed its name to Ladrillera Monterrey, S.A. Since

then, the company has grown through a series of acquisitions and organic growth, such as the incorporation of

adhesives to its product portfolio in 1957, sanitary ware in 1963 (and subsequent sale to Colombian

multinational Corona in 2015) and the acquisition of the adhesives company Niasa in 2001 (Figure 4).

Today, Lamosa has 4,663 employees distributed among 23 production centers with an installed capacity of 130

million square meters. The company, which manufactures ceramic tiles and adhesives, has a significant

presence in Mexico and across the Americas, exporting to the United States and more than 15 countries in

Central and South America. Grupo Lamosa is based in San Pedro Garza Garcia, Mexico.

Lamosa has been listed in the Mexican Stock Exchange since 1951 with the ticker LAMOSA*, up to today it

has 383 million of outstanding shares and maintains a low level of liquidity. It has paid consecutive dividends

since 2013 after significantly decreasing their debt (Table 1).

The company operates in three business divisions:

Wall and floor tiles

This division operates 11 production centers making avant-garde products according to market trends

manufactured with “Full Definition” technology which allows reproducing stones, marbles and woods

in their natural form with great fidelity. It offers such market-leading brands, as Porcelanite, Lamosa,

Italica and Firenze Tecnoarte.

Adhesives and waterproofing

Is a leader in the Mexican market with more than 50 years of history, its wide variety of high

performance products let it offer innovative and practical solutions in the construction industry. They

operate through the market-leading brands Crest, Perdura, Niasa and Solutek with 13 production

centers.

Real estate development

It handled the development and promotion of residential and commercial properties within the

metropolitan area of Monterrey, Nuevo Leon, like Privanzas and Galerias Valle Oriente, which were

later sold. Lately it has lowered its presence in this market to almost no revenue in 2015.

Currently Lamosa has the largest worldwide production installed capacity in ceramic floor tile, reaching more

than 130 million square meters per year with above 90% of capacity utilization. During 2015, Lamosa invested

MXN $926 million, which were used mostly for technological upgrading and expansion of production capacity

plus MXN $49 million invested in projects related to information technologies. This is the biggest investment

amount in the preceding 5 years and it represents an increase of 231% compared to the previous year (Table 2).

Additionally, they announced the construction of a new floor tile plant in Guanajuato increasing their capacity

by 8 million square meters. The plant is expected to be operating by the end of 2016.

It is important to mention that Grupo Lamosa has received five times the recognition of "Best in Show" for its

coatings business at the International Fair Coverings, the last one was received in 2012.

Their products are distributed through: independent suppliers and hardware stores, providers of construction

materials and nationwide "Home Centers”. Highlighted in volume importance the "Home Centers" as Home

Depot and Lowe's in both markets.

The major suppliers of raw materials include companies like Cemex, Cementos Lafarge, Torrecid of Mexico,

S.A. de C.V., Colorobbia Mexico, S.A. de C.V., and Ferro Mexicana, S.A. de C.V. As for power supply, the

main gas supplier is Pemex and the electric power is provided by the Comisión Federal de Electricidad.

Page 1

Grupo Lamosa

Construction Materials Burkenroad Reports

Wall and floor

tiles

72%

Adhesives and

waterproofing

26%

Others

2%

Figure 5: EBITDA

Corporate governance.

Grupo Lamosa seeks to fulfills with applicable rules and regulations in all areas. It has complied with

the best practices in this area for several consecutive years among which is included that 50% of its

board members are independent.

The Board of Directors has intermediate bodies such as the corporate practices committee, the audit

committee and the ethics committee to perform their functions. These committees carried out their

activities in accordance with existing legislation and the bylaws of the company. Additionally, the Board

of Directors for advisory purposes has a Finance Committee. As can be seen in Table 5, these

professionals have a long standing trajectory of experience in business and the company’s own board.

Financial overview.

The company has had a five year CAGR in sales of 4% (Figure 6), 5.23% in EBITDA and 27.65% in net

income; assets have had a 0.96% growth, while liabilities had a decrease of 2.81% and equity increased

8.44%. For the period of 2016 to 2020 we estimate a CAGR growth of 2.7% in sales (Figure 7). We

expect an improvement of 3.84% in EBITDA (Figure 9), and a 6.5% in net income, based on a positive

outlook for the edification sector, but with a slowing dynamism.

The company reported strong sales for the first semester of 2016, reaching MXN $5,770 million, an

increase of 16% compared to 2015, an EBITDA of $1,334, increasing 34% and net income of $495

million; an increase of 65%. In terms of margins, the margin EBITDA increased 300 basis points

passing from 20% to 23% The profit margin increased as well from 2015’s 6% to 9%. These generalized

increases in the company’s indicators are mainly due to a favorable performance of the construction

industry as a whole and stable costs of the company, which has focused on its core business after the

sale of its sanitary ware segment. With their business strategy, we consider investments on top-of-the-

line equipment for facilities have paid off in the form of increased margins and a portfolio which

includes luxury items translating into increased profitability.

