Rio De Janeiro Concession Will Strain Cash Flow, But Digital Investments May Strengthen Future Profitability

Key Takeaways

• Substantial investments and acquisitions could strain net margins and cash flow in the short term, impacting financial flexibility and operational efficiencies.
  
• Expansion into new markets and increased event presence drive revenue but bring operational challenges, potentially compressing margins until growth matures.
  
• Strategic investments and acquisitions position Eletromidia for sustained revenue growth and enhanced profitability, driven by operational efficiency and expanded service offerings.

Catalysts

Operates as an out-of-home advertising company in Brazil.

• The upcoming 20-year concession for bus shelters and street clocks in Rio de Janeiro will require a significant financial outlay, including a R$440 million concession fee in 2024, leading to increased leverage and possibly strained cash flow until the positive impact is realized starting in 2027. This could negatively impact net margins and earnings in the short term.
  
• Eletromidia is making substantial investments in new technologies and digital assets, such as the acquisition of 4yousee and expansion of digital SaaS solutions. While these investments target long-term growth and diversification, they will likely increase costs in the short term, potentially compressing net margins.
  
• The global acquisition and expected integration process could cause uncertainties and transitional costs in the short term, affecting operational efficiencies and net margins as synergies are realized over time.
  
• Expansion into new geographic areas and increased presence at large events, while driving revenue growth, could also present operational challenges and costs as new markets and partnerships mature, impacting net margins and earnings during the maturation phase.
  
• Leveraged cash position due to anticipated payments for acquisitions and city concessions may limit financial flexibility, thus impacting the ability to reinvest in other growth areas or manage debt efficiently, potentially affecting net earnings and margins.

Eletromidia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eletromidia's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 19.6% in 3 years time.
• Analysts expect earnings to reach R$327.2 million (and earnings per share of R$2.33) by about May 2028, up from R$114.5 million 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 18.8x on those 2028 earnings, down from 38.1x today. This future PE is lower than the current PE for the BR Media industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.8%, as per the Simply Wall St company report.

Eletromidia Future Earnings Per Share Growth

Risks

• The company's revenue growth of 36% year-on-year, driven by an expansion in new assets and improved sales mix, suggests strong market demand and operational efficacy, potentially leading to sustained revenue enhancement.
  
• Eletromidia's strategic long-term investments in street furniture and technology, including new concessions and digital upgrades, indicate a commitment to maintaining and possibly increasing revenue streams.
  
• The acquisition of analytics company 4yousee is poised to bolster Eletromidia's SaaS solutions and enhance data-driven strategies, which can potentially strengthen earnings.
  
• The anticipated synergies from the Globo acquisition, though currently speculative, could amplify Eletromidia's industry presence and operational scale, positively impacting future earnings and profitability.
  
• Strong financial performance indicators such as a 51% increase in EBITDA and a net margin of 16% highlight sustained operational efficiency, suggesting potential for continued profit margin improvement.

Valuation

• The analysts have a consensus price target of R$25.667 for Eletromidia 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$29.0, and the most bearish reporting a price target of just R$19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$1.7 billion, earnings will come to R$327.2 million, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 18.8%.
• Given the current share price of R$30.51, the analyst price target of R$25.67 is 18.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.