Description
RAIA S.A. (RAIA3-BR)
Current Price: R$25.40
Target Price: R$35.00 (37% upside)
Industry: Brazilian Healthcare/Retail
Market Capitalization: R$1.6 bn / USD $1.0 bn
Raia S.A. ("Raia" or the "Company") is Brazil's second largest drugstore chain based on number of stores and the fifth largest in terms of sales. The Company's strong balance sheet, industry-leading organic expansion plan, well-developed infrastructure/systems, and experienced management team position Raia to be a leader in the consolidation of Brazil's fast growing and highly fragmented drug retail market
- - Raia currently has over 350 drugstores in five different states in the southeast of Brazil (Sao Paulo, Rio de Janeiro, Minas Gerais, Parana, and Rio Grande do Sul). These 5 states are amongst the most affluent in Brazil and account for approximately 70% of the Brazilian pharmaceutical market
- - The Brazilian drugstore market is highly fragmented and in the process of consolidation, with the top five chains gaining share at the expense of independents and supermarket share stagnated
- o As of December 31, 2010, the top five retail chains in Brazil accounted for only 3% of the stores and 24% of the sales in the Brazilian pharmacy market
| % of Stores |
2005A |
2006A |
2007A |
2008A |
2009A |
2010A |
| Top 5 Chains |
2% |
2% |
2% |
2% |
3% |
3% |
| Other Chains |
6% |
6% |
6% |
6% |
6% |
7% |
| Supermarkets |
1% |
1% |
1% |
1% |
1% |
1% |
| Independents |
92% |
92% |
91% |
91% |
90% |
89% |
| |
|
|
|
|
|
|
|
| % of Sales |
|
2005A |
2006A |
2007A |
2008A |
2009A |
2010A |
| Top 5 Chains |
16% |
17% |
19% |
20% |
23% |
24% |
| Other Chains |
20% |
21% |
23% |
25% |
25% |
24% |
| Supermarkets |
2% |
2% |
3% |
3% |
3% |
3% |
| Independents |
62% |
60% |
56% |
52% |
49% |
48% |
o While Raia's national market share is only 4.1% (% of sales), roughly in-line with the other leading chains, its market share in Sao Paolo (where 246 of its existing 350 stores are located) is significantly higher, at 9.3% of sales as of year end 2010 (up from 3.2% as of year end 2007)
- o Consolidation is expected to continue as better access to capital, volume-based purchasing discounts, and more professional systems and business practices will allow the leading chains to continue to take share from the less sophisticated independent players
- - Raia completed its IPO in December 2010, with a R$655 mm offering (R$526 mm primary), priced at R$24.00 per share
- - In FY 2010, the Company generated R$1,860 mm of gross revenue and $76 mm of EBITDA.
The Brazilian pharmaceutical market is growing faster than the global average
- - The Brazilian pharmaceutical market (revenue from pharmaceutical sales) has grown at a CAGR of 12% from 2005 to 2010 (relative to the global average of approximately 7%). Brazil should continue to grow well above the global pace due to:
- o Aging of the Brazilian population (the number of Brazilians over 60 years old is set to double over the next two decades)
- o Continuous improvement in consumer purchasing power as disposable incomes in the lower and middle classes (fastest growing portions of the population) increase
- o Rapid growth in the generic drugs segment (30% CAGR from 2005 to 2010, including 38% growth in 2010) to further increase accessibility and affordability of prescription drugs to the Brazilian consumer
Raia has grown faster than the market, despite having limited financial resources (a highly levered balance sheet) prior to its IPO. This not only provides management with a successful track record of having executed an aggressive store opening plan, but also provides for significant, embedded EBITDA growth in the Company's existing portfolio due to the store maturation process
- - From 2007 to 2010, Raia grew its store count more quickly than any other member of the top five chains, with 200 net new store openings from 2007 to 2010, more than doubling the 150 stores it had as of year end 2006
- o Consequently, as of December 31, 2010, approximately 44% of Raia's stores have been opened within the last three years and have not completed their maturation process