All of the margins were heavily influenced by the capacity of the company to maintain a highly efficient

cost structure, although the profit margin was especially sensitive to the increased foreign exchange

losses seen in the aforementioned year, increasing from MXN $115 million to MXN $270 million

(through a 10% depreciation of the Mexican Peso). Financing costs were specially affected by foreign

exchange movements between the US dollar and the Mexican peso, since even with the reduction of

debt, depreciation led to an overall increase of paid Mexican pesos, from $261 million to $394 million

for said period, as a result of its USD denominated outstanding loans. Nonetheless, and in spite of the

foreign exchange losses, the company’s 2016 first semester net income saw an increase of 65%, from

2015’s MXN $300 million to MXN $495 million.

$9,967

$11,721

2011 2012 2013 2014 2015

Figure 6: Historical sales by segment

Wall and floor tiles Adhesives and waterproofing

Table 5. Board of Directors

Federico Toussaint

Elosúa

Eduardo Elizondo

Barragán *

Bernardo Elosúa Robles Armando Garza Sada *

Guillermo Barragán

Elosúa Carlos Zambrano Plant *

Javier Saavedra Valdés Eduardo Padilla Silva *

José Manuel Valverde Valdés

Eduardo Garza T. Fernández *

María del Carmen

Elosúa González

Maximino José Michel

González * Source: Company Annual Report 2016.

* Independent

Source: Reported by the company, 2016 second quarter.

Table 4. Management Team

Name Position in LAMOSA

Federico Toussaint

Elosúa

CEO and Board

President

Tomás Luis Garza de la

Garza Chief Financial Officer

Julio Rafael Vargas

Quintanilla

Human Resources

Director

Servio Narváez Garza Coatings Division

Director

Jorge Manuel Aldape

Luengas

Adhesives Division

Director Source: Company Annual Report 2016.

Adhesives

Source: Company reports.

Source: Company reports and own estimates.

Strategy

The growth strategy of Grupo Lamosa historically has been based on acquisitions of certain plants and

business competitors of ceramic coatings and adhesives in order to grow its capacity and strengthen its

business. Currently is concentrating on selling products with higher margins looking to be more

profitable. It has been focusing on two business segments: wall and floor tiles and adhesives and

waterproofing.

MM

XN

$8,971

$17,681

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

20,000.0

2014 2015 2016e 2017e 2018e 2019e 2020e

Figure 7: Sales, Net & Oper margin

Sales Net mar Oper mar

MM

XN

Page 2

Table 3: SWOT Analysis

STRENGHTS OPPORTUNITIES

• Market leader.

• Attractive dividend payout policy.

• Efficient financial management.

• Good corporate governance practices.

• Developed domestic market.

• It has invested important amounts in leading-

edge technology.

• Worldwide highest production capacity.

• Domestic market strengthening.

• New emerging international markets with

potential high demand for ceramic tiles and

adhesives; as well as high-end luxury products.

• Improve cost structure due to national energy

reform; pushing gas prices down.

WEAKNESSES THREATS

• Risk exposure to international macroeconomic

factors, foreign exchange and national fiscal

policy.

• High dependence on domestic markets.

• High level of debt denominated in US dollars.

• Low stock liquidity.

• Higher level of competition.

• Strengthening dollar to domestic currency.

• Increases in energy costs.

• Exposure to economic cycles.

• Low growth of domestic construction industry.

• Potential government fiscal changes related to

the industry can affect its cost structure, sales and

ultimate profitability. Source: Own elaboration

Grupo Lamosa

Construction Materials Burkenroad Reports

$998

$2,325

0%

5%

10%

15%

20%

25%

30%

35%

-

500 .0

1,000.0

1,500.0

2,000.0

2,500.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mil

lion peso

s

Figure 8: Historic EBITDA

EBITDA EBITDA margin

Source: Company reports.

$2,548

$3,905

0%

5%

10%

15%

20%

25%

30%

35%

-

500 .0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

2016e 2017e 2018e 2019e 2020e

Figure 9: Forecasted EBITDA

EBITDA EBITDA margin

Source: Company reports and own estimates.

$4,750 $5,613

-

0.5

1.0

1.5

2.0

2.5

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

2014 2015 2016e 2017e 2018e 2019e 2020e

Millio

n p

eso

s

Figure 10: Debt level and leverage

Debt Debt/EBITDA

Source: Company reports and own estimates.

0.0

5.0

10.0

15.0

2008 2010 2012 2014 2016 2018 2020

Figure 11: Debt and coverage

Debt/EBITDA Interest Coverage

Source: Company reports and own estimates.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2014 2015 2016e 2017e 2018e 2019e 2020e

Figure 12: Mexico GDP growth

National Contruction Industry

Source: IMF and CMIC

DuPont Analysis.

From 2010 to 2015, Lamosa has had an average of 11.3% return on equity (ROE), and currently the

company holds a 14.2% ROE. The indicator doesn’t show a clear increasing trend, but through a

separation of its three components (DuPont analysis), it can be seen that asset turnover has remained very

stable for the period, with a range from 0.56 to 0.69 (Table 6). On the other hand, profit margin has seen

increases and decreases from 200 to almost 700 basis points (volatile net income), which can be

explained due to foreign exchange effects in interest payments; once again, the FX rates largely explain

these, as the company’s debt is based mainly in US dollars. Thus, increases or decreases in ROE have

been largely caused by volatility in net income.

