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Credicorp capital . mila chile .company report - habitat - hold - credicorp capital (1)

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  • 1. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comHabitat: HOLDUncertain regulatory & cost headwinds threaten positive trendAfter updating our projections and tweaking our model, we have arrived to a new Y.E. 2013 target price of $ 947 and maintain ourHOLD recommendation for shares. Our T.P. implies an upside including dividends of 6.6%. Our recommendation is founded on thecompany’s exposure to stable cash flows positively influenced by the strong macro environment in Chile and Peru (lowunemployment levels & salary growth), accretive operational returns, and a new growth opportunity in Peru. On a relative basis,Habitat trades at a recurring P/E 14.8x in 2013 e and 13.9x in 2014, which remains in line with global peers (14.8x and 13.2x) despiterunning up 38% (LTM) after recent M&A activity within the sector. While we believe Habitat should continue to benefit from thedomestically driven growth within Chile and Peru (+5.2% & +7.8%, respective based on Credicorp Capital estimates), we still see likelychanges in the regulatory environment as a potential risk to current valuation levels, which is not reflected in current valuation levels.June 10th, 2013LTM St ock Dat a ( USDm) Bloomberg Ticker: Habit at CICurrent Price 940 P/BV 3.7x2013YE Target Price 947 Dividend Payout Ratio 90%Upside Inc. Div. 6.6% Dividend Yield 5.5%M áx/M in LTM (CLP) $1,000 / $649 Float (%) 32%M kt. Cap. 1,918 Float 614EV 1,794 Avg. Vol. LTM (USDm) 2.6Book Value 516 Outstanding Shares (M n.) 1,000Habit at vs. IPSA LTMU SD m 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15ERevenues 234 248 248 257 282 320EBITDA 159 199 192 195 212 239EBIT 145 181 170 180 197 224Net Income 126 152 145 152 165 187Adj. Net Income 130 126 126 128 139 157EPS (CLP$) 64 62 62 62 68 77M arginsEBITDA M g. 68.0% 80.2% 77.4% 76.0% 75.0% 74.7%EBIT M g. 62.2% 73.3% 68.5% 70.4% 69.7% 70.0%Net M g. 53.9% 61.5% 58.2% 59.1% 58.6% 58.2%M ult iplesEV/EBITDA 7.5x 9.0x 9.3x 8.5x 7.5x 7.2xP/E incl. Reserves 10.2x 12.4x 13.3x 12.6x 11.6x 10.3x We continue to believe Habitat offers important exposure tothe strength in the domestic Chilean and, now , Peruvianmarket via its dependence on the formalization ofemployment and the real salary growth of its contributorbase in each respective market. We expect real salary growthto reach 3% in Chile in 2013. Though aging Chilean demographics and higher employmentformalization points towards a more developed market, inPeru the market is younger and less formalized. Wecalculate a dependency ratio of 46% for Chile versus 35% forPeru. Additionally, we estimate the formalization of thePeruvian market is close to ~24% while in Chile penetrationhovers around ~60%. The older demographic in Chile willrequire the system to consistently find ways to increasereplacement rates, which today stand below the OECD’srecommendation of 70%. Though we do not expect a major overhaul of the system,changes in regulation remain a risk. In our view, the issueson the table, most importantly the low payout from thesystem to retirees is less of an actor problem, but rathermore of an issue involving inefficiencies in employment.Furthermore, we do not find a strong argument for a call tolower variable rates as a tool to solve this issue (though stillat risk) due to the structure of this business nor does thereturn to a pay as you go system provide a solution as anyincrease in payments will depend on a greater fiscal burdenby the government. Growth abroad in Peru offers upside to our last revision.Under our base scenario, Peru adds USD 94 million in equityvalue or 46 pesos per share. At this moment, Peru’s pensionsystem is looking towards Chile as an exemplary model. Weexpect the younger demographic bodes well for growth. Also,the mechanism in which compulsory commissions arecharged in Peru differ from those in Chile and the currentplan to transition the system to an eventual 100% fixed feestructure over AUM, should drive exponential sales growth.However, we ascribe a certain risk to our estimates, primarilydue to the company’s lack of track record and immaturity ofmarket. Valuation looks to be in line with the market after adjustingfor return on cash reserves. On a global average, we thinkvaluation is fair for a business which out earns its cost ofequity, demonstrates stability in its cash flow, and presentsnew growth in a developing market. Moreover, recent M&Aactivity has left Habitat as the only potential public vehicle inthe system after the completion of Provida’s sale. We see upside risk coming from better than expected realsalary growth and positive churn data for the company bothin Chile and Peru. Downside risks to our thesis include: i)decline in variable commission fees; ii) general change inregulatory framework; iii) greater competitive pressure fromfuture auction in the market; iv) and a general deteriorationin macro economic factors.03691215185006007008009001,0001,100Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13Mar-13Apr-13May-13Jun-13USDmCLPTraded Volume (right axis)HabitatIPSA