- o Management estimates that while a new store is burdened with over 90% of the SG&A costs of a mature store from day 1, it will not reach its revenue potential until year four, suggesting a steep, embedded EBITDA ramp in the existing store base that will become increasingly evident over the next two years
| Illustrative Store Maturation Curve |
|
|
|
|
| (R$ in '000) |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
CAGR |
| Gross Revenue |
$3,993 |
$5,359 |
$5,970 |
$6,238 |
16.0% |
| % Growth |
- |
34.2% |
11.4% |
4.5% |
|
| Gross Profit |
958 |
1,340 |
1,493 |
1,560 |
17.6% |
| % Margin |
24.0% |
25.0% |
25.0% |
25.0% |
|
| SG&A Expenses |
830 |
890 |
901 |
905 |
2.9% |
| % Revenue |
20.8% |
16.6% |
15.1% |
14.5% |
|
| Store Level EBITDA |
128 |
450 |
591 |
655 |
72.4% |
| % Growth |
- |
252.3% |
31.3% |
10.8% |
|
| % Margin |
3.2% |
8.4% |
9.9% |
10.5% |
|
| |
|
|
|
|
|
|
| % Mature Store |
|
|
|
|
|
| Gross Revenue |
64% |
86% |
96% |
100% |
|
| SG&A Expenses |
92% |
98% |
100% |
100% |
|
| Store Level EBITDA |
20% |
69% |
90% |
100% |
|
- o As the table below illustrates, the store maturation process alone (giving no credit to future store growth or nominal growth in the existing store base) should allow Raia to increase EBITDA by 40% over the next 3 years.
| |
|
|
|
Embedded |
|
|
|
|
| Raia Stores by Vintage |
|
|
Store-Level |
Incr. |
Embedded |
2010 |
|
| As of 12/31/10 |
|
|
EBITDA |
Corp |
EBITDA |
Actual |
|
| ($R in millions) |
Stores |
% Total |
Growth |
Exp.* |
Growth |
EBITDA |
% Growth |
| Year 1 |
|
52 |
15% |
$27 |
(5) |
23 |
- |
- |
| Year 2 |
|
41 |
12% |
$8 |
(1) |
7 |
- |
- |
| Year 3 |
|
61 |
17% |
$4 |
(1) |
3 |
- |
- |
| Year 4 |
|
196 |
56% |
0 |
0 |
0 |
- |
- |
| Total |
|
350 |
100% |
$40 |
($7) |
$33 |
$76 |
43.5% |
| *Assumed to be 4% of incremental revenue for illustrative purposes. |
|
|
|
o Regarding the risk of currently maturing stores (and future stores, for that matter) never reaching either the revenue or EBITDA contribution of existing mature stores, it is worth noting that over the last 3 years, each successive vintage of maturing stores has reached equivalent levels of revenue and EBITDA more quickly than the one before. Management attributes this achievement to more sophisticated real estate selection processes and inventory management as the Company has grown.
In addition to embedded store growth, Raia expects to use the proceeds from its recently completed IPO to further accelerate its new store growth plan
- - Raia has earmarked approximately R$275 mm of the $R500 mm of net IPO proceeds to fund new store growth over the next three years
- - Relative to the average of 50 stores per year the Company has opened since 2007, the Company plans to open 60 new stores in 2011 and 90 in each of 2012 and 2013 (and into the foreseeable future thereafter), resulting in a unit growth CAGR of 18-19% from 2010 to 2013
- - Importantly, this growth is set to occur predominantly in Raia's existing markets, where it already has in-place distribution centers, established supplier relationships, and deep knowledge of its competition and customer base.
- - In fact, Raia believes its new stores are likely to be even more profitable than its in-place store base (by maturity) as their existing portfolio will be more heavily weighted towards the more competitive urban markets of Sao Paulo and Rio de Janeiro (where they compete against other national chains) versus regional chains in the more suburban and rural areas of their existing footprint
- - As stated before, the cash to fund this new store growth is on-hand (and currently earning over 12% in annual interest), and is not dependent on future financing
Raia is able to invest its capital at extremely attractive ROICs
- - A new store costs Raia approximately R$1.0 mm to build. This cost is composed of approximately R$800k of capex, R$80k of pre-opening expenses, and $R120k of working capital investment
- - Assuming a mature store EBITDA of $655k (see table above), D&A (or maintenance capex) of approximately 2.0% of revenue, and a 34% corporate tax rate, results in an after-tax ROIC for new stores of approximately 35%.