Leverage has also seen changes over the years, with an average of 3.14, indicating a disciplined use of the

assets. Lamosa has had, in average, a lower asset turnover, a higher profit margin and a higher leverage

than its peers, this has meant for Lamosa a higher ROE compared to the other companies operating in the

industry.

Table 6: DuPont analysis

Year Profit

Margin

Asset

Turnover Leverage ROE

2010 5.74 0.56 4.19 13.5

2011 2.58 0.58 3.67 5.5

2012 9.12 0.63 3.18 18.3

2013 6.59 0.63 2.76 11.5

2014 4.93 0.59 2.57 7.5

2015 6.59 0.69 2.48 11.3

Source: Bloomberg.

Debt

After having incurred a debt of USD $807 million to buy Porcelanite in 2007 (its largest competitor) the

company had reduced the debt to a level of MXN $5,011 million 1S16 with a level of 1.9x Debt to

EBITDA ratio, an increase of 1% compared to the end of 2015. From this debt, 40% is denominated in

national currency and 60% in USD.

We expect that the debt will be around MXN $8,500 million by the end of 2017, due to the acquisition of

Ceramica San Lorenzo, which will imply a Debt to EBITDA ratio of around 2.2x, although this ratio is

lower than the one it had when it acquired Porcelanite in 2007 (Figure 11). We also consider that Lamosa

will have the capacity to handle the level of debt, due to its ability to continue increasing its cash flows,

with which they will continue paying its debt at a similar rate to the current one (around 10% per year).

Industry analysis.

Lamosa’s revenues mostly come from floors and coatings, in 2015 the tile floor represented

approximately 181.1 million square meters and tile coating accounted for approximately 35.3 million

square meters of the Mexican market in which Lamosa has an estimated participation of around 35%. The

2015 total Mexican industry had sales of 216.4 million square meters represented an increase of 9.7

percent compared with 2014. It is anticipated a similar increase of around 10 percent for 2016.

Lamosa operates in the construction materials industry which is mainly influenced by the population

growth, the employment level and the construction industry specifically the housing sector which in turn

is driven by the number of credits given.

According to the consensus of leading analysts and international organizations, it is anticipated that in

2016 will be a moderated growth in the global economic particularly in the United States; it is expected to

have an expansion of 3 percent in US GDP, therefore it is expected that in 2016 Mexico non-oil exports

will have an acceleration with an expected GDP below 3%. This will be reflected in a more dynamic

manufacturing production, services related to foreign trade and internal consumption. The Mexican

Chamber of Construction Industry (CMIC) expects a national GDP growth for 2016 and 2020 of 2.4%

and 3.3% respectively with an estimated 2.3% and 2.9% growth in construction GDP for the same period

(Figure 12).

In 2015 private construction accounted 46% of the total construction in Mexico, where building

represented 32% and housing 11% (Figure 13). In the last five years, private construction has grown

between 1% and 8%, building between -4% and 9% and housing between -21% (in 2013) and 13%

(Figure 14). It is worth mentioning that the lowest values observed in 2013 were mainly due to a change

in policy for the sector implemented in that year, which involved new rules for the allocation of subsidies

and operation rules of the main employee credits assigner (INFONAVIT).

MM

XN

M

MX

N

MX

N

Page 3

Grupo Lamosa

Construction Materials Burkenroad Reports

-21%

-14%

-7%

0%

7%

14%

2011 2012 2013 2014 2015

Figure 14: Construction subsector

growth.

Private Building Housing

82%

3%3%

3%

3%

2%4%

Figure 17: Mexican exports

USA

Costa Rica

Chile

Panama

Guatemala

Nicaragua

Others

11%

11%

10%

54%

7%

4%

32%

46%

Figure 13: Construction in Mexico

Others Water Electricity Transportation

Buildings

Housing

Others

Building

Public Private

Source: INEGI, 2015 data.

Source: INEGI.

00-04

05-09

10-18

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

5% 4% 3% 2% 1% 0% 0% 1% 2% 3% 4% 5%

Figure 15: Mexico population pyramid

Male

Female

Source: INEGI, 2015 data.

Figure 16: Credit balance by type 3,500

3,000

2,500

2000

1,500

1,000

5,000

0 2013 2014 2015

Housing

Consumption

Industrial

Source: Banco de Mexico with data from CNBV.

Based on the behavior of GDP related to building and data from the construction industry reported by

INEGI, we consider that the cycle in which is currently the construction industry in the country is a phase of

moderate expansion with future annual growth rate between 2% and 3%. We also expect a moderate growth

for Latin America construction industry, mainly driven by an increase in per capita income, population

growth and a trend towards greater urbanization and industrialization in the region.

Ceramic Market

According to Zion Research report the global demand for ceramic tiles market was valued at around USD

$72,000 million in 2014 and is expected to generate revenue of USD $120,000 million by the end of 2020,

expanding at a CAGR of slightly above 9.0% between 2015 and 2020; thus benefiting Lamosa as a

geographically diversified company.

