Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Cross Asset Strategy

<ul>
<li>Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market</li>
<li>Pension reform, although slow, is progressing and both executive and legislature are more engaged</li>
<li>Brazil Bank sector trends to April-end show loan growth acceleration, controlled delinquency and steady lending spreads</li>
<li>We reiterate our positive view on <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> , for its value attributes and potential to deliver better returns going forward, and potential disposals of non-core interests boosting capital</li>
</ul>


Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market
Pension reform, although slow, is progressing and both executive and legislature are more engaged
Brazil Bank sector trends to April-end show loan growth acceleration, controlled delinquency and steady lending spreads
We reiterate our positive view on Banco Do Brasil Sa (BBAS3 BZ) , for its value attributes and potential to deliver better returns going forward, and potential disposals of non-core interests boosting capital


Brazil GDP Contraction, Sluggish Progress on Pension Reform Overshadow Sound Bank Sector Trends

Equity Bottom-Up

Guararapes Confeccoes SA / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/28023" target="_blank" data-smartkarma-citation="entities:28023:1">Guararapes Confeccoes SA (GUAR3 BZ)</a>, is a top three competitor to Brazilian market leader <a href="https://www.smartkarma.com/entities/24472" target="_blank" data-smartkarma-citation="entities:24472:1">Lojas Renner SA (LREN3 BZ)</a> in apparel retail</li>
<li>Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position</li>
<li>We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation</li>
<li>We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation</li>
</ul>



Guararapes Confeccoes SA (GUAR3 BZ), is a top three competitor to Brazilian market leader Lojas Renner SA (LREN3 BZ) in apparel retail
Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position
We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation
We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation


Guararapes: Good Value in Brazil Retailing, Sound Presence in Consumer Finance

Accelerating Tomorrow’s Independent Research

Boost Research

Boost Research Ltd is an appointed representative of Messels Ltd which is authorised and regulated by the FCA of the UK. 

This document is issued by Boost Research Limited solely for its clients. It may not be reproduced, redistributed or passed to any other person in whole or in part for any purpose without written consent of Boost Research. The material in this document is not intended for distribution or use outside the United Kingdom. This material is not directed at you if Boost Research is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you.

This document is provided for information purposes only and should not be regarded as an offer, solicitation, invitation, inducement or recommendation relating to the subscription, purchase or sale of any security or other financial instrument.  This document does not constitute, and should not be interpreted as, investment advice.  It is accordingly recommended that you should seek independent advice from a suitably qualified professional advisor before taking any decisions in relation to the investments detailed herein. All expressions of opinions and estimates constitute a judgement and, unless otherwise stated, are those of the author and the research department of Boost Research only, and are subject to change without notice. Boost Research is under no obligation to update the information contained herein. Whilst Boost Research has taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, Boost Research cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. This document is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to herein. No representation or warranty either expressed or implied is made, nor responsibility of any kind is accepted, by Boost Research or any of its respective directors, officers, employees or analysts either as to the accuracy or completeness of any information contained in this document nor should it be relied on as such. No liability whatsoever is accepted by Boost Research or any of its respective directors, officers, employees or analysts for any loss, whether direct or consequential, arising whether directly or indirectly as a result of the recipient acting on the content of this document, including, without limitation, lost profits arising from the use of this document or any of its contents.

This document is provided with the understanding that Boost Research is not acting in a fiduciary capacity and it is not a personal recommendation to you. Investing in securities entails risks. Past performance is not necessarily a guide to future performance. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Investments in the entities and/or the securities or other financial instruments referred to are not suitable for all investors and this document should not be relied upon in substitution for the exercise of independent judgment in relation to any such investment. The stated price of any securities mentioned herein will generally be the closing price at the end of any of the three business days immediately prior to the publication date on this document. This stated price is not a representation that any transaction can be effected at this price.

