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Equity Strategy Brazil April 5, 2020 When the Scenario Changes, I Change My Mind In this report, we update our Brazil Buy List (BBL) to consider weaker 2020 GDP growth outlook in Brazil and globally, and a potentially slower recovery post crisis. We also discuss how this crisis could change individuals’ behavior and analyze the potential impact on sectors and companies. ◼ Growth outlook deteriorated: higher unemployment and lower consumer confidence. ◼ Think ahead: How might post-crisis behavior changes affect different sectors? ◼ Adding Vale to our Brazil Buy List. Portfolio is balanced between defenders and rebounders. Growth outlook deteriorated: higher unemployment and lower consumer confidence. First, we believe that the negative impact on GDP growth could be more intense than initially expected due to higher unemployment and lower consumer confidence. The impact on Brazil’s GDP growth could be even worse, given its higher dependence on the services sector. Second, the pace of GDP recovery could be less intense than expected, as lockdowns could take longer to be fully relaxed, similar to what is occurring in Asian countries. This can be seen in the still-low traffic congestion in some countries, despite the recovery in other economic indicators. Lastly, the origin and the magnitude of this crisis seem unprecedented and will likely have short- and long-term consequences for our society, which we start to discuss in this report. Think ahead: post-crisis behavior changes and impacts on companies and sectors. In this report, we discuss the changes in individual behaviors that we expect to result from this crisis with our sector analysts, and list the potential implications for sectors and companies. We believe that some trends that were occurring (online shopping, online banking, home office) will be accelerated, and some other trends will emerge as a result of this crisis (telemedicine and eventually reduced social contact, particularly in the short term). We believe that most of the behavioral changes can be classified in two categories: online everything and contactless society, which will be the subjects of a deeper analysis in upcoming reports. Changing our Brazil Buy List: Adding Vale; Removing Gerdau. We are updating our Brazil Buy List to consider a deteriorating outlook for 2020 GDP growth in Brazil and globally. We also believe that the fiscal and political conditions in Brazil have worsened due to the crisis, which has led us to reduce the risk of our portfolio. Lastly, we believe China will be an important driver of the global economic recovery. We are including Vale and removing Gerdau from our portfolio. The rationale is to look for companies that depend on global demand and benefit from a weaker BRL while avoiding names that rely on a quick rebound of the Brazilian economy. Portfolio is balanced between defenders and rebounders. Our Brazil Buy List portfolio includes five names that we consider more defensive (VALE3, BBDC4, BBAS3, JBSS3, CPFE3). Despite having a more cautious view on GDP growth (Brazil and global) and acknowledging a weaker post-crisis outlook for Brazil, the Ibovespa is down 40% YTD in local currency and down 55% YTD in U.S. dollars. Thus, we still have exposure to companies that would benefit from post-crisis recovery (LREN3, EZTC3, HAPV3, MULT3, RENT3). We are sticking to our strategy of picking leading companies in their respective sectors, as higher efficiency, lower leverage and high cash positions will help them to better navigate during this crisis. Finally, we are living unprecedented moments in terms of volatility. As an example, the Bovespa Stock Exchange experienced the three most volatile trading sessions of the past 30 years in March 2020. As we adapt to this unique period, we highlight that this could lead to an increased turnover in our recommended portfolio. STRATEGY TEAM Marcos Assumpção, CFA +55-11-3073-3021 [email protected] Jorge Gabrich, CNPI +55-11-3073-3048 [email protected] André Dibe Please refer to page 6 of this report for important disclosures, analyst certifications and additional information. Itaú BBA does and seeks to do business with Companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report +55-11-3073-3222 as the sole factor in making their investment decision. Itaú Corretora de Valores S.A. is the securities arm of Itaú Unibanco Group. Itaú BBA is a registered mark used by Itaú [email protected] Corretora de Valores S.A. Equity Strategy – April 5, 2020 Behavior Changes Post Crisis: What Might the Impact on SECTION 1 Sectors Be? Crises usually lead to behavior changes, and we highlight that this crisis is no different. Every crisis raises uncertainty and brings fears to individuals, particularly economic fear (the fear of losing jobs). However, this health-related crisis is different from other crises in the past, as its duration and intensity are still unknown and its potential impact on the global economy is also unclear. We note this crisis seems to bring additional fears to individuals, including the fear of losing lives, the fear of food and other product shortage (supply-chain disruption) and the fear of reduced social contact. These could have important implications for consumer confidence and habits, particularly in the short term. Google Trends Evolution: Recessão (Recession) 2.5 2 1.5 1 0.5 0 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: Itaú, Google Google Trends Evolution: UTI (ICU) 25 20 15 10 5 0 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: Itaú, Google Itaú BBA | 2 Equity Strategy – April 5, 2020 Google Trends Evolution: Desemprego (Unemployment) 90 80 70 60 50 40 30 20 10 0 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: Itaú, Google Google Trends Evolution: Distanciamento Social (Social Distancing) 1.2 1 0.8 0.6 0.4 0.2 0 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: Itaú, Google Google Trends Evolution: Desabastecimento (Shortage) 3 2.5 2 1.5 1 0.5 0 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Source: Itaú, Google Speeding up current trends and bringing new ones: Online everything and contactless society. Overall, most of the trends we expect to see are related to increased use of technology that could lead to higher productivity. This crisis will not only speed up some trends that were occurring, which we call online everything (online shopping, online banking, online work or home office, online food purchasing), but also bring new habits that emerge as a result of this crisis, which we call contactless society (end of cash, telemedicine and eventually reduced social contact, particularly in the short term). Below we list some trends that we are seeing in each sector and their potential impact. Itaú BBA | 3 Equity Strategy – April 5, 2020 Pulp & Paper. We believe that after the COVID-19 pandemic there could be a structural increase in hygiene habits, e-commerce penetration, and digitalization. This in turn would affect the consumption levels of paper products, especially tissue/fluff (currently 47% of global market pulp demand), packaging products (7%) and Printing & Writing (26%). As a case in point, we estimate a 4.2% CAGR for tissue/fluff paper production from 2019-30, which compares with 2.9% before; 3.3% CAGR 2019-30 for carton board production, 2.3% before; and -4.1% CAGR 2019-30 for P&W production, -0.7% before. Finally, we believe that pulp consumption levels in 2030 will remain similar to both paper production estimates, as the relatively higher consumption of pulp for tissue/fluff products will eventually be offset by the lower consumption of Printing & Writing products adding to packaging products’ usual low consumption of pulp, due to the usage of recycled paper. Pre-COVID Paper Production Estimates (ktons) Source: Itaú Post-COVID Paper Production Estimates (ktons) Source: Itaú Retail and Shopping Malls. In the short term, we see some online retailers needing to improve their sales channel, while brick-and-mortar stores are likely to suffer the negative effects of social distancing through reduced foot traffic, and malls are affected by the loss of revenues from variable rents and parking. In the medium term, COVID-19 is likely to propel e-commerce adoption, causing lower brick-and-mortar sales, eventually negatively affecting shopping malls. Retailers and malls might find themselves needing to adapt their business models. We see increased demand for logistic hubs in the short to medium term. Health Care. Telemedicine could gain larger acceptance, eventually leading to a reduced usage of emergency care, generating the following benefits: reduced medical loss ratio, higher efficiency, increased use of predictive vs. corrective medicine. Although we could see this happening, we don’t see compelling signs of this trend yet. Another possible trend is increasing health concerns, which could lead to an increase in demand for healthier food and healthier habits. Itaú BBA | 4 Equity Strategy – April 5, 2020 Homebuilders & Properties. Corporate rents could suffer a blow in the long term if home office gains ground definitively. Companies could need to rent less space if employees rotate between home office and traditional office work. Eventually the square meter could depreciate in more-central residential locations, as people would feel less inclined to pay premiums for location if they work less frequently at the office.
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  • Working Paper No

    Working Paper No

    Disentangling the Effect of Private and Public Cash Flows on Firm Value Cristina Mabel Scherrer and Marcelo Fernandes Working Paper No. 800 August 2016 ISSN 1473-0278 School of Economics and Finance Disentangling the effect of private and public cash flows on firm value Cristina Mabel Scherrer ∗1 and Marcelo Fernandes 2 1Aarhus University and CREATES 2Sao Paulo School of Economics, FGV and Queen Mary University of London June 8, 2016 Abstract This paper presents a simple model for dual-class stock shares, in which com- mon shareholders receive both public and private cash flows (i.e. dividends and any private benefit of holding voting rights) and preferred shareholders only receive public cash flows (i.e. dividends). The dual-class premium is driven not only by the firm’s ability to generate cash flows, but also by voting rights. We isolate these two effects in order to identify the role of voting rights on equity-holders’ wealth. In particular, we employ a cointegrated VAR model to retrieve the impact of the voting rights value on cash flow rights. We find a negative relation between the value of the voting right and the preferred shareholders’ wealth for Brazilian cross- listed firms. In addition, we examine the connection between the voting right value and market and firm specific risks. JEL classification numbers: G32, G34, G38, G15 Keywords: Private benefits, voting right, dual-class shares ∗ Department of Economics and Business Economics, Aarhus University, Fuglesansgs All´e4, 8210 Aarhus V, Denmark. E-mail: [email protected]. 1 1 Introduction In many countries firms have the possibility to issue different types of shares with distinct voting and dividends rights.