Alpargatas And Aegea's Performance Will Boost Portfolio Strength By 2027

Key Takeaways

• Strategic debt reduction and improved liquidity management could decrease interest expenses, boosting net margins and earnings.
  
• Improved operational performance and higher dividends from investments may enhance revenue growth, cash flow, and shareholder returns.
  
• High interest rates, inflation, and economic uncertainties may hinder revenue growth and earnings, while fiscal inefficiencies and market variability could impact stock value and dividends.

Catalysts

Through its subsidiaries, operates in the financial and industrial markets in Brazil and internationally.

• The anticipated end of fiscal inefficiencies by 2027, specifically related to PIS and COFINS taxes, is expected to save the company R$650 million annually, having a significant positive impact on net margins.
  
• The company's strategic focus on reducing gross debt and enhancing liquidity management, including prepayment and refinancing of debt, could reduce interest expenses, thus positively impacting net margins and earnings.
  
• Expected improvements in the operational performance of invested companies, particularly non-financial ones like Alpargatas and Aegea, could contribute to revenue growth and improve overall results.
  
• The potential for increased dividends from non-financial investments as these companies stabilize financially, particularly in infrastructure sectors, could enhance cash flow and shareholder returns.
  
• Management's strategy of maintaining a high ROE (17.4% in 2024), coupled with a solid dividend payment policy, is aimed at delivering strong shareholder value, potentially lifting earnings and future stock valuations.

Itaúsa Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Itaúsa's revenue will grow by 36.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 179.5% today to 97.6% in 3 years time.
• Analysts expect earnings to reach R$20.6 billion (and earnings per share of R$1.91) by about April 2028, up from R$14.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 7.5x today. This future PE is greater than the current PE for the BR Banks industry at 6.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.47%, as per the Simply Wall St company report.

Itaúsa Future Earnings Per Share Growth

Risks

• Persistently high interest rates in Brazil and globally can increase the cost of debt, thereby reducing net margins and affecting cash flow.
  
• The ongoing inflationary pressures and economic slowdown in key markets like the U.S. and Europe could lead to uncertainty and lower revenue growth prospects for Itausa's portfolio companies.
  
• The market's slow recognition and adjustment to potential fiscal inefficiencies until 2027, such as PIS/COFINS taxes, might continue to contribute to a substantial stock price discount, impacting Itausa's earnings projections.
  
• Performance variability among non-listed companies like Aegea and Dexco, especially under challenging economic conditions, poses risks to consistent earnings growth and could affect revenue predictability.
  
• External factors, such as U.S. tariff policies and Brazil's political climate, could introduce additional macroeconomic uncertainties, potentially impacting revenue and Itausa's ability to maintain its dividend payout levels.

Valuation

• The analysts have a consensus price target of R$12.053 for Itaúsa based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$21.1 billion, earnings will come to R$20.6 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 18.5%.
• Given the current share price of R$10.17, the analyst price target of R$12.05 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.