  • 2. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comIncome Statement (USDm)Company SummaryManagementOwnership structureChairman : Jose Antonio Guzmán M attaCEO : Cristián Rodriguez AllendesCFO : Patricio Bascuñan M ontanerInvest or Relat ions : Cristian Halabi / M egan CallahanW EB sit e : www.afphabitat.clIPO dat e : 1998M anagement( USDm) 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 ERevenues 2 3 4 2 4 8 2 4 8 2 57 2 8 2 3 2 0 3 3 1Growth -11.6% 6.0% 0.3% 3.6% 10.1% 13.5% 3.4%Cost of Sales + SG&A -85 -93 -96 -100 -112 -125 -130Growth 2.1% 9.8% 3.8% 8.0% 11.7% 11.8% 4.2%EBIT 14 5 18 1 170 18 0 19 7 2 2 4 2 3 3Growth -19.9% 24.8% -6.1% -0.5% 9.0% 14.0% 3.7%Depreciation -4 -4 -4 -5 -5 -6 -6Growth 12.9% 0.6% 2.1% 25.2% 5.5% 5.6% 5.9%EBITDA 16 3 172 19 2 19 5 2 12 2 3 9 2 4 8Growth -13.3% 5.7% 11.8% 1.5% 8.5% 13.1% 3.6%Non-Operational income 10 13 18 10 10 10 10Pre-tax income 155 19 5 18 8 19 0 2 0 6 2 3 4 2 4 2Taxes -29 -42 -44 -38 -41 -47 -49M inority interest 0 0 0 0 0 0 0Net income 12 6 152 14 5 152 16 5 18 7 19 3Growth -19.0% 21.0% -5.0% 4.9% 9.0% 12.8% 3.4%Adj. Net Income 13 0 12 6 12 6 12 8 13 9 157 16 1EPS ( CLP) 6 4 6 2 6 2 6 2 6 8 77 79M argins 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 EEBIT 62.2% 73.3% 68.5% 70.4% 69.7% 70.0% 70.2%EBITDA 69.6% 69.4% 77.4% 76.0% 75.0% 74.7% 74.9%Effective tax -18.8% -21.8% -23.1% -20.2% -19.9% -20.3% -20.4%Net income 53.9% 61.5% 58.2% 59.1% 58.6% 58.2% 58.2%M últ iplos 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 EEV/EBITDA 7.5x 9.0x 9.3x 8.5x 7.5x 7.2x 0.0xP / E 10.2x 12.4x 13.3x 12.6x 11.6x 10.3x 0.0xP / BV 3.0x 4.0x 4.3x 3.8x 3.4x 3.1x 2.9xDiv. Yield 7.6% 6.3% -5.5% 5.9% 6.0% 6.4% 7.1%Others 33.4%I. Union Esp.3.7%CChC 67.5%Source: Company Reports2
  • 3. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comCompany SummaryObligatory commissionBalance Sheet (USDm)( USDm) 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 ECash and cash equivalents 97 114 126 120 132 152 156Current assets 102 120 132 127 139 159 164Cash reserves 360 404 417 441 482 526 573Fixed assets 29 29 29 28 27 26 28Tot al asset s 50 7 56 9 59 3 6 15 6 70 73 8 79 5Short term debt 0 0 1 1 1 1 1Accounts payable 33 41 21 43 45 49 51Total Current Liabilities 45 53 30 55 57 62 64Long term debt 1 1 1 1 1 1 1Tot al Liabilit ies 8 0 9 9 78 10 6 113 12 4 13 2Shareholders Equit y 4 2 8 4 70 516 511 559 6 16 6 6 5M inority Interest 0 0 0 0 0 0 0Equit y + Liabilit ies 50 7 56 9 59 3 6 15 6 70 73 8 79 5Rat ios 2 0 11 2 0 12 LTM 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 EEf f iciency Rat iosCosts / Revenues -0.36x -0.37x -0.39x -0.39x -0.40x -0.39x -0.39xDebt Rat iosDebt / Assets 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0xDebt / Equity 0.0x 0.0x 0.0x 0.0x 0.0x 0.0x 0.0xNet Debt / EBITDA -0.6x -0.7x -0.6x -0.6x -0.6x -0.6x -0.6xProf it abilit y Rat iosROE 29.4% 32.4% 28.1% 29.7% 29.6% 30.3% 29.0%Adj. ROE* 30.3% 26.7% 24.5% 25.0% 24.8% 25.6% 24.2%ROA 22.9% 24.4% 21.4% 23.1% 23.2% 24.0% 23.0%1.44% 1.48%1.27%0.77%2.36%1.54%0.00%0.50%1.00%1.50%2.00%2.50%Capital Cuprum Habitat Modelo Planvital ProvidaDec-11 Dec-12*excluding returns on cash reservesSource: SAFP3
  • 4. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comUpdate on the competitive environment in Chile71%Source: SAFPNet churn of contributors within system during 2012Real salary growth versus contributor growth in the Chilean system, 2012Habitat competes as a leading player in terms of size, profitability, and performance in the local AFPindustry. Unlike Provida, which focuses on a lower income segment, dominating in size but notprofitability, and Cuprum, which focuses on returns and not size (niche player), Habitat targets a middle tohigher-end income segment, which has resulted in an important balance between returns and scale.Going forward, we would expect that with already important economies of scale and a history of superiorresults (fund performance and quality of service – see initiation report Not Yet Time to Retire, 2012),Habitat remains as the most competitive in a system where demand is relatively inelastic.In 2012, Habitat achieved the highest growth in its salary base (real +9.0% versus national average of3.3%), which we attribute to the company’s focus on an above average income segment and younger thanaverage demographic of the population when compared to the industry. More than 60% of the company’scontribution base (close to 50% for the industry) are aged between 20 and 40, an age group which hashistorically demonstrated an above average income growth pattern. Based on national figures, real salarygrowth in Chile has averaged close to 2.0% growth over the past 10 years, while Habitat’s real growth hastrended closer to or above GDP growth in recent years.Recent Regulatory Changes: After recent regulatory changes, Habitat was the only AFP to take theinitiative to lower its commission fees. Despite a potentially lower top line, it still charges the lowestobligatory fees when set aside its