Analysts start to review recommendation after elections

11/03/2022

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Petrobras, Brazil’s largest company by revenues and market capitalization, emerged as a clear loser from presidential election — Foto: Leo Pinheiro/Valor

Analysts had a thorny task in the last few months: predicting the future of Brazilian listed companies, especially state-owned ones, before the tightest presidential election ever, with two antagonistic projects for the country. Now that fate is sealed, the time has come to redo the math.

In general, the already consolidated understanding is that the retail, education, and low-income construction sectors will benefit most from the new federal administration. In particular, the correction of target prices and recommendations for winners and losers has begun. Petrobras, Brazil’s largest company by revenues and market capitalization, is clearly in the second group.

The state-owned behemoth has the power to cause seismic tremors in the economy and investments. According to the most recent data from Exchange B3, the shares with the public are divided among about 718,000 individuals, 5,900 companies, and 2,900 institutional investors.

This correction by banks and brokerages had already been happening more discreetly after the first round of voting, according to the events and the winds of the polls. With the definition on Sunday, it tends to become more explicit.

On Monday morning, after the results were known, XP cut by 25% its price target for Petrobras, although keeping a buy recommendation, and took the opportunity to reallocate its bets on its private-sector competitors Prio, which it started covering, and PetroRecôncavo, whose coverage was resumed. BTG Pactual cut its price target by 10%, keeping the previous neutral recommendation, while J.P. Morgan made the most radical move, cutting by 30% the company’s price target and downgrading its recommendation to neutral from buy.

Analysts have different views on what will happen with the oil company’s pricing policy but are unanimous about the change in investments – for example, the return of heavy allocations in refining – which means the end of the dividend bonanza.

“While we are confident that many mistakes of the past will not be repeated,” BTG says in a report, “investors cannot underestimate the new government’s ability to use Petrobras as a vehicle to drive economic growth, investment, jobs, and energy security.”

Put into numbers, the bank calculates that a 50% increase in investments would reduce the dividend yield in 2023 to 15% from 21%, which would cause shares to fall 25%. If investments double, in the worst-case scenario, the dividend yield drops to 9%, causing stocks to decline 53%.

J.P. Morgan foresees payment of 25% of free cash flow in dividends, compared to 60% today, and has a pessimistic view regarding the pricing policy. The bank has reduced the chances of the company passing on international oil prices to fuel prices to 40% from 60%. “The new administration has openly criticized Petrobras’s conduction and has already signaled changes in the company,” the bank said in a report.

Petrobras shares closed slightly higher on Tuesday, at R$33.37 (common shares) and R$29.86 (preferred shares), after a sharp drop the day after the runoff vote.

The state-owned oil company’s recent phase as a relatively safe and highly profitable investment, after a long recovery from the corruption scandals of the not-too-distant past under the Workers’ Party’s rule, has created a great expectation among analysts and investors of the continuity of the current strategy of divestment and large dividends, as well as potential privatization.

The shock of reality was enormous: since the stock peaked on October 21, the company’s market capitalization has dropped R$106 billion. And this is all about politics, considering that local and foreign peers gained ground in the same period.

In this particularly good year for the industry, Petrobras still rose 50%. Yet, it underperformed Prio (which climbed 78%), PetroRecôncavo (70%), and U.S.-based rival Exxon (80%).

For the coming months, there is nothing to expect but ups and downs caused by political news. The third-quarter earnings report, which comes out on Thursday, will have little to say.

In J.P. Morgan’s view, the shares will only come out of a volatile scenario when there is clarity about the plans for Petrobras, which is likely to take at least the first six months of the new term, it predicts.

Meanwhile, more analysts will review their price targets for 2023 and also their recommendations, as a correction seems inevitable. The company was, even with all the problems of a state-owned company, coming in at multiples closer to its peers. But this is now history.

*By Nelson Niero, Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/