Equities
●
Global
September 2019
Key HSBC stock calls
Current price:
BRL29.90
Target price:
BRL34.00
Up/downside:
13.7%
Our DCF-driven TP of BRL34 (previously BRL26) is driven by our BRL WACC of
9.1% (previously 8.7%) based on our assumptions of a risk-free rate of 3.0% in
USD terms (unchanged and in line with the Global Equity strategy team’s view),
equity risk premium of 5.5% (unchanged) and country risk of 0.8% (derived by the
weighted average of the company’s exposure to each country through volumes
compared with the spread of the respective CDSs; previously 0.7%). We assume a
beta of 0.8 (based on the average of the Bloomberg 2-year daily beta, 5-year
weekly beta and 10-year weekly beta; previously 0.85) and a cost of debt of 7%
(unchanged) and a debt-total capital ratio of 35% (market capital based; previously
43%). We use a long-term tax rate of 23% (unchanged), a long-term growth rate of
2.5% (unchanged) and an inflation differential of 1.8% (based on the long-term
inflation differential between Brazil and the US; unchanged). We maintain a
governance risk of 1% (unchanged) until all legal hurdles are resolved.
Our target price of BRL34.00 implies c14% upside from the current share
price and cross-references 2019e EV/EBITDA of 7.6x. We maintain a Buy
rating. We like JBS for its debt reduction story, diverse portfolio of proteins,
geographic footprint, leadership in the industry and scale. Its proposed
NYSE listing would likely improve governance, reduce cost of capital and
strategically position the company for new growth opportunities.
Downside risks: (1) Upward pressures on
animal feed prices. (2) Import tariffs,
restrictions or bans from any major export
market. (3) Failure to list on the NYSE or
corporate governance issues could keep the
company’s cost of capital higher and
perhaps limit financing options for future
growth. (4) Disease outbreaks impacting the
livestock or issues in their supply. (5)
Changes in consumer preferences. (6) A
stronger local currency in Brazil could
pressure export margins. (7) Climate change
regulations. (8) Political or economic
uncertainty in domestic or export markets.
Current price:
BRL37.89
Target price:
BRL37.00
Up/downside:
-2.3%
We value BRF using a DCF methodology. Our new TP of BRL37 (previously
BRL36) is driven by our WACC of 9.4% (previously 9.3%) based on our
assumptions of a risk-free rate of 3.0% in USD terms (unchanged and in line
with the Global Equity strategy team’s view), equity risk premium of 5.5%
(unchanged) and country risk of 2.3% (derived by the weighted average of
the company’s exposure to each country through volumes compared with the
spread of the respective CDSs; previously 2.5%). We use a beta of 0.74
(based on the average of the Bloomberg 2-year daily beta, 5-year weekly
beta and 10-year weekly beta; previously 0.8) and a cost of debt of 7%
(unchanged) and a debt-to-total capital ratio of 33% (market cap based,
previously 40%). We use a long-term tax rate of 20% (unchanged), in line
with management guidance, a long-term growth rate of 3% (previously 3.5%)
and an inflation differential of 1.8% (based on the long-term inflation
differential between Brazil and the US; unchanged).
Our target price of BRL37 implies c2% downside from the current price and
cross-references 2019e EV/adj. EBITDA of 10.8x. We downgrade BRF to
Hold on valuation grounds and given it has a limited geographic footprint,
leverage, 2019e EV/EBITDA of 10.6x, and ongoing management changes.
We also think beef is better positioned to benefit from the impact of ASF in
the long term.
Based on the near-spot FX rate of c4.1 BRL/USD, our target price for BRF
ADR shares (BRFS US, USD9.25) is USD9.02 (from USD8.96) and we
downgrade to Hold.
Downside risks: (1) Product innovation and
distribution upgrades require more capital than
expected. (2) Renewed pressure on EBITDA
from high commodity exposure (grain prices).
(3) Weak macro environment. (4) New poultry
and pork export bans and tariffs. (5) Disease
outbreaks impacting the livestock or issues in
their supply. (6) Competition from potential new
entrants like Tyson in Brazil; new leadership at
JBS and its proposed NYSE listing allows it to
expand into poultry more aggressively in Brazil.
A large competitor with deep pockets, extensive
local protein insights, and a lower cost of capital
than BRF could be disruptive to the company.
(7) Changes in consumer preferences reducing
meat consumption. (8) A stronger local
currency in Brazil could pressure export
margins. (9) Climate change regulations. (10)
Political or economic disruption in domestic or
export markets.
Upside risks: (1) ASF impact on poultry pricing
elevates revenues and margins more than we
have modelled and management is able to pay
down debt even faster than expected, enabling
a premium valuation for top-line acceleration
and debt reduction. (2) Grain prices weaken
substantially over the next couple of years in
Brazil and margins for BRF benefit. (3) The
strategic disadvantages we cite in this report for
BRF leave management too disadvantaged to
keep pace with JBS for growth that the board
opts to sell the company for a premium
valuation.
