SONAE: Fundamental figures too good to overlook. Time to buy?

23 Mac

Fundamental Analysis
EBITDA: +7.2% YoY (to €990M in 2023)
Margin: 11.8% (-0.2 points YoY)
Net Income Group Share = 357 (+6.3% YoY)
PER: 1680 / 357 = 4.71 (heavily undervalued considering below data and historical PERs)
Net Gearing (Net Debt To Equity Ratio, [(Total Debt - Cash) / Book Value of Equity]): 526/3462 = 0.15 (15%, Prudent)
Total Debt To Equity Ratio: 5383 / 3462 = 1.55 (around 1 to 1.5 is healthy according to British Business Bank's article "Debt to equity ratios for healthy businesses")
Current ratio: 2010/2502= 0.80 (not healthy and almost unchanged with respect to 2022, see next line. According to Wall Street Prep, 1.5 to 3.0 is healthy)
Net Debt to Ebitda = 526 / 990 = 0.53
Working Capital = -1220M€, keeps being negative. Very interesting article from eFinanceManagement explains the Advantages of Negative Working Capital for a cash-rich company whose operating cycle is fast (it may mean that they can bargain very well with their suppliers who provide the funds and the flexible time limit to pay).
Prev Current ratio (2022): 1938/2465 = 0.79
Proposed dividend for 2023: 0.05639€
EPS = 357M€ / 2000M = 0.18€/share (ATH?)
Current dividend yield = 6.19%
Dividend Payout Ratio = [0.05639 / 0.18] x 100 = 31%
Free cash flow Dividend payout ratio = [0.05639/(187.4M/2000M] x 100 = 60%

Technical Analysis
There was a disjoint channel happening since July 2022 on the Daily Graph in which the share price dropped out in the lower end in December 2023. Since the company has very good fundamentals, the possibility of an inverse H&S could be around the corner, having an interesting point of entry at 0.78-0.81. However, the share price is already heavily undervalued considering the fundamental analysis previously done. The daily RSI (14) bounced back in March 2023 from below 30 directly to the upper band at 70 indicating the possibility of a continuation of share price upward movement up to +20%. Therefore, it is up to the investor to decide whether at current prices (0.85-0.88€) is already worth the risk (if the 0.78€ ever gets touched and then bounces back up, the drawdown risk would be -11.4%).

Finally, it is expected that on May the company will pay the dividend. Therefore, the share price may re-adjust its value upwards in April before the dividend is paid and the share price is subsequently slashed down again.

Have a great week ahead.

23 Mac

Nota

There are some formulas not appearing due to opening squared brackets. Here you have the correction update:
Net Gearing (Net Debt To Equity Ratio, ((Total Debt - Cash) / Book Value of Equity)): 526/3462 = 0.15 (15%, Prudent)
Dividend Payout Ratio = (0.05639 / 0.18) x 100 = 31%
Free cash flow Dividend payout ratio = (0.05639/(187.4M/2000M) x 100 = 60%

24 Mac

Nota

Looking at the book value, the price is very undervalued.

Book value (Shareholder's Equity): 3462M€
Book Value Per Share: 3462/2000= 1.73€/share.
Current market price: 0.88€/share.
P/B ratio: 0.88/1.73 = 0.51 (<1, undervalued stock).

24 Mac

Nota

Supermarket or Food retail sector PERs:
Jeronimo Martins: 15.57
Carrefour: 6.92
Ahold Delhaize: 13.98
Tesco: 14.97
Sainsbury's: 78.03

Why are these differences present? Because Sonae is not only a supermarket (MC). It's also a Clothes store (Losan, Salsa, Zippy), a commercial centres' "REIT" (Sonae Sierra), a MediaMarkt (Worten), has a stake in a communications and entertainment kind of Netflix-AT&T (NOS), another stake in venture capital firm in Retail Technologies, Digital Infrastructure, Cybersecurity, and Emerging Technologies (Bright Pixel), had a stake in Iberian Sports Retail Group (ISRG) which was sold in 2023 to JD Sports and has a stake in Zeitreel (former Sonae Fashion), part of Sonae Group, dedicated to the development of distinctive and worldwide fashion brands.

... And all of this diversification does not seem to be working well. Too much decentralization of the core business (MC) ends up with a share price extremely undervalued. Let's continue the analysis on what investors see as so much risk that the company cannot be valued higher than it's Book Value Per Share.

24 Mac

Nota

According to Investopedia: Invested capital is the total amount of money raised by a company by issuing securities—which is the sum of the company's equity, debt, and capital lease obligations.

Sonae seems to want to become a big diversified holding like Berkshire Hathaway but it is making some mistakes on its way such as NOS, Worten, ISRG, Zeitreel and other clothes stores in which pacefully discontinous its investment:

Invested capital (€m)_____________________2,022____2,023
MC____________________________________48.16%___48.96%
Worten________________________________-1.12%___-0.12%
Sierra_________________________________20.45%___21.87%
NOS___________________________________16.76%___14.97%
Bright Pixel_____________________________5.43%___5.89%
ISRG___________________________________2.27%___0.00%
Other businesses_________________________9.33%___9.66%
o.w. Zeitreel___________________________4.89%___3.54%
Others, eliminations & adjustments_______-1.28%___-1.22%

And luckily, weighted net debt on each business is better redistributed according to success story:

Net debt (€m) excluding lease liabilities______________2,022______2,023
MC______________________________________________75.61%_____92.34%
Sierra__________________________________________18.49%_____24.59%
Bright Pixel____________________________________-10.48%____-3.90%
Holding & other_________________________________16.39%_____-13.03%

24 Mac

Nota

But what investors might be worried about is to see that weighted Net debt and weighted Invested Capital for Sierra increases while the weighted Ebitda remains constant YoY at 8%:

Weighted EBITDA__________________________2,022_____2,023
MC________________________________________61%_____65%
Worten_____________________________________8%_____7%
Sierra______________________________________8%_____8%
NOS (Equity Method Results)___________________7%_____6%
Bright Pixel_________________________________8%_____-1%
ISRG (Equity Method Results)__________________2%_____18%
Other businesses____________________________10%_____-0.23%
Eliminations & adjustments___________________-4%_____-4%

Even though Sierra's EBITDA increased from 74M€ (2022) to 79M€ (2023), +6.76% YoY.
Investors see little growth in Sierra's EBITDA compared to MC's, which increased +13.45% YoY. Worten's EBITDA remained unchanged at 73M€, a sign that may mean that the business is already