Saraiva

Nau Securities Limited
2 Eaton Gate
London SW1W 9BJ
United Kingdom
t +44 20 7947 5510
f +44 20 3043 0009
www.nau-securities.com
John Nelson Ferreira, FCCA
Investment analyst
t +44 20 7947 5511
[email protected]
Romas Viesulas
Specialist sales
t +44 20 7947 5515
[email protected]
Saraiva
19 January 2015
Trading on 6% of sales for a reason
Restructuring costs and gearing may inhibit publishing’s M&A strategy
In April 2014, following our meeting with management in São Paulo,
we concluded that the medium-term outlook for Saraiva had become
less positive. This view was driven by our belief that management
bandwidth and the firm’s balance sheet could become stretched in
implementing what appeared to us to be a growth strategy that was
too all-encompassing. Unless the firm found strategic partners for
certain areas of its growth strategy and/or pulled out of areas where it
was sub-scale, we believed that Saraiva could struggle to generate
superior margins (we were 70bps below 2014 implied EBITDA margin
guidance). The firm’s results for the first 9m of 2014 and the outlook
for at least the first half of this year suggest to us that Saraiva may
struggle to right size its retail operations and implement a suitably
aggressive strategy to consolidate the content market for higher
education and vocational courses in Brazil.
2
Retailing’s sales/m and SSS looks good but SG&A costs are too high
Saraiva’s retail SG&A expenses were equivalent to 31% of net sales at
9m of 2014. This compares to 16% for Lojas Americanas, 23% for Via
Varejo and 22% for Magazine Luiza. Even if management manages to
reduce this ratio to say closer to 25% (it has not been lower than 27%
in the 14 years since 2000), it will still result in Saraiva having to
absorb a relatively heavy cost structure. Whilst Saraiva does not have
2
a “revenue problem” in that the firm performs well on sales per m
compared to its peers, the combination of structurally higher
operating expenses and a less ambitious growth plan than say Lojas
Americanas (plans to open 800 new stores in the next five years), may
make Saraiva’s revenue line vulnerable going forward. This is perhaps
especially so with respect to the tablet, laptop, printer and smart
phone segments, which together accounted for 29% of the firm’s 9m
2014 sales. We have assumed Saraiva spends R$20m in restructuring
its retail division in 2015E and as a result is able to lift its EBITDA
margin from this division from 2.4% in 2013, to 4.4% by 2017E.
Buy, Price Target R$10.00 (+96%)
RIC | BBG
SLED4.SA | SLED4:BZ
Sector
Consumer discreationary | publishing & retailing
Price (R$)
5.1
Number shares (m)
28.596
Market Cap. | EV (R$m)
144 | 724
Max | Min 52 week (R$)
22.79 | 5.00
Beta
0.54
Av. Daily Volume (US$m)
0.3
Free Float (%)
66 (SLED4)
Local market | Index weight
None
Consensus distribution
(3 B, 0 N, 2 S), PT 15.6 (29 – 12)
R$m
13A
14E
15E
16E
17E
2144
2299
2444
2681
2881
EBITDA
95
113
95
165
183
EBIT
49
66
47
115
131
Net income
13
2
-15
42
54
EPS (R$)
0.42
0.09
-0.58
1.61
2.06
DPS (R$)
0.88
0.02
0.00
0.52
0.66
PER (x)
12.1
59.3
-
3.2
2.5
EPS growth (%)
-85%
-80%
-
-
28%
Net sales
Price/cash earnings
Dividend yield (%)
EqFCF yield (%)
2.5
3.0
4.4
1.6
1.4
17.3%
0.4%
-
10.1%
13.0%
-86.8%
-103.6%
-51.7%
-5.3%
-8.0%
Price/book (x)
0.3
0.3
0.3
0.3
0.3
EV/EBITDA (x)
6.0
6.4
7.9
4.5
4.1
EV/EBIT (x)
11.5
11.0
16.1
6.4
5.6
EBIT Margin (%)
2.3%
2.9%
1.9%
4.3%
4.5%
Pre-tax ROIC (%)
5.2%
6.2%
4.4%
10.6%
11.7%
ROE (%)
2.5%
0.4%
-3.2%
8.7%
10.5%
Net debt/(cash)
423
580
610
594
593
4.4
5.1
6.4
3.6
3.2
Net debt/EBITDA (x)
Source: Bloomberg, Nau Securities. Prices as of 19 January 2015
Saraiva!
MAV 50d!
MAV 200d!
40!
R$!
Saraiva!
35!
30!
25!
20!
15!
10!
0!
Jan-15!
Nov-14!
Jul-14!
Sep-14!
May-14!
Jan-14!
Mar-14!
Nov-13!
Jul-13!
Sep-13!
May-13!
Jan-13!
Mar-13!
Nov-12!
Jul-12!
Sep-12!
May-12!
Jan-12!
5!
Mar-12!
We calculate Saraiva is worth R$29 per share, implying 469% upside
Given that we have assumed that Saraiva’s short-term earnings and
cash flows will be disrupted by restructuring, we have arrived at a
valuation for the firm based upon applying peer group price-to-sales
multiples for the firm’s two operating divisions. We have valued the
publishing business on the basis of applying a 50% discount to Abril
Educação multiple of 212% and have valued Saraiva’s retail operations
by applying 100% of the average price-to-sales ratios for FNAC,
Barnes & Noble and Magazine Luiza (18%). After adjusting for group
eliminations, we arrive at an equity value per share for Saraiva of
R$29, which would represent 469% upside from the current share
price. Whilst on the face of it, this looks appealing; we believe that the
value of the firm’s divisions are a function of management’s ability to
show that they can return the retail business to sustainable profitable
growth and successfully diversify away from the public sector
textbook market by developing new recurring revenue streams across
the publishing and education market segments. Ahead of evidence that
this is taking place, we continue to rate the firm a buy, but with a
R$10 price target, which would place Saraiva on 6.2x 2016E earnings.
Source: Bloomberg, Nau Securities!