| |
|
|
|
Embedded |
|
|
|
|
| Raia Stores by Vintage |
|
|
Store-Level |
Incr. |
Embedded |
2010 |
|
| As of 12/31/10 |
|
|
EBITDA |
Corp |
EBITDA |
Actual |
|
| ($R in millions) |
Stores |
% Total |
Growth |
Exp.* |
Growth |
EBITDA |
% Growth |
| Year 1 |
|
52 |
15% |
$27 |
(5) |
23 |
- |
- |
| Year 2 |
|
41 |
12% |
$8 |
(1) |
7 |
- |
- |
| Year 3 |
|
61 |
17% |
$4 |
(1) |
3 |
- |
- |
| Year 4 |
|
196 |
56% |
0 |
0 |
0 |
- |
- |
| Total |
|
350 |
100% |
$40 |
($7) |
$33 |
$76 |
43.5% |
| *Assumed to be 4% of incremental revenue for illustrative purposes. |
|
|
|
- Due to certain tax-advantaged attributes that Raia currently has, its cash tax rate over the next several years should approximate 20%. Using this tax rate instead of the statutory 34% Brazilian tax rate increases the effective ROIC of new units to over 42% by maturity
In addition to accelerated unit growth, Raia is using the proceeds from its recent IPO to significantly enhance the profitability of its existing operations
- - During its period of private ownership, Raia financial leverage prevented it from taking advantage of certain attributes of the Brazilian drug retail market that could have increased its profitability. With a net cash balance of over R$250 mm as of December 31, 2010, the Raia management team is focused on several initiatives to improve the profitability of its existing operations (above and beyond the store maturation process), including:
- o Shortening supplier payment terms. During Q1 2011, Raia renegotiated the terms of many of its supplier agreements, exchanging larger purchasing discounting for shorter payment terms. Prior to the IPO, in part due to its financial leverage, Raia's accounts payable days were closer to 60 relative to the industry average of 30 days. The financial benefits of these new agreements should result in further improved gross margins beginning in Q1 2011. In addition, the new capital structure should allow Raia to buy more products upfront (in cash), rather than relying on seller financing, which provides yet incremental upside to gross margin in 2011.
- o Opportunistic purchasing. Prior to the IPO, due to its prior financial position, the Company was not able to take advantage of "one-off" opportunities to purchase large amounts of inventory from suppliers who were looking to offload merchandise at steep discounts (in order to clear warehouse space or meet sales quotas, for example). Management has suggested that the benefits from such opportunities (also to be evident in gross margin) have proven to be "greater than expected" in 2011 to date.
- o Increased inventory purchasing prior to the annual price increase. The maximum price that a pharmaceutical can be sold for in Brazil is regulated by the government and is subject to annual price increases that come into effect on April 1 of every year. This price increase applies not only to the price that end consumers pay for the drug at retail pharmacies, but also to the price that the drug retailers pay to wholesalers and drug manufacturers for their inventory (the price increase is effective throughout the supply chain). As such, a well-capitalized drug retail chain can generate a cost advantage over its less well-capitalized independent and private peers by purchasing excess inventory in March (prior to the increase) and selling it longer after its peers have depleted themselves of their lower cost goods. 2011 will be the first year that Raia can fully take advantage of this phenomenon (this is also the reason why Q2 is seasonally the highest gross margin quarter in the Brazilian drug store industry - as major players are effectively selling goods at the post price increase price that they bought prior to price increase).