Ceramic tile in Mexico and in the United States is one of the alternative products that can be obtained for

coating floors and walls, competing with other types of coatings such as carpet, natural stone, laminate,

wood, vinyl, etc. Usually the tile has kept the competitive advantage of being a highly functional product,

with superior decorative appearance, durability and easy maintenance, with the main disadvantage the

comparative cost of installation.

According to the duty Information System Via Internet (SIAVI), during 2015 Mexican exports of tile and

ceramic tile amounted USD $355,169,365, where 82.2% was destined to US (Figure 17). However, China

regained the position as the largest exporter to the U.S. market. It is expected that growth in this U.S.

industry will continue at a similar rate observed in 2015.

Population

One of the main factors for the increasing demand in housing (Figure 14) is due to a rise in the group of

people between 18 and 30 years old, this group has been growing faster than any other in recent years and

this demand is reflected either by buying new houses or by remodeling ones (Figure 15). We expect that this

tendency will continue in the following years.

Housing Financing

The National Banking and Stock Commission (CNBV) reports that the housing loans portfolio balance in

aggregate terms at the end of 2015 (MXN $623 thousand million) represented 20 percent of the total loan

portfolio (MXN $3,118 thousand million) of financial institutions (Figure 16). The real growth of the

portfolio of housing loans during 2015 was 8.5 percent, similar growth as the last three years which it is

expected to continue the same tendency in the following years as long as some factors staying at the same

level such as total number of credits.

In relation to credits, the Federal Mortgage Society (SHF) ensures that the housing sector will continue

receiving enough credits to meet their needs, including bridge loans to developers as well as the availability

of innovative products for acquisition, improvement, construction for rent and self-construction housing.

They indicate that at the end of 2015 the distribution of the annual housing funding program placed

acquisition with 53.1% of total funding, improvement or expansion with 38.3% and 8.6% to infrastructure

programs. Together they represent 1.15 million credits granted with an investment of MXN $321 thousand

million. It is expected a 0.6% increase for 2016, this is 1.16 million credits where 49.3% is for house

acquisition, 40.7% for improvements and 10% for self-production (Table 7). From this total number, 745,198

credits are expected from INFONAVIT where 394,753 correspond to house purchase (new and used),

320,765 to improvements through the “Mejoravit” program and 29,680 as the new product of self-

production. In the case of FOVISSTE, 79,577 credits are expected where 59,847 are for acquisitions while

the remaining 19,730 are for “Respalda2M” improvement program; there are also expected 118,500 bank

credits where 105,000 are for acquisition, 10,000 for improvements and 3,500 for self-production. Fonhapo,

OREVIS, Banjercito, ISSFAM, Pemex, Habitat A.C. and other housing agencies, which provide loans for

acquisition, improvement and self-production, have estimated that 223,597 credits will be demanded.

Ceramic Tiles (Floor Tiles, Wall Tiles and Other

Tiles) Market for Residential Replacement,

Commercial, New Residential and Other

(Countertops, Facades, etc.) Applications: Global

industry Perspective, Comprehensive Analysis and

Forecast, 2014 –2020. Source: SIAVI – HS:6907 and 6908.

Table 7: Number of credits, 2016.

Solution Type 2015 2016e Annual

Variation

Acquisition 615,109 575,409 -6.5%

Improvements 443,623 475,353 7.2%

Self-production 100,748 116,110 15.2%

Total credits 1,159,480 1,166,872 0.6%

Source: Data reported by SHF.

Page 4

1

1

Grupo Lamosa

Construction Materials Burkenroad Reports

Employment

During the first quarter of 2016 according to the Mexican Social Security Institute (IMSS) insured workers, 641,780 formal spaces were generated where

6.0% was in the construction sector. In May 2016 CMIC predicted employment growth in construction of 2.0% YoY by the end of 2016, representing

122,000 new jobs which they also expect to increase in the next years following the industry expansion.

Peer Analysis.

Internacional de Cerámica S.A.B. de C.V. (Ceramic): Is a Mexican company which was established in Chihuahua, Mexico, with more than 36 years in the

ceramic market. Interceramic reported at the 1S16 of MXN $4,498 million (an increase of 18.4% vs 1S15). Has a production capacity of around 44 million

square meters, with nine manufacturing plants located in both Mexico and the United States. Additionally, Interceramic counts with a highly developed

distribution infrastructure with show rooms, franchisees, independent distributors and company-owned distributors throughout America. In China,

Interceramic products are distributed through a Joint-Venture with ICC Guangdong Xinfengjing Ceramics Co, Ltd., a company based in the southeastern

Chinese providence of Guangdong.

Grupo Industrial Saltillo S.A.B. de C.V. (GISSA): Is a Mexican conglomerate with several important divisions, generating its revenue mainly from

construction materials, engine blocks and houseware. One of such companies is Vitromex, through which the company outstands as an important player

producing wall and floor tiles. The construction materials division reported in 1S16 MXN $3,013 million in sales, an increase of 8% regarding 2015’s

comparable period.

Mohawk Industries, Inc. (MHK): Is an American company and world leader in flooring manufacturing that is horizontally and vertically integrated. Its

portfolio of products includes: carpet, rugs, ceramic tile, laminate, wood, stone, luxury vinyl tile and vinyl flooring. The company has significant operations

in the United States, Mexico, Russia, Bulgaria, Brazil, Malaysia, Australia and New Zealand (among other). Recently, Mohawk acquired an important

industry leader: Marazzi group SpA. At 1S16, the company has reported sales of over USD $4,482 million showing an increase of 14% over 1S15.

