Portfolio Pruning And Margin Expansion Will Drive A Powerful Healthcare Turnaround

Catalysts

About CM Hospitalar S/A

CM Hospitalar S/A operates as a leading healthcare distributor and service platform, supplying hospitals, clinics, labs, and retail with medicines, materials, and vaccines across Brazil.

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

• Disciplined portfolio pruning in hospitals and clinics, with exit from low ROIC contracts and focus on higher margin, better term agreements, may support sustained gross margin expansion and structurally higher EBITDA and earnings levels.
• Rapid growth in laboratories and adult vaccines, supported by ongoing product launches and increased procedure volumes, positions CM Hospitalar S/A to capture revenue growth above the broader market and strengthen overall profitability through a richer category mix.
• Acceleration of higher margin retail and own brand categories, including wipes and other consumer lines now ramping after turnaround, could lift blended gross margin and drive faster growth in operating income.
• Ongoing logistics, freight, and SG&A efficiency initiatives, powered by technology investments and network optimization, may help reduce unit costs and expand net margins even in a moderate top-line growth environment.
• Continued improvement in working capital discipline with shorter cash conversion cycles, tighter receivable terms, and leaner inventories may enhance free cash flow generation and support deleveraging, which can lower net financial expenses and improve net income.

Assumptions

This narrative explores a more optimistic perspective on CM Hospitalar S/A compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming CM Hospitalar S/A's revenue will grow by 6.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.8% today to 0.3% in 3 years time.
• The bullish analysts expect earnings to reach R$43.2 million (and earnings per share of R$-0.41) by about December 2028, up from R$-996.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$-180.5 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, up from -0.5x today. This future PE is greater than the current PE for the BR Healthcare industry at 16.9x.
• The bullish 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 27.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The turnaround is heavily dependent on continuous gross margin expansion through contract pruning, pricing and mix improvements. However, competition in hospitals and clinics remains intense and management notes at least one rival willing to be more aggressive on price and payment terms, which could force Viveo to concede margin or volume and weaken long term gross margin and EBITDA margin.
• Management is deliberately slowing growth in hospitals and clinics to restore ROIC and working capital discipline. Even if this is tactically sound, it may cause the company to cede share in a structurally growing, double digit market, capping long term revenue growth and limiting operating leverage on fixed costs.
• The deleveraging plan assumes that current strong free cash generation will persist and improve. Yet leverage is still high, refinancing discussions for the large 2026 and 2027 maturities have not started, and interest rates remain elevated in Brazil, so any setback in operations or tighter credit conditions could drive higher financial expenses and constrain net income.
• Working capital gains rely on further reductions in inventory days and a structural tightening of receivable terms toward 60 days. These changes depend on successful renegotiation with customers and flawless inventory management after years of rapid M&A integration, meaning execution missteps or customer pushback could stall cash conversion improvements and weigh on free cash flow and net debt reduction.
• Recent profit improvement was buoyed by the one off DIFAL tax reversal and other nonrecurring financial effects. Remaining provisions and ongoing state level disputes for 2021 still need to be resolved, so if underlying operational gains prove less robust than expected or adverse tax outcomes occur, the company’s long term earnings trajectory and net margin could fall short of bullish expectations.

Valuation

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

• The assumed bullish price target for CM Hospitalar S/A is R$2.0, which represents up to two standard deviations above the consensus price target of R$1.51. This valuation is based on what can be assumed as the expectations of CM Hospitalar S/A's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$2.0, and the most bearish reporting a price target of just R$1.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$13.7 billion, earnings will come to R$43.2 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 27.7%.
  
• Given the current share price of R$1.5, the analyst price target of R$2.0 is 25.0% 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.