While reported same store growth metrics are skewed by the store maturation process, Raia's mature store base also continues to grow revenues at rates modestly ahead of Brazilian inflation
- - Due to disruption to the industry in late 2008/2009 associated with the financial crisis (smaller players had limited access to capital) in addition to tax regime changes during the same time period that disproportionately affected independent chains, national drug retail chains in Brazil exhibited outsized same-store growth in 2009, followed by a year of extremely tough comparables in 2010. As such, it is most relevant to look at comparable sales in the industry on a 2 year basis
| 2 Year Average Same Store Growth |
2008 |
2009 |
2010 |
| Mature Same Stores |
|
6.9% |
11.2% |
7.0% |
| All Same Stores |
|
9.5% |
18.2% |
14.1% |
- - This is driven by several factors, including Raia's ability to price below its independent competitors due to purchasing efficiencies and sophisticated loyalty programs that drive repeat traffic
- o In 2010, customers with loyalty cards generated approximately 75% of revenues
- - Management has stated that they believe mature same stores will grow revenues in-line to slightly ahead of inflation in 2011
Share gain by drug stores in the fast-growing Hygiene and Personal Care (HPC) market and acceleration in the rate of generic growth drive additional upside
- - The drug retail chains in Brazil is also gaining share in the fast-growing HPC market
- o From 2004 to 2010, HPC sales in Brazil have grown at an annual CAGR of 13%, including 13% in 2010
- o Over this time period, drug store chains have gained significant market share of HPC sales from both supermarkets and independent pharmacies, accounting for 16.5% of total Brazilian HPC sales in 2010 vs only 9.0% in 2004
- o Over this time period, drug store chains in Brazil grew their HPC sales by a CAGR of over 13% (accounting for nearly all the growth in the market as both domestic and multinational HPC companies such as Colgate, P&G, and Unilever shifted their marketing focus to the higher traffic/frequency drugstore channel). Over this same time period, the supermarket and independent drug channels grew their HPC sales by CAGRs of 2.0% and 0.1%, respectively.
- - As stated earlier, the generic drug sales in Brazil have significantly outpaced the overall pharmaceutical market since 2005, growing at a CAGR of 28% relative to the overall market at 12%. From 2010 to 2012, IMS Health estimates that branded drugs accounting for over R$300 mm of annual drug sales in Brazil are set to go off patent, including extremely popular drugs such as Lipitor, Crestor, and Viagra.
- o This should serve not only to accelerate the accessibility and affordability of popular pharmaceuticals to Brazil's lower and middle classes, but provides a higher gross margin revenue stream to the drug retailers. We estimate that generic pharmaceuticals result in gross margins of above 55% to drug retailers, relative to their branded counterparts at gross margins in the 15-16% range.
- o Of note, despite sales prices per pill meaningfully less than their branded counterparts, the gross margin disparity is large enough such that gross profit dollars per script is still higher for a generic drug
The margin profile of Raia's only public comparable, Drogasil, demonstrates the embedded margin potential of the business
- - As of year end 2010, Raia and Drogasil had similar:
- o Store Counts: 350 / 338
- o Store Sizes: ~7k square meters per store each
- o Gross Revenue: $1.9 bn / $2.1 bn
- o Gross Margins: 25.2% / 25.2%
- o Geographic Footprints (concentration in the southeast of Brazil)
- - However, Drogasil generated $144 mm of EBITDA in 2010, nearly double Raia's EBITDA of $76 mm in 2010
- o Drogasil's EBITDA margin of 6.9% compares to Raia's of 4.1%
- - This is predominantly a function of two things:
- o Drogasil's store base, on average, being more mature than Raia's resulting in significantly higher store level EBITDA margins
- o Drogasil already having optimized its purchasing commitments and supplier agreements, having been a well-capitalized public company since 2007