Portobello S.A. (PTBL3): Is a Brazilian company which manufactures and distributes ceramic construction materials and decorative ceramic products such

as: ceramic floor tiles, wall tiles and ceramic roofing materials. Attends mainly its domestic market, but also has sales abroad, spanning five continents:

America, Asia, Africa, Europe and Australia/Oceanic, reporting MXN $2,439 million in sales for 1S16. It is the largest Brazilian ceramic product

manufacturer in the country, located in Tijucas, Santa Catarina.

Kajaria Ceramics Ltd. (KJL): Is an Indian company with more than 25 corporate offices, manufacturing plants and showrooms in several locations in India.

The company has a production capacity of over 7.5 million square meters. Kajaria’s revenues are concentrated in the production and distribution of ceramic

walls, tiles and sanitary ware, is leader in its own home market and is currently strengthening its exports.

Table 8. Peer Analysis.

Company Grupo Lamosa Interceramic Gpo Ind Saltillo Mohawk Ind Kajaria

Ceramics Portobello

Ticker LAMOSA CERAMIC GISSA MHK KJC PTBL3

Revenue* $11,416 $8,885 $12,865.40 $149,706.90 $6,596.70 $4,974.70

EBITDA* $2,477.50 $1,422.90 $1,733.80 $27,750.20 $1,177 $631.10

EBITDA Margin 21.70% 16.00% 13.50% 18.50% 18.60% 12.70%

Price $37.00 $38.96 $32.75 $3,885.60 $351.50 $16.99

Market Cap.* $14,162.10 $6,437.30 $11,653.30 $288,128 $27,930.60 $2,694.00

Enterprise Value* $18,966.80 $7,939.40 $11,644.40 $340,885.10 $28,726 $5,490.30

Number of Employees 4,663 4,722 6,851 34,100 2,300 2,600

Shares Outstanding** 382.8 128.8 355.8 74.2 79.5 158.5

Net Income* $896.60 $504 $849.40 $15,143 $582 $119.60 Median

Net Margin 8.20% 5.70% 6.60% 10.10% 9.20% 2.40% 7.40%

Net Debt /EBITDA 1.9 0.9 -0.3 1.9 0.5 3.1 1.4

ROA 5.80% 8.40% 5.60% 8.20% 13.20% 2.00% 7.00%

ROE 14.20% 17.60% 8.60% 16.30% 27.50% 10.70% 15.25%

P/E 15.3 13.4 13.7 17.9 44.3 18.5 16.6

P/BV 2.1 2.1 1.1 2.9 10.9 1.9 2.1

P/S 1.3 0.7 0.9 1.8 4.2 0.4 1.1

P/EBITDA 5.8 4.8 6.7 10.2 21.9 3.5 6.25

EV/EBITDA 7.6 5.5 6.7 12.1 22.6 5.0 7.2

Source: Bloomberg, figures from last 12 months. *Amounts in million pesos. **Amounts in millions.

Page 5

Grupo Lamosa

Construction Materials Burkenroad Reports

$10.0

$12.0

$14.0

$16.0

$18.0

$20.0

2011 2012 2013 2014 2015 2016

Figure 19: FX rate

Macroeconomic analysis.

According to the International Monetary Fund (IMF), Mexico’s GDP growth for the following years 2016

and 2017 is expected to be on average 2.5%. Persistent and relevant world economic factors, such as China’s

recent economic growth slowdown, Europe’s inability to exit its period of a stagnant economy, Japan’s

quantitative easing tools and the normalization of the United States’ monetary policy rise questions for short

and midterm economic stability (Figure 18).

Mexican Central Bank (Banxico) estimates the historic record low inflation reached in 2015 (as low as

2.13%) will not persistent for 2016, and will converge with the authority’s expected 3% target, consistent

with recent surges in gasoline prices (which are established by the Mexican government). The recent

fluctuations in the Mexican Peso (13.42% depreciation during 1S16) due to the expectation of the United

States normalization of its monetary policy, the persistent low oil prices and US elections have not yet fully

translated into a higher inflation for the country, as producers resist passing through price increases to

consumers to avoid losing market shares.

All of these factors, combined with the decision of British citizens to exit the European Union through a

countrywide referendum (known commonly as Brexit), have triggered Banxico to raise interest rates to

4.25% (a 50 basis points increase in June 2016), thereby increasing the cost of debt for companies with

variable rate loans, such as Lamosa, and potentially limiting their growth through an increase on their cost of

capital. TIIE, the reference rate for variable loans in Mexico has increased around 1% in 1S16.

Estimations.

For our estimates, we considered an increase in Lamosa market share and improvements in profit margins due to recent investments. Regarding Ceramica

San Lorenzo acquisition, we are assuming that it would be concluded at the beginning of 2017 moving the Debt to EBITDA ratio to a level of around 2.2x by

the end of that year.