Saraiva
19 January 2015
An eventual year…
Since our last published report on Saraiva on 23 April 2014 a number
of significant developments have impacted the outlook for the firm:
•
On 19 August 2014, Saraiva announced that its longserving CFO, João Luís Ramos Hopp, had resigned after 24
years with the firm;
•
On 24 September 2014, Saraiva announced that it had only
generated sales of R$154m from PNLD 2015, reflecting a
collapse in its market share to 15.0% from PNLD 2012’
24.6%. We had modeled R$200m in public sector textbook
sales for 2014 (including digital content which has yet to
be priced);
•
•
On 7 November 2014, Saraiva announced that it had
terminated its relationship with Michel Jacques Levy, the
firm’s CEO, after just one year. Mr. Levy’s role has been
eliminated on the basis that the two VPs responsible for
the publishing and retailing divisions, namely Mauricio
Fanganiello and Marcelo Ubriaco respectively, now report
directly to Jorge Saraiva Neto, Saraiva, who has taken on
the roles of President and Deputy-Chairman of the firm;
On 13 November 2014, Saraiva released disappointing Q3
2014 results on the back of weaker than expected retail
division margins. Management took the opportunity to
revise down their guidance for EBITDA in 2014 by 40%
from R$190m – R$210m, to R$110m to R$130m. Nau
Securities was at R$175m. Management had issued its
original guidance for 2014 on 17 April 2014.
Restructuring in 2015?
Marcelo Ubriaco aims to recalibrate the retail division by the summer
Whilst Mauricio Fanganiello took the helm of the publishing business
back in Q2 2013, Marcelo Ubriaco only assumed responsibility for the
retail division in Q1 2014. He subsequently carried out a review of
Saraiva’s retail activities through to the end of Q3 2014. From Q4
2014 through to the end of Q2 2015, Marcelo Ubriaco will focus on
the implementation of initiatives that will:
“Deliver solid results to shareholders and ensure customer satisfaction.”
Saraiva aims to achieve up to a 7% retail EBITDA margin in 3-5 years
In 2H 2015, Marcelo Ubriaco has been charged with developing a
long-term plan for Saraiva’s retail division. Ultimately, management is
aiming for the retail division to be able to deliver a 6% to 7% EBITDA
margin in “three to five years.” We have modeled for Saraiva’s retail
EBITDA margin to reach 4.4% by 2017E, having troughed at 2.3% in
2014E. Saraiva’s decision to essentially put the brake on further
expansion of its retail footprint and target SSS real growth of at least
1%, essentially requires Marcelo Ubriaco to focus on ripping out both
direct and indirect costs from the retail division.
Brazilian general retailers sales/m2 (R$000), 9m 2014 !
Lojas Americanas (ex B2W)!
7.0!
12.1!
Magazine Luiza (ex eCommerce)!
Lojas Americanas!
13.0!
Saraiva (ex eCommerce)!
14.2!
Magazine Luiza!
14.8!
Via Varejo (Casas Bahia)!
14.9!
Via Varejo!
15.1!
Via Varejo (Pontofrio)!
15.7!
Saraiva!
The retail division’s bloated cost structure needs to be addressed
In our view, the flattening of the management structure has opened
up the possibility of tackling the retail’s division’s bloated cost
structure and the firm’s central overhead, where we estimate 500 of
Saraiva’s staff represents just some 15% of the firm’s labour costs. We
believe that the most immediate consequences from the realignment
of the management team are that:
a)
Growth capex in the physical retail network will be reined
in and management will focus on optimising the
profitability of the existing 116 stores they already
manage; including aiming to achieve at least 1% real growth
in SSS going forward. We believe that Saraiva will only lift
investment in the retail division if further opportunities
emerge in the airport terminal space and/or it can secure
improved terms from Brazil’s shopping mall operators with
2
respect to its megastore format (average size 860m and
2
we estimate cost of circa R$3,500/m ;
b)
Saraiva will embark upon a restructuring programme in 1H
2015, with the focus squarely on reducing the retail
division’s SG&A. We estimate that the total costs associated
with such a programme will amount to R$20m;
c)
What resources are available will be directed at publishing,
with a view to implementing management’s goals of
consolidating premium content for higher education and
vocational studies and the ongoing digitalisation of content
and related launches of new products.
20.7!
0.0!
5.0!
10.0!
15.0!
20.0!
25.0!
Source: Company data, Nau Securities!
Saraiva SG&A as % of retail sales, 2000 - 2017 !
Saraiva’s retail business does not have a critical revenue problem
2
The table above compares sales per M for Saraiva with Brazil’s other
principal general retailers for the first nine months of 2014. Where
possible, we have provided results on a consolidated basis and
adjusted for a firm’s eCommerce revenues. As can be seen, Saraiva’s
retail business does not have an obvious “revenue problem” , in that
2
sales/m for 9m 2014 on a consolidated basis is actually materially
higher than any of its domestic peers and adjusted for the firm’s
meaningful eCommerce sales (30% of consolidated revenues) is still a
2
respectable R$14,200/m . Furthermore, the firm has delivered
positive and consistent performance with respect to SSS growth over
recent quarters. This is especially so in the content of an operating
environment that has been particularly testing for all of Brazil’s
retailers.
Saraiva has set a 1% real growth rate target for SSS going forward
The chart below shows that whilst not as consistent as the
extraordinarily stable level of SSS growth reported by Lojas
Americanas, or as dynamic as the progression in SSS growth disclosed
by Magazine Luiza, Saraiva has not failed to deliver positive SSS in
any one of the last seven reported quarters. However, what can be
said and indeed has been reflected in management’s recently stated
business goals, is that Saraiva needs to start delivering real growth in
SSS on a more consistent basis and indeed a minimum real rate of
growth target of 1% has been set.
2 / 14
Saraiva
19 January 2015
Brazilian general retailers' SSS progression, Q1 2013 - Q3 2014 !
Saraiva!
Lojas Americanas!
Administrative expenses as % of SG&A, 9m 2014 !
Magazine Luiza!
Saraiva!
Via Varejo!
Magazine Luiza!
Lojas Americanas!
25.0%!
30%!
25%!
25%!
20.0%!
20%!
20%!
15.0%!
15%!
10%!
10.0%!
