Cencosud S.A Target Price Update

Transcription

1 Cencosud S.A Target Price Update Target Price: CLP 2,400 Recommendation: Buy Risk: High May 13, 2014 Sector: Retail T: Company Information Ticker Bloomberg: CENCOSUD CI Equity Closing Price (CLP/share): 1, M Price Range: 1, ,649.2 Daily Volume (millions of CLP): 4,674.8 Shares (millions): 2,828.7 Market Capitalization (thousands of USD): 5,383.9 Shares / ADR: 3 Share Price Investment Thesis We updated our target Price for Cencosud S.A. to CLP 2,400 per share for yearend 2014, with a Buy recommendation and high risk. At the current closing price, our target implies a potential growth of 26.5%. In addition, we expect a dividend yield of 0% for December 2014, totaling a return of 26.5%. Our thesis considers the strong inorganic growth the company has had in recent years and their capacity to successfully consolidate said operations. Successfully consolidate acquired operations in the short-term in Colombia and Brazil increasing operating efficiencies. This has led to a reduction in the margins due to increased expenses associated to the integration of its operations. Nonetheless, we expect an improvement in results of the consolidation of its operations in Colombia and Brazil by the end of 2014, increasing in this way the efficiencies of the company and reducing expenses investment plan of USD 425 million, which will increase the sales by 6% YoY. A 30% of the investment will take place in Chile, 20% in Brazil, 18% in Colombia, 20% in Peru and 12% in Argentina. The Capex announced will allow the company to pay debt and take its DFN/EBITDA indebtedness level back to 3.0x thus maintaining its risk classification and complying with covenants established in its bonds. Share Price vs. IPSA Base High exposure to Argentina, a country experiencing significant political and inflationary problems. We expect a depreciation of the Argentine Peso from ARS 8.01 to ARS 9.72 per dollar in 2014, which could reduce Cencosud s income. If we consider that 28% of the EBITDA comes from that country, the EBITDA of the company would decrease by 5% with the possible depreciation of the Argentine peso. This is partially compensated by the company s strong position in the supermarket segment, which amounts to 74% of its income and 54% of its EBITDA. Risks Consolidation of operations: The execution of the plan could affect the company s value either in a favorable or unfavorable way, inasmuch as that the company exceeds our expectations or not. Country Risk: Political and economic changes that may arise in each country Cencosud operates in. These changes include: changes of the estimated demand, foreign exchange fluctuations, interest rates, taxes, and minimum wages. All these factors could eventually affect the company s value. CENCOSUD Source: Bloomberg, CorpResearch IPSA Cencosud May 16, 2014

2 Cencosud Target Price (CLP): Recomendation: Buy Company Description Cencosud is one of the main conglomerates in Latin-America, present in Chile, Argentina, Brazil, Colombia and Peru. Cencosud has businesses in Supermarkets, Home improvement, department stores, shopping centers and Financial Business. At December, 38% of its income comes from Chile, 25% from Argentina, 20% from Brazil, 8% from Peru and 9% from Colombia. ERR (CLP billions) Sales 10,341,040 10,531,119 10,978,017 11,470,091 Gross Margin 2,969,491 3,049,723 3,194,811 3,346,491 Gross Margin% 29% 29% 29% 29% Operating Income 624, , , ,109 Operating Margin% 6.0% 6.0% 6.1% 6.3% EBITDA 767, , , ,630 EBITDA Margin % 7.4% 7.6% 7.7% 7.9% Net Financial Expenses - 252, , , ,167 Non-Operating Income - 298, , , ,028 Earnings 229, , , ,922 EPS (CLP/share) Property Structure Balance (CLP billions) ADS 1% Cash and cash equivalents 256, , , ,596 Non-current assets 7,474,910 7,554,007 7,638,654 7,725,663 Total Assets 10,065,234 9,891,228 10,244,339 10,509,754 Financial Debt 2,957,141 2,732,141 2,822,141 2,822,141 Total Liabilities 5,803,867 5,469,618 5,636,995 5,701,834 Total Equity 4,261,367 4,421,610 4,607,344 4,807,920 Noncontrolling Interest Income Distribution FC (CLP billions) % Others 23% Pension Funds 16% 2% 3% 9% Supermarket Departament Store Financial Services Controllin g Group 60% 75% Home Improvement Malls Operating Income 624, , , ,109 Adjusted Taxes - 209, , , ,934 Depreciation & Amortization 165, , , ,521 Capex , , ,530 Δ Working Capital 530,454-12,295 8,708 7,297 Free Cash Flow 1,110, , , ,464 Capital Increase Dividends - 80,901-35,642-68,752-76,346 New Debt - 581, ,000 90,000 - Comparables P/E Ratio EV/EBITDA Ratios Cencosud Share Price (CLP) 1,892 1,897 1,897 1,897 Falabella P / U (x) Forus Liabilities/Equity (x) Ripley EV / EBITDA (x) EBITDA / Financial Expenses (x) Net Financial Debt / EBITDA (x) ROA (% ) 2.3% 2.3% 2.5% 2.6% β (vs IPSA): 1.29 ROE (% ) 5.4% 5.2% 5.5% 5.8% WACC: 12.0% Dividend Yield (% ) 1.3% 0.7% 1.3% 1.4% Source: CorpResearch, Bloomberg, Company Financial Statements.