For our estimated period from 2016 to 2020 we expect a conservative CAGR of 7.8%, in response to a still positive outlook for the construction sector; we

expect sales to reach MXN $12,140 million at the end of 2016 and MXN $17,681 million by 2020, in line with its installed and used capacity. For the same

period from 2016 to 2020 we estimate a steady growth of around 8% in net profit.

Valuation.

To obtain the target price of Grupo Lamosa, two methodologies were used: Relative Valuation of

comparable companies and Discounted Cash Flow (DCF) method which resulted in a price target of MXN

$36.41 and $41.16 per share respectively. The selected weightings for the target price were 30% for relative

valuation method and 70% for DCF; with which we obtained a target price of $39.73 MXN at the end of

December 2016, representing a potential upside of 9.15%.

For the relative valuation, three comparable companies among which are Interceramic, Mohawk and

Portobello were used. With this methodology a price of $36.41 MXN per share was obtained. It is worth

mentioning that Lamosa group compared with the median of these companies has the second biggest EV to

EBITDA (only below Mohawk) with a current value of 7.6x.

With respect to our estimates, by 2016 we projected sales of MXN $12,140 million, an increase of 14.14%

over 2015, with an EBITDA of MXN $2,548 million. DCF valuation was performed by projecting the

financial statements from 2016-2020 with a perpetual growth rate of 2% and a weighted average cost of

capital (WACC) of 10.29%. For the calculation of WACC, CAPM (Capital Asset Pricing Model) method

was used to calculate the cost of equity (12.33%) assuming a 3% premium for liquidity risk was assumed.

Table 9. WACC Risk free 6.03%

Beta 0.55

Market risk premium 6.00%

Liquidity risk premium 3.00%

Cost of capital 12.33%

Cost of debt (after tax) 3.25%

Equity weight 77.5%

Debt weight 22.5%

WACC 10.29%

$10 $20 $30 $40 $50 $60 $70

P/E

P/BV

P/EBITDA

P/S

EV/EBITDA

DCF

Figure 20. LAMOSA* stock price

valuation

Source: Own elaboration

0.25

0.5

0

0.1

0.2

0.3

0.4

0.5

0.6

2011 2012 2013 2014 2015 2016

0.0

1.0

2.0

3.0

4.0

5.0

Figure 18: Interest rates

TIIE FED

Source: Bloomberg

Source: Bloomberg

Investment Summary.

Based on the attractive fundamentals of the company, a good performance of housing demand and employment, the increasing of housing credits, as well as

the potential upside observed in the share price, we assign a recommendation of MARKET PERFORM.

Page 6

Grupo Lamosa

Construction Materials Burkenroad Reports

Table 10. Target price

DCF 41.16 70% 28.81

Relative

Valuation 36.41 30% 10.92

Target price 39.73

Market price 36.40

Upside 9.15%

Table 11: Sensitivity analysis. (DCF) WACC

Gro

wth

rat

e 9.88% 10.08% 10.29% 10.60% 10.94%

1.00% 38.16 37.85 37.53 37.04 36.54

1.50% 39.92 39.59 39.26 38.74 38.23

2.00% 41.84 41.49 41.16 40.61 40.08

2.50% 43.95 43.60 43.24 42.68 42.12

3.00% 46.30 45.92 45.55 44.96 44.37

Source: Own elaboration.

Table 12. Discounted free cash flow method.

Million pesos 2015-12 2016-12 (FC) 2017-12 (FC) 2018-12 (FC) 2019-12 (FC) 2020-12 (FC)

EBIT $ 1,779 $ 2,088 $ 2,798 $ 2,937 $ 3,082 $ 3,236

Taxes $ (623) $ (731) $ (979) $ (1,028) $ (1,079) $ (1,132)

NOPAT $ 1,156 $ 1,357 $ 1,819 $ 1,909 $ 2,004 $ 2,103

Depreciation y amortization $ 366 $ 460 $ 609 $ 628 $ 649 $ 670

Free CF $ 1,522 $ 509 $ (173) $ 1,952 $ 2,066 $ 2,136

Terminal value $ 21,092

Summary

NPV (Enterprise value) $ 19,209

Debt 4,048 Number of shares 383

Cash 602 Target price 41.16

Equity Value $ 15,763

Source: Own elaboration.

Solid financial indicators: Lamosa in recent years has reported constant good financial performance. It has had a solid EBITDA growth, increasing

revenues and stable operational costs.

Market leader: Lamosa is the largest ceramic manufacturer in the world and is the national leader in all its products. Additionally, Lamosa has always kept

at the forefront in designing products with higher added value. Lamosa is currently in a process of expansion in South America with the acquisition of

Ceramica San Lorenzo, which will strengthen its distribution and production capabilities in Chile, Colombia, Peru and Argentina.

Market diversification: Lamosa has operations in more than 17 countries from Central and South America as well as in the United States of America,

which in 2015 represented 15% of their total income, this has allowed the company to enter new and less competed markets. In 2015, the company sells its

sanitary ware business to focus on ceramic products and adhesives. On the course of the years it has added ceramic wall and floor tiles, ceramic roofing

materials, water-proof adhesives and specialized adhesives to its product portfolio, all of which allows to company to focus on its two main divisions:

ceramic products and adhesives.

