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Making a Comeback: Initiate with OP

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Making a Comeback: Initiate with OP Positivo Fred Mendes LatAm TMT 27 November 2019 7.610000000000 Making a Comeback: Initiate with OP Positivo is a personal computer and mobile phone company focused on the low- end market, with a ~75% market share in its niche, which is highly correlated to GDP. Our positive view is based on: (i) cyclical upturn in Brazil, with PC market set to 350 rebound 5% in 2020; (ii) public biddings’ pent up demand and (iii) growth avenues through Accept, Positivo’s server seller and HaaS (hardware as a service). 300 Its valuation is appealing at 5.3x EV/EBITDA for YE20, a 25% discount to global peers, but with higher growth and an opportunity to expand margins. 250 Initiate coverage with an Outperform rating and a R$9.50 TP for YE20. 200 We see Positivo as an appealing case to play potential macro recovery. The company is mainly focused on the sale of PCs/laptops (~60% of revenue) and mobile phones (~22% 150 of revenue). During Brazil’s economic crisis, the company held onto its market share despite a greater impact on its niche market: income classes “C” and “D” (~75% market 100 share). Now, with a potential macro recovery in Brazil, we expect that the overall PC/laptop market should grow by 5% in 2020, while Positivo should also gain market share as low- 50 income consumers tend to benefit the most from improvements in employment and GDP. Nov-18 Feb-19 May-19 Aug-19 Nov-19 Also, Positivo has new avenues of growth: Accept (a server seller) and HaaS (hardware as a service), which are reporting revenue growth at above 30%, vs. 5% for Positivo, and Positivo IBOV higher margins of 16%+, vs. 6-8% for Positivo consolidated. Finally, Positivo´s valuation is appealing at 5.3x EV/EBITDA for 2020, a ~25% discount to global peers, but with higher growth. All in all, we initiate coverage with an OP rating and a YE20 TP of R$9.50. Ticker: POSI3 BZ Rating: Outperform Accept and HaaS are avenues of growth. In 2018, Positivo acquired Accept, which Target: R$9.50 customizes and sells servers, through a full earn-out transaction. Given its large scale and Upside: 25% distribution channels, Positivo was able to leverage Accept’s business, reporting net revenue of R$160mn in 2018, vs. R$90mn in 2017, and we forecast ~R$220mn for FY19. Accept also has higher margins, at 16-19%, vs. 6-8% for Positivo. The other opportunity (R$ mn) 2018A 2019E 2020E lies in Positivo’s hardware as a service business (HaaS), in which it rents its equipment for EPS (R$) -0.01 0.14 0.58 an average period of 3 years. Although the payout time is longer, at 1.5 years, the EBITDA margins are much higher, at 30-39%, and we forecast revenue growth of 30%+ for the EBITDA 121 137 161 coming years. Furthermore, there is high demand for this product, but given its capital- P/E - 54.6 13.2 intensive nature, growth relies on Positivo’s capital structure that is decreasing leverage. Both projects offer opportunities to boost growth and lift margins. EV/EBITDA 7.3 6.4 5.3 P/BV 1.3 1.3 1.2 The core business is a grind-it-out game. Positivo’s core markets, PCs and mobile phones are highly competitive and face low margins, as global players (Dell, Apple, and Dividend Yield % 0.0% 0.0% 0.5% Samsung) tend to dominate the market, particularly among high-end consumers. However, * As reported by the company Positivo’s efficient production and focus on the low end (income classes “C” and “D”) have led to a dominant market share of 75% in its niche. We therefore see two opportunities for Positivo: (i) further growth and greater market share based on macro improvement, and (ii) Key Figures 27-Nov-19 pent-up demand in the public sector that has been sidelined since 2012, when it Local Price (R$) 7.61 represented ~50% of net revenue, vs. ~20% currently. Nonetheless, we are seeing signs of public bidding processes starting to gain traction, as Positivo last month won a process Price Range - 52 wk (R$) 2.19 - 7.61 in São Paulo state for 65k units, representing R$205mn in revenue, while other bids are in Shares Outstanding (mn) 86 the pipeline, representing R$3bn. We see public biddings as an upside risk to the case that we do not incorporate yet in our model. 