10%!
6%!
5.0%!
Q1 2013!
Q2 2013!
Q3 2013!
Q4 2013!
Q1 2014!
5%!
0.0%!
Q3 2014!
Q2 2014!
0%!
Saraiva!
Via Varejo!
Magazine Luiza!
Source: Company data, Nau Securities!
Lojas Americanas!
Source: Company data, Nau Securities!
Saraiva physical store network, 2005-2017 !
Saraiva capex by division, 2010-2017 !
Saraiva does have a challenge with respect to SG&A (especially “A”)
The chart below sets out the stark challenge facing Marcelo Ubriaco
when it comes to Saraiva’s retail division, namely the business has a
bloated cost structure and especially so with respect to the firm’s
administrative costs. As can be seen, Saraiva’s SG&A expenses were
equivalent to an eye-watering 31% of net revenues for the first 9m of
2014. This compares to ratios ranging between 16% to 23% for the
firm’s key domestic peers for the same period.
We believe retail division restructuring will commence in Q1 2015
Management have provided no guidance or indeed confirmed that
they plan to execute a restructuring programme. However, we believe
that in the context of a decision to rein in the growth of the firm’s
physical store network, this requires costs to be cut at the SG&A level
and as such we believe will inevitably require a reduction in staffing
levels. Saraiva has hired a Brazilian consultancy firm called Gradus
(www.gradusconsultoria.com.br), to help management identify cost
savings and avenues for greater efficiency. Given the timetable set
out by Saraiva for Marcelo Ubriaco to implement changes to the retail
business that will lead to improvements in profitability, we believe
that Saraiva is likely to execute restructuring during the first quarter
of this year. We have attempted to reflect the financial impact of
such a process by making the following assumptions:
Brazilian general retailers' 9m 2014 SG&A/sales ratio (%) !
Saraiva!
Lojas Americanas (ex B2W)!
Lojas Americanas!
Via Varejo!
Magazine Luiza!
35%!
31%!
30%!
23%!
16%!
22%!
25%!
•
Saraiva’s control functions represent 8% of the headcount,
but some 15% of labour costs and that this area will see a
12.0% reduction in headcount;
•
4,650, or 77.5% of the firm’s headcount is located in the
retail division and 4.5% of this staff pool will be let go;
•
We have assumed that average severance costs equate to
12 months’ salary and as such the combined cost of
redundancy in 1H 2015 will be R$15m;
•
We have assumed a further R$5m of costs will be incurred
with respect to expenses, such as impairments charges and
consultancy fees.
20%!
17%!
15%!
10%!
5%!
0%!
Saraiva!
Lojas Americanas Lojas Americanas!
(ex B2W)!
Via Varejo!
Magazine Luiza!
Source: Company data, Nau Securities!
Retail capex as a % of retail gross sales, 2010-2016 !
Administrative costs were 25% of Saraiva’s 9m 2014 SG&A expenses
The chart below also shows that Saraiva’s cost problems are in part a
reflection of particularly high administrative cost line and in this
regard, the retail division’s share of central overhead costs. In this
latter respect, some 8% of Saraiva’s 6,000 employees work for central
functions and we believe that their costs will represent close to 15%
of the firm’s overall labour costs. For 9m 2014, administrative costs
totaled R$98m and were equivalent to 25% of Saraiva’s total retail
SG&A for the period. This ratio compares to 6% for Lojas Americanas,
10% for Via Varejo and 20% for Magazine Luiza.
Estimated retail restructuring costs
Central functions
Retail
Publishing
Staff
Other restructuring charges
Total restructuring costs
Staff
Factor
R$m
Staff cuts
500
2
33
12.0%
4
4650
1
247
4.5%
11
850
1
45
0.0%
0
325
4.6%
15
6000
Severance
5
20
Source: Nau Securities
3 / 14
Saraiva
19 January 2015
We model the SG&A to sales ratio down 250bps by 2017E to 27.8%
Retail SG&A represented 31% of the division’s physical store net
revenues in 9m 2014 and management are aiming to take this down
to closer 25.0% in the next three to five years. However, in the chart
below, we set out the progression of Saraiva’s retail SG&A to sale
ratio for the 17 years to 2017E. As can be seen, the lowest ratio ever
recorded over this period was 27.5% in 2007 and indeed a ratio of
below 28.0% was only ever subsequently recorded in 2011 and 2012.
We have modeled for Saraiva to reach a ratio of 28.6% in 2015E,
28.0% in 2016E and reach 27.8% by 2017E. Needless to say, even if
Saraiva is successful in cutting its SG&A costs, it will still be behind its
peers with regard to the weight of operating expenses in its turnover,
which ultimately could undermine its ability to compete and fund
growth.
This has been driven by our lower top line growth estimates
(reflecting our new forecasts for the progression of the firm’s physical
store network), our expectation of lower PNLD 2016 (a typically
weaker cycle for Saraiva) and the absorption of R$20m of
restructuring charges this year. For 2016E, we have reduced our
EBITDA estimate by 34% to R$165m. In this report we have initiated
estimates for 2017E and forecast EBITDA of R$183m for that year.
Nau revised estimates, 2014E – 2016E
2014E
2015E
2016E
Prior Nau
2404
2556
2857
Revised Nau
2299
2444
2681
-4%
-4%
-6%
Prior Nau
175
221
250
Revised Nau
113
95
165
-35%
-57%
-34%
3.65
Net Sales (R$m)
Difference (%)
EBITDA (R$m)
Saraiva SG&A as % of retail sales, 2000 - 2017 !
40.0%!
35.0%!
Difference (%)
EPS (R$)
30.0%!
Prior Nau
1.88
2.96
25.0%!
Revised Nau
0.08
-0.56
1.48
Difference (%)
-96%
-
-59%
20.0%!
Source: Nau Securities estimates
15.0%!
10.0%!
2017!
2016!
2014!
2015!
2013!
2011!
2012!
2010!
2009!
2008!
2007!
2006!
2004!
2005!
2003!
2001!
2002!
2000!
5.0%!
0.0%!
