Petrobras, 9 More Picks to Play Brazil Recovery
Brazilian equities already reflect potential improvement, but some may still have upside as margins improve, Credit Suisse says
By
Dimitra DeFotis
Oct. 10, 2017 2:06 p.m. ET
Brazilian stocks are expensive on prospects for margin expansion next year, but there's more to come
Credit Suisse says.
Analysts
Andrew T. Campbell and
Otavio Tanganelli write that equities in Brazil are trading at 13.3 times estimated earnings for the next four quarters, versus the historical multiple of 11.5. They also note that margins based on earnings before interest, taxes, depreciation and amortization (Ebitda) have recovered to 23.1%, excluding banks, just below the long-term average margin of 24.5%. But they think there is the possibility that margins will "overshoot to the upside" if economic recovery in Brazil is better than expected, or if commodity prices move higher. EBITDA margins were above 30% in 2005 and 2006.
Credit Suisse offered the following basket of 10 Brazilian companies with margin upside in 2018. CS listed only local tickers; we added ADRs. The companies on the list, based on Credit Suisse forecasts, are "expected to enjoy material upswings to margins through 2018, and are rated Outperform. Stock performance is based on dollar-adjusted price returns, according to FactSet.
Petroleo Brazileiro (
PBRN.Mexico and
PBR) (Energy) Potential catalyst, per Credit Suisse: Higher oil prices coupled with full year benefit of new pricing policy. Last 12 months (LTM) margin: 31%. 2018 estimated margin: 39%. (Shares are up 3.5% this year.)
Qualicorp (
QUAL3.Brazil) (Health Care): Lower losses with bad debt and further cost cutting opportunities, on top of the gradual macro rebound. LTM margin 39%. 2018E: 44%. (Shares are up 105% this year.)
Ambev (
ABEV and
ABEV3.Brazil) (Food and Beverage) Industry volumes rebounding, better pricing environment (tailwinds from improvement in disposable income) and cost control. LTM margin 41%. 2018E: 45%. (Shares are up 39% this year.)
Iguatemi Empresa de Shopping Centers (
IGTA3.Brazil) (Real Estate) Expansions during 2015-16 that are ramping up.
should fuel top line growth and increase operating leverage, same-store sales (SSS) rebounding, improving occupancy rates and delinquency decreasing. LTM margin 74%. 2018E: 78%. (Shares are up 53% this year.)
Linx (
LINX3.Brazil) (Software) Synergies from recent acquisitions start to bear fruits in the coming year. LTM margin 22%. 2018E: 26%. (Shares are up 23% this year.)
Fleury (
FLRY3.Brazil) (Health Care) Rising productivity, efficiency gains, maturation of new stores opened. LTM margin 25%. 2018E: 28%. (Shares are up 72% this year.)
Lojas Americanas (
LAME4.Brazil) (Retail) Improvement in SSS, efficiency gains (lower SG&A per square meter in new stores), better pricing algorithms and higher margin stores maturation. LTM margin 15%. 2018E: 18%. (Shares are up 20.5% this year.)
Equatorial Energia (
EQTL3.Brazil) (Utility) Tariff reviews and volume growth boosting top line, along with normalization of delinquency rates. LTM margin 18%. 2018E: 20%. (Shares are up 16% this year.)
Telefonica Brasil (
VIVT4.Brazil and
VIV) (Telecom) Better pricing environment and positive regulatory changes start to yield margin expansion in the future. LTM margin 33%. 2018E: 35%. (Shares are up 21% this year.)
Lojas Renner (
LREN3.SA) (Retail) Improvement in SSS, more efficient logistics network, inventory management. LTM margin 20%. 2018E: 21%. (Shares are up 81.5% this year.)
Among these stocks, Ambev and Petrobras are among the top-10 holdings in the
iShares MSCI Brazil Capped exchange-traded fund (
EWZ). The other Brazilian equities in the ETF's top 10 are miner
Vale(
VALE) and three Brazilian banks.
Petrobras, 9 More Picks to Play Brazil Recovery