- § Of note, rather than accrue these benefits to the gross margin line (hence the identical gross margin to Raia in 2010), Drogasil management chose to invest the benefits of better purchasing and supply agreements into lower prices, which has driven increased traffic and sales per store versus Raia, even after adjusting for the differences in maturity profiles
- § As such, the benefit to Drogasil's EBITDA margin is seen through operating leverage (higher sales on a largely fixed G&A base), rather than through higher gross profit margins
- - Raia management estimates that if it decided to invest its gross profit savings in lower prices, it could drive an incremental 200-300 bps of SS revenue growth in excess of what it would otherwise
- - Other than these two factors, Raia management estimates that aside from an approximate 50 bp difference in EBITDA margin due to Drogasil owning relatively more of its real estate than Raia, there structurally should be no difference between Drogasil's EBITDA margin profile and their own (after adjusting for maturity profile and benefits of purchasing/supply agreements)
- - A side by side financial summary of the two companies is presented below:
| Raia vs Drogasil |
Raia |
CAGR |
|
Drogasil |
CAGR |
| Financial Summary |
2007A |
2008A |
2009A |
2010A |
'07-'10 |
|
2007A |
2008A |
2009A |
2010A |
'07-'10 |
| Stors, EOP |
198 |
259 |
299 |
350 |
20.9% |
|
211 |
256 |
283 |
338 |
17.0% |
| % Growth |
32.0% |
30.8% |
15.4% |
17.1% |
|
|
17.9% |
21.3% |
10.5% |
19.4% |
|
| Gross Revenue |
$829 |
$1,148 |
$1,595 |
$1,860 |
30.9% |
|
$1,006 |
$1,339 |
$1,788 |
$2,089 |
27.6% |
| % Growth |
- |
38.5% |
38.9% |
16.7% |
|
|
- |
33.1% |
33.5% |
16.8% |
|
| Gross Profit |
$196 |
$275 |
$363 |
$469 |
33.7% |
|
$238 |
$315 |
$431 |
$527 |
30.3% |
| % Margin |
23.7% |
23.9% |
22.8% |
25.2% |
|
|
23.7% |
23.5% |
24.1% |
25.2% |
|
| SG&A |
|
$177 |
$239 |
$306 |
$393 |
30.4% |
|
$187 |
$249 |
$312 |
$383 |
27.0% |
| % Revenue |
21.4% |
20.8% |
19.2% |
21.1% |
|
|
18.6% |
18.6% |
17.5% |
18.3% |
|
| EBITDA |
|
$19 |
$36 |
$57 |
$76 |
58.9% |
|
$51 |
$66 |
$119 |
$144 |
40.9% |
| % Margin |
2.3% |
3.1% |
3.6% |
4.1% |
|
|
5.1% |
4.9% |
6.6% |
6.9% |
|
| % Growth |
- |
90.5% |
58.9% |
32.5% |
|
|
- |
29.2% |
79.0% |
21.0% |
|
We believe consensus estimates capture the revenue potential of Raia's expansion plan, but do not adequately reflect the Company's potential to meaningfully increase its EBITDA margin
- - On average, sellside estimates are forecasting Raia to increase its EBITDA margin by only 40 bps in 2011, an incremental 20 bps in 2012, and an incremental 30 bps in 2013, resulting in 5.0% EBITDA margins in 2013 (or a 90 bp increase over 3 years)
- - As a basis for comparison, Drogasil's EBITDA margins were 4.9% as recently as 2008, and have increased 200 bps over 2 years (to 6.9% as of 2010).
- Due to the combined effect of all the factors discussed above, we believe that Raia should be able to increase its EBITDA margin at a much faster pace than what is currently being forecast by consensus estimates.
- o Our base case forecasts 4.9% EBITDA margins in 2011, 5.4% EBITDA margins in 2012, and 5.9% EBITDA margins in 2013, resulting in EBITDA and Diluted EPS outcomes meaningfully ahead of consensus
- o Our base case results in an EBITDA CAGR of 43.5% from 2010 to 2013, nearly 1000 bps ahead of consensus at 35.0%
| Base Case Estimates |
|
|
|
|
|
|
CAGR |
| ($R in millions) |
|
|
2010A |
2011E |
2012E |
2013E |
'10-'13 |
| Base Case Gross Revenue |
|
$1,860 |
$2,318 |
$2,952 |
$3,792 |
26.8% |
| vs Consensus |
|
|
- |
(1%) |
0% |
2% |
|
| Base Case EBITDA |
|
|
76 |
114 |
160 |
224 |
43.5% |
| vs Consensus |
|
|
- |
9% |
16% |
20% |
|
| % Margin |
|
|
4.1% |
4.9% |
5.4% |
5.9% |
|
SUMMARY FINANCIALS AND CURRENT VALUATION
- - Raia is a high growth, high ROIC business with a long runway to expand its unit count, revenues, and margins. We believe the below financial projections represent a reasonable base case, with further upside potential possible.
