GRUPO CARSO HOLD Condumex’s Swecomex: the New Driver of … · 2004-10-09 · target price of...

Important disclosures/certifications are in the “Important Disclosures” section of this report. U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 407-7809.

Latin American Equity Research Company Report

Mexico, October 8, 2004 Mexico – Conglomerates

GRUPO CARSO HOLDCondumex’s Swecomex: the New Driver of Growth Luis Miranda, CFA (5255) 5269-1926 [email protected]

(10/07/2004) CURRENT PRICE: US$9.35/M$52.70 TARGET PRICE: US$10.20/M$60.50

What’s Changed Rating: Unchanged at Hold Price Target: Introducing US$10.20/M$60.50 for 2005 EBITDA: ’04 From US$944 Mn to US$985 Mn ’05 From US$992 Mn to US$1,048 Mn ’06 From US$1,053 Mn to US$1,119 Mn

Company Statistics Bloomberg GCARSOA1/GPOVY 52-Week Range (US$) US$5.90-US$9.37 2005E P/E Rel to IPC (x) 0.82005E P/E Rel to Congs (x) 0.7IPC (US$) 9853-Yr CAGR (03-06E) 37.3%Market Capitalization (US$ Mn) US$3,811Float (%) 30%3-Mth Avg Daily Vol (US$000) 1,353Shares Outst (ADR 2:1) 815Net Debt/Equity (x) 0.7Book Value per ADR (US$) 6.65

Estimates and Valuation Ratios 2003 2004E 2005E 2006E Net Earn (M$) 1,969 4,925 5,270 5,686Current EPS 2.35 5.92 6.34 6.84Net Earn (US$) 179 424 442 464Current EPADR 0.43 1.02 1.06 1.12P/E (x) 16.8 10.0 9.6 9.2P/Sales (x) 0.57 0.65 0.61 0.57P/CE (x) 8.93 6.28 5.92 5.22FV/EBITDA (x) 6.1 6.4 5.8 5.3FV/Sales (x) 0.99 1.08 0.97 0.88FCF Yield (%) 7% 8% 8% 10%Div per ADR (US$) 0.12 0.12 0.14 0.13Div Yield (%) 2.6% 1.3% 1.4% 1.4%

Sources: Bloomberg, Company Reports, and Santander Investment estimates. M$ figures in nominal terms.

Investment Thesis: In this report, we are introducing our year-end 2005 target price of US$10.20 per ADR (M$60.50) for Gcarso. In addition, we are factoring in our updated estimates for the oil platform business in Swecomex, Condumex’s blossoming business. We will no longer refer to our year-end 2004 target price of US$8.60/M$49.50. Our year-end 2005 target price implies a total return of 11% compared with the expected 6% total return for the IPC index in the same period. Therefore, we are maintaining our Hold rating on the stock. Our investment thesis has not changed. We believe Gcarso’s business portfolio is solid and that it will benefit in 2004 and 2005 from a recovery in economic growth and the successful entrance to the oil platform manufacturing business via Swecomex. However, we see mixed signs in valuation; while the stock looks attractively valued in terms of FV/EBITDA multiples, it appears fairly valued in terms of net asset value (NAV) and book value (BV).

Reasons for Change to Price Target/Estimates: • We are updating our estimates, mainly on the back of a better

outlook for Swecomex, which entered the oil platforms business in late 2003 and now has a backlog of US$470 million (there are still 24 more oil platforms to be assigned in Pemex’s current investment program). We believe that most of the revenue from this backlog will have a positive impact on GCarso’s 2005 figures.

• Our new EBITDA estimates imply 15% growth in 2004 versus 2003 and 6% growth in 2005. In our view, the 2004 economic recovery appears stronger in numbers than it actually is due to the low base of comparison in 2003.

Valuation and Risks to Investment Thesis: • Gcarso trades at 5.8 times our 2005 FV/EBITDA estimate, which is

a 3.5% premium to its five-year average, and it trades at a 2% premium to its Mexican peers’ FV/EBITDA average. We estimate a 19% discount to its NAV versus the estimated 30% five-year average discount.

• The main risks to our investment thesis are: (1) better-than-expected growth in the Mexican economy; (2) stronger results for Condumex; and (3) higher margins in the department stores format.

Condumex’s Swecomex: the New Driver of Growth

2 Important disclosures/certifications are in the “Important Disclosures” section of this report. U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 407-7809.

Grupo Carso is Mexico’s largest conglomerate. The company’s core businesses are retail, telecommunications, construction, and energy. The company’s business portfolio is linked to the Mexican economy, and it is the Mexican conglomerate with the lowest exports ratio (approximately 7% of sales). Thus, the stock is considered the most defensive play among its peers. We estimate that the company has a 55% exposure to the domestic consumption sector through its retail, tobacco, and construction businesses. The company’s business portfolio includes Condumex, Nacobre, Porcelanite, Frisco, Cigatam, Sanborns, Sears, El Globo, and shopping centers.

VALUATION We are introducing our year-end 2005 target price of US$10.20 per ADR (M$60.50 per local share). Our target price implies upside potential of 11% from current levels, which compares with the 6% expected return for the IPC index in the same period. Thus, we are maintaining our Hold rating. Year to date, Gcarso’s stock has outperformed the IPC index by 8%. The stock’s performance was very strong during the January-February and the August-September periods. We believe this was driven by the recovery in fourth-quarter 2003 figures and solid results for first-quarter 2004 and the good news concerning the oil platform business during second-quarter 2004. However, we believe that most of the good news is priced in, and we expect Gcarso to move in tandem with the IPC.

We believe the stock’s valuation remains attractive in terms of its 2005E FV/EBITDA multiple, both in absolute and relative terms. Also, the stock’s defensive nature due to its high exposure to domestic consumption looks attractive in an environment where we see domestic consumption improving in the Mexican economy (Grupo Sanborns represents 35% of consolidated sales and Cigatam represents close to 20%). Finally, the company has proven that it has the management capability to enter a new business operating with relevant financial impact at the consolidated level (the oil platforms business in Condumex). However, we believe these positive points are partially offset by a relatively low 19% discount to our 2005 NAV, which compares unfavorably with the 30% average of the last five years and 1.3 times P/BV. This implies a 60% premium to its Mexican peers (versus a 48% average), and the expected lack of growth at the EBITDA level in Cigatam, which would increase Gcarso’s effective exposure to domestic consumption to 35% of sales, only 10 percentage points higher than Alfa. We expect this difference to narrow in the medium term.