Boost Research and its respective analysts are remunerated for providing investment research to professional investors, corporations, other research institutions and consultancy houses. Boost Research, or its respective directors, officers, employees and clients may have or take positions in the securities or entities mentioned in this document.  Any of these circumstances could create, or be perceived as creating, conflicts of interest. Boost Research’ analysts are not censored in any way and are free to express their personal opinions. As a result, Boost Research may have issued other documents that are inconsistent with and reach different conclusions from, the information contained in this document. Those documents reflect the different assumptions, views and analytical methods of their authors. No director, officer or employee of Boost Research is on the board of directors of any company referenced herein and no one at any such referenced company is on the board of directors of Boost Research.

Messels is authorised and regulated in the United Kingdom by the Financial Conduct Authority for the provision of investment advice. Residents of the United Kingdom should seek specific professional financial and investment advice from a stockbroker, banker, solicitor, accountant or other independent professional adviser authorised pursuant to the Financial Services and Markets Act 2000. This report is intended only for investors who are 'professional clients' as defined by the FCA, and may not, therefore, be redistributed to other classes of investors.

The content of this report is covered by our Policy of Independence which may be viewed at www.messels.com.

 

Analysts’ Certification

The analysts involved in the production of this document hereby certify that the views expressed in this document accurately reflect their personal views about the securities mentioned herein. The analysts point out that they may buy, sell or already have taken positions in the securities, and related financial instruments, mentioned in this document

<ul>
<li>Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets</li>
<li>This reflects the Bolsonaro administration's limited engagement with the Legislature so far on pension reform</li>
<li>Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies</li>
<li>The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval</li>
<li>We see the equity market and currency corrections as an opportunity, and we highlight our positive view on <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a>
</li>
</ul>


Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
This reflects the Bolsonaro administration's limited engagement with the Legislature so far on pension reform
Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)



Brazil Politics; The "Noise" On Pension Reform Is an Investor Opportunity

<ul>
<li>Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (<em>Lava Jato</em>) criminal investigation, on bribery and corruption charges</li>
<li>We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks</li>
<li>This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view</li>
<li>Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term</li>
<li>Nonetheless, we still see potential for <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> to re-rate over the medium term, and narrow the PBV gap with its core peers, <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a> and <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a>, as Banco do Brasil's own internal restructuring takes effect</li>
</ul>


Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term
Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil's own internal restructuring takes effect


Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Thematic (Sector/Industry)

<ul class="">
<li>Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates</li>
<li>A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk</li>
<li>The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage</li>
<li>We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios</li>
<li>The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a>, where the PBV discount to the private sector remains excessive; versus <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a>, the PBV discount is 42% and versus <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a> the PBV discount is 39%</li>
</ul>


Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates
A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk
The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage
We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios
The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is Banco Do Brasil Sa (BBAS3 BZ), where the PBV discount to the private sector remains excessive; versus Itau Unibanco Holding Sa (ITUB4 BZ), the PBV discount is 42% and versus Banco Bradesco Sa (BBDC4 BZ) the PBV discount is 39%


Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

Brazil

Banco Bradesco S.A. attracts deposits and offers commercial banking services. The Bank offers business loans, personal credit, mortgages, lease financing, mutual funds, securities brokerage, and Internet banking services.  Bradesco operates in Brazil and Argentina, the United States, the Cayman Islands, and the United Kingdom.  Bradesco offers credit cards, insurance, and pension funds.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Banco Bradesco (BBDC4 BZ)

Brazil GDP Contraction, Sluggish Progress on Pension Reform Overshadow Sound Bank Sector Trends

Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market Pension reform, although slow, is progressing and both...

Victor Galliano

Guararapes: Good Value in Brazil Retailing, Sound Presence in Consumer Finance

Guararapes Confeccoes SA (GUAR3 BZ), is a top three competitor to Brazilian market leader Lojas Renner SA (LREN3 BZ) in apparel retail Its...

Victor Galliano

Brazil Politics; The "Noise" On Pension Reform Is an Investor Opportunity

Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and...

Boost Research

Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption...

Boost Research

Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid...

Boost Research

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)