market folly

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Sahm Adrangi of Kerrisdale Capital who presented the long case for Via Varejo (VVAR11).


Sahm Adrangi's Value Investing Congress Presentation

• Theme: looking abroad. US up 41% since Jan 1, 2013. Trailing P/E expanded from 15x to 19x.  Meanwhile int'l markets stalled and valuations are depressed 
• Likes Russia especially. Up +6% in same period and trades at 7x P/E. Also BOVESPA (+6%, and 10x P/  E) and Hang Seng (+12%, 9.5x P/E) 
• Side idea: Sberbank. 5.4x P/E, 0.9x TBV. Weathered the Russian Ruble crisis of ‘87, oil crash of ‘09,  and 2014 sanctions today. During period of extreme distress, Russians tend to revert their deposits  back to their most venerable banking institution. Investors are focused on NIM growth, but the edge is in future fee income


Long: Via Varejo (VVAR11)  

• Brazil’s largest electronics retailer and leader in home furnishing and household durables. Kerrisdale   thinks Brazil's emergent middle class positions Via Varejo for multi-year growth 
• Opportunity exists due to broken IPO (R$23.00 IPO price vs. initial range of R$25.60 – R$33.60) and   due to capital pressures at the government level 
• Hidden value: Via Varejo owns 23% stake in CNova, a rapidly growing ecommerce retail platform   with €2.9bn revenue in 2013

Via Varejo: 

• Leading brands include Casas Bahia (611 stores) Ponto Frio (361 stores) and CNova (ecommerce) 
• Casas Bahia is Brazil’s most valuable retail brand name. Management plans to expand footprint by   7% per year in 2015 and 2016. Kerrisdale thinks reinvesting capital for these stores presents a high   internal ROE opportunity 
• Advantage comes from scale. Distribution network is 3.5x larger than peers, sells 3x more than next   largest peer and uses distribution centers that allows it to be lowest cost-provider 
• Household durables are under owned by Brazil's emergent and middle class. The average Brazilian   doesn't own a washing machine, computer, flatscreen tv, etc. 
• Due to high import taxes on electronics, English speakers in high income brackets tend to buy high   cost goods abroad. Casas Bahia's target audience of mid to low income groups are less likely to buy   offshore and are therefore more captive
• Important note: Via Varejo supports sales by extending credit to customers and this serves as a  profit center for Via Varejo 
o 15% of sales are financed by their balance sheet 
o Kerrisdale claims Varejo’s credit underwriting is a core competency as they maintain a   decades-old database of repeat customers

CNova: 

• CNova is result of merger between Nova Pontocom (Brazil’s #2 ecommerce company behind B2W)   and CDiscount (France’s #1 ecommerce company) 
• Pending IPO: CNova filed an F-1 registration statement on June 6th 
• Amazon has had trouble expanding in Brazil due to lack of infrastructure. They just stared shipping   goods in Feb’14  
• Kerrisdale cited Brazilian ecommerce retail penetration of 5% vs. 15% in US – odd because the next   presenter cited 6% for US 
• Tiger Global invested $500mm in competitor B2W to restructure balance sheet and fund   infrastructure buildout

Valuation:

• Trades at 13.6x unlevered LTM earnings, 10.5x 2015 P/E including CNova. When you strip out CNova   at 2x revenue, multiple falls to 7x 2015 P/E 
• Price target: R$40 vs. R$25 today


Be sure to check out the rest of the Value Investing Congress presentations here.