Finally, we recognize the potential for positive surprises if Grupo Sanborns is able to deliver higher-than-expected operating growth, the industrial division wins additional contracts in the oil platform business, or new projects are announced in the infrastructure-energy areas.

FV/EBITDA FORWARD Gcarso is currently trading at 6.4 our 2004 FV/EBITDA estimate and at 5.8 our 2005 estimate. The 5.8 times multiple implies a 3.5% premium to its five-year average (5.6 times), and a 2% premium to the sector’s average, versus the 6% premium average for the last five years.

Year-end 2005 target of US$10.20 per ADR (M$60.50 per share).

We believe the stock’s valuation remains attractive in terms of FV/EBITDA.

3Important disclosures/certifications are in the “Important Disclosures” section of this report. U.S. investors’ inquiries should be directed to Santander Investment Securities Inc. at (212) 407-7809.

Figure 1. Gcarso – Forward FV/EBITDA (Five-Year Average and +/- 1 Std. Deviation)

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Sources: Company Reports and Santander Investment Securities estimates.

However, we see two valuation parameters that limited further appreciation of the FV/EBITDA multiple, in our view. First, Gcarso’s discount to its NAV is 19%, versus the five-year average of 30%. Second, in terms of book value, the stock is the most expensive one in the sector, trading at 1.3 times P/BV, a 60% premium to the sector, versus its 48% average over the last five years.

NET ASSET VALUE

Based on our new 2005 EBITDA estimates, Gcarso trades at a 19% discount to its NAV. This discount is higher than the 16% discount in our previous report published on June 8, due to our upward revision in EBITDA for 2004 and 2005. However, the current 19% discount is narrower than our 30% five-year average estimate. On a stand-alone basis, the NAV multiple would imply that Gcarso is almost fairly valued. However, we believe it is possible to see further reduction in the NAV discount, on the back of a solid performance of its industrial portfolio during 2004 and 2005. Our target price implies a 12% discount to its NAV. However, due to the diversified nature of the company, we believe a narrower discount over our estimate would be unsustainable in the long run.

Figure 2. Gcarso – Net Asset Value 2005E (U.S. Dollars in Millions, Except Per Share Amounts) 2005E FV/EBITDA Firm Net % % of Subsidiary EBITDA Multiple Value Debt Ownership NAV NAVCigatama 147 6.5 948 15 50% 466 9.4%Condumex 282 7.4 2,092 246 100% 1,837 36.9%Nacobre 90 6.2 557 255 100% 302 6.1%Frisco 87 8.7 755 314 99% 436 8.8%Porcelanite 90 5.8 520 207 100% 312 6.3%Retail Mexicob 353 0.0 0 318 79% 994 20.0%Others b 65 7.0 456 (102) 100% 558 11.2%Total 1,113 5,328 1,253 4,906 98.5%- Net Debt/Holding (73) -1.5%= Net Asset Value 4,979 101.5%Shares Outstanding (Mn) 877 Local ADRValue/Share M$64.61 US$11.35Current Price M$52.31 US$9.19Prem /(Disc) to SOTP -19.0%a Adjusted for combined Cigatam/Phillip Morris de Mexico operations. b Includes market capitalization for Grupo Sanborns (Sanborns, Sears, MixUp, El Globo, and the Shopping malls). Sources: Company reports, Santander Investment Securities estimates, and Value Line estimates.

We are not so encouraged by the stock’s P/BV and NAV discount.

We estimate that the stock trades at a 19% discount to its NAV.



In our NAV valuation, we are using FV/EBITDA 2005E multiples, which are based on a sample of U.S. companies and their Value Line estimates. Our sample includes Phillip Morris (Altria), British American Tobacco, UST Inc., Gallagher Group, for Tobacco; Belden Inc, Andre Corp, and Hubbell Inc for Industrial Electric; and Mueller Ind. International and Aluminum, Trinity Ind. and Alcoa for Industrial Metal Transformation. For mining, we included Barrick Gold, Newton Mining Placer Dome Mining, while we included American Standard, Elcor and Masco for Building products. In addition, we used the market value of Grupo Sanborns as a reference, which we consider a conservative approach.

Finally, Figure 3 shows Gcarso’s P/BV premium/discount versus its Mexican peers. As mentioned previously, we believe the stock is fairly valued considering this multiple. At 1.3 times P/BV, this represents a 60% premium to the sector average, versus its 48% average over the last five years. We recognize that Gcarso has traditionally traded at a premium to its peers due to its defensive play nature; however, we believe that current levels already reflect the solid performance of its business portfolio.

Figure 3. Gcarso – P/BV Premium Discount to its Mexican Peers’ Average

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EARNINGS OUTLOOK In this report, we are adjusting our estimates to account for Gcarso’s new business line, oil platforms, which we estimate will add US$12 million in EBITDA to our 2004 estimates and US$47 million to our 2005 estimates (considering only the current projects). We are also incorporating our new macro estimates. The main changes were in our 2005 GDP growth estimates (from 4.0% to 4.2%), and our FX rate estimates (from M$11.30/US$ to M$11.50/US$ in 2004, and from M$11.65/US$ to M$11.80/US$ in 2005).

Figure 4. Mexico – Select Economic Projections, 2002-2005F 2002 2003 2004F 2005FReal GDP (%) 0.7% 1.3% 4.0% 4.2%CPI Inflation (%) 5.7% 4.0% 4.5% 3.8%US$ Exchange Rate (Year-End) 10.44 11.24 11.50 11.84 US$ Exchange Rate (Average) 9.67 10.79 11.35 11.71 Interest Rate (Year-End) 7.0% 6.0% 7.5% 7.8%Interest Rate (Average) 7.1% 6.2% 6.6% 7.6%Fiscal Balance (% of GDP) -1.2% -0.6% -0.2% 0.0%Current Account Balance (% of GDP) -2.2% -1.5% -1.7% -2.1%International Reserves (US$ Bn) 48.0 57.4 58.9 60.2Total External Debt (% of GDP) 21.7% 22.4% 21.8% 20.9%Source: Santander Investment Securities historical and forecasts.

Figure 5 shows our change in estimates, which are mainly driven by the adjustments in Condumex due to the better than expected figures in the oil platform business.

Figure 5. Gcarso – Estimate Revision, 2003E-2004E (U.S. Dollars in Millions) 2004E 2005E Previous Current Change Previous Current Change

Revenue 5,449 5,820 7% 5,831 6,279 8%Op. Profit 739 776 5% 803 869 8%Op. Margin 13.60% 13.3% -2% 13.8% 13.8% 0%EBITDA 944 985 4% 992 1,048 6%Net Income 316 429 36% 367 438 19%EPADR 0.76 1.07 40% 0.88 1.08 23%Except per share data. Sources: Company reports and Santander Investment Securities estimates.