We model EPS to turn negative in 2015E and equal R$0.53 per share
Our estimates for EPS have been significantly cut and may become
materially below consensus once this catches up with the street’s
revisions. Indeed we have slashed our 2014E EPS from R$1.88 to
R$0.08 and forecast a loss per share of R$0.53 in 2015E, against an
original EPS of R$2.96.
Source: Company data, Nau Securities!
Saraiva working capital cycle, 2012-2017 !
We cut 2014E EBITDA by 35% to R$113m (guidance: R$110m-130m)
Management disclosed new guidance for 2014E with its release of Q3
2014 results on 13 November 2014. As can be seen, management
brought down their guidance for gross revenues by 4% and EBITDA
by a full 40% to a range of R$110m to R$130m. Management
changed their metric from guidance on the ratio of net debt to
EBITDA (2.8x), to an absolute range for net debt of R$500m to
R$600m. The implied level of net debt at the mid-point of EBITDA
guidance was R$560m. We have modeled R$580m.
Store chain
Saraiva physical store network, 2005-2017 !
iTown!
Traditional bookshops!
Megashops!
Airports!
140!
120!
100!
Saraiva management guidance for 2014E
Original
Gross sales (R$bn)
EBITDA R$m)
Net Debt (R$m)
Revised
80!
Difference
2.4 - 2.6
2.3 - 2.5
4%
190 - 210
110 - 130
40%
560
500 - 600
Change in metric
60!
40!
Source: Company data. Note: Original net debt assumed from 2.8x multiple of net debt to EBITDA
2017!
2016!
2015!
2014!
2013!
2012!
2011!
2010!
2009!
2008!
2007!
2006!
2005!
A worse than expected performance with PNLD 2015 hit the numbers
We have reduced our net sales estimates for both 2014E and 2015E
by 4% in large part due to lower estimates for PNLD revenues in each
year. For 2014E, PNLD 2015 came in at R$154m. We have assumed a
further R$15m of digital content will be booked in 1H 2015E from
PNLD 2015. This compared to our original estimate of R$200m. For
2014E, we have assumed that PNLD 2016 revenues will total
R$100m. Our revised 2014E gross sales estimate now stands at
R$2,353m, or 2% above the lower end of management’s revised
guidance. Our 2016E estimate for net sales of R$2,681m is 6% below
our original estimate. We have reduced our EBITDA estimate for
2014E by 35% to R$113m, which now places us within management’s
revised guidance of R$110m–R$130m. We have cut our 2015E
EBITDA estimate from R$221m to R$95m which is likely to place us
below consensus.
20!
0!
Source: Company data, Nau Securities!
Saraiva puts the break on expansion of the physical retail network
One of the contributing factors in our revision of our estimates is that
we had originally modelled for Saraiva to continue to expand its
selling area over the forecast period. The table below compares our
previous estimates for Saraiva’s retail network for the period 2014E2016E and our revised assumptions, following management’s shift in
strategy. As can be seen, we originally modeled for Saraiva’s physical
store network to reach 129 units by the end of 2016E, in large part
through the continued roll out of both “new traditional” stores and
megastores. We had also not modeled the roll out of airport units at
that time. Our revised estimates have assumed no growth in the
firm’s iTown store network over the forecast period. We have
incorporated Saraiva’s move into the airport terminal space and
indeed have assumed seven stores in operation this year and that
this rises to nine in 2016E.
4 / 14
Saraiva
19 January 2015
Saraiva 2013 retail sales by channel !
Having originally modeled for the combined networks of “traditional
stores” and megastores to total 120 by 2016E, we have now scaled
this back to 103 and indeed have now assumed that Saraiva reduces
its chain of “traditional stores” from 49 in 2014E to 45 by 2016E. In
sales area terms, we estimate that this will reduce our original selling
area assumptions by between 5% and 6% for 2015E and 2016E
respectively. Management has stated that they are aiming to establish
a five-year plan for the retail network with a view to better
identifying where growth capex should be applied. For now, the firm
2
2
is experimenting with 400m -500m stores (mobile technology &
game focus) and pop-up stores in malls (back-to-school, festivals,
events – 81 “events” during 2014).
!
eCommerce!
33%!
Physical stores!
67%!
Nau Securities prior & revised estimates for store network, 2014-16
2014
2015
7
8
9
Traditional bookshops
54
57
60
Megashops
57
59
60
0
0
0
118
124
129
7
7
7
Traditional bookshops
49
46
45
Megashops
57
57
58
3
7
9
80!
116
117
119
70!
-2
-7
-10
60!
-704
-3343
-4142
-1%
-5%
-6%
iTown
Airports
Previous network
iTown
Airports
Revised network
Difference (retail units)
Difference (selling area), m2
As a % of original selling area
2016
Source: Saraiva, Nau Securities!
Capex
Saraiva capex by division, 2010-2017 !
Retail!
Publishing!
90!
50!
40!
Source: Nau Securities estimates
30!
20!
2017E!
2016E!
2015E!
2014E!
2013!
2012!
2011!
10!
2010!
Saraiva’s online offering must continue to evolve to compete
Whilst management has been successful in turning around the
profitability of its eCommerce channel and has carved out a
reasonable slice of the Brazilian ecommerce market place (circa 2.5%
with 15m visitors to the site each month) and indeed online sales
represent close to 30% of retail turnover, we believe that the growing
scale and purchasing power of the eCommerce platforms of Via
Varejo, Lojas Americanas and Magazine Luiza, together with the
medium to longer term threat of Amazon, will challenge Saraiva’s
market share and the profitability of this channel. We believe that
Saraiva is particularly vulnerable in the tablet, laptop, printer and
smart phone segments, which together accounted for 29% of the
firm’s overall retail sales at 9m 2014, against 11% back in 2006.
Saraiva is not blind to these threats and competes on price for share
in selective products according to our reviews of comparative price
sites, seeks to cross-sell product offerings across its online and
physical channels (seeking to leverage its position in the education
space), has introduced a successful service offering at some of its
stores (customers can bring in their tablets and smart phones for
repairs and advice on usage and upgrades), is working to upgrade the
experience of its online consumers through investment in the
functionality of its web page (upgrade introduced at end of 2014) and
logistics backbone (>60m deliveries per year and same-day-delivery)
and continues to further diversify its product offering. The stakes are
high and we believe that achieving success will involve significant
management bandwidth and continuous investment in evolving the
value proposition for the customer base.