Technology: Lamosa has 24 production centers. In the coatings business, it has the highest technology in digital printing equipment - full definition

technology. During the previous 4.5 years Lamosa has invested in different areas MXN $2,984 million with $879 invested during 2016, to maintain their

competitive advantage. These investments will be reflected in higher EBITDA with a lower amount of employees versus its main competitor: Interceramic.

Efficiency: Grupo Lamosa has the highest operating margins in the industry thanks to a strict control of costs and expenses which has been implemented

for the past years and because it has a high productivity driven by cutting edge technology, derived from recent important capital investments.

Industry: Is expected to grow moderately but steadily mainly supported by private construction and the necessary construction materials associated with

such activity. In addition, the Mexican government will continue to grant mortgage credits. Outside of Mexico, the United States is expected to follow a

steady growth, pushing sales on the most important foreign market for the industry as a whole. In 2015, the number of private housing units started was

over 1.1 million, in a steady yearly increase from 2009’s 550 thousand units (since the collapse in 2008 due to the economic crisis).

Investment Risks.

Political

Considering the exports represents a 15% of the company’s revenues and, at the present, the USA is the most relevant foreign market for Grupo Lamosa, it

is important to mention the political risk associated with the next presidential election to be held in November. The republican candidate has expressed

strong views regarding existing commercial treaties like the North American Free Trade Agreement (NAFTA) and in general, the implication of the

country (US) being disadvantaged by current commercial terms; which could materialize to new tariffs and quotas.

Market

With Lamosa’s net debt exposed to foreign exchange (particularly in USD), there is risk of a continuing depreciation of the local currency against the US

dollar; with the majority of Grupo Lamosa’s income in Mexican pesos. During the first semester of 2016, the Mexican peso saw a depreciation of 13.42%

against the USD, and it is expected to reach $18.50 USD/MXN at 2016’s year end, although analysts don’t disregard the probability of a short term

exchange rate of over $20.00 USD/MXN due to the upcoming presidential elections.

Page 7

Grupo Lamosa

Construction Materials Burkenroad Reports

Financial Ratios 2014 2015 2016 2017 2018 2019 2020

Liquidity

Current Ratio 2.5 1.9 1.9 2.5 2.4 2.4 2.4

Quick 1.9 1.4 1.4 1.8 1.8 1.7 1.8

Cash Ratio 1.9 1.4 1.4 1.8 1.8 1.7 1.8

Interest Coverage 5.3 7.2 10.3 7.5 8.6 10 11.5

Productivity

Accounts Receivables turnover 6.9 4.6 5.2 5.3 5.5 5.6 5.7

Inventory Turnover 3.9 4.3 4.6 4.7 4.8 4.8 4.9

Accounts Payables turnover 5.7 5.7 6.4 6.6 6.7 6.8 6.9

Working Capital $3,048 $1,341 $1,930 $2,734 $2,760 $2,787 $2,813

Working Capital Turnover 2.9 7.9 6.3 5.9 6 6.1 6.3

Fixed Assets Turnover 2 2.2 2.5 2.6 2.7 2.7 2.8

Total Assets Turnover 0.6 0.7 0.8 0.8 0.8 0.9 0.9

Days Inventory on Hand 92.7 85.4 79.5 77.9 76.6 75.3 74

Days Receivable 52.9 79.4 70.1 68.4 67 65.5 64

Cash Conversion Cycle 81.9 100.9 92.9 90.7 88.8 87 85.2

Leverage

Total Debt Ratio 0.3 0.3 0.3 0.4 0.3 0.3 0.3

Total Debt-to-Equity 0.8 0.7 0.7 1.2 1.1 1 0.9

Total Debt-to-Capital 0.4 0.4 0.4 0.6 0.5 0.5 0.5

Net Debt-to-EBITDA 2.2 2 1.6 2.2 1.9 1.7 1.4

Efficiency

Gross Margin 40.00% 40.70% 41.00% 41.20% 41.50% 41.80% 42.10%

Operating Margin 17.50% 16.70% 17.20% 17.40% 17.70% 18.00% 18.30%

EBITDA Margin 22.40% 21.90% 21.00% 21.20% 21.50% 21.80% 22.10%

Net Margin 4.90% 6.60% 8.20% 7.90% 8.30% 8.60% 9.00%

Profitability

Return on Assets (ROA) 2.90% 4.40% 6.20% 6.50% 7.00% 7.50% 7.90%

Return on Equity (ROE) 7.40% 10.80% 16.40% 21.10% 22.90% 24.70% 24.70%

Return On Invested Capital (ROIC) 8.10% 10.20% 10.80% 12.30% 12.80% 13.30% 13.80%

Page 8

Currently, the country’s central bank, Banxico has taken measures such as the rise of interest rates by 50 bps on June 30, 2016, and, in conjunction with

representatives of the Mexican government, have announced cut backs in federal spending representing 0.7% of the country’s GDP which have eased FX

movements. Higher interest rates increases the cost of capital (higher interest payments), with the Mexican variable reference rate, TIIE, having increased

approximately 1% during 1S16. Currently, around 40% of Lamosa’s loans are based in variable rate loans referenced to TIIE.

