Yes, great question. I talked to IR about the ~12b reais figure that they have not provisioned for. Mainly, this dates back to tax disputes that have been ongoing for over a decade and might take time to be resolved. Overall, management believe that they have a good chance of winning these cases (hence why they did not provision for them in the first place). However, if they were to lose a few cases, the total amount would end up being a way smaller fraction vs. face value, as this amount includes interest (SELIC is currently at a mid-teens rate) and penalties. All-in-all, it's somewhat hard to handicap (and this is an issue for multiple companies in Brazil), but perhaps some amount can be added to the SOTP to mitigate this. I did not, as I think my FV estimate of GPA is quite conservative, but that is entirely up to you and could make sense. Hope this helps.
Hi Steve, thanks for subscribing, I appreciate your support.
In terms of the pieces, the stub is trading at ~$1.10 and the Exito piece is at $2.79 per share (for the 4 share equivalent). Both securities look very cheap at the moment. At $1.10 for the stub, I estimate that GPA is trading at ~2.5x "normalized" EBITDA (assuming a 9% margin on 2023 numbers, and including lease expenses). Exito is trading at an implied price of ~2,800 COP/share, which should put it at ~4x operating profit on my 2023 numbers.
In the near term, I would expect to see Exito under some continued selling pressure, but that is likely to create a good opportunity, particularly as we might still have Gilinski interested in buying the company. If we don't see a bid for the company, I think this could easily trade at ~6-7x EBIT, which would result in upside of ~75% or so.
The stub I also like. It's still cheap and there's value in core GPA, the Cnova shares, and 13.3% of Exito shares that remain in the core holding; moreover, the GPA chains are likely to be interesting (and digestible) for an acquirer. I think it could easily trade at ~5.0x EBITDA, if not higher, which would be ~60% upside.
If I had to pick one, I would go for Exito, as the company is higher quality, the story is cleaner, and you have a potential acquirer as well. The only caveat is that given the recent spin, you might still see some selling pressure in the near term.
Anyways, hope this helps! And let me know if you have any other questions.
$CBD sold down pretty hard over the last week. Why? Late SEC filings still not filed, Exito spinoff not happening in Q2 (that train has now sailed), or Casino telling the market they’ll dump both stocks at the earliest possibility? Or something else?
The only thing I would challenge is Grupo Exito´s quality. I think Exito will struggle to sustain EBIT margin in 23, due to inflationary pressure, Q1 results already show fixed cost +26% vs YA. SSS are growing 11.8% but inflation is 13% in Colombia.
Plus historically has much lower ROIC than ASAI3-CRFB3 so I would also assign a lower multiple. I think it is worth between 5.500 and 7.000 B Col pesos, instead of 7.000 to 8.000.
But must repeat it´s very well written and am thankfull for the idea. I´m investing a little bit now because the stub is not worth 0, and some post spin off in case I find even greater margin of safety.
Will add a couple of things. First, FX is playing a relevant role here, which can add up as long as BRL and COP make some gains vs USD or else lose some value. Second, CBD will deliver Exito's shares at book value, according to one of its presentations, which is north of COP$5.400 in orden to avoid capital gains in Brazil. So its very likely that Exito shares will rise before the event.
Perhaps a dumb question: I am a U.S. retail investor. What would my American brokerage, e.g., Schwab or IB, do with the Grupo Exito shares that I receive. What could I do with them? Perhaps the problem is that I don't understand this statement: "EXITO shares will be completely fungible across NY, Colombia, and Brazil."
Éxito currently trades in Colombia. For Brazilian holders of CBD (PCAR3), a BDR will be created that allows stockholders to hold Éxito shares on the Brazilian exchange. Similarly, in the US, an ADR will be created to hold Éxito shares in the US market. (Fungible means that shares will be able to be converted, say from, an ADR to the Colombian shares. In theory, they all represent ownership in Éxito)
Do you have a view on the contingent liabilities surrounding GPA (the "stub") that might impact your US1-2 valuation of the "stub"? (https://www.morningstar.com/news/dow-jones/2023020910454/pao-de-acucar-shares-drop-53-after-unfavorable-brazil-court-ruling). Maybe a slight commentary on what are the open legal case will be good and the full extent of the contingent liabilities will help.