0!
Source: Company data, Nau Securities!
We model capex/sales to fall from 3.8% in 2013, to 1.8% by 2017E
In light of our revised assumptions for the progression of Saraiva’s
physical store network over the forecast period, we have reduced our
growth capex estimates for the firm’s retail division and increased
our estimates for capex in the publishing business. Our model
2
assumed R$4,000 per m of capex re-based to 2012 adjusted for
annual 3% real rises in building costs. Given our lower estimates for
the expansion in selling area over the forecast period, we have
reduced our absolute capex estimate for the retail division from
R$45.6m in 2015E, to R$26.0m, for example. Below we provide an
overview of our revised retail capex assumptions compare to our
original estimates in the context of the ratio of retail capex to gross
retail sales for the period 2010-2016. As can be seen, our revised
estimates see the ratio drop 200bps from 3.8% in 2013 to 1.8% by
2016E (original estimate of 2.7%).
5 / 14
Saraiva
19 January 2015
c)
Saraiva already has a commanding presence in segments of
the higher education market place, such as an estimated
35% market share of the legal and technical textbook
market and Brazil’s leading overall STM publisher (Business
Administration, Economics, Accounting, Marketing, Law),
with some 20% market share. Apart from the specific
advantages of having meaningful share of these important
courses, Saraiva’s brand has high awareness on campus as
a result;
d)
Saraiva already has experience in digitalising its content
for higher education students and indeed its B2B e-book
subscription model (“Minha Biblioteca”) has seen enrolled
students jump from 170,000 in Q3 2013, to 370,000 in Q3
2014.
e)
Saraiva acquired a publishing house called Editora Érica for
an undisclosed sum in June 2013. The firm specialises in
the publication of books for technicians, such as computer
programmers and engineers and generated net revenues of
R$14.2m and EBITDA of R$4.9m in 2012. Less than six
months later, on 9 December 2013, Saraiva announced that
it had signed a contract with Kroton Educacional S.A for
the provision of content for 25 courses to be offered by
Editora Érica through Brazil's National Programme for
Access to Technical Education and Employment (Pronatec).
Created in 2011, the Pronatec programme involves a
variety of initiatives designed to support the development
of technicians in Brazil and has a R$5.2bn budget for 2014
(R$3.7bn in 2013). Given that the OECD estimates that
technical courses have a penetration rate of 19% in Brazil,
against 27% for OECD as a whole, there is room for Saraiva
to continue to expand its business in this market segment
and as such this represents an important area for
management focus over coming quarters and years.
Retail capex as a % of retail gross sales, 2010-2016 !
Previous!
Revised!
6.0%!
5.0%!
4.0%!
3.0%!
2.0%!
2016E!
2015E!
2014E!
2013!
2012!
2010!
2011!
1.0%!
0.0%!
Source: Company data, Nau Securities!
Saraiva spends R$49m on a share buy-back programme over 2014
On 13 February 2014, the Board of Directors approved a share buyback programme for up to 510,173 and 1,581,128 ordinary and
preferences shares respectively. This represented 5% and 8% of each
share class. At the time of writing, we have assumed that 80% of this
programme was completed at a cost of some R$24m. As was the case
when this programme was launched, we question the logic of
applying so much capital to buying back shares at a time when the
firm has elevated levels of gearing and has ambitions to consolidate
the market for higher educational content.
Educational content
There is a major market opportunity for distance learning solutions
Saraiva is present across every segment of the student market place
through the publication of public sector textbooks and the provision
of teaching systems and distance learning solutions. Management
believes that the single most significant opportunity for the firm’s
publishing division is the provision of premium content for students
involved in either professional/vocational education (1m) or more
broadly, higher education (7m). In specific terms, Saraiva believes
that there is a market opportunity for the provision of distance
learning solutions for students in higher education. We consider that
this focus is attractive due to the following considerations:
a)
Whilst the enrolment numbers for private schools is on the
rise due to increased affluence (2010-2013 CAGR +4%) the
overall student population of 2-18 year olds in Brazil is
actually declining (2010-2013 CAGR -1%). On campus
higher education enrollment has seen a CAGR of 4% over
2010-2013, or the same rate of growth as that of private
school student enrollment. Higher education distance
learning saw a CAGR of 7% over 2010-2013;
b)
The market place for providing solutions for students in the
pre-school to high school segment is characterised by the
presence of a number of significant players and certainly
so compared to the market place for students in higher
education. Furthermore, Saraiva aims to focus on providing
hybrid solutions for small and medium sized HEIs to help
them reduce costs and attract and retain students;
We estimate publishing will spend R$119m over 2015E-2017E
Whilst Saraiva already has important elements of what would be
required to deliver a competitive solution for higher education
students, the firm can further consolidate the content market in this
space and as such requires capital to execute M&A. We have assumed
that Saraiva can spend a total of R$119m over the three years to
2017E on its publishing activities. Some of this expenditure should be
applied to maintenance capex, the roll-out of new products and
services including the continued digitalisation of content and launch
of new products. With gearing levels remaining high over our forecast
period (net debt to EBITDA of 3.6x in 2016E and 3.2x in 2017E), we
do not believe that the firm has much room for meaningful M&A and
will probably target similar sized deals to Editora Érica, which it
acquired back in June 2013.
Forming a partnership could jump-start Saraiva’s growth strategy
Given that one of the firm’s 14 initiatives for growth is “Expansion
through partnerships in the education value chain.”, if Saraiva does
proceed down this path, much will depend on the nature and
commitment of any partner management chooses to work with in
these markets. There is a scenario where a partner of high standing
could persuade the market that Saraiva would have a credible chance
of establishing a meaningful business in the distance learning and
high school and college markets in the near-term and create the
possibility for the firm to be rated more in the context of Kroton
Educacional and Abril Educação than, say, FNAC or Barnes & Noble.