larger peers. Though it is unclear exactly how this change will roll outfor the company, compounded by historical data which has shown a low price elasticity in the market, webelieve that the company will be able to offset any loss in new affiliates due the exclusivity reserved for lowcost competitor through a higher contribution penetration level. However, the augmentation of thispenetration tends to be marginal, inducing a dependence on wage growth for strong revenue generation..In 2012, we also observed a positive churn rate of 322 thousand contributors or 6.2% of the total system,up from an average of 5.5% over the previous 3 years For Habitat, the churn effect was marginal but apositive 1,255 net adds versus a negative 4,000 additions for the system, primarily reflecting net losses forCapital and Provida. Positively, this proves thus far that Modelo has not been successful enough to takecontributors from pre-existing players within system; however Habitat continues to show market sharelosses in affiliates over a 2 year period (-195 bps versus +800 bps for Modelo and -370 bps for Provida).Public system is not the answer: As mentioned earlier, we think the natural regulatory changes to occurgoing forward will focus on increasing coverage and replacement rates, a challenge which in our viewremains partially outside of the realm of the current pension system’s power and responsibility. Aspreviously argued, creating a more flexible labor market and reducing the informality in employment canhave the largest impact on the future sustainability and growth of the system. We do not think the answerto the current brouhaha of low payouts to be the construction and return to a publically managed pensionentity nor a pay as you go system. Both of these systems have been proven by other developed countriesto temporarily increase coverage at the expense of a country’s fiscal capacity. Moreover, the short-term,political incentives for a public operator greatly differ from a private system, which conversely rely onimproved product offerings in order to maintain profitability and productivity, which in turn is eventuallypassed on to contributors in the form of lower priced products.Public arguments not withstanding, the private system has achieved levels of coverage exceeding those ofthe pre-pension reform, which reached 73% in 2009 (including old and new system) versus 65% in 1989.Put another way, the coverage in the 2008/2009 years represents a 15% increase over 1981 levels.-30,000 20,000 70,000 120,000 170,000 220,000CapitalCuprumHabitatModeloPlanvitalProvidaSystemChurn amount (# of people)Net Churn Negative Churn Positive ChurnSystemCapitalProvidaPlanvitalCuprumHabitat-1%0%1%2%3%4%5%6%7%8%9%6% 7% 8% 9% 10% 11%Avg.YoYgrowthinContributors(2011-2012)Avg. YoY Growth in Avg. Gross Income (2011-2012)Source: Company reports & Credicorp Capital EstimatesSource: SAFP4
  • 5. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comChile’s pension fund system demonstrates characteristics of maturity compared to other OECD countries.In 2012, total pension assets as a percentage of GDP reached 58.5% (USD 145 billion) versus a 72.4%weighted average for the OECD countries (OECD considers a ratio above 20% as mature). Meanwhile, inPeru, the importance of pension funds relative to the size of the economy was 18.8% (USD 38 billion, +21%YoY) in 2012. A major reason for the industry’s success has been its mandatory contribution policy,instituted in May of 1981. Despite the success of this reform, replacements rates for average earnersremain below the OECD recommendation of 70% while fertility rates have fallen and life expectancy rateshave risen, issues which will remain relevant, going forward.A natural trend of a maturing demographic is a rising dependency ratio (% of youth and old / total workingpopulation age), which the INE estimates will reach 50% by 2025 or levels close to Japan and the UnitedStates, today. This trend highlights the importance of increasing contribution and replacement rates inthe country so that the system will be able to sustain itself. In our view, one of the principal reasons for alower replacement rate is generated by the low density of contribution. For example, some studies haveshown that the replacement rate for men in the system is 63% while only 50% for women, reflecting thelower participation of women in the workforce, earlier retirement age, and longer average life span. Also,the density (periodicity of payment & amount) of contribution varies between actors in the system basedon education levels and type of employment in the system.Another reason for lower contribution has been lack of participation of independents in the system, bothformally and informally. Only until recent regulatory changes defined in 2008 will independents working inthe formalized labor market be required to contribute into the system (fully required by 2015). Whileformality it is easier to monitor and control vis a vis tax receipts, the informality of labor is exactly theopposite, creating a significant challenge for regulators to impel contribution and thus