Larrain Vial Sold ICA Stake as Mexican Builder’s Shares Plunged

Larrain Vial Administradora General de Fondos SA, manager of Latin America’s best-performing small-cap stock fund, has sold most of its holdings of Empresas ICA SAB (ICA*) this year after the Mexican construction company failed to pare back debt, a fund official said.

The Larrain Vial Magallanes II fund has “practically zero” shares of Mexico City-based ICA, co-portfolio manager Martin Benitez said in a phone interview yesterday. At the end of 2012, ICA was the Magallanes fund’s most heavily weighted stock, at about 3 percent of overall holdings, according to regulatory filings.

The shares of ICA, Mexico’s biggest construction company, have tumbled 28 percent this year as earnings slumped amid delays in public-works spending. A deal reached in 2012 to sell most of the company’s homebuilding unit collapsed last week. ICA’s net debt at the end of the first quarter was 10.7 times earnings before interest, tax, depreciation and amortization, or Ebitda, up from 8.8 times a year earlier, according to data compiled by Bloomberg.

“ICA’s most recent results really scared us,” Benitez, who helps manage about $350 million in Latin American stocks at Larrain Vial, said in a telephone interview from Santiago. “We expected them to reduce debt and they actually increased it. At this level it will become harder for ICA to grow.”

ICA’s debt ratio compares with an average of 2.8 times for regional peers. The company’s first-quarter profit fell 80 percent from a year earlier to 164 million pesos ($13 million).

The $31.4 million Magallanes (LVMAGII) fund, of which Benitez is a co-manager with Tomas Langlois, invests only in small- and medium-size companies, according to the firm’s website. That includes stocks with equity capitalizations in the lowest 25 percent for each market, Benitez said.

Buying Pinfra

The fund has returned 33 percent in the past 12 months, the best performance among 97 peers classified as small-, mid- and multi-cap Latin American stock funds, according to data compiled by Bloomberg. The search excluded Argentine-domiciled funds, whose returns are distorted because of accounting differences related to that country’s foreign exchange rate.

A Larrain Vial fund based in Luxembourg has about $320 million under management, Benitez said. That fund increased its stake in ICA during the first quarter by 915,000 shares to 3.03 million as of March 28, worth about $10 million at the time.

Both funds have been liquidating their ICA stakes, Benitez said, adding that Larrain Vial is now buying shares of Mexican builder Promotora y Operadora de Infraestructura SAB or Pinfra.

Mexico City-based Pinfra’s lower debt load will leave it with more borrowing capacity to undertake new projects once the government details its plans, Benitez said. Pinfra’s net debt to Ebitda was about 2.3 times as of March 31, according to data compiled by Bloomberg.

President Enrique Pena Nieto is expected in the coming months to detail his priorities for building projects during his six-year term. In his Dec. 1 inauguration speech, he pledged to back projects including railroads, highways and port expansions.

To contact the reporter on this story: Eduardo Thomson in Santiago at ethomson1@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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