We present our consolidated estimates in Figure 6 and our estimates by division in Figure 7.

Figure 6. Gcarso – Consolidated Estimates, 2003-2006E (U.S. Dollars in Millions) 2003 2004E 2005E 2006E 03/02 04E/03 05E/04E 06E/05ESales 5,125 5,820 6,279 6,667 0% 14% 8% 6%Op. Profit 651 776 869 906 -6% 19% 12% 4%Op. Margin 12.7% 13.3% 13.8% 13.6% EBITDA 854 985 1,048 1,119 -5% 15% 6% 7%EBITDA Margin 16.7% 16.9% 16.7% 16.8% Net Profit 179 429 438 458 -13% 139% 2% 4%NM Not meaningful. Sources: Company reports and Santander Investment Securities estimates.



Figure 7. Gcarso – Consolidated Estimates by Division, 2002-2005E (U.S. Dollars in Millions) Grupo Carso / Total 2003 2004E 2005E 2006E 03/02 04E/03 05E/04E 06E/05ESales 5,125 5,820 6,279 6,667 0% 14% 8% 6%Operating Margin 12.7% 13.3% 13.8% 13.6% EBITDA 854 985 1,048 1,119 -5% 15% 6% 7%EBITDA Margin 16.7% 16.9% 16.7% 16.8% Condumex Sales 1,244 1,584 1,804 1,957 4% 27% 14% 9%Operating Margin 11.7% 12.7% 13.0% 13.0% EBITDA 188 247 282 302 -6% 32% 14% 7%EBITDA Margin 15.1% 15.6% 15.6% 15.4% Nacobre Sales 457 548 592 631 3% 20% 8% 7%Operating Margin 6.6% 10.4% 10.8% 11.3% EBITDA 53 85 90 98 -22% 60% 7% 8%EBITDA Margin 15.8% 11.8% 15.6% 15.3% Frisco Sales 283 272 263 268 8% -4% -3% 2%Operating Margin 11.3% 19.0% 20.3% 20.6% EBITDA 65 85 87 89 -1% 30% 3% 2%EBITDA Margin 23.1% 31.2% 33.1% 33.1% Porcelanite Sales 294 281 314 354 4% -4% 12% 13%Operating Margin 22.4% 19.2% 20.0% 20.0% EBITDA 94 81 90 97 15% -14% 11% 9%EBITDA Margin 32.1% 28.8% 28.5% 27.6% Cigatam Sales 1,000 1,063 1,079 1,070 -3% 6% 1% -1%Operating Margin 6.8% 6.7% 6.2% 6.3% EBITDA 81 81 81 83 -10% 0% 0% 2%EBITDA Margin 8.1% 7.6% 7.5% 7.7% Retail* Sales 1,725 1,880 2,009 2,156 -2% 9% 7% 7%Operating Margin 14.5% 14.4% 15.1% 15.3% EBITDA 301 320 353 381 -7% 6% 10% 8%EBITDA Margin 17.5% 17.0% 17.6% 17.7% Others Sales 121 140 150 163 -22% 16% 8% 8%Operating Margin 33.8% 37.9% 34.0% 34.3% EBITDA 50 64 65 70 -11% 28% 2% 7%EBITDA Margin 41.3% 45.8% 43.3% 42.9% Sources: Company reports and Santander Investment Securities Investment estimates.

CONDUMEX’S SWECOMEX, THE NEW DRIVER OF GROWTH Condumex is a conglomerate in and of itself. Condumex is Gcarso’s largest industrial operation, representing 28% of sales in second-quarter 2004. Condumex is an industrial corporation itself, with more than 30 operating companies and almost 18,000 employees (approximately 38% of Gcarso’s total employees). The group is a market leader in the manufacturing of high, medium, and low voltage electrical wires, telecommunication and automotive industry cables. In addition, it has expanded into the manufacturing field of a wide range of products, such as automotive parts, capital goods, and equipment for energy generation and distribution, as well as the installation of voice, data, and video network systems. Condumex classifies its activities in five divisions: automotive parts and electronics, cables, automotive cable, energy, and installations.

Swecomex is part of the energy division. The energy division has 10 operating companies, and one of them is Swecomex. Condumex acquired South Western Engineering Comp., (Swecomex) in 1992. It is a company with 40 years of experience in the manufacturing of process equipment, such as heat exchangers, condensers, steam generator, tanks, industrial heaters, and vacuum


systems. Swecomex’s offices and plants are located in Guadalajara, in Mexico’s west, but in 2003, the company acquired two building yards on the country’s East Coast, in Veracruz (Tuxpan) and Tamaulipas (Pueblo Viejo) where there are assembly sites and some manufacturing facilities.

Condumex enters the oil platform business. In third-quarter 2003, Gcarso announced that it had been contracted by Pemex to build three oil platforms. The contract was worth US$120 million. Based on the contract, the company is to deliver these platforms in 2004 and 2005 and collect revenues from Pemex starting in second-quarter 2004. In the latter period, the company announced that it had won an additional contract for two more oil platforms worth US$350 million, with an average cost per platform of US$175 million, significantly higher than the US$40 million for the previous contract. The difference in the contracts is not only their size, but also the equipment that Swecomex must install in the platforms. For these projects, the group hired Heerema from the Netherlands and Kepch from Germany as technology advisors for the construction and control of the manufacturing process.

What is the expected impact of Swecomex’s contracts on Gcarso? We estimate that Swecomex’s current backlog of close to US$470 million would represent approximately US$12 million in EBITDA in 2004 and US$47 million in 2005. We look for EBITDA margins to be higher in 2004 due to a favorable purchase strategy of raw materials by the company. Therefore, we expect an EBITDA margin of 15% in 2004 and a modest decline in 2005 to 13.5%. As shown in Figure 8, we expect most of the revenues from these projects to have a material impact on results in 2004 (and especially) in 2005 when we believe they would represent close to 6% of consolidated sales for Gcarso. This implies that in 2005, and considering only oil platform revenues, on a stand-alone basis, Swecomex could be similar in size to Porcelanite and Frisco.

Figure 8. Swecomex – Estimated Value of Current Projects (U.S. Dollars in Millions Except %) Total Average Revenues EBITDA Value Price 2004E 2005E 2006E 2004E 2005E 2006EProject 3Q03-III 116 38.7 80.0 36.0 - 12.0 4.9 -Project 2Q04-II 350 175.0 - 314.0 36.0 - 42.4 4.9Total 466 80.0 350.0 36.0 12.0 47.3 4.9% of Condumex 5.1% 22.1% 1.8% 4.9% 16.8% 1.6%% of Gcarso 1.4% 6.0% 0.5% 1.2% 4.5% 0.5%

Sources: Company reports and Santander Investment Securities Investment estimates.

