Multi Brand Expansion And Digital Channels Will Drive Long Term Earnings Resilience

Catalysts

About Zamp

Zamp operates and develops leading quick service restaurant brands across Brazil, including Burger King, Popeyes, Starbucks and Subway.

What are the underlying business or industry changes driving this perspective?

• Scaling a diversified, multi brand portfolio after the integration of Starbucks and Subway should enable Zamp to capture a larger share of Brazilian out of home consumption while smoothing brand specific cycles, supporting sustained net revenue growth and more resilient earnings.
• Rapid expansion and refinement of digital channels, including Totem, delivery and the proprietary app, is increasing identified and higher ticket transactions. This should structurally lift average check, enhance CRM monetization and improve margins through better labor and throughput efficiency.
• Ongoing store format optimization, with a greater mix of higher productivity freestanding units, drive thrus and remodeled locations, is expected to raise unit level sales densities and payback. This supports operating leverage and higher consolidated EBITDA margins.
• Brand turnarounds at Popeyes, Starbucks and Subway, driven by improved operations, product availability and targeted marketing, indicate rising brand equity. This can translate into above industry same store sales growth, stronger system sales and expanding franchise fee and royalty revenue.
• Deleveraging potential from growing operating cash flow, combined with a long duration and balanced debt maturity profile through 2029, provides room for continued capex in technology and store growth while progressively reducing interest expense and enhancing net income.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Zamp's revenue will decrease by 3.8% annually over the next 3 years.
• Analysts are not forecasting that Zamp will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Zamp's profit margin will increase from -3.5% to the average BR Hospitality industry of 9.8% in 3 years.
• If Zamp's profit margin were to converge on the industry average, you could expect earnings to reach R$439.9 million (and earnings per share of R$1.1) by about December 2028, up from R$-179.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 13.4x on those 2028 earnings, up from -7.8x today. This future PE is greater than the current PE for the BR Hospitality industry at 12.8x.
• 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 25.89%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent inflation in beef and other key inputs could force further menu repricing at Burger King, pressuring traffic and same store sales growth and ultimately constraining consolidated revenue expansion and gross margins over the long term.
• Integration complexity from managing four large brands with different formats and nationwide footprints may keep SG&A elevated and delay planned efficiency gains, limiting operating leverage and weighing on EBITDA margins and earnings growth.
• If Brazilian consumers structurally trade down or reduce out of home consumption in a weaker macro environment, Zamp's large exposure to malls, in line units and more premium brands like Starbucks could see slowing traffic and ticket growth, hurting system sales and net revenue.
• Higher net debt to EBITDA of 2.5 times and reliance on continued second half cash generation increase sensitivity to interest costs and refinancing conditions, which could absorb a larger share of operating cash flow and cap net income growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of R$7.41 for Zamp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$14.0, and the most bearish reporting a price target of just R$3.23.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be R$4.5 billion, earnings will come to R$439.9 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 25.9%.
  
• Given the current share price of R$3.5, the analyst price target of R$7.41 is 52.8% 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.