-
| Base Case Estimates |
|
|
|
|
|
|
CAGR |
| ($R in millions) |
|
2009A |
2010A |
2011E |
2012E |
2013E |
'10-'13 |
| Ending Store Count |
|
299 |
350 |
408 |
496 |
584 |
18.6% |
| % Growth |
|
- |
17.1% |
16.6% |
21.6% |
17.7% |
|
| |
|
|
|
|
|
|
|
|
| Income Statement: |
|
|
|
|
|
|
|
| Gross Revenues |
|
1,595 |
1,860 |
2,318 |
2,952 |
3,792 |
26.8% |
| % Growth |
|
- |
16.7% |
24.6% |
27.4% |
28.4% |
|
| Gross Profit |
|
358 |
458 |
578 |
737 |
946 |
27.3% |
| % Growth |
|
- |
28.0% |
26.2% |
27.4% |
28.4% |
|
| % Margin |
|
22.5% |
24.6% |
24.9% |
25.0% |
25.0% |
|
| SG&A Expenses |
|
301 |
382 |
464 |
577 |
722 |
23.6% |
| % Growth |
|
- |
27.1% |
21.4% |
24.3% |
25.1% |
|
| % Revenue |
|
18.9% |
20.6% |
20.0% |
19.5% |
19.0% |
|
| EBITDA |
|
|
57 |
76 |
114 |
160 |
224 |
43.5% |
| % Growth |
|
- |
32.5% |
50.7% |
39.8% |
40.4% |
|
| % Margin |
|
3.6% |
4.1% |
4.9% |
5.4% |
5.9% |
|
| |
|
|
|
|
|
|
|
|
| Balance Sheet: |
|
|
|
|
|
|
|
| Net Debt / (Cash) at Year End |
182 |
(286) |
(207) |
(77) |
(32) |
|
| |
|
|
|
|
|
|
|
|
| Cash Flow Statement: |
|
|
|
|
|
|
|
| CFO |
|
|
|
|
$84 |
$103 |
$138 |
|
| Maintenance CapEx |
|
|
|
(41) |
(52) |
(66) |
|
| FCF |
|
|
|
|
44 |
51 |
72 |
|
| One-Time Working Capital Investments |
|
(75) |
(75) |
0 |
|
| Expansion CapEx |
|
|
|
(56) |
(89) |
(93) |
|
| Cash Flow Available for Financing |
|
|
(87) |
(112) |
(21) |
|
- Based on our financial forecasts, Raia will grow its revenue and EBITDA at CAGRs of 26.8% and 43.5%, respectively, from 2010 to 2013 and is trading at 9.7x 2012 EBITDA and 6.9x 2013 EBITDA
| Raia Summary Valuation |
|
|
|
|
|
|
| (R$ in millions) |
|
|
|
|
|
|
|
| Share Price (5/10/11) |
|
$25.40 |
|
TEV / |
|
|
|
| FD Shares |
|
|
61.9 |
|
2012E EBITDA |
|
9.7x |
| Equity Value |
|
$1,573 |
|
2013E EBITDA |
|
6.9x |
| YE 2013 Net Debt (Cash) |
(32) |
|
|
|
|
|
| TEV |
|
|
$1,542 |
|
TEV / EBITDA - Maint. CapEx |
|
| |
|
|
|
|
2012E EBITDA - M. Capex |
14.3x |
| 2010-2013 Revenue CAGR |
26.8% |
|
2013E EBITDA - M. Capex |
9.8x |
| 2010-2013 EBITDA CAGR |
43.5% |
|
|
|
|
|
TARGET VALUATION
- - Given the significant EBITDA growth embedded in Raia's store portfolio even by year end 2012 and 2013 due to the acceleration of new store growth and the corresponding maturation process, we do not believe a standard multiple-based approach is sufficient to appropriately capture the value of the Company and its long runway to invest at extremely attractive after-tax ROICs
- - Rather, we believe it is more appropriate to value Raia as a portfolio of mature stores
- - First, we examine the financial profile of a mature store:
| Mature Store Financial Profile |
|
|
|
|
|
|
CAGR |
| (R$ in '000) |
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Yrs 1- 5 |
| Gross Revenue |
|
|
$6,238 |
$6,644 |
$7,076 |
$7,536 |
$8,025 |
6.5% |
| % Growth |
|
|
- |
6.5% |
6.5% |
6.5% |
6.5% |
|
| % Inflation |
|
|
- |
5.0% |
5.0% |
5.0% |
5.0% |
|
| % Real Growth |
|
|
- |
1.5% |
1.5% |
1.5% |
1.5% |
|
| Gross Profit |
|
|
$1,560 |
$1,661 |
$1,769 |
$1,884 |
$2,006 |
6.5% |
| % Margin |
|
|
25.0% |
25.0% |
25.0% |
25.0% |
25.0% |
|
| SG&A Expenses |
|
|
$905 |
$951 |
$1,000 |
$1,052 |
$1,106 |
5.2% |
| % Revenue |
|
|
14.5% |
14.3% |
14.1% |
14.0% |
13.8% |
|
| % Fixed (Grows with Inflation) |
|
- |
90.0% |
90.0% |
90.0% |
90.0% |
|
| % Variable (Grows with Revenue) |
- |
10.0% |