increasecontribution density. This latter should remain among the most salient challenges for system growth inthe short and medium term.Despite the critics, the local pension system has grown to become a backbone for the Chilean society anda model to the emerging world. However, all the benefits are still difficult to fully grasp due to the shortperiod of implementation of new reforms. Looking forward, we believe that 4 major themes should befocused on by regulators to improve the retirements of contributors:• A focus on liberalizing or creating a more flexible labor force, removing disincentives to hire, such as ahigh requirement of severance pay. Today in Chile, employers are required to pay out one month of fullsalary for every year worked, capped at 11 months. Creating less friction in unemployment benefits willprovide incentives to find work quicker, thus potentially having a positive effect on contribution.• A mandatory increase of contribution per payer, which today stands at 10%. Effectively, an increase inthis rate would capitalize additional savings into a contributor’s account on a monthly basis, at theexpense of AFPs (greater working capital requirement due to increase in cash reserve requirements).• Increase voluntary saving ratios via employer contribution matching of both younger and oldercontributors. Today, total voluntary savings accounts only represent 4.0% of the total population versus1.2% in 2002, a 13.9% CAGR over 10 years.• The increase of the national retirement age, which today stands at 65 years for men and 60 years forwomen. The OECD average stands at 67 years.% of Population under the age of 15 and over the age of 60Evolution of Chile’s natural (net) population growth rateChilean demographics…But the Chilean system is encountering a “greying” population14.1%8.8%6.2%0%2%4%6%8%10%12%14%16%1975-1980 2005-2010 2020-20250.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050< 15 60 or over-800,000 -600,000 -400,000 -200,000 0 200,000 400,000 600,000 800,0000- 410-1420-2430-3440-4450-5460-6470-7480+1960-800,000 -600,000 -400,000 -200,000 0 200,000 400,000 600,000 800,0000- 410-1420-2430-3440-4450-5460-6470-7480+Age(yrs)2010MenWomenAll Sources: INE5
  • 6. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comSource: SAFP & IM TrustDupont Analysis (2012)Employment ProductivityCost Efficiencies…elasticity of demand still support high returnsReturns achieved by the system have evolved over time, reaching levels of close to 60% during thesystem’s initial phase at the end of the 1980’s and falling to 17% during the mid 1990’s while the systemunderwent the competitive stage of its life. Since this period and after the 2008 reforms, 5 AFPs haveoperated in the system of which the two largest concentrated 66% of all members, comparing to 21participants between 1993 and 1994.In order to evaluate the true competitiveness of the industry, concentration cannot be the only variableconsidered. In our view, it is important to understand how easily an industry’s structure can bechallenged. Within the pension system the existence of barriers to entry and the level of price competitionhave dictated the high returns. Government mandated auctions for new affiliates entering the systemremain a testament to the low organic churn of the system. Effectively, without a forced auction newcompetition would not exist.However, in 2012 Habitat increased its personal and sales forces inducing a 10.2% increase in operationalexpenses as it works to increase its competitiveness within the system. In the short term, we ascribecertain downside risk to our valuation to cost increases in the short term, though under our basescenario, we expect cost increases to stabilize after the 2Q 2013 during which time the company hasstated it plans to complete its current commercial strategy, “Habitat me explicó y yo entendi” (Habitatexplained and I understood). We expect the company’s efficiency index (operational expenses / operationalincome) to jump 60 bps in 2013, driven by increased expenses generated by Peru, primarily in 2H 2013.The economies of scale achieved by a single operator (mandatory flow and centralized stock of costs) andthe regulations defining the single corporate purpose support higher barriers to entry. This can be seenthrough the existence of Modelo, or the 6th and most recent entrant to the market who had exclusivecontrol over all new affiliates entering the system during its first two years of operations. Comparatively,the low price responsiveness of demand or fee structure produced both by the mandatory nature of thesystem, long term horizon of investment, and the generally high information costs for contributors allprovide contrary winds to competition intensity.In 2012, Habitat achieved an operational ROE of 25% (excluding cash reserves), compared to an averageof 22% for the system, excluding Habitat. Though ROE was 16.3 percentage points below Cuprum’s or themost profitable operator in the system, ROA was only 2.4% percentage points below, illustrating a greaterdifference in leverage than in operational efficiency. We estimate that the