What can we expect going forward? Pemex’s four-year strategic investment program in platforms (2003-2006) encompasses 47 projects. With the latest public information from Pemex, of the 47 projects, 16 have already been assigned and seven are currently in the bidding process (we believe that Swecomex’s US$350-million contract already includes these seven platforms). Therefore, there are 24 remaining platforms to be assigned by Pemex over the next two years.

Figure 9. Pemex – Strategic Investment Program in Platforms by Type of Platform (2003-2006) Status Prod. Drilling Comp. Housing Link Wells Others TotalAssigned - 12 - - 1 2 1 16Currently Bidding 3 4 - - - - - 7To be Bid 3 11 1 7 - 2 - 24Total 6 27 1 7 1 4 1 47

Sources: Pemex.

At present, we believe that it would be aggressive to account for a similar back log level after 2005. We understand that the last two platforms that Swecomex won were for production, which explains the high average price per project (US$175 million). This is because these platforms are not only larger in size, but also because the contract includes additional equipment and services. In our view, the current backlog is not sustainable, as there are three more production platforms to be bid, and, thus, going forward we would expect, on average, a lower average price per unit in the upcoming bidding results. Furthermore, currently, Swecomex has an



installed capacity constraint, as it is limited to two yards (Veracruz and Tamaulipas) and its current manufacturing facilities in Guadalajara. At current production rates, we believe that the company could bid for additional platforms that would start production during the second half of 2005.

What to look for in the medium term. In our view, the upcoming bidding process in oil platforms will be a relevant event to monitor. However, we believe it is important to follow closely Gcarso’s interest and development in additional infrastructure, energy or petrochemical related projects. In the last two years, Gcarso’s industrial businesses have focused on its commercial and service effort towards offering integral energy solutions under the Sinergia concept.

The government’s proposal for the expense budget for 2005 presented to Congress considers a 27% increase in infrastructure investment from Pemex, CFE, and Luz y Fuerza del Centro, the state-owned oil and electricity companies. The budget for investment in projects directly financed by the government increased significantly. For Pemex, the budget expanded from the expected US$1.0 billion to approximately US$5.0 billion (this figure does not include Pidiriegas). For CFE and Luz y Fuerza, the budget considers a 15% and 44% increase in investments, respectively.

Figure 10. Pemex – Strategic Investment Program, 1998-2004E (U.S. Dollars in Billions)

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We believe that, in the medium term, Pemex will maintain a high level of investment to improve its reserve levels, which have declined 16% over the last four years. However, currently, we believe that it is difficult to assess the specific ongoing impact of Gcarso other than additional oil platforms that the group might win.

Figure 11. Pemex – Proven Reserves (Barrels in Millions), 2000-2003 P1 2000 2001 2002 2003 03/00Crude Oil and Condensate Reserves 12,312 12,622 11,725 10,473 -15%Dry Gas Reserves 9,713 8,776 8,572 8,094 -17%Total Reserves 22,025 21,398 20,297 18,567 -16%

Sources: Pemex.

Construction could be an additional source of growth. Management aims to increase its exposure to construction, targeting the housing and infrastructure sectors, including energy and possibly petrochemicals. In our opinion, the impressive results of Swecomex in the oil platform


business are representative of what Gcarso is capable of, leveraging on its diversified business structure. Although we believe the group has the capability in terms of human and financial resources, in our view, it is still unclear how the company will approach additional endeavors. Thus, as we believe these are the early stages of these projects, we are not factoring in any potential impact in our earnings model.

Integration or simplification. Gcarso’s management has been working toward integrating services and processes, as well as the development of value-added products. The “Sinergia” project was the first step, aimed at commercialization and services. We believe that going forward, we could start to see a stronger integration between Condumex and Nacobre, as their product portfolio and combined services have a potential for integration and simplification, in our opinion. We understand that some of the integration at the support areas level has already been done and has generated savings at the SG&A level, which we believe will be fully reflected in 2005.

OUTLOOK BY DIVISION Condumex (28% of sales and 27% of EBITDA). We estimate sales growth of 27% in 2004 versus 2003 in U.S. dollar terms, and 14% in 2005. At the EBITDA level, we estimate a 31% growth in 2004 in U.S. dollar terms year on year and 14% in 2005. The two main drivers for this division are the oil platforms revenues and EBITDA from Swecomex, which was non-material in 2003, and the steady demand from Telemex in 2004 and expected in 2005. We have to remember that in 2004, Telmex’s capex for Mexico increased from US$1.0 billion to US$1.7 billion, and had a very positive effect on Condumex’s numbers during the first half of 2004. For 2005, we understand that Telmex’s capex could post an additional 5%-10% increase in U.S. dollar terms versus 2004, as the company is expected to maintain its strong demand for Condumex’s products and services. We believe that in 2005, an additional source of growth for Condumex could be demand from Embratel in Brazil.

Furthermore, the effect of the oil platforms and the recovery in demand from Telmex are benefited by a very low base of comparison in 2003, as, in the first half of that year, the Condumex posted one of the lowest operating margins in history for the division.

Nacobre (10% of sales and 9% of EBITDA). We expect sales and EBITDA growth of 20% and 60%, respectively for full-year 2004, driven by a recovery in the price of copper, aluminum, and plastic products, as well as the positive effect of the shutdown of the aluminum smelter in third-quarter 2003, which has fully impacted 2004 numbers and reduced operating cost at the aluminum division. In our view, this division will likely also be benefited by the solid demand in the construction industry in Mexico. We highlight that the impressive EBITDA growth in 2004, similar to Condumex, is benefited by a very low base of comparison in 2003. For 2005, we expect 7% growth in EBITDA, driven by the expected 6.8% growth in public and private investment in Mexico (real peso terms year on year).

Cigatam (19% of sales and 9% of EBITDA). The company implemented an increase of M$1.00 on cigarette packs across the board in January 2004. We estimate that this represents a price increase of 15% for value brands to 6% for premium brands. On May 31, 2004, the two cigarette companies with operations in Mexico agreed to contribute to a government fund that covers catastrophic health expenses related to tobacco in Mexico. The objective is to create a fund for M$4.0 billion (approximately US$350 million), from August 10, 2004 to December 2006. According to Gcarso, this program will be implemented in the following manner: a contribution of M$0.50 per package to the program from August to December 2004 (two and a half Mexican cents per cigarette); a contribution of M$0.70 per package from January 2005 to September 2005 (three and a half cents per cigarette), and a contribution of M$1.00 per package



from October 2005 to December 2006 (five cents per cigarette). These contributions are exempt from value added and excise taxes.