6 / 14
Saraiva
19 January 2015
National textbook program (PNLD)
Brazilian purchase of text books for the public sector, PNLD
2002 !
High$school$
R$m!
250!
6th$%$9th$
1st$%$5th$
200!
150!
The future may bode well for Saraiva, given its multi-year track
record with respect to the PNLD auction process and its proven
ability with regard to the digitalisation of educational content.
However, the firm also faces threats, given the larger balance sheet
and capabilities of the likes of Abril Educação, the current leader in
the public sector textbook space, other local competitors and of
course Amazon, which has recently struck a deal with the Brazilian
Ministry of Education for the free use of their Kindle application to
distribute digital textbooks to public sector teachers.
Saraiva 2013 publishing revenues by client segment !
100!
2016E!
2010!
2013!
2007!
2004!
2015E!
2009!
2012!
2006!
2003!
2017E!
2011!
2014!
2008!
2005!
2002!
50!
!
Public sector!
34%!
0!
Private sector!
66%!
Source: Saraiva, Nau Securities!
The results of the 2015 National Textbook Program were released by
the National Fund for Educational Development ("FNDE") on 22
September 2014. The “PNLD 2015” covers the purchase of textbooks,
digital objects and content in the “MEC Daisy format” (for the visually
impaired):
Working capital
Our assumptions are more modest than management’s goals on NWC
The chart below sets out our progression for Saraiva’s working capital
cycle over the forecast period of 2014E-2017E. As can be seen, we
have modeled for the firm’s working capital cycle to peak to rise to
128 days in 2014E from 111 days in 2013, peak at 134 days in
2015E and then fall back to 131 days by 2017E as management
works through their plans to better manage NWC. Inherent in our
forecasts is that management is not able to deliver more meaningful
improvements in working capital management as we believe that
what benefits will be derived from improved stock control (new
logistics backbone) and a more focused approach towards the
commercialisation of products through both the eCommerce and
physical store network, these will be in part mitigated as a result of
the overall competitive environment.
Saraiva working capital cycle, 2012-2017 !
Days inventory outstanding (DIO)!
Days payable outstanding (DPO)!
Days sales outstanding (DSO)!
Working capital cycle (days)!
160!
250!
140!
200!
120!
150!
100!
100!
0!
40!
-50!
20!
-100!
0!
-150!
2017E!
50!
60!
2016E!
80!
2015E!
Back in June 2014, Saraiva announced that Brazil’s Department of
Basic Education/Ministry of Education (MEC) had approved 74% of its
submitted portfolio of high school textbooks for PNLD15, a marked
improvement on the 66% ratio achieved in the last cycle (PNLD12). Of
the 23 textbooks submitted, 17 were approved. Saraiva’s textbooks
related to eleven of the twelve subject areas included in PNLD 2015.
Abril Educação also provided more granularity with respect to the
performance of its publishing houses, Ática and Scipione. Of the 26
textbooks submitted by Ática and Scipione, 20 were approved, which
corresponded to an approval rate of 77%, against the 55% approval
rate achieved for PNLD 2012. On 24 September 2014, Saraiva
announced that the value of its sales of physical textbooks totaled
R$154m. No value had been agreed for the digital components of
PNLD 2015. This result compared to our original estimate of R$200m
in revenues from PNLD 2015. For the previous relevant three year
cycle (PNLD 2012) there were 91.7m new adoptions (43.1m for PNLD
2009) with Saraiva securing orders for 22.6m textbooks, equivalent
to a 24.6% market share (27.1% for PNLD 2009). The total value of
the PNLD 2012 contract for Saraiva was R$205m (PNLD 2009
R$143m). Whilst Saraiva performed well in PLND 2014 and indeed in
market share terms punched above its weight with respect to the
“digital components” of the public sector text book auction (market
share of 22% against an overall market share of 13.9%), we are
entering a period of significant uncertainty with respect to how fast
and in which format the Federal Government will look to adopt digital
content, the related means of transmitting that content to the
country’s student population and what margins will be on offer for
providers of content (note a material element of any PNLD auction is
replacement of textbooks which would not be relevant in a scenario
where content is provided digitally).
We model PNLD at 22% of publishing sales by 2017E (34% in 2013)
We have modeled revenues of R$100m from PNLD 2016 in 2015E,
R$140m from PNLD 2017 in 2016E and R$135m from PNLD 2018 in
2017E. BY 2017E, our model results in public sector sales
representing 22% of publishing revenues compared to 34% in 2013.
2014E!
Abril Educação (Ática and Scipione): 30.4m textbooks
20.6m in the new adoption (High school )and 9.8m for
replacements of previous years (Elementary Education I
and Elementary Education II).
Source: Saraiva, Nau Securities!
2013!
•
Saraiva: 17.2m textbooks (12.4m for the new adoption
(High School) and 4.8m for replacement for previous years
(Elementary Education I and Elementary Education II).
2012!
•
Source: Company data, Nau Securities!
7 / 14
Saraiva
19 January 2015
Valuation
We believe that Saraiva’s management needs to:
Implied equity value calculation for Saraiva & assumptions
Retailing
Show that they can return the retail business to sustainable profitable
growth.
%
1829
80%
Publishing
524
22%
Elliminations
-54
-2%
2299
100%
Group
Whilst we believe that management are focusing on the right areas
(e.g. taking on SG&A costs), the fact is that, even if they were able to
achieve their goal of cutting retail SG&A expenses to around 25% of
turnover, this would still be an inferior performance to every one of
their major competitors. As such, there is a danger that Saraiva will
struggle to break out from the retail division’s sub-optimal margins
and that the pressures faced by the division will only rise as larger
competitors in both the physical and online channels leverage their
growing pricing power across Saraiva’s key product categories.
