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Americanas (AMER3): Morgan Stanley sees three positive catalysts and raises the stock’s buy recommendation

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Morgan Stanley raised Americanas (AMER3) shares from equal-weight (exposure in line with the market average, equivalent to neutral) to overweight (exposure above the market average, equivalent to buying), with the target price changing from R$20 to R$24, which represents a potential for appreciation of 24.2% in relation to the closing price on Tuesday (4) of R$19.33.

The reclassification, according to analysts, is motivated by “three positive inflection points ahead for Americanas: (1) AlphaWise Survey [feita pelo banco] sees improvement in consumer sentiment in Brazil, (2) the company’s new CEO [Sergio Rial] can drive strategic transformation and (3) net margin is set to improve next year”.

Against a backdrop of rising interest rates and persistently high inflation, the Brazilian consumer outlook positively surprised Morgan Stanley. In their most recent AlphaWise survey, conducted in August 2022, 47% expect the economy to improve over the next six months — the biggest positive response since the first wave of the survey in March 2020.

For shopping trends, the bank’s research team says that Brazilian consumer behavior has normalized for online activities.

Fifty-nine percent of Brazil’s consumers reported purchasing items unrelated to online shopping in the past month, essentially in line with the bank’s November 2021 surveys — despite shopping mall visits in the past month continuing to rise, reported by 51. % of consumers in Brazil (versus 42% in November 2021 and 34% in June 2021).

Strategic transformation and new CEO of Americanas

Morgan Stanley sees a potential tipping point in Americanas’ strategic transformation (encompassing omnichannel and fintech initiatives), with integration work moving forward and a new CEO announced. Physical store and e-commerce assets are now integrated under Americanas’ single operating and shareholder base.

“While 2021 faced disruption as this combination was implemented, we see the company now with the initial integration work completed and a favorable resulting structure,” comments the bank.

Further increasing Morgan’s optimism about the pace of strategic change is the hiring of former Santander Brasil CEO Sergio Rial, effective January 1, 2023.

“While no specific plans have been put forward, we see fintech Ame as a potential area of ​​greatest focus.” In the bank’s opinion, the change in management further demonstrates Americanas’ willingness to accelerate its transformation efforts.

Net margin expansion

With investments that included broader free shipping offers, Americanas’ adjusted EBITDA margins (Ebitda, or earnings before interest, taxes, depreciation and amortization, over revenue) dropped from 17.7% in 2019 to 12.0% in 2021 For 2022, Morgan projects margins of 12.7%. However, the year-to-date Ebitda expansion trends were outweighed by a significant deterioration of -420 bps on an annual basis in net financial expenses, reflecting the increase in interest rates in Brazil.

Analysts expect Americanas to show a loss in 2022, with net margins of -0.2%, while for 2023 they expect improvements.

While total financial expenses in 2023 are practically stable in absolute terms (in reais), when considering the 10% revenue growth projection, net financial expenses become a point of margin leverage. Therefore, they project a 120bps expansion for Ebitda margin (to 13.8%), with +190bps of net margin expansion (to 1.7%, +30bps above consensus), as well as +100bps of margin expansion net for 2024 and 2025.

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