As distributors were expecting an additional price increase from cigarette companies to support the aforementioned health program, sales and EBITDA growth in second-quarter 2004 were surprisingly strong (EBITDA grew 29% year on year in real peso). We believe this figure is not sustainable, and we expect the second half of 2004 to present a difficult base of comparison. Typically, volume and profitability decline after a period of anticipated purchases by distributors. Therefore, we estimate sales growth of 6% in U.S. dollar terms versus 2003 but flat growth at the EBITDA level. For 2005, and due to the mature nature of the business, we expect another flat year in EBITDA growth in U.S. dollar terms.

In terms of excise tax, we do not expect significant pressure in 2005, as the expected increase would be only 10% more for non-filter cigarettes. This is a variable that likely would limit price increases for next year.

Figure 12. Cigatam – Excise Tax and Cigatam Average Price Increases, 2000-2005E 2000 2001 2002 2003E 2004 2005EFilter 85% 100% 105% 107% 110% 110%Non Filter 21% 21% 60% 80% 100% 110%Average Price Increase 12% 10% 7% 5.0% 7% NANA Not available. Sources: Company reports.

Porcelanite (5% of sales and 8% of EBITDA). After a difficult first half of 2004 (which was negatively affected by tougher competition from Gissa’s Vitromex) and an accident in the Queretaro plant, which caused a temporary shutdown, we expect Porcelanite’s figures to improve during the second half of the year versus the first half. However, we believe this improvement will not be enough to offset the slow start of the year. Therefore, we estimate a sales decrease of 4% in U.S. dollar terms and a 14% decline in EBITDA in 2004 versus 2003. For 2005, we are more optimistic about the division’s outlook, as the company should benefit from the shutdown of the Santa Anita plant in first-quarter 2004, the increase in capacity at the Guanajuato plant and the coming on line of the new plant in Sonora (Mexico’s Northwest), which will allow the company to operate under a more efficient environment and improve its exports to the U.S. In addition to this, we believe that 2004 will present an easy base of comparison.

Therefore, we estimate 12% sales growth in U.S. dollar terms and an 11% increase in EBITDA on a year-on-year basis. In terms of installed capacity for this division, we believe that the new capacity increase in Guanajuato will compensate for the shutdown of Santa Anita, and Sonora might bring approximately 10 million square meters per year and bring total installed capacity close to 80 million square meters by year-end 2004.

Frisco (5% of sales and 8% of EBITDA). The main event of this division was the divestiture of Quimica Fluor (QF) in second-quarter 2004. Grupo Carso sold the chemical business to Grupo Industrial Camesa (Camesa). The transaction was for 100% ownership of QF for M$288 million (approximately US$26 million), including the company’s debt (US$31 million). Camesa would pay with convertible debentures with a maturity of seven years and a 9% coupon. QF was a minor operation that represented 0.9% of Gcarso’s consolidated sales and 0.5% of consolidated EBITDA. This was not a core business, which had been underperforming the industrial portfolio during 2003, and represented a backward integration for Camesa. Although it was a small business within Gcarso’s portfolio, we estimate the operation represented a 4% decline in net debt, and most importantly, the divestiture of a non-core asset.

For full-year 2004, we estimate a 4% decline in sales in U.S. dollar terms versus 2003, mainly


due to a high base of comparison. However, we look for 30% growth in EBITDA, due to the favorable pricing environment in the mining business and the stable railroad operation, as well as the benefit of the divestiture of an underperforming business unit. For 2005, we see a more stable environment for this division, and we expect a 3% decline in sales (mainly driven by an expected decline in prices of metals), but we estimate 3% growth in EBITDA due to a more efficient operation in the railroad operations. Bear in mind that the railroad operation represents more than 70% of the division’s sales and close to 75% of its EBITDA.

Retail (31% of sales and 32% of EBITDA). For the retail division, we expect a good performance in 2004, driven by solid results in Sanborns and Sears, but partially offset by weak operating results in the bakery chain (El Globo) and in JCPenney stores (five units, which consolidate at the holding company level). We expect 6% growth in EBITDA in 2004 in U.S. dollar terms versus 2003, driven by the company’s expansion program, but also by a recovery in Sanborn’s profitability, due to a better sales mix and the successful implementation of its merchandising strategy. We also expect this division to benefit from the expected growth in consumption of 3.6% in 2004 and 3.8% in 2005.

Figure 13. Cigatam – Excise Tax and Cigatam Average Price Increases, 2000-2005E 2001 2002 2003 2004E 2005E 2006ESanborns 149 154 160 165 171 177Promusa 60 64 64 67 71 75Sears 45 45 48 50 52 54El Globo 123 131 157 185 213 241Coffee Shops 25 25 25 25 25Total 377 419 454 492 532 572

Sources: Company reports and Santander Investment Securities estimates.

The retail division enters Central America. During the first half of 2005, Gcarso’s retail division will make its first appearance in El Salvador, as the group accepted an invitation from a local Mall developer. The company is working on opening Sears, Sanborns, MixUp, and El Globo formats, which will serve as anchor stores in the mall. In our view, the only format that possesses operational problems is El Globo, as production and distribution in this bakery is a key element for its success, and has been the bottleneck for its expansion in Mexico. At present, we do not know of any plant that would be able to supply in El Salvador. This is the first step in this division’s expansion to Central America, and management is evaluating opportunities in Guatemala, Costa Rica, and Panama.

The agreement to use the JCPenney brand name comes to an end. Grupo Sanborns has five stores which consolidated at the retail division holding company, which continue to operate under the JCPenney brand name. Nevertheless, after the acquisition in December 2003, Sanborns had until August 2004 to use the brand name on its stores. We understand that management is currently evaluating the future of these stores. Three of them could be converted into the Sears format (there are two stores that overlap in the same mall with Sears stores), or all five stores may be converted into a new format. We believe that Grupo Sanborns’s management could even decide to convert a few into Sears stores and shut down the others).



RISKS TO INVESTMENT THESIS The following are the main risks to our investment thesis.

• Stronger-than-expected growth in the U.S. and Mexican economies. We view Gcarso as representative of the Mexican economy due to the diversified nature of its business portfolio. Overall, we believe that the main driver of Gcarso’s growth is the economic recovery in the Mexican economy. Therefore, we believe that any positive event in the latter would be reflected in better numbers and the valuation of the company.