company is able to earn abovethat of the industry due to its cost control efficiency and average focus on a higher income segment.Though we do not believe lower variable commission fees can solve the replacement rate and coverageissue, we see downside risk in falling rates as a result of political pressure, new players in market due tomandated auctions, and the pass through of efficiency generated by private operators. Looking at thecurrent commission structure, we calculate an average commission burden paid as a percentage of aworking lifetime of accumulated assets of 0.68% for men and 0.95% for women, which does not appearhigh in global terms and supports our view that any price war leading to pressure to lower obligatory feesnot be fundamental, but rather political. Under our base case scenario, we maintain obligatory fees at1.27% in Chile. However, adjusting downwards from 1.27% to 1.19% by 2016 and maintain all else equal,reduces are target price by CLP 66 or 7% of equity value. Our base estimates generate a 2013e ROEexcluding cash reserves of 27%, reaching 25% by 2016 for Chilean operations.CapitalCuprumPlanvitalProvidaHabitat0.5x1.0x1.5x2.0x0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%Leverage(Assets/Equity)ROAProvidaCapitalPlanvitalHabitatCuprum25%35%45%55%65%75%0.1% 0.2% 0.3% 0.4% 0.5% 0.6% 0.7%Costs/OperationalRevenuesw/outObligatoryReservesCosts / AUMProvida Capital Planvital Habitat Cuprum26%47%37%42%25%30%35%40%45%50%55%-246810Habitat Capital Cuprum ProvidaSalesForce/TotalEmployees(%)SalesForce/10kContributorsSales Force / 10,000 Contributors Sales Force / Total Employees (%)All Sources: Company Reports6
  • 7. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comSource: Superintendcia de Bancos, Seguros, y AFP Peru & IM Trust Estimates*Habitat estimated for 2013. Other data is as of 2012.**Weighted based on contributorsPrincipal Industry IndicatorsLooking forward at a new growth opportunity in Peru In December of 2012, Habitat won the tender in Peru for all new affiliates entering the private pension system by offering the lowest mixed commission fees among 6 other bidders. Thecompany’s exclusivity will have a duration of two years, during which time Habitat expects to generate a market of 700,000 new affiliates or approximately 12% of the market. The success ofthe tender hinged on Habitat’s ability to offer the lowest mixed fee (90% variable & 10% AUM) of 0.55% versus its closest competition, Profuturo who offered 0.77%. The major regulatory difference between Peru and Chile can be observed in the fee structure. Today in Peru, new affiliates will be required to pay a mixed fee, 90% of which will be chargedon top variable income while 10% will be charged on top of total assets under management. Based on the current legal structure, the system will converge to 100% AUM fees within 10 years.Considering follow on auctions which should translate into greater competition, we assume a long term fee over AUM of 1.0% (2015) versus its 1.25%, today. However, due to the immaturityof the Peruvian system and the changes observed in Chile over the past 2 years it is difficult to project a 10 year horizon for the system, and would ascribe some margin of error to ourestimates for Habitat in the country. Despite the lack of full clarity of what Peru might become, in our view, Peru presents a important growth opportunity for the company, particularly due to the country’s lower formalizedmarket (~24% versus ~56% in Chile) and real GDP growth expectations (6.3% vs. 4.7% in Chile 2013e). Furthermore, Peru’s pension system is relatively young and immature in terms ofassets (AUM today represents 19% of GDP versus 60% in Chile) and has grown at a rate of 23% over the last 10 years versus 13% in Chile. The lower formalization has also in part driven aCAGR affiliate growth over the last decade of 6% or 170% above that of Chile. The same goes for contributor growth, which averaged 8.0% in Peru versus 4.6% in Chile over the same period. Demographically, the country is younger and will provide ample years of high growth for the industry. A lower life expectancy, averaging 72 years versus 78 year in Chile and a fertility rate is122% higher than Chile has resulted in a dependency ratio closer to 35% versus 46% in Chile, today. Major Assumptions: In our base case scenario, we assume an initial gain of 700 thousand affiliates with an average contribution ratio of 53% over the first 3 years of operation. We assume anadditional tender at the end of year 2, with which we expect the company to win again with lowest mixed fee offering, thus lowering our AUM fee by 25 bps to 1.0% by 2015. Thereafter, wemaintain AUM fees at 1.0% to reflect uncertainty in potential changes. In terms of salary base, we expect Habitat to focus initially on a lower income segment, which averages ~USD 500taxable income monthly or USD 6,000 annually. We apply a growth rate of 8% in the short term converging to a nominal salary growth rate of 5% by 2016. On the cost side, we expect costs tototal 25 million for the company’s first 3 years of operations (2013-2016), there