Yes, great question. I talked to IR about the ~12b reais figure that they have not provisioned for. Mainly, this dates back to tax disputes that have been ongoing for over a decade and might take time to be resolved. Overall, management believe that they have a good chance of winning these cases (hence why they did not provision for them in the first place). However, if they were to lose a few cases, the total amount would end up being a way smaller fraction vs. face value, as this amount includes interest (SELIC is currently at a mid-teens rate) and penalties. All-in-all, it's somewhat hard to handicap (and this is an issue for multiple companies in Brazil), but perhaps some amount can be added to the SOTP to mitigate this. I did not, as I think my FV estimate of GPA is quite conservative, but that is entirely up to you and could make sense. Hope this helps.
Thanks for the color!
Of course!
Thanks. Can we chat. If so how can I reach. Worth your time. SS
Of course. Send me an email at info@clarksquarecapital.com and I'll respond through there.
I’m a new subscriber. What do you think of the 2 pieces now that they have been distributed. Which has more upside CBD or EXTO. Thanks!
Hi Steve, thanks for subscribing, I appreciate your support.
In terms of the pieces, the stub is trading at ~$1.10 and the Exito piece is at $2.79 per share (for the 4 share equivalent). Both securities look very cheap at the moment. At $1.10 for the stub, I estimate that GPA is trading at ~2.5x "normalized" EBITDA (assuming a 9% margin on 2023 numbers, and including lease expenses). Exito is trading at an implied price of ~2,800 COP/share, which should put it at ~4x operating profit on my 2023 numbers.
In the near term, I would expect to see Exito under some continued selling pressure, but that is likely to create a good opportunity, particularly as we might still have Gilinski interested in buying the company. If we don't see a bid for the company, I think this could easily trade at ~6-7x EBIT, which would result in upside of ~75% or so.
The stub I also like. It's still cheap and there's value in core GPA, the Cnova shares, and 13.3% of Exito shares that remain in the core holding; moreover, the GPA chains are likely to be interesting (and digestible) for an acquirer. I think it could easily trade at ~5.0x EBITDA, if not higher, which would be ~60% upside.
If I had to pick one, I would go for Exito, as the company is higher quality, the story is cleaner, and you have a potential acquirer as well. The only caveat is that given the recent spin, you might still see some selling pressure in the near term.
Anyways, hope this helps! And let me know if you have any other questions.
I don't think I have come across them before... Will include a link to your post in my Monday free emerging market links post...
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$CBD sold down pretty hard over the last week. Why? Late SEC filings still not filed, Exito spinoff not happening in Q2 (that train has now sailed), or Casino telling the market they’ll dump both stocks at the earliest possibility? Or something else?
It´s a great write up!
The only thing I would challenge is Grupo Exito´s quality. I think Exito will struggle to sustain EBIT margin in 23, due to inflationary pressure, Q1 results already show fixed cost +26% vs YA. SSS are growing 11.8% but inflation is 13% in Colombia.
Plus historically has much lower ROIC than ASAI3-CRFB3 so I would also assign a lower multiple. I think it is worth between 5.500 and 7.000 B Col pesos, instead of 7.000 to 8.000.
But must repeat it´s very well written and am thankfull for the idea. I´m investing a little bit now because the stub is not worth 0, and some post spin off in case I find even greater margin of safety.
Will add a couple of things. First, FX is playing a relevant role here, which can add up as long as BRL and COP make some gains vs USD or else lose some value. Second, CBD will deliver Exito's shares at book value, according to one of its presentations, which is north of COP$5.400 in orden to avoid capital gains in Brazil. So its very likely that Exito shares will rise before the event.
Perhaps a dumb question: I am a U.S. retail investor. What would my American brokerage, e.g., Schwab or IB, do with the Grupo Exito shares that I receive. What could I do with them? Perhaps the problem is that I don't understand this statement: "EXITO shares will be completely fungible across NY, Colombia, and Brazil."
No worries.
Éxito currently trades in Colombia. For Brazilian holders of CBD (PCAR3), a BDR will be created that allows stockholders to hold Éxito shares on the Brazilian exchange. Similarly, in the US, an ADR will be created to hold Éxito shares in the US market. (Fungible means that shares will be able to be converted, say from, an ADR to the Colombian shares. In theory, they all represent ownership in Éxito)
Great! This is very clear now. Much thanks.