• Additional contracts related to infrastructure and energy. Gcarso’s management has expressed plans to expand the company’s presence in the infrastructure and energy projects. However, at this point we are not factoring in additional projects in our earnings model. If the company were to announce a relevant project in this area, we would revisit our figures.

• Healthier margins for Condumex and Nacobre. Both companies have exposure to very competitive industries where there is pressure from imported products, as well as from domestic competitors. However, economic growth, productivity improvements, and better sales mix have allowed the company to improve its profitability, and we are factoring that in our model. However, it is possible that these improvements could be better than expected on the back of a stronger economic growth or additional savings in SG&A.

• Healthier-than-expected recovery in margins in the department stores format. The ongoing promotional activity in the department stores segment has marginally affected Sears’s high margins, and we are factoring this into our estimates. If this were to change, we believe this would translate into higher-than-expected numbers for Sears, which is the largest business unit in Grupo Sanborns.


COMPARATIVE VALUATION TABLE Figure 14. Conglomerates – Valuation Table, October 7, 2004 Local ALFA DESC GCARSO VITRO GISSA IMSAUBC CRISTAL AvgADR NA DES GPOVY VTO GISQY IMY CGW Country Mexico Mexico Mexico Mexico Mexico Mexico ChileRating St. Buy UP HOLD HOLD BUY St. BUY BUYLocal Price (M$) M$ 42.99 M$ 3.16 M$ 52.70 M$ 10.63 M$ 18.48 M$ 26.12 CH$ 6,000US Price (US$) US$ 3.81 US$ 5.49 US$ 9.35 US$ 2.84 US$ 1.64 US$ 21.01 US$ 28.4952 weeks-Max M$ 45.31 US$ 9.04 US$ 9.01 US$ 4.10 M$ 23.00 US$ 24.30 US$ 31.6552 weeks-Min M$ 22.99 US$ 4.55 US$ 5.90 US$ 2.10 M$ 14.25 US$ 11.91 US$ 20.85Target Local (M$) M$ 51.00 M$ 3.80 M$ 60.50 M$ 12.30 M$ 23.15 M$ 31.30 CH$ 6,600Target ADR (US$) US$ 4.30 US$ 6.70 US$ 10.20 US$ 3.20 US$ 2.00 US$ 24.50 US$ 30.00Upside Potential (US$) 13% 22% 9% 13% 22% 17% 5%Shares Out. 581 1,369 815 301 286 563 64Shares / ADR NA 20 2 3 1 9 3ADR Outstanding NA 68 407 100 48 63 21Float 34% 20% 30% 40% 18% 16% 45% 29%Market Cap. (US$) 2,214 384 3,810 284 468 1,304 608 1,296Enterprise Value (US$) 3,743 1,582 5,754 1,814 762 1,939 773 2,338NAV: Prem. / Disc. 2002 -65% -26% -36% -27% -50% NA NA2003 -40% 30% -23% -55% -45% -51% -33%Current -43% -110% -19% -60% -22% -22% -45%FV/EBITDA * 5.4 5.6 5.6 4.3 4.8 4.7 NA 5.12002 4.2 7.9 4.7 4.3 4.3 4.4 6.7 5.22003 6.2 6.9 6.1 5.1 5.8 7.9 8.9 6.72004E 6.6 7.2 6.4 4.7 5.0 4.5 8.3 6.12005E 5.7 6.8 5.8 4.2 4.1 4.0 8.3 5.62006E 4.9 7.0 5.3 3.9 3.5 3.6 7.8 5.1EPS (Nominal) M$ M$ M$ M$ M$ M$ CH$2002 2.38 -0.76 2.35 -0.14 0.80 2.16 2762003 1.69 -1.68 2.35 -1.89 0.71 1.35 1002004E 6.84 0.01 5.92 1.24 1.56 3.80 2902005E 4.46 0.18 6.34 1.68 2.23 4.24 3512006E 5.45 0.14 6.84 2.70 2.65 4.84 435EPS / EPADR (US$) EPS EPADR EPADR EPADR EPS EPADR EPADR2002 0.24 -1.53 0.47 -0.04 0.08 1.94 1.152003 0.15 -3.05 0.43 -0.51 0.06 1.11 0.512004E 0.59 0.01 1.02 0.32 0.13 2.94 1.402005E 0.37 0.31 1.06 0.42 0.19 3.20 1.592006E 0.45 0.23 1.12 0.66 0.22 3.55 1.96P/E 2002 19.8 -2.5 15.9 -116.6 23.3 10.3 16.12003 22.2 -2.3 16.8 -6.3 25.5 14.7 55.82004E 7.3 NM 10.0 10.0 14.9 8.3 21.42005E 11.5 21.3 9.6 7.6 10.7 7.6 18.82006E 9.7 29.6 9.1 4.8 9.2 6.9 15.3ROE 2002 6.9% -12.6% 9.4% -0.7% 4.8% 9.9% 7.6% 4.1%2003 4.2% -32.0% 8.5% -9.5% 4.0% 5.4% 2.8% 5.1%2004E 16.1% 0.1% 18.8% 6.2% 8.0% 12.9% 7.6% 4.3%2005E 9.6% 2.6% 16.7% 7.9% 10.3% 12.4% 8.4% 4.9%ROCE 2002 5.4% 5.5% 5.7% -3.2% 5.4% 5.9% NA 4.1%2003 4.5% 3.5% 6.2% 7.9% 3.7% 4.6% NA 5.1%2004E 4.4% 1.8% 7.1% 2.3% 4.0% 6.0% NA 4.3%2005E 4.5% 2.0% 7.4% 4.3% 4.9% 6.2% NA 4.9%2006E 0.8 0.4 1.1 0.5 0.8 0.7 1.4

All data in US$. NA Not available. NM Not meaningful. Sources: Company reports and Santander Investment Securities estimates.