3 Cencosud Income Distribution by Country 10% 8% 19% 25% 38% Chile Argentina Perú Colombia Brasil Source: Company Reports, CorpResearch. Cencosud EBITDA Distribution by Country 6% 8% 6% 28% 52% Investment plan The investment plan published for 2014 decreased when compared to those of due to problems with the sale of the financial retail business, which was finally not completed. The investment should reach USD 425 million this year, where USD 210 million are allocated to the opening of new stores. Additionally, we only consider on time implementation of 95% and delays in 5% of store openings. Based on these assumptions, we estimate a 6% increase in the sales area distributed in this manner: 75% in supermarkets, 21% in Home Improvement and 4% in Department Stores. Therefore, we expect income to increase by 11% within the next 3 years, adding up to CLP 277,214 million by the end of In any case, we expect the adjustments made to the investment plans to continue until 2016, and then increase gradually. Proyected Store Square Meters Millions M2 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 2,9 3,5 0, Source: Company Reports, CorpResearch 2014E 2015E 2016E Situation in Argentina Argentina is going through a troubled political and economic situation, thus we expect an exchange rate depreciation of 21%. 28% of the Company s EBITDA comes from that country; hence the fall in EBITDA by exchange rate will be 5%. In addition, we expect positive SSS in that country, which are affected by the current high inflationary rates. We do not expect the situation to improve in that country, neither in the short or the medium term.. Exchange Rates ARS/Dólar Consensus Forecast 3,7 3,8 4,0 13,07 9,52 Chile Argentina Perú Colombia Brasil 3,94 4,17 4,64 5,52 7,02 Fuente: Company Reports, CorpResearch Source: Concensus Forecast, CorpResearch

4 Proyected EBITDA & Mg. EBITDA CLP Billions 0,95 0,90 0,85 0,80 0,75 0,70 0,65 7,4% 0,77 7,6% 7,7% 0,81 0,85 7,9% 0, E 2015E 2016E Source:Company Reports, CorpResearch Price Earnings Ratio ,34 8,0% 7,9% 7,8% 7,7% 7,6% 7,5% 7,4% 7,3% 7,2% 7,1% Valuation We have valued the company using a discounted cash flow method (DCF) given the economic prospects for the region, its investment plan and its capacity for consolidating its operations. We consider a tax rate of 25% in Chile to calculate the discount rate (WACC). In the case of the adjusted tax, we have increased it gradually from 21% to 24% in By 2018, we have incorporated the elimination of the FUT, reaching a relevant tax of 35%. Due to lower operating prospects, our target price was reduced compared to our previous report, but we have upgraded our recommendation from Hold to Buy, due to the low price shares have today. Poorer forecasts are mainly due to the tax changes we expect for the next 5 years in Chile. In addition, these estimations are affected by the exchange rate depreciation in the region and the 45% capex reduction aimed at improving the company s leverage level. This new investment plan will make Cencosud exhibit healthy indebtedness ratios again. The income increase of 2.7% in in 2014 is not completely reflected in the EBITDA, since the pressures over costs are going to continue due to the consolidation of the company s acquisitions and new store openings. We estimate that SAGs will show a slight improvement by the end of the year, as a result of the consolidation of the operations in Brazil and Colombia, leading to greater operating efficiencies. This should take the SAGs back to historical levels, which should gradually help take the EBITDA margin back to historical levels of 8.5%, progressively increasing the company s income, which should go up to CLP 232,218 million by the end of ,97 23,08 23,30 Cencosud is one of the main Latin American conglomerates, present in Chile, Argentina, Brazil, Colombia and Peru. Cencosud has participation in the Supermarket, Home improvement, Department Store, Shopping Center and Financial Businesses. As of December, 38% of its income comes from Chile, 25% from Argentina, 20% from Brazil, 8% from Peru and 9% from Colombia ,54 Proyected Income CLP Billions Source: Company Reports, CorpResearch 22,55 27,01 12,0 11,5 11,0 10,5 10,0 10,3 10,6 11,0 11,5 9,5 Source: Company Report, CorpResearch 2014E 2015E 2016E

5 CorpResearch Álvaro Donoso Director CorpResearch Economic Studies Sebastián Cerda Executive Director CorpResearch and Economic Studies Nicolás Birkner Head of Macroeconomic and Financial Analysis Karla Flores Senior Economist Variable Income Studies Vicente Meschi Sub-director of Variable Income Studies Sergio Zapata Senior Analyst. Sectors: Electrical, Utilities. Cristóbal Casassus Senior Analyst. Sectors: Banking, Transport. M Josefina Güell Analyst. Patricio Acuña Analyst. Martín Antúnez Analyst. Sectors: Construction, Telecommunications. Rosario Norte 660 Piso 17, Las Condes, Santiago. Phone: IMPORTANT US REGULATORY DISCLOSURES ON SUBJECT COMPANIES

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