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Company Alert: EEB - HOLD: Attractive new investment in Peru at fair price; reducing room for potentially aggressive inorganic growth in 2014

Price: COP 1,350; Target Price: COP 1,800

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January 29, 2014 ( newswire) EEB signed a contract to purchase 23.6% of Transportadora de Gas del Perú (TGP) and 100% of Operadora de Gas del Amazonas (COGA) through its natural gas subsidiary, TGI. EEB would pay around USD 650mn at 9.6x EV/EBITDA 2013E. There are two clear messages we want to convey with this report: 1) the transaction is positive as we believe TGP is an attractive asset, acquired at fair price, and aligned with EEB's strategy; and 2) EEB's management's apparent determination to continue growing aggressively through M&As in the short term, calls for caution.

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TGP is the largest transporter of natural and liquid gas in Peru. We believe EEB can materialize the acquisition into growth and profitability, having thorough knowledge of both sector and country. TGP operates in a strategic sector with high growth potential, and the transaction multiple looks reasonable.

On the other hand, due to this acquisition and the size of other transactions in which EEB has expressed intentions to participate - namely acquiring Isagen's control, and increasing the stake in TGI, the company could have significant liquidity needs in the short term, stressing its leverage position or resulting in overhang risk. Also, the stock remains exposed to the uncertainty surrounding the situation of the mayor of Bogotá, and the sale flow of Ecopetrol's stake in EEB (6.9%).

In light of the risk factors that affect the stock price, and despite EEB's high growth opportunities, strong fundamentals, and room for upside from current prices, we maintain our HOLD rating and our 2014 T.P. of 1,800, based on a SOTP model, with target multiples of 11.8x EV/EBITDA 2014E and 14.4x P/E.

For charts, tables and the full report, see the attached file.

Credicorp Capital

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