FINANCIAL STATEMENTS Figure 15. Gcarso – Income Statement, Balance Sheet, and CF Statement, 2003-2006E (U.S. Dollars in Millions) Income Statement 2003 % 2004E % 2005E % 2006E %Sales 5,125 100.0% 5,824 100.0% 6,282 100.0% 6,670 100.0%Cost of Sales 3,708 72.3% 4,271 73.3% 4,623 73.6% 4,909 73.6%Gross Profit 1,417 27.7% 1,553 26.7% 1,658 26.4% 1,761 26.4%Oper. and Adm. Expenses 766 14.9% 776 13.3% 789 12.6% 855 12.8%Operating Profit 651 12.7% 777 13.3% 870 13.8% 906 13.6%Depreciation 203 4.0% 210 3.6% 179 2.9% 214 3.2%EBITDA 854 16.7% 985 16.9% 1,048 16.7% 1,119 16.8%Financing Costs 136 2.7% 81 1.4% 133 2.1% 125 1.9% Interest Paid 218 4.3% 173 3.0% 161 2.6% 156 2.3% Interest Earned 57 1.1% 51 0.9% 25 0.4% 33 0.5% Monetary Gain/Loss (66) -1.3% (52) -0.9% (35) -0.6% (28) -0.4% FX Gain/Loss 40 0.8% 11 0.2% 31 0.5% 30 0.5%Other Financial Operations (83) -1.6% (5) -0.1% - 0.0% - 0.0%Profit before Taxes 432 8.4% 691 11.9% 737 11.7% 781 11.7%Tax Provision 201 3.9% 267 4.6% 273 4.3% 273 4.1%Profit after Taxes 231 4.5% 424 7.3% 464 7.4% 508 7.6%Subsidiaries 80 1.6% 89 1.5% 65 1.0% 47 0.7%Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0%Minority Interest 76 1.5% 88 1.5% 87 1.4% 91 1.4%Net Profit 179 3.5% 424 7.3% 442 7.0% 464 7.0%Balance Sheet 2003 2004E 2005E 2006EAssets 5,869 100.0% 6,327 100.0% 6,815 100.0% 7,400 100.0% Short-Term Assets 2,087 35.6% 2,362 37.3% 2,597 38.1% 2,906 39.3% Cash and Equivalents 192 3.3% 115 1.8% 197 2.9% 373 5.0% Accounts Receivable 921 15.7% 1,128 17.8% 1,196 17.6% 1,264 17.1% Inventories 959 16.3% 1,079 17.1% 1,165 17.1% 1,231 16.6% Other Short-Term Assets 14 0.2% 40 0.6% 39 0.6% 37 0.5% Long-Term Assets 5,264 89.7% 5,721 90.4% 6,206 91.1% 6,783 91.7% Fixed Assets 3,177 54.1% 3,359 53.1% 3,609 53.0% 3,877 52.4% Deferred Assets 371 6.3% 400 6.3% 431 6.3% 468 6.3% Other Assets 605 10.3% 605 9.6% 609 8.9% 617 8.3%Liabilities 3,215 100.0% 3,270 100.0% 3,180 100.0% 3,123 100.0% Short-T. Liabilities 1,438 44.7% 1,367 41.8% 1,319 41.5% 1,304 41.7% Suppliers 392 12.2% 432 13.2% 466 14.7% 493 15.8% Short-Term Loans 628 19.5% 499 15.3% 429 13.5% 400 12.8% Other ST Liabilities 417 13.0% 436 13.3% 423 13.3% 411 13.2% Long-Term Loans 943 29.3% 1,071 32.7% 1,052 33.1% 1,034 33.1% Deferred Liabilities 834 25.9% 832 25.5% 808 25.4% 785 25.1% Other Liabilities - 0.0% - 0.0% - 0.0% - 0.0%Majority Net Worth 2,105 79.3% 2,420 79.2% 2,877 79.2% 3,386 79.2%Net Worth 2,654 100.0% 3,057 100.0% 3,635 100.0% 4,277 100.0%Minority Interest 549 20.7% 637 20.8% 758 20.8% 891 20.8%Cash Flow 2003 2004E 2005E 2006ENet Majority Earnings 179 424 442 464 Non-Cash Items 97 80 111 168 Changes in Working Capital (211) (275) (130) (116)Capital Increases/Dividends 213 (84) (24) (63)Change in Debt (99) (2) (88) (47)Capital Expenditures (220) (220) (230) (230)Net Cash Flow (41) (77) 82 176 Beginning Treasury 232 192 115 197 Ending Treasury 192 115 197 373 Sources: Company reports and Santander Investment Securities estimates.


Figure 16. Gcarso – Income Statement, Balance Sheet, and CF Statement, 2003-2006E (Millions of Mexican pesos as of December 2004) Income Statement 2003 % 2004E % 2005E % 2006E %Sales 59,236 100.0% 67,593 100.0% 72,141 100.0% 75,742 100.0%Cost of Sales 42,852 72.3% 41,007 60.7% 53,096 73.6% 55,747 73.6%Gross Profit 11,368 19.2% 15,679 23.2% 12,025 16.7% 13,647 18.0%Oper. and Adm. Expenses 3,830 6.5% 6,664 9.9% 2,037 2.8% 3,358 4.4%Operating Profit 7,538 12.7% 9,015 13.3% 9,988 13.8% 10,289 13.6%Depreciation 2,340 3.9% 2,328 3.4% 2,336 3.2% 2,488 3.3%EBITDA 9,878 16.7% 11,449 16.9% 12,047 16.7% 12,721 16.8%Financing Costs 1,576 2.7% 948 1.4% 1,528 2.1% 1,416 1.9% Interest Paid 2,514 4.2% 1,998 3.0% 1,846 2.6% 1,770 2.3% Interest Earned 667 1.1% 591 0.9% 282 0.4% 372 0.5% Monetary Gain/Loss (767) -1.3% (597) -0.9% (398) -0.6% (323) -0.4% FX Gain/Loss 486 0.8% 134 0.2% 362 0.5% 341 0.5%Other Financial Operations 968 1.6% 52 0.1% - 0.0% - 0.0%Profit before Taxes 5,672 9.6% 8,015 11.9% 8,461 11.7% 8,873 11.7%Tax Provision 2,323 3.9% 3,093 4.6% 3,130 4.3% 3,106 4.1%Profit after Taxes 3,348 5.7% 4,922 7.3% 5,330 7.4% 5,768 7.6%Subsidiaries 924 1.6% 1,029 1.5% 742 1.0% 537 0.7%Extraordinary Items - 0.0% - 0.0% - 0.0% - 0.0%Minority Interest 878 1.5% 1,025 1.5% 994 1.4% 1,032 1.4%Net Profit 2,058 3.5% 4,925 7.3% 5,078 7.0% 5,272 7.0%Balance Sheet 2003 2004E 2005E 2006EAssets 68,914 100.0% 72,755 100.0% 77,737 100.0% 83,611 100.0% Short-Term Assets 24,502 35.6% 27,159 37.3% 29,622 38.1% 32,831 39.3% Cash and Equivalents 2,251 3.3% 1,317 1.8% 2,242 2.9% 4,213 5.0% Accounts Receivable 10,815 15.7% 12,975 17.8% 13,647 17.6% 14,283 17.1% Inventories 11,267 16.3% 12,412 17.1% 13,294 17.1% 13,913 16.6% Other Short-Term Assets 169 0.2% 456 0.6% 440 0.6% 423 0.5% Long-Term Assets 61,808 89.7% 65,793 90.4% 70,795 91.1% 76,636 91.7% Fixed Assets 37,306 54.1% 38,634 53.1% 41,173 53.0% 43,805 52.4% Deferred Assets 4,357 6.3% 4,600 6.3% 4,915 6.3% 5,287 6.3% Other Assets 7,105 10.3% 6,962 9.6% 6,942 8.9% 6,975 8.3%Liabilities 37,752 100.0% 37,603 100.0% 36,272 100.0% 35,289 100.0% Short-T. Liabilities 16,882 44.7% 15,717 41.8% 15,046 41.5% 14,731 41.7% Suppliers 4,606 12.2% 4,965 13.2% 5,318 14.7% 5,565 15.8% Short-Term Loans 7,377 19.5% 5,740 15.3% 4,899 13.5% 4,520 12.8% Other ST Liabilities 4,899 13.0% 5,012 13.3% 4,829 13.3% 4,645 13.2% Long-Term Loans 11,074 29.3% 12,314 32.7% 12,004 33.1% 11,687 33.1% Deferred Liabilities 9,796 25.9% 9,573 25.5% 9,223 25.4% 8,871 25.1% Other Liabilities 0 0.0% 0 0.0% 0 0.0% 0 0.0%Majority Net Worth 24,714 79.3% 27,826 79.2% 32,823 79.2% 38,251 79.2%Net Worth 31,161 100.0% 35,151 100.0% 41,465 100.0% 48,322 100.0%Minority Interest 6,447 20.7% 7,326 20.8% 8,642 20.8% 10,071 20.8%Cash Flow 2003 2004E 2005E 2006ENet Majority Earnings 2,058 4,926 5,078 5,272 Non-Cash Items 1,136 835 1,557 1,969 Changes in Working Capital 2,481 3,163 1,478 1,308 Capital Increases/Dividends 2,464 (978) (275) (719)Change in Debt 233 385 (490) (53)Capital Expenditures (2,543) (2,553) (2,641) (2,612)Net Cash Flow 5,828 5,778 4,706 5,166 Beginning Treasury 2,635 2,251 1,317 2,242 Ending Treasury 2,251 1,317 2,242 4,213 Sources: Company reports and Santander Investment Securities estimates.