10.0% |
10.0% |
10.0% |
|
| Store Level EBITDA |
|
|
$655 |
$710 |
$769 |
$832 |
$901 |
8.3% |
| % Margin |
|
|
10.5% |
10.7% |
10.9% |
11.0% |
11.2% |
|
| D&A / Maint CapEx |
|
|
$125 |
$133 |
$142 |
$151 |
$161 |
|
| % Revenue |
|
|
2.0% |
2.0% |
2.0% |
2.0% |
2.0% |
|
| Store Level EBIT |
|
|
530 |
577 |
627 |
682 |
740 |
8.7% |
| % Revenue |
|
|
8.5% |
8.7% |
8.9% |
9.0% |
9.2% |
|
| After-Tax EBIT (@ Statutory Rate) |
$350 |
$381 |
$414 |
$450 |
$488 |
8.7% |
| % Revenue |
|
|
5.6% |
5.7% |
5.9% |
6.0% |
6.1% |
|
| |
|
|
|
|
|
|
|
|
|
- We believe the above stream of defensive cash flows from a mature drug store in the growing Brazilian drug retail market should be valued at 8.0 to 9.0x EBITDA or 15.0x-17.0x After-Tax EBIT (proxy for FCF)
| Bottoms Up Raia Valuation |
|
|
|
|
| ($R in millions) |
|
|
|
|
|
| Mature Store EBITDA |
|
|
$0.655 |
$0.655 |
$0.655 |
| Multiple Range |
|
|
8.0x |
8.5x |
9.0x |
| TEV Per Store |
|
|
$5.2 |
$5.6 |
$5.9 |
| # of Stores as of YE 2013 |
|
584 |
584 |
584 |
| Value of Raia Store Base (mm) |
|
$3,060 |
$3,252 |
$3,443 |
| Implied Multiple of After-Tax EBIT / FCF |
15.0x |
15.9x |
16.8x |
| |
|
|
|
|
|
|
| Estimated 2013 Corp. Overhead |
|
(125) |
(125) |
(125) |
| EBITDA Multiple Range |
|
8.0x |
8.5x |
9.0x |
| Corporate Overhead Deduction |
|
(999) |
(1,061) |
(1,123) |
| |
|
|
|
|
|
|
| Total Enterprise Value |
|
$2,062 |
$2,191 |
$2,319 |
| YE 2012 Net Debt / (Cash) |
|
(32) |
(32) |
(32) |
| Equity Value |
|
|
$2,030 |
$2,159 |
$2,288 |
| FD Shares |
|
|
|
61.9 |
61.9 |
61.9 |
| Target Price |
|
|
$32.78 |
$34.86 |
$36.94 |
| Current Price |
|
|
$25.40 |
$25.40 |
$25.40 |
| % Upside |
|
|
|
29.1% |
37.2% |
45.4% |
- As a sanity check, we look at Walgreen's in the US, a largely mature, stable and growing retail drug store chain
- o At its current price of $43.10, WAG is trading at 7.0-8.0x Forward EBITDA and 14.0-16.0x unlevered after-tax EBIT with a forward growth profile of 3% on the top-line and 6% on the EBITDA line
| Walgreen's |
|
|
|
|
|
|
|
|
| (USD in millions) |
|
|
|
|
|
|
|
|
| Share Price |
|
$43.10 |
|
TEV / |
|
|
|
|
| FD Shares |
|
928.0 |
|
CY 2011E EBITDA |
|
|
7.7x |
| Equity Value |
|
$39,997 |
|
CY 2012E EBITDA |
|
|
7.1x |
| 2011E Net Debt |
|
206 |
|
TEV / |
|
|
|
|
| TEV |
|
|
$40,203 |
|
CY 2011E Unlevered After-Tax EBIT |
15.6x |
| |
|
|
|
|
CY 2012E Unlevered After-Tax EBIT |
13.9x |
UPCOMING CATALYSTS
- - Raia will announce its Q1 2011 results on Wednesday, May 11 after market close, followed by a conference call on Friday, May 13
- - We believe the combination of (1) acceleration in same store sales trends (partially a function of maturing store being a larger part of Raia's mix) (2) early signs of gross margin improvement from the Company's volume purchasing and newly negotiated supply agreements (3) strong G&A expense control should lead to significant EBITDA margin expansion in Q1 that will result in both sellside analysts and buyside investors needing to increase their FY 2011 and FY 2012 profitability estimates across the board
- - In addition, we believe Q2 2011 results in August will serve to further strengthen management's case that they can close the margin gap to Drogasil more quickly than the market us currently expecting