forth averaging 53% of sales or the average for the industry over the last 3 year period. Based on ourassumptions, we expect operations to breakeven during year 3 with the capacity of generating USD 16 million in earnings by 2020. We value our base scenario equity at 46 per share, whichimplies an exit P/E excluding cash reserves of 10x or a 12% premium to Chile due to higher long term growth potential.AFP Af f iliat es ( mn.) Cont ribut ing % M kt . Share ( Cont ribut or) AUM ( bn.) M kt Share AUM Commission Fees ( old) M ixed Fee St ruct ure ( t ender 2 0 12 )Horizante 1.4 42% 25% 8.7 24% 1.89% 1.63%Integra 1.4 50% 29% 11.0 30% 1.74% 1.52%Prima 1.3 50% 28% 11.4 31% 1.60% 1.55%Profuturo 1.2 38% 19% 5.5 15% 2.10% 1.46%Habitat* n/a n/a 12% n/a n/a n/a 0.55%Syst em Average 5.2 4 5% 10 0 % 3 6 .6 10 0 % 1.8 1%** 1.3 4 %7
  • 8. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comInformal employment as a % of totalContribution rates, Chile vs. Peru ( contributors / affiliates)Dependency Ratio ( less than 15 yrs & more than 64 yrs / Wking. Population)Chilean & Peruvian pension system indicatorsAverage retirement age at labor force exit (OECD)Gross pension replacement rate: average earners (OECD)Importance of pension assets to the size of economy (% of GDP)18.8%36.6%59.4%0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0%GreeceFranceKoreaItalyGermanyPortugalSpainMexicoPeru*JapanSimple AverageIsraelChile*United StatesUnited KingdomAustraliaNetherlands01020304050607080Men Women44.958.10204060801001200%20%40%60%80%100%2000 20100%10%20%30%40%50%60%70%80%90%1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050Chile USD Japan0%10%20%30%40%50%60%2007 2008 2009 2010 2011 2012Contribution Rate Chile Contribution Rate PeruSource: SAFP & SBS PeruSource: INE & World BankSource: ILOSource: OECDSource: OECDSource: OECD8
  • 9. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comValuationTarget priceDiscount rate (Chile)DDM (Chile) We valued Habitat using a 10 year DDM (2013 – 2022) and assuming a dividend payout ratio of 90%,excluding returns on cash reserves. We assume a real cost of equity of 7.4% for Chile and 9.5% forPeru in USD, growing perpetuity at a nominal 0% and 3%, respectively by country. Our perpetuitygrowth rates imply a P/E exit multiple excluding returns on cash reserves of 9.0x for Chileanoperations and 10.0x for Peruvian operations. On a relative basis, Habitat trades at a recurring P/E 2014e of 13.9x and EV /EBITDA of 8.5x, whichstands at a 1.5% premium and 8.6% discount, respectively to global peers. In our view, the fairvaluation on a fwd P/E basis compared to global wealth managers is fair due to lower shareliquidity and despite higher returns and a more stability in cash flow generation. Though growthinto Peru, a strong macro situation in Chile, and recent M&A activity in the market should continueto justify relative valuation levels above the company’s historical averages, current levels leave littleto no space for execution hiccups, political pressure on regulatory environment, and any importantdeterioration in economic expectations. Moreover, we expect a dividend yield of 5.9% in 2013, which is below the 8% average over the past 3year period, though still ranks among the highest in the IPSA index for 2013e.Model InputsTotal equity value Chile USDm 1,838Equity value Peru USDm 94Exchange Rate CLP / USD 490Tot al equit y value CLPbn 9 4 6 ,50 1Outstanding shares M illion 1,0002 0 13 Y E Target Price CLP per share 9 4 7Current Price CLP per share 940Upside Pot ent ial 0 .7%Dividend Yield 2013 5.9%USDm 2 0 13 E 2 0 14 E 2 0 15E 2 0 16 E 2 0 17ETotal net income (t-1) 152 154 164 181 185Return on cash reserves (t-1) 27 24 26 29 32Required cash reserves (t-1) 13 14 14 16 15Dividend 113 116 124 136 138DDM 113 10 8 10 7 110 10 4C hile ( clp real)Risk premium 6.0%Levered beta 0.74Risk free rate 3.0%Cost of equity (CLP real) 7.4%2013e inflation 2.7%Exit M ultiple ex. reserve income 9.0x( U SD m)Equity from DDM Chile 995Equity in perpetuity Chile 843Tot al Equit y 1,8 3 89
  • 10. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comRisk-Reward Analysis Bull Case: 2013E T.P.$1,050(+17.6%, including dividends)(a) In Chile, we assume macro fundamentals to support low unemployment levels, thus driving salarygrowth above GDP growth in short term for Habitat, converging to 3% over the long term. (b) We expectcommission fees to remain flat and expect contributor growth to derive from new independents (140thousand) as well as 3% organically, an average rate observed over the previous 5 years. (c) In Peru,we assume macro fundamentals to support low unemployment levels, thus driving salary growthabove GDP growth in short term, falling to 3% in long term. (d) In Peru, we expect a 2nd tender win in2015, increasing the company’s affiliate based by an additional 600 thousand thereafter, at a long termcontributor penetration rate of 70%. We expect AUM fees to fall from 1.25% to 1.0% by 2015 tender andto remain thereafter. (d) Assumption that monthly contribution rate stays at 10%. (e) We consider along term P/E exit multiple of 10x. Base Case: 2013E T.P.