Santander has reestablished its coverage of Ambev, changing the recommendation from ‘buy’ to ‘neutral’ and reducing the price target from R$ 18.50 to R$ 15.
The new price target implies a potential upside of 26% compared to the current price.
The bank stated that even though the stock has risen 13% since July (above the 5% of the Ibovespa), the challenges the company faces continue to limit any additional re-rating of the stock.
Analysts Guilherme Palhares, Laura Hirata, and Diego Marques cite economic conditions in Argentina, uncertainties related to taxation, and a limited upside due to capital restructuring as the main factors hindering the stock’s expansion.
“We believe the market is not pricing in the full extent of Ambev’s tax credits. We expect the company to monetize R$ 12 billion in tax credits (7% of its market cap). On the other hand, we still see a negative net tax impact from international operations,” the report stated.
Santander also mentioned that the environment in Argentina has been challenging due to the country’s fiscal and economic situation. “At the same time, we see alcoholic beverage prices in Argentina rising below the CPI, leading to margin compression,” wrote the analysts. “Looking ahead, we have little to no visibility of a recovery in this crucial region for Ambev.”
In the report, Santander further noted that Ambev currently has a net cash position and investors have been anticipating a capital restructuring given the changes in regulatory environment related to tax subsidies and dividends on equity.
However, Santander does not expect Ambev to announce extraordinary dividends in the short term, “as it has the opportunity to reduce its tax burden through corporate restructuring and monetization of tax credits.”
The bank also stated that “the constantly changing regulatory environment in the region may not be suitable for a decision to leverage at this time.”
“Additionally, an extraordinary dividend would deplete the ability to pay dividends on equity, eliminating a large part of the tax shield.”
On the positive side, Santander mentioned that alcohol beverage consumption has been strong in Brazil, with the GDP projected to grow by around 3% this year, and volumes for Ambev and its competitors have been increasing.
“This constructive scenario has offset the more aggressive pricing approach of Grupo Petrópolis,” the report stated.
However, in the long term, “we are still not convinced that beer consumption will structurally increase in Brazil given the slowdown in population growth and health concerns.”
Ambev is worth slightly over R$ 200 billion on the B3. The stock has risen 0.7% in the last twelve months and is trading sideways today.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