- o We would note that on top of Q2 2011 being the first full quarter where management's new purchasing and supply agreements are in place post IPO, the quarter should be exceptionally strong due to three key seasonal elements
- § First, sales in Q2 are seasonally stronger than Q1 due to the lack of Carneval (which results in a seasonally slow week in Q1 for the drug retail industry). This should result in incremental G&A leverage (90% fixed)
- § Second, as discussed above, Raia is well positioned to take advantage of forward purchasing benefits in Q2 associated with the April 1st industry-wide drug price increase (which on average this year will result in an increase in the maximum sales price of drugs by 4.8%)
- § Third, inflationary wage increases in Brazil do not come into effect until July 1 (Q3), making Q2 not only the seasonally strongest quarter from a gross margin side (point #2) but also the seasonally strongest quarter from a staffing/payroll perspective
- - As such, we believe each of the next two quarters have the potential to demonstrate significant margin improvement to skeptics who do not believe management can both execute on an aggressive store expansion plan and increase consolidated EBITDA margin simultaneously and could result in a significant re-rating of the share price
Catalyst
- - Raia will announce its Q1 2011 results on Wednesday, May 11 after market close, followed by a conference call on Friday, May 13
- - We believe the combination of (1) acceleration in same store sales trends (partially a function of maturing store being a larger part of Raia's mix) (2) early signs of gross margin improvement from the Company's volume purchasing and newly negotiated supply agreements (3) strong G&A expense control should lead to significant EBITDA margin expansion in Q1 that will result in both sellside analysts and buyside investors needing to increase their FY 2011 and FY 2012 profitability estimates across the board
- - In addition, we believe Q2 2011 results in August will serve to further strengthen management's case that they can close the margin gap to Drogasil more quickly than the market us currently expecting
- o We would note that on top of Q2 2011 being the first full quarter where management's new purchasing and supply agreements are in place post IPO, the quarter should be exceptionally strong due to three key seasonal elements
- § First, sales in Q2 are seasonally stronger than Q1 due to the lack of Carneval (which results in a seasonally slow week in Q1 for the drug retail industry). This should result in incremental G&A leverage (90% fixed)
- § Second, as discussed above, Raia is well positioned to take advantage of forward purchasing benefits in Q2 associated with the April 1st industry-wide drug price increase (which on average this year will result in an increase in the maximum sales price of drugs by 4.8%)
- § Third, inflationary wage increases in Brazil do not come into effect until July 1 (Q3), making Q2 not only the seasonally strongest quarter from a gross margin side (point #2) but also the seasonally strongest quarter from a staffing/payroll perspective
- - As such, we believe each of the next two quarters have the potential to demonstrate significant margin improvement to skeptics who do not believe management can both execute on an aggressive store expansion plan and increase consolidated EBITDA margin simultaneously and could result in a significant re-rating of the share price