An Attempt to Assess DASA Free Cash Flow

I'll try to make an estimate of what would be DASA Free Cash Flow. It's a very interesting company, but it's very hard to analyse it.

Investments in Work Capital

Inventories and receivables has been quite steady between the range of 25-30% of net revenue since 2005. The average is 26.5%. On the other hand, suppliers are floating around 4-5%, in an average of 4.3%. So the net investment in work capital historically has been around 25% of net revenue growth. 

That is, if revenue grows from 1 bi to 1.1 bi we can expect a net investment in work capital of 25 millions.

Margin of Safety on Suzano Business

I usually look at the potential "permanent loss of capital", before estimating potential upside in a determined investment. Now I was wondering how much capital we could (permanently) loss in Suzano Pulp and Paper (SUZB5).

So I took all assets and properly discounted by a rate that I think is proportional to the risk of conversion of that assets in money. I also considered all liabilities recorded plus 50% of possible demands that wasn't provisioned (they only record provisions whose chances of loss are probable).

Cielo vs Analysts: 1 x 0

Now the analysts praise Cielo. One year ago, then included CIEL3 on the SELL list. At that same time, I was buying. God save the all mighty analysts!!!

Exame: Cielo encerra 2011 ainda no céu dos cartões (e quem podem desafiá-la?)

Citigroup recomenda compra para ações da Cielo e Redecard"

Estadão: Cielo foi a ação mais rentável em 2011, diz Economática"

EBITDA x CFO

After reading this post I was wondering by how much EBITDA overestimate cash generated by companies operations (CFO). 

In order to get an answer for that I took the 10 greatest non-financial companies listed on Bovespa and compared EBITDA with CFO reported.

And here goes my conclusions/notes:

Unbelievable

That's really funny, king of all nonsense (by O Pequeno Investidor):

Pessoas comuns já estão lucrando na bolsa de valores

EBITDA Fantasy

Nothing besides what we know, but the article is interesting anyway.

A Fantasia do EBITDA

They point out that EBITDA is inadequate to measure cash flow, mainly because it doesn't count for financial expenses. Besides that, I add the following EBITDA flaws:

• Ignore tax payments
• Ignore investments in work capital (inventories and receivables) as revenue grows
• Ignore investments made by the company
• Count all account trick as being cash (like reversal of provisions or gain on biological assets)

Yes, EBITDA was created on purpose to overvalue companies real gains!

Thought of the Day - 02

Bovespa has a lot of excellent stocks. And also has a lot of cheap stocks. However, it's difficult to find excellent and cheap ones.

Lirio Parisotto

Thought of the Day - 01

Sit Still: with individual stocks, 10% of the time they’re cheap enough to buy, 10% of the time they’re expensive enough to sell, and the rest of the time you should just hold them if you own them and avoid them if you don’t.

Steve Leonard of Pacific Capital

SUZB5 - Market Value x Enterprise Value

Regarding the previous post (Market Value x Enterprise Value), I did some calculations on Suzano numbers (average last 3 years).

1. I first calculated cash from operations and then divided by its market value, which gives a nice yield above 20%.
2. Then I added to the previous calculated CFO interests expenses and then divided by enterprise value, yielding 12.5%.

ALPA4 - Alpargatas

Alpargatas stands out in creating and managing brands that are desired by consumers in many countries (like Havaianas). Besides that, is controlled by a well known and defined group (Camargo Correa). Also shows strong and stable cash generation.

So I decided to take a look at the three last cash flows available (2011 was multiplied by 4/3 to put in an annual basis):

As you can see, it's an exceptional company, with average FCF over Equity above 20%. However, it's not cheap right now.
I added it to my wish list.

Market Value or Enterprise Value

What to look at? Market value or enterprise value (market value plus net debt)?
For example, SUZB is currently valued for BRL 2.7 billions. However, if you buy the whole company you'll still have to pay more BRL 5.3 billions to pay all debts.
So, how much Suzano worth today?

Shopping Malls

Quick glance at the three larger shopping malls in Ibovespa.
None of them is attractive right now.
Multiplan is my favorite for the future.

