Description

Summary: Neogrid Participacoes SA is a Brazilian SaaS company that acquired several early-stage, cash flow negative start-ups in 2021. This led to a negative impact on the company’s profitability in 2022. However, this is expected to reverse throughout 2023 as the acquired companies shift from EBITDA negative to positive. Despite the negative contribution from these acquisitions, Neogrid’s current valuation is ~8x LTM EV/EBITDA and ~13x LTM FCF.

Our thesis is based on the assumption that Neogrdi’s acquisitions will become profitable in 2023 or that Neogrid will at least reduce the associated cash burn. Once this happens, we expect that Neogrid’s valuation will decrease to 3-4x EV/EBITDA, significantly lower than other Brazilian SaaS peers which trade between 7-12x, and attractive on an absolute basis.

We believe that the fair value for Neogrid’s shares is R$3.2, which is 9x normalized EV/EBITDA and 15x normalized cash P/E. In addition, the current share price offers good downside protection as the company has 35% of its market capitalization in net cash.

Description: Neogrid, founded in 1999 by chairman Miguel Abuhar, provides supply chain management solutions by collecting data from wholesalers, distributors and retail locations to allow consumer products companies to better manage their inventories and sales strategies. 82% of Neogrid’s 2022 revenues were from Brazil. The company has strong cash conversion, and has historically posted modest organic growth.

The company went public in December 2020 at R$4.5 per share and raised R$300MM, valuing the company at 4x EV/Sales and 16x EV/EBITDA. In 2021 Neogrid, acquired five early-stage companies for R$118MM, which specialized in promotions and trade marketing, market intelligence on end consumer habits and market price collection and pricing strategy. The acquisitions were purchased at 3-4x EV/Sales, with R$52MM paid upfront and the remainder tied to earnouts. Neogrid believes these products are all tangential to its core product and aims to fully develop them and cross-sell them to their existing customers.

However, the five acquired startups were cash flow negative and negatively impacted Neogrid’s earnings in 2022, causing the company to miss consensus expectations. In FY20, the company generated revenues of R$212MM and EBITDA of R$51MM, resulting in a 24% EBITDA margin. In FY22, Neogrid generated revenues of R$265MM and EBITDA of R$27MM resulting in a 10% EBITDA margin.  Approximately R$15MM of the decline was driven by the negative earnings associated with the acquired companies, and the remainder was due to a decline in the base business due to the weak Brazilian economy, along with additional public company expenses.

In March 2022, Neogrid changed its CEO to Jean Klaumann, who was previously COO at Linx for ten years, which was acquired by Stone in 2021. Since arriving, Klaumann has replaced the entire c-suite of the company. The most recent hire was Aury Francisco as CFO, who was recently CFO at Movily, a Brazilian tech holding company. Klaumann has guided the acquired companies reaching EBITDA breakeven during FY23 and margins normalizing in Q423.

Longer-term the company targets to achieve the "rule of 40" where revenue growth and EBITDA margin combined would be greater than 40%. Lastly, while Neogrid continues to hold R$200MM in excess cash on its balance sheet from the IPO, future acquisitions have been put on hold for the near-term. Notably, Mr. Abuhar has consistently bought shares in the open market over the past year and a half.

Valuation: At R$1.4 per share Neogrid trades at ~8x 2022 EV / EBITDA. Factoring in some modest growth and a normalization of margins, the company could earn EBITDA north of R$70MM and cash net income of ~R$50MM in 2024 /2025. 15x cash net income would result in a share price of R$3.2, implying ~9x EV/EBITDA. The best comps in Brazil are Totvs, Sinqia, and Localweb, which trade between 7x-12x EV/EBITDA.

Risk Factors: Neogrid’s primary risks are linked to macroeconomic conditions in Brazil and the company’s ability to turn the acquired companies profitable. The Brazil equity market has been underperforming over the past two years due to rising benchmark interest rates and uncertainty over the impact of Lula Da Silva's election as president on Brazil's budget and debt levels. This has led to lower equity valuations and overall economic growth in Brazil, and Neogrid has cited the slowing economy and a pause in investment spending by Brazilian corporates as a challenge to their earnings and customer base. Additionally, there has been significant management turnover at Neogrid over the past few years and the impact of these changes on the business are still to be proven out.

Catalyst

Progression of quarterly earnings throughout 2023 and the normalization of overall EBITDA margins.