Operational

Natural gas is the most important input for the production process with exposition to changing international prices. Currently, the company hedges this risk

with the use of swap derivatives of 7,740,000 MMBTUS maturing in 2016, 2017 and 2018; with prices ranging from $4.23 to $4.50 USD per MMBTUS.

Considering Lamosa’s reported use of 9,542,653 MMBTUS 2015, there is still a risk associated with the increase in gas prices, which could affect negatively

the company’s profits. According to current future prices, some analysts expect to have an increase in natural gas prices, although the risk remains for a

sharp spike in this company input.

Income statement. Million pesos.

2014 2015 2016 2017 2018 2019 2020

Revenue $ 8,971 $ 10,636 $ 12,140 $ 16,081 $ 16,594 $ 17,124 $ 17,681

Cost of Goods Sold $ 5,381 $ 6,310 $ 7,163 $ 9,455 $ 9,707 $ 9,966 $ 10,237

Gross Profit $ 3,590 $ 4,326 $ 4,977 $ 6,625 $ 6,886 $ 7,158 $ 7,444

Operating Expenses $ 2,024 $ 2,547 $ 2,889 $ 3,827 $ 3,949 $ 4,076 $ 4,208

Operating Income $ 1,566 $ 1,779 $ 2,088 $ 2,798 $ 2,937 $ 3,082 $ 3,236

Interest Expenses $ 296 $ 247 $ 203 $ 374 $ 340 $ 309 $ 281

Interest Income $ (25) $ (17) $ (12) $ (36) $ (33) $ (32) $ (33)

Other Expenses $ 332 $ 399 $ 243 $ 322 $ 332 $ 342 $ 354

Taxes $ 520 $ 448 $ 664 $ 861 $ 921 $ 982 $ 1,046

Net Income $ 442 $ 701 $ 991 $ 1,278 $ 1,378 $ 1,481 $ 1,589

Depreciation and Amortization $ 331 $ 366 $ 460 $ 609 $ 628 $ 649 $ 670

EBITDA $ 2,011 $ 2,325 $ 2,548 $ 3,407 $ 3,566 $ 3,731 $ 3,905

Balance sheet. Million pesos. 2014 2015 2016 2017 2018 2019 2020

Total Assets $ 15,077 $ 15,776 $ 15,893 $ 19,708 $ 19,707 $ 19,844 $ 20,066

Total Current Assets $ 5,629 $ 5,825 $ 5,296 $ 7,659 $ 7,543 $ 7,563 $ 7,668

Total Noncurrent Assets $ 9,448 $ 9,950 $ 10,597 $ 12,049 $ 12,164 $ 12,281 $ 12,398

Total Liabilities $ 9,105 $ 9,305 $ 9,868 $ 13,647 $ 13,701 $ 13,836 $ 13,628

Total Short-Term Liabilities $ 2,291 $ 3,113 $ 2,764 $ 3,105 $ 3,135 $ 3,165 $ 3,195

Total Long-Term Liabilities $ 6,814 $ 6,192 $ 7,105 $ 10,542 $ 10,566 $ 10,671 $ 10,433

Equity $ 5,972 $ 6,471 $ 6,025 $ 6,061 $ 6,006 $ 6,008 $ 6,438

Liability + Equity $ 15,077 $ 15,776 $ 15,893 $ 19,708 $ 19,707 $ 19,844 $ 20,066

Grupo Lamosa

Construction Materials Burkenroad Reports

The Latin America Burkenroad Reports from ITESM are financial analysis of companies listed in the Mexican

Stock Exchange, and capital budgeting of medium and small companies. They are elaborated by students of

both the Master in Finance program of EGADE Business School, and the Bachelor in Finance and Accounting;

under the supervition of recognized professors.

The Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Instituto de Estudios Superiores de

Administración de Venezuela (IESA), and Universidad de los Andes from Colombia, along with Tulane

University, started the Latin America Burkenroad Program with the support of Multilateral Investment Fund of

the Interamerican Development Bank in 2001. Actually it has been expanded to other countries, to Guatemala

by the Escuela Superior Politécnica Litoral, to Perú by the Universidad Catolica de Perú, to Colombia by the

EAFIT, ICESI, and the Universidad Del Norte, as well as Argentina by the Universidad de Belgrano, and soon

to Brazil and Chile.

This program enriches human capital by providing training in financial analysis and valuation techniques, and

also intends to facilitate access of companies to financing sources by providing financial information to

investors and financial institutions.

The reports prepared by this program, evaluate financial conditions and investment opportunities in Latin

American companies. Financial reports of listed companies are distributed to national and foreign investors

through publications and financial information systems such as Reuters, Infosel Financiero and Finsat, among

others. Investment capital budgeting reports are distributed only to beneficiary companies for future private

presentations to financial institutions or potential investors.

Investment plans and financial situation of the analyzed companies are presented to the financial community in

an Annual Meeting.

For more information about the Burkenroad Latin America Program please visit the following websites:

http://burkenroad.wix.com/pagina-hpstr

www.latinburkenroad.com

María Concepción del Alto Ph.D.

mdelalto@itesm.mx

Research Director

Burkenroad Reports, Mexico

Departamento Académico de Contabilidad y Finanzas

EGADE Business School

Tel +52 (81) 86256000 ext. 6050