Magnesita's 3Q11 Cash from Operations = deception

Take a look at this shit: Release 3Q11

They start the release with this big achievement:

MAGNESITA REGISTRA FLUXO DE CAIXA OPERACIONAL DE
R$ 461 MILHÕES, RECORDE NO ACUMULADO DO ANO, E LUCRO
LÍQUIDO 12% SUPERIOR AO DO 2T11

Let's see the 2011 acumulated Cash Flow Statement at page 21.

It starts with net earnings and add some adjustments, as usual.
Then things start to get interesting:

1) They added 63.116 of judicial litigation received - that's ok for a cash flow statement, but doesn't justify all the cheers about the CFO, because it's NONRECURRENT.
2) They added more 48.883 of asset sales - shouldn't this be cash from investiments? This is obviously NONRECURRENT and probably NONOPERATIONAL
3) They added 119.321 of the increase in accounts payable (Fornecedores e empreiteiros). This is also NONRECURRENT.

Subtracting all those NONRECURRENTS the CFO would be only 229,68 millions. It's just a 50% difference from the headline!
I looked for any comments about the CFO but they just cheered about their great accomplishment.

Very Good News

Times are becoming so good that now even analysts are pessimists!
This one says that Ibovespa valuation is fair enough and don't expect it over 60.000.

O que pensa a analista mais pessimista (realista?) da bolsa sobre 2012

LOGN3 - Log-in Logística

Here goes my main notes about Log-in:

• Cash flow from operations since 1Q2010 is BRL 73,7 mi. Since receivables increased a lot, total cash flow generated is under BRL 20 mi (less than BRL 3 mi per quarter).
• Cost of debt is very low. Almost 3/4 of it is TJLP + 2.5%.
• According to the company, cost of TEU per day of own boat is 80% less than chartered boat (Cost TEU/day of BRL 6.00 x BRL 29.00).
• One boat just begun (Jacaranda) and other will begin (Jatoba) commercial operation soon.

So, if you believe company is pre-operational (except for TVV Vilha Velha) and the new boats will reduce costs and increase FCF, it may be a good pick. 

But bear in mind that today it doesn't generate cash and doesn't pay dividends, so you'll have to make a bet. What is yours?

Food and Meat Companies

I took a look at the three major food/meat companies.

By far BRFS3 it's the best, not just because it's not indebted, but also because of its core business: 50% of net sales comes from milk and processed foodstuffs, sold in internal market. It's not a commodity like business. But it's not cheap. Cash flow is 8% of market value and, after deducting investments, I guess a 5% FCF Yield.

The other two (JBSS3 and MRFG3) are rubbish. JBS has a huge revenue, if it improves margin a little, it can generate a lot of cash. But Marfrig can't even generate a dime!

Analysts (In)Accuracy Forecasts

I simply can’t understand why so many guys spend so much time engaged in forecasts. They are always too optimistic and with so little chance of success. In short, it's completely nonsense.

Here is what James Montier says about this:

Let’s say you invest according to the following process: forecast the economy, forecast the path of interest rates, forecast sectors which will do well in that environment, and finally forecast which stocks will do well in that sector. Let’s assume you are right on each forecast 70% of the time (massively above the rates actually seen). However, if you require all four forecasts to be correct, you have just a 24% chance of getting it right! (This assumes each forecast is an independent event).

Vale 25 billions lawsuit

Vale is being sued to pay BRL 25 billions due to tax contigencies (4.66 per share) that hasn't been provisioned. Since it's being paying since 2008 an average of 1.66 per share in dividends, that amount to be paid is 2.8 times average dividends distributed.

Also, Vale has provisioned just 1.44 billion for tax contingencies and the total possible tax demands hits BRL 40 billions!

In addition to contingencies for which we made provisions, the company is part in claim where the loss expectation is considered possible for Vale and for its attorneys and that represent on September 30, 2011 and December 31, 2010, the total amount of R$ 40,769,086 and R$ 9,605,546 in the consolidated company and R$ 34,262,857 and R$ 4,484,876 on the parent company, respectively. For these cases it was not recorded provision. The variation in the claims values regarding reasonably possible contingencies is related with cases in which is discussed the payment in Brazil, of income tax and social contribution on net income on the profits of foreign subsidiaries.