R$m
Saraiva 2014E net revenues
Trailing 12m price/sales ratio
Abril
212%
Lojas Americanas
115%
Magazine Luiza
14%
FNAC
17%
Barnes & Noble
22%
Implied equity values
Publishing:
@ 50% of Abril ratio
554
63%
Retail:
37%
878
100%
-57
Implied equity value of Saraiva
821
Current equity value of Saraiva
144
Difference
677
Implied upside
469%
Implied target price (R$)
R$29.0
Source: Nau Securities, Bloomberg. Saraiva
Gearing
Our model produces a net debt to EBITDA ratio of 5.1x for 2014E
Saraiva has elevated levels of financial gearing. We have modeled for
the firm to finish 2014E with net debt of R$580m, which would fall
within the higher end of management’s recent guidance for net debt
of R$500m to R$600m. Given our 2014E EBITDA estimate of
R$113m, Saraiva has a net debt to EBITDA ratio for 2014E of 5.1x.
We have modeled for Saraiva to be able to reduce its gearing ratio to
3.2x by 2017E.
Saraiva net debt to EBITDA ratio, 2012-2017E !
Net debt (R$m)!
Net debt to EBITDA ratio (%)!
600!
5.0!
500!
4.0!
400!
3.0!
300!
2.0!
200!
1.0!
100!
0.0!
0!
2017!
6.0!
2016!
700!
2015!
7.0!
2014!
We calculate Saraiva is worth R$29 per share, implying 469% upside
Given that we have assumed that Saraiva’s short-term earnings and
cash flows will be disrupted by restructuring, we have arrived at a
valuation for the firm based upon applying peer group price-to-sales
multiples for the firm’s two operating divisions. We have valued the
publishing business on the basis of applying a 50% discount to Abril
Educação multiple of 212% and have valued Saraiva’s retail
operations by applying 100% of the average price-to-sales ratios for
FNAC, Barnes & Noble and Magazine Luiza (18%). After adjusting for
group eliminations, we arrive at an equity value per share for Saraiva
of R$29, which would represent 469% upside from the current share
price. Whilst on the face of it, this looks appealing; we believe that
the value of the firm’s divisions are a function of management’s
ability to show that they can return the retail business to sustainable
profitable growth and successfully diversify away from the public
sector textbook market by developing new recurring revenue streams
across the publishing and education market places. Ahead of evidence
that this is taking place, we continue to rate the firm a Buy, but with a
target price of R$10.00, which would place Saraiva on a 2016E PE of
6.2x.
324
Less elliminations (@ 50% of Abril)
2013!
If one believes that ultimately change will occur, there is value
We believe that management will face difficulty implementing their
ambitious growth plans for publishing, given the current initiatives to
rebalance the retail division and the overall elevated level of
financial gearing at the firm. Indeed, we do not expect Saraiva to be
able to deliver superior shareholder returns over the forecast period
and have modeled for Saraiva only to be able to generate a post-tax
ROIC of 8.4% by 2017E. However, if one takes the view that we are
mistaken on our outlook and that the firm’s margins and related
returns will be more positive over 2014E-2017E, there is an
attractive valuation case.
@ 100% of FNAC/B&N/ML ratios
Total
2012!
Successfully diversify away from the public sector textbook market
over time by developing new recurring revenue streams across the
publishing and education market places for the firm to enjoy a
sustainable rerating.
Source: Company data, Nau Securities!
8 / 14
Saraiva
19 January 2015
BNDES transform the maturity and effective cost of Saraiva’s debt
On 14 August 2014, Saraiva announced that it had agreed a finance
line with BNDES totaling R$629m. The majority of the funds have
been sourced from the PROCULT fund (Program for the Development
of the Culture Related Economy) and are to be used in support of the
firm’s investment programme for the period 2013-2016. The
financing line with both reduce Saraiva’s absolute cost of borrowing
and extend the maturity of its debt. The funds from the line will be
released in three installments, with approximately 30% freed during
the second semester of 2014; a further 30% in 2015; 25% in 2016
and the remaining balance in 2017. Principal will be amortised over
ten years (2014 to 2024), including a 24 to 36 month grace period,
corresponding to an average duration of 59 months, compared to
Saraiva’s then average duration of just ten months. 67% of the
interest cost of the debt will indexed to Brazil’s long-term interest
rate, namely the TJLP and the remaining balance to Selic. This would
imply a blended cost of debt of just over 8% (excluding bank
guarantee costs), compared to an estimated average cost of debt at
the time of some 13%. Up until the end of 9m 2014, R$200m had
been released to the firm. Saraiva disclosed that the duration on its
R$726m of gross debt equaled 23 months at 9m 2014 and that it
estimated that this would rise to 36 months by 2015E.
9 / 14
Saraiva
19 January 2015
R$m
PL
2013A
2014E
2015E
2016E
2017E
1924
2144
2299
2444
2681
EBITDA
