Managers look for companies with good fundamentals to invest in

07/05/2022

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Prevailing view is that investors must identify potential opportunities to join top-notch, resilient assets trading at a heavy discount — Foto: Divulgação

Companies with strong economic fundamentals trading at a discount are being analyzed by investment funds looking for opportunities on the Brazilian exchange B3. Despite the high interest rates, fast inflation and strong volatility, a scenario that increases risk aversion, these firms have been studying whether to buy into businesses, purchase shares of listed companies, or increase their stakes in companies with good growth history that have been affected by the crisis.

“It is cheaper to buy [shares of] companies on the stock exchange than to inject capital in unlisted companies,” said Rafael Furlanetti, institutional managing partner at XP Investimentos. “With the current prices on the stock exchange, private equity funds [which buy shares in companies] and long-term investors evaluate opportunities to become shareholders of companies that have strong fundamentals that will certainly weather this crisis,” he said.

Although it is still a restricted phenomenon, the prevailing view is that investors must identify potential opportunities to join top-notch, resilient assets trading at a heavy discount throughout the year, sources say.

The Brazilian cloud computing platform Locaweb has recently gained a major shareholder – the asset management company General Atlantic (GA), which has in its portfolio the pharmaceutical retail company Pague Menos and several technology companies. GA’s strategy is to gradually buy shares in companies, sources say. Today, the company holds a 10.7% stake in Locaweb – in March, the fund acquired a 4.9% stake in the stock market. The company is down 54,8% on the stock market this year, and lost 77,8% in 12 months. From January to March, the company’s net revenue rose 55% year over year, while profit advanced 154%.

Petz, a pet products retailer, has drawn funds like Mubadala, which historically allocates capital in infrastructure and real estate around the world, sources say. The Abu Dhabi sovereign wealth fund raised $322 million earlier this year to invest in Brazilian companies. According to a source in the financial market, the fund mulls acquiring a stake in the fast-food chain Burger King, now called Zamp in Brazil.

Petz already has a major investor. The sovereign wealth fund GIC built a 5.2% stake in the chain at the end of 2021, increased it to 5.4% in May, then reduced it to 4.87% in June. But the fund is willing to raise the stake above 5% again in the near term, a source familiar with the retailer’s strategy said.

“Both Petz and Locaweb are companies seen as having good fundamentals that are being affected by broader factors,” a source in the financial market said. “Other retail companies, such as Assaí and Grupo Mateus, have drawn more attention from investors,” an investment banker based in São Paulo said.

“What we see are different timings,” said an asset manager with investments in education and consumption. “With more aggressive interest rate hikes in the U.S., the markets are pricing a stronger deceleration, but these foreign private-equity funds look very long term, they think five, 10 years in advance. It’s different from the public market, which works with a one-year horizon, joins and leaves stocks all the time, and follow the short-term situation.”

Dynamo, one of the most traditional asset management companies in the country, mulls increasing stakes in companies from its portfolio, a source within the firm told Valor. Car rental company Localiza (which merged with Unidas), cosmetic maker Natura, energy company Eneva, retailer Lojas Renner, sugar and energy company Cosan and energy company Vibra are in the current portfolio. “There are a lot of cheap stocks and there will be a lot of opportunities. We are definitely looking at what is attractive,” a source linked to Vinci said.

Verde Asset also remains long in Brazilian listed companies and sees cheap stocks, according to the asset management company’s financial results, unveiled last week.

Carlos Carvalho Jr., managing director of Kínitro Capital, says that there have been some interesting deals by private-equity funds in recent months in Brazil because investors are starting to see valuations that justify strategic buying. “According to these funds’ calculations, there are, to some extent, more depreciated assets among the publicly-traded ones than among the privately held ones.”

A Valor’s analysis of 25 purchase and sale transactions of positions at B3 in 15 companies (from traditional companies in their sectors to newcomers to the stock market) shows a greater appetite from investors in general to increase their stakes in certain businesses. The analysis includes deals involving long-term funds and asset management companies focused on the short term – in both cases, without the objective of changing control or its management structure.

According to the survey, from January to June, one-third of the 25 deals were aimed at increasing stakes, while two-thirds reduced positions. In the previous six months, more than 70% were aimed at reducing stakes.

In order to have a broader volume of companies evaluated, consolidated deals in their markets, such as Renner, Raia Drogasil (drugstores) and Iguatemi (shopping malls), as well as recently listed companies in a growth phase, such as Petz and Quero-Quero (retailer), and groups that went public after 2020, such as Westwing (retailer), Track&Field (retailer) and Multilaser (technology), were considered in the analysis. The deals are filed with the CVM.

The U.S. asset management company Wishbone Management had already increased its position in Quero-Quero to 10.68% in April from 6.67%. Now, according to data from June, it holds 14.14%. Itaú Unibanco, however, reduced its stake in the retailer to 4.98% in June from 8.11% in March. The retailer has lost almost 43% of its market capitalization this year, with sales up 24% from January to March. Wasatch Advisors, an asset manager with an appetite for small-caps, increased its stake in Petz to 5.51% in June from 4.99%.

In the list of assets with stronger fundamentals, Raia Drogasil and Renner reported to the market that J.P. Morgan increased its shares in the companies – in the latter, to 5% in March from 4.6%.

Mr. Carvalho, with Kínitro Capital, sees Brazil a little ahead in terms of capital market recovery, which can be beneficial. “There are three main phases in these periods of acute crisis: the devaluation of company multiples, the revision of stock profits, and the capitulation, which is basically total lack of positive expectations, with investors surrendering to a very negative perception. Our market is in this third phase and the U.S. market, in the second phase, so we are ahead in this process of exiting this cycle. Obviously, if we don’t have a drastic worsening of the scenario again,” he said.

In June, up to the 27th, foreign investors bought R$252.2 billion in stocks on the B3 and sold R$250.9 billion, which means a net injection R$1.3 billion. In 2022, the balance is positive by about R$53 billion. A survey carried out by Valor Data shows that only 19 companies from the IBRx Index saw their shares rise over the last 12 months. The index is made up by the most liquid companies of B3.

Sergio Spinelli, with law firm Spinelli Advogados, says that companies that do not have “poison pill” clauses are becoming the target of asset management companies that invest in public companies. These clauses are protection mechanisms for shareholders of public companies against hostile takeover attempts by another investor. Each company has defined in its bylaws when the clause, which forced the investor to extend the offer to the other shareholders, can be triggered.

“The funds, when they allocate capital in these companies by building positions, need to see liquidity,” Mr. Spinelli said. “It is natural to look for companies without poison-pill clauses because it is one less limiting factor.” He still sees room for a further drop in the value of stocks driven by high interest rates.

Otávio Yazbek, with Yazbek Advogados, said that this clause started to gain relevance in Brazil after the IPO boom in 2006-2007. “This mechanism is very common in the United States, with companies’ moves to have a dispersed control. In Brazil, however, it guarantees that the controlling shareholder remains in control.”

With the recent IPO drives – in 2020 and 2021 –, Mr. Yazbek has seen that corporate disputes are beginning to emerge, since funds have increased stakes in companies. “New disputes have started to arise, also because funds, some with a more activist profile, are gaining a greater weight in recent stock offerings. The context is different than in previous booms.”

Assaí, Burger King (Zamp) and Mateus declined to comment. Petz said it does not comment on market moves that have not been disclosed to the market. Mubadala also said that it does not comment on market rumors. GIC did not immediately reply to a request for comment.

*By Mônica Scaramuzzo, Adriana Mattos — São Paulo

Source: VAlor International

https://valorinternational.globo.com/