IMPORTANT DISCLOSURES GCarso – 12-Month Relative Performance (U.S. Dollars)

90

100

110

120

130

140

150

160

O-03 N-03 D-03 F-04 M-04 A-04 J-04 J-04 A-04 O-04

GCARSO

IPC

Sources: Bloomberg and Santander Investment Securities.

GCarso – Three-Year Stock Performance (U.S. Dollars)

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

J-01 S-01 D-01 M-02 J-02 S-02 D-02 M-03 J-03 S-03 D-03 M-04 J-04500

550600

650700

750

800850

900950

1,000

Grupo Carso (L Axis) IPC (R Axis)

H $3.7012/7/01

H $4.402/8/02

SB $4.207/1/02

B $3.4511/22/02

H $3.255/7/03

B $7.309/30/03

H $8.606/8/04

Source: Santander Investment Securities.

Analyst Recommendations and Price Objectives SB: Strong Buy B: Buy H: Hold UP: Underperform S: Sell UR: Under Review

2004-0137

IMPORTANT DISCLOSURES (CONTINUED) Key to Investment Codes Rating

Definition

% of Companies

Covered with This Rating

% of Companies Provided Investment Banking

Services in the Past 12 Months

Strong Buy Expected to outperform the local market more than 15%. Buy Expected to outperform the local market 5%-15%.

45.45% 64.29%

Hold Expected to perform within a range of 5% above or below the local market. 38.18% 21.43%Underperform Expected to underperform the local market 5%-15%. Sell Expected to underperform the local market more than 15%.

16.36% 14.29%

The numbers above reflect our Latin American universe. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this report and the risks to achieving these targets, please refer to the latest published research on these stocks. Research is available through your sales representative and other electronic systems. Target prices are 2004 year-end unless otherwise specified. Recommendations are based on a total return basis (expected share price appreciation + prospective dividend yield) unless otherwise specified. Stock price charts and rating histories for companies discussed in this report are also available by written request to Santander Investment Securities Inc., 45 East 53rd Street, 17th Floor (Attn: Research Disclosures), New York, NY 10022 USA. Ratings are established when the firm sets a target price and/or when maintaining or reiterating the rating. Ratings may not coincide with the above methodology due to price volatility. Management reserves the right to maintain or to modify ratings on any specific stock and will disclose this in the report when it occurs. Valuation methodologies vary from stock to stock, analyst to analyst, and country to country. Any investment in Latin American equities is, by its nature, risky. A full discussion of valuation methodology and risks related to achieving the target price of the subject security is included in the body of this report. The benchmark used for establishing Argentina recommendations is our forecast of the year-end Argentina IFCI index. For the Andean countries, our benchmark is the simple average of the country risk of each country plus the 10 year U.S. T-Bond yield plus 5.5% of equity risk premium. For additional information about our rating methodology, please call (212) 350-3974. This report has been prepared by Santander Investment Securities Inc. (“SIS”) (a subsidiary of Santander Investment S.A., which is wholly owned by Banco Santander Central Hispano, S.A. ("Santander"), on behalf of itself and its affiliates (collectively, Grupo Santander) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy any relevant securities (i.e., securities mentioned herein or of the same issuer and/or options, warrants, or rights with respect to or interests in any such securities). Any decision by the recipient to buy or to sell should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with and available from the entity governing the related market and the company issuing the security. This report is issued in Spain by Santander Central Hispano Bolsa, Sociedad de Valores, S.A. (SCH Bolsa), and in the United Kingdom by Santander Central Hispano S.A., London Branch (Santander London), which is regulated by the Financial Services Authority in the conduct of investment business in the UK. This report is not being issued to private customers. SCHI, Santander London, and SCH Bolsa are members of Grupo Santander. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Luis Miranda. Grupo Santander receives non-investment banking revenue from the subject company. Within the past 12 months, Grupo Santander has managed or co-managed a public offering of securities of Grupo Carso. The information contained herein has been compiled from sources believed to be reliable, but, although all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgment as at the date of this report and are subject to change without notice.

Any U.S. recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with SIS, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the U.S. Securities Exchange Act of 1934) for this report and its dissemination in the United States.

© 2004 by Santander Investment Securities Inc. All Rights Reserved.

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