183
95
113
95
165
% margin
9.5%
4.4%
4.9%
3.9%
6.1%
Net sales
EBIT
144
49
66
47
115
% margin
7.5%
2.3%
2.9%
1.9%
4.3%
(38)
(39)
(63)
(62)
(57)
0
0
0
0
0
106
10
3
(15)
58
-27%
27%
-28%
0%
-28%
(29)
3
(1)
-
(16)
-
-
-
-
-
Minority interest
(0)
0
0
0
0
Reported net income
77
13
2
(15)
42
Adjusted net income
77
13
2
(15)
42
Accounts receivable
370
257
315
326
350
Inventories
403
503
546
594
637
Other current assets
105
166
192
198
195
Accounts payable
299
216
220
232
255
Other current liabilities
105
109
92
97
106
Net working capital
473
601
741
789
820
Tangible assets
126
116
111
106
105
Intangible assets
156
175
175
175
175
88
85
77
56
53
516
516
481
466
493
Net financial result
Non-Recurring result
Profit before taxation
% tax
Taxation
Equity income
BS
Other assets
Shareholders funds
Other liabilities
Gross debt
Cash
39
44
49
67
446
740
770
754
160
87
23
160
160
288
423
580
610
594
1335
1326
1577
1615
1675
144
49
66
47
115
39
46
48
49
50
Net change in working capital
-27
-128
-140
-47
-32
Capex
(64)
(59)
(62)
(62)
(68)
0
-22
0
0
0
(25)
(25)
(25)
(1)
-
21
64
226
30
(16)
Net (cash)/ debt
Total Assets
CF
40
375
Profit before taxation
Depreciation
Net (acquisitions)/disposals
Dividends
Other items
Cash flow increase/(decrease)
Equity free cash flow
(15)
(64)
(89)
(30)
16
25
(128)
(152)
(76)
(8)
Source: Nau Securities, Saraiva
10 / 14
Saraiva
19 January 2015
R$m
EV
2013A
2014E
2015E
2016E
2017E
Market capitalisation
144
144
144
144
144
Net debt/(cash)
288
423
580
610
594
1
1
1
1
1
432
566
724
754
740
Other
Enterprise value
Per
# shares ('000)
28.28
28.28
28.28
28.28
28.28
Share
Gross Dividend (R$)
0.92
0.88
0.02
0.00
0.52
EPS (R$)
2.72
0.42
0.08
-0.53
1.48
Adjusted EPS (R$)
2.72
0.42
0.09
-0.58
1.61
Equity free cash flow (R$)
0.88
-4.51
-5.39
-2.69
-0.28
18.24
18.23
17.01
16.47
17.43
Book value (R$)
Equity
PE ratio (x)
1.9
12.4
60.4
-9.0
3.2
Multiples
Equity free cash flow yield (%)
16.9%
-86.8%
-103.6%
-51.7%
-5.3%
Dividend yield (%)
17.7%
17.0%
0.4%
0.0%
10.0%
P/BV (x)
0.3
0.3
0.3
0.3
0.3
EV
EV/sales (x)
0.2
0.3
0.3
0.3
0.3
Multiples
EV/EBIT (x)
3.0
11.6
11.0
16.2
6.5
EV/EBITDA (x)
2.4
6.0
6.4
7.9
4.5
12.1%
-13.7%
-14.7%
-1.9%
4.5%
0.5
0.6
0.7
0.7
0.7
EV free cash flow yield (%)
EV/invested capital (x)
Return
ROE (%)
15.7%
2.5%
0.4%
-3.2%
8.7%
&
Pre-tax RoIC (%)
17.9%
5.2%
6.2%
4.4%
10.6%
Capital
Net debt (cash) / EV (%)
66%
74%
80%
81%
80%
Structure
Short-term debt / gross debt (%)
40%
50%
68%
65%
66%
138%
126%
117%
118%
125%
Interest cover (x)
4.3
2.3
1.7
1.5
2.6
Dividend cover (x)
3.0
0.5
4.0
-
2.9
Net debt/EBITDA (x)
1.6
4.4
5.1
6.4
3.6
Gross debt/EBITDA (x)
2.1
4.7
6.5
8.1
4.6
104%
NWC + Net tangible assets / EV (%)
Coverage
Investment
Cash conversion (%)
&
Capex/sales (%)
Efficiency
Asset replacement (%)
Asset utilisation (x)
102%
58%
65%
101%
3.3%
2.7%
2.7%
2.5%
2.5%
-166%
-128%
-130%
-128%
-136%
2.4
2.3
2.2
2.3
2.5
10.0
17.7
20.2
22.5
25.4
NWC turnover (x)
4.2
4.0
3.4
3.2
3.3
Cash conversion cycle (days)
90
93
102
103
100
Fixed assets turnover (x)
Source: Nau Securities, Saraiva.
11 / 14
Saraiva
19 January 2015
Stores
2013A
2014E
2015E
2016E
7
7
7
7
7
Traditional bookshops
50
49
46
45
44
Megashops
54
57
57
58
59
1
3
7
9
9
112
116
117
119
119
2017E
iTown
Airports
Total
Selling area (m2)
2017E
2013
2014E
2015E
2016E
1058
1058
1058
1058
1058
Traditional bookshops
13383
13132
12328
12060
11792
Megashops
46643
49248
49248
50112
50976
212
636
1484
1908
1908
Total
61296
64074
64118
65138
65734
2013
2014E
2015E
2016E
2017E
iTown
42.0%
0.0%
0.0%
0.0%
0.0%
Traditional bookshops
0.0%
-1.9%
-6.1%
-2.2%
-2.2%
Megashops
6.6%
5.6%
0.0%
1.8%
1.7%
-
200.0%
133.3%
28.6%
0.0%
5.9%
4.5%
0.1%
1.6%
0.9%
iTown
Airports
Growth in selling area (m2)
Airports
Total
Gross sales (R$m)
2013
2014E
2015E
2016E
2017E
1221
1366
1475
1581
1680
580
580
638
715
798
Consolidated gross sales
1801
1946
2113
2296
2478
eCommerce as % of total (%)
32.2%
29.8%
30.2%
31.1%
32.2%
6.7%
6.0%
6.5%
5.5%
5.3%
Physical store gross sales
eCommerce gross sales
Same-store-sales growth (%)
Net sales (R$)
2013
2014E
2015E
2016E
2017E
1688
1829
1986
2159
2329
Publishing
507
524
515
585
620
Intragroup
-51
-54
-58
-63
-68
2144
2299
2444
2681
2881
Retail
Consolidated
Net sales growth (%)
2013
2014E
2015E
2016E
2017E
Retail % of total
76.9%
77.7%
79.4%
78.7%
79.0%
Retail YoY growth
11.9%
8.4%
8.6%
8.7%
7.9%
Publishing % of total
23.1%
22.3%
20.6%
21.3%
21.0%
Publishing YoY growth
Overall YoY growth
EBITDA (R$)
7.8%
3.4%
-1.7%
13.6%
6.0%
11.4%
7.2%
6.3%
9.7%
7.5%
2013
2014E
2015E
2016E
2017E
Retail
41
42
51
88
102
Publishing
54
71
44
77
80
Consolidated
95
113
96
165
183
2013
2014E
2015E
2016E
2017E
2.4%
2.3%
2.6%
4.1%
4.4%
10.6%
13.5%
8.6%
13.2%
13.0%
4.4%
4.9%
3.9%
6.1%
6.3%
EBITDA margin (%)
Retail
Publishing
Consolidated
Source: Nau Securities estimates
12 / 14
Saraiva
19 January 2015
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Nau Securities Ratings weight
# Covered Stocks
% Weight
Buy
38
56
Fair Value
20
30
9
14
Sell
13 / 14
Source: Saraiva