$947 (+6.6%, including dividends)(a) In Chile, we assume macro fundamentals to support low unemployment levels, thus driving salarygrowth above GDP growth in short term for Habitat (7.6% in 2013 followed by 6.1% in 2014), convergingto real 3% over the long term. (b) We expect variable commission fees to fall to remain at 1.27% whilewe expect a total of 140 thousand new affiliates for the company by 2015 (only independents). (c) InPeru, we assume macro fundamentals to support low unemployment levels, thus driving salarygrowth above GDP growth in short term (8% in 2013 converging to 5% by 2016, nominal). (d) In Peru,we expect a 2nd tender win in 2015, increasing the company’s affiliate based by an additional 600thousand thereafter, at a long term contributor penetration rate of 60%. We expect AUM fees to fallfrom 1.25% to 1.0% by 2015 tender and to remain thereafter. (d) Assumption that monthly contributionrate stays at 10%. (e) We consider a long term P/E exit multiple 9.0x. Bear Case: 2013E T.P.$717 (-17.8%, including dividends)(a) In Chile, we assume macro fundamentals to support low unemployment levels, thus driving salarygrowth above GDP growth in short term for Habitat, converging to 2% over the long term. (b) In Chile,we expect variable fees to fall to 1.19% in long term and no organic growth from independents. (c) InPeru, we assume macro fundamentals to support low unemployment levels, thus driving salarygrowth above GDP growth in short term, converging to 5% by 2016. (d) In Peru, we do not expect atender in 2015. We assume a long term contributor penetration rate of 50%. We expect AUM fees to fallfrom 1.25% to 1.0% by 2015. (d) Assumption that monthly contribution rate in Chile increases to 15% by2014. (e) We consider a long term exit multiple of 9.0x.ScenariosRisk / Reward ViewBull, Base, & Bear Analysis1,0507179329471003005007009001,1001,300Jan/00Jun/09Jun/10Jun/11Jun/12Jun/13CLP/shareHistorical Price2013YE Target PriceUSDm 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15Revenues 129,437 114,486 121,301 125,688 138,324 157,015EBITDA 91,934 77,832 97,270 95,586 103,715 117,318Net Income 76,151 61,654 74,576 74,344 81,033 91,386Revenues 129,437 114,486 121,301 129,315 144,673 166,193EBITDA 91,934 77,832 97,270 97,808 107,683 123,266Net Income 76,151 61,654 74,576 76,121 84,205 96,085Revenues 129,437 114,486 121,301 124,071 133,919 140,653EBITDA 91,934 77,832 97,270 94,490 100,642 106,513Net Income 76,151 61,654 74,576 73,467 78,577 82,798Base CaseBull CaseBear Case10
  • 11. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comComparablesGlobal comps EV/EBITDA ltmP/BV ltmP/E ltm10.1x7.5x5x6x7x8x9x10x11xOct-10Feb-11Jun-11Oct-11Feb-12Jun-12Oct-12Feb-13Jun-13AverageStd. Deviation +/-13.0x8.7x4x5x6x7x8x9x10x11x12x13x14xJan-10May-10Sep-10Jan-11May-11Sep-11Jan-12May-12Sep-12Jan-13May-13AverageStd. Deviation +/-4.2x3.1x0x1x1x2x2x3x3x4x4x5x5xJan-10May-10Sep-10Jan-11May-11Sep-11Jan-12May-12Sep-12Jan-13May-13AverageStd. Deviation +/-M kt . Cap. EV / EBITDA EV / EBITDA P/ E P/ E P/ BV EBITDA( USD m) 2 0 13 E 2 0 14 E 2 0 13 E 2 0 14 E UDM M g.Habit at ( incl. Reserves) 1,854 8 .5x 7.5x 14 .8 x 13 .9 x 4 .1x 6 8 %Provida 1,965 7.5x 7.1x 8.7x 8.1x 2.7x 63%Cuprum 1,316 na na na na 6.9x 66%BlackRock Inc 48,674 12.1x 10.8x 17.3x 15.3x 1.9x 41%Franklin Res. 32,018 9.3x 8.3x 14.3x 12.9x 3.4x 40%Blackstone 24,106 18.6x 14.9x 9.4x 7.9x 4.4x 28%T Rowe Price 19,632 10.5x 9.4x 19.4x 17.3x 4.8x 49%Invesco 15,323 15.2x 13.3x 15.7x 13.6x 1.9x 28%Eaton Vance 4,953 10.6x 9.0x 18.9x 16.5x 7.6x 39%Ashmore Group 4,011 9.4x 8.1x 14.1x 12.4x 4.5x naLegg M ason 4,268 9.1x 8.8x 15.6x 13.7x 0.9x 15%Waddell Reed 4,038 9.9x 8.7x 17.3x 15.0x 7.2x 32%Federated Inv 3,034 11.2x 10.3x 16.9x 15.4x 5.8x 38%Cohen & Steers 1,630 12.8x 11.4x 20.6x 17.2x 7.8x 36%Janus Capital 1,664 7.2x 6.7x 13.3x 11.6x 1.1x 33%Calamos Asset 221 5.5x 5.6x 17.6x 17.4x 1.1x 40%M etlife 49,385 na na 8.2x 7.9x 0.8x naPrincipal Financial 11,341 na na 11.5x 10.3x 1.2x naAverage ex. Insurers 10 .5x 9 .3 x 15.6 x 13 .9 x 4 .1x 4 1.1%Average 10 .5x 9 .3 x 14 .9 x 13 .3 x 3 .8 x 4 1.1%Company11Source: Bloomberg & Credicorp Capital Estimates
  • 12. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comHeinrich Lessau CHILE COLOMBIA Hernán Arellano Marilyn MacdonaldHead of Research Head of Equities Equity Sales Internationalhlessau@credicorpcapital.com Francisca Manuschevich Daniel Velandia harellano@credicorpcapital.com mar_macdonald@btconnect.com# (562) 2446 1704 Head of Equity Research - Chile Head of Research & Chief Economist # (562) 2446 1706 # (4477) 7151 5855fmanuschevich@credicorpcapital.com dvelandia@credicorpcapital.comPERÚ # (562) 2446 1798 # (571) 339 4400 Ext 505 Roberto Salas Cristián CastilloEquity Sales International Sales Trader InternationalAlejandro Rabanal Christopher DiSalvatore Valeria Marconi rsalas@credicorpcapital.com ccastillo@credicorpcapital.comHead of Equity Research - Perú Senior Analyst: Retail & Financials Senior Analyst: Oil & Gas # (562) 2446 1732 # (786) 999 1633arabanal@credicorpcapital.com cdisalvatore@credicorpcapital.com vmarconi@credicorpcapital.com# (511) 