3-month ADTV (R$mn) 5.6 Market Cap (R$mn) 658 Valuation. Despite the stock’s ~240% gain YTD, vs. ~23% for the IBOV, we see Positivo trading at an appealing EV/EBITDA of 5.3x for 2020, a ~25% discount to global peers. In EV (R$mn) 950 our view this discount as unwarranted, as Positivo has better growth potential with an P/BV 1.3 opportunity to increase margins. Current Net Debt (R$mn) 293 Risks: (i) End of tax benefits; (ii) increasing competition as global players try to enter the Net Debt/2019 EBITDA 1.6x low end of the market; and (iii) relatively low liquidity, with ADTV of ~R$5mn. Fred Mendes, CFA Guilherme Haguiara [email protected] [email protected] +55 (11) 3847 9259 +55 (11) 3847 9258 Bradesco S.A. Corretora de Títulos e Valores Mobiliários (Bradesco BBI) does and seeks to do business with companies covered in its research reports.As a result, investors should be aware that Bradesco Corretora and its affiliates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For full disclaimer and definitions, please refer to the end of this report. COMPANY REPORT Bradesco BBI Equity Research 27 November 2019 Business overview: Figure 1: Gross revenue breakdown by product Figure 2: Gross revenue breakdown by channel 80% 17% 63% 39% 60% Notebook 1% 53% 55% 53% Desktop 3% 48% Smartphones 40% 26% 28% 24% 26% Feature phones 24% 26% Edu Tech gross revenue 19% 20% 19% 21% 20% 12% Others gross revenue 0% FY16 FY17 FY18 9M19 3Q19 21% Retail Government Corporate Source: Company data, Bradesco BBI 2 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019 Positivo back in the game? What to expect: Macro tailwinds and market trends We are assuming coverage of Positivo with an Outperform rating and a DCF-based TP of R$9.50 for YE20, implying upside potential of 25%. The company outlook is likely to benefit from macro improvement, as it has historically been substantially exposed to the Brazilian economy. According to consensus figures, Brazil’s GDP growth should accelerate to 2% YoY in 2020, from 1% in 2019, which should translate into a better environment for Positivo to grow. Figure 3: Positivo’s Revenue vs. GDP - Growth YoY Source: Company data, Bradesco BBI estimates, IPEA A better consumer environment should drive performance in Positivo’s retail sales. According to consensus, Brazil’s unemployment rate should drop to 11.1% in 2020, while the Selic target rate is expected to be at 4.5%. These two factors combined bode well for Brazilian consumers, and thus for Positivo’s retail sales. As an example, we believe lower interest rates and falling unemployment in Brazil could lead retailers to accept a greater number of installments, making consumers more likely to purchase PCs. Figure 4: Retail Sales vs. Private Consumption Source: Company data, Bradesco BBI estimates, Bloomberg, IPEA 3 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019 Government spending should remain under control, but with pent-up demand from public institutions. While household consumption growth should accelerate, government spending has less room to grow. Nevertheless, we believe there is pent-up demand in the public sector following several years of more contained government spending. Thus, we believe there could be room for growth in sales to public institutions, as there is the need to replace old PCs or add new ones to meet needs. Figure 5: Public Consumption vs. Positivo’s Public Revenue Source: Company data, Bradesco BBI estimates, Bloomberg, IPEA Improving macro trends to support retail and corporate growth… Positivo’s positioning in a cyclical industry means macro tailwinds should follow in 2020. The PC market in Brazil is significantly impacted by economic downturns, which led to a challenging period for PC manufacturers during the country’s recession. Conversely, an improvement in macro conditions should also raise the tide for the PC market, as consumption of discretionary goods picks up. According to consensus, Brazil is starting to show economic recovery, with expected GDP growth of 1% for 2019 and acceleration to 2% in 2020, which could boost Positivo’s sales in all segments. Figure 6: Brazil PC Market vs. GDP growth Source: Company data, IDC, Bradesco BBI estimates, 4 COMPANY REPORT Bradesco BBI Equity Research 27 November 2019 Positivo is well positioned in the Brazilian PC market to capitalize on a recovery. Between 2012 and 2018, Positivo delivered sales figures broadly in line with the overall Brazilian PC market, maintaining an average market share of 15.2%. That said, Positivo’s market share has declined over the course of 2019, reaching 13.9% in 3Q19. In our view, this dynamic reflects Positivo’s “minimum price and margin policy”, along with lower demand from public institutions. Figure 7: Positivo vs. Brazil PC Market Source: Company data, IDC, Bradesco BBI estimates, Brazil’s retail PC market should continue progressing in tandem with household consumption. Historically, we have seen the Brazilian PC retail market growth maintain a close link with overall household consumption.
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