205 9190 Ext 36070 # (562) 2446 1724 # (571) 339 4400 Ext 594 CHILE PERÚMaría Teresa Sarmiento Felipe Etchegaray Jaime Pedroza Rene Ossa Jorge MonsanteSenior Analyst: Infrastructure Senior Analyst: Telecom & Utilities Senior Analyst: Utilities Equity Sales International General Manager Credibolsamsarmientov@credicorpcapital.com fetchegaray@credicorpcapital.com jpedroza@credicorpcapital.com reneossa@credicorpcapital.com jmonsante@credicorpcapital.com# (511) 205 9190 Ext 33055 # (562) 2446 1768 # (571) 339 4400 Ext 9139 # (562) 2651 9324 # (511) 313 2918Fernando Pereda Ignacio Spencer Juan Camilo Domínguez Christian Munchmeyer Gonzalo MoralesSenior Analyst: Cement & Utilities Senior Analyst: Food & Beverages, Others Senior Analyst: Banks Sales & Trading International Head of Sales & Tradingfpereda@credicorpcapital.com ispencer@credicorpcapital.com jcdominguez@credicorpcapital.com cmunchmeyer@credicorpcapital.com gmorales@credicorpcapital.com# (511) 205 9190 Ext 37856 # (562) 2450 1688 # (571) 339 4400 Ext 572 # (562) 2450 1613 # (511) 313 2918 Ext 32901Héctor Collantes Javier Günther Juliana Valencia COLOMBIA Úrsula MitterhoferSenior Analyst: Mining Analyst: Construction & Health Services Analyst: GEA & BVC Sales & Tradinghcollantes@credicorpcapital.com jgunther@credicorpcapital.com jvalencia@credicorpcapital.com Sergio Ortíz umitterhofer@credicorpcapital.com# (511) 205 9190 Ext 33052 # (562) 2450 1695 # (571) 339 4400 Ext 365 Head of Equities Sales - Colombia # (511) 313 2918 Ext 32922sortiz@credicorpcapital.comOmar Avellaneda José Manuel Edwards # (571) 339 4400 Ext 273Senior Analyst: Retail & Others Analyst: Natural Resourcesoavellaneda@credicorpcapital.com jedwards@credicorpcapital.com Juan Antonio Jiménez# (511) 205 9190 Ext 36065 # (562) 2446 1761 Head of Equity Sales Internationaljjimenez@credicorpcapital.comAndrés Ossa # (571) 339 4400 Ext 466Analyst: Telecom & Utilitiesaossa@credicorpcapital.com Santiago Castro# (562) 2651 9332 Sales & Trading Internationalscastro@credicorpcapital.comLourdes Alamos # (571) 339 4400 Ext 369Assistant to Researchlalamos@credicorpcapital.com# (562) 2450 1609EQUITY RESEARCH TEAM EQUITY SALES & TRADINGContact Information
  • 13. Christopher DiSalvatore(56 2) 2446 1724 cdisalvatore@credicorpcapital.comFrancisca Manuschevich(56 2) 2446 1798, fmanuschevich@credicorpcapital.comThis report has been prepared by Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A. and/or their subsidiaries for informative purposesonly. This report is based on publicly available information that it should be considered to come from reliable sources. However we do not guarantee it as accurate or complete and itshould not be relied on as such.Unless otherwise stated, this report does not include privileged information that could violate either copyrights or market regulations.This material belongs to Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A. and/or their subsidiaries and can not be copied, distributedor redistributed in any form by any means or without the prior written consent of Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A.and/or their subsidiaries.The purpose of this report is not to predict the future, nor guarantee specific financial results. It is also important to consider that the information contained in this research may beoriented to a specific segment of clients or investors, with a certain risk profile that may not be yours. Unless otherwise stated, the report does not contain investment recommendationsor other suggestions that can be understood to be given under the capital market intermediaries’ special duty to clients classified as investors. When recommendations are made, thereport will specify a risk profile. Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A. and/or their subsidiaries can seek and/or conductbusiness with companies that are mentioned in the report, and they can also execute buying and selling transactions of shares that are mentioned.It is important to state that fluctuations in Exchange rates can have adverse effects on investment value. Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/orBCP Capital S.A.A. and/or their subsidiaries recommend their clients to seek assistance from professionals accredited by the appropriate regulatory agency. It is up to the client todetermine if the information in this report is sufficient to make an investment decision or any other market operation.Under no circumstances can the information published here be considered as provided legal, accounting or taxation concept. When it is required, Inversiones IMT S.A. and/orCorreval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A. and/or their subsidiaries recommend their clients to seek advice from accredited professionals.Inversiones IMT S.A. and/or Correval S.A. Sociedad Comisionista de Bolsa and/or BCP Capital S.A.A. do not assume any responsibility, obligation nor any loss related to the informationcontained in this report, neither do these same firms assume civil responsibility for any legal recourse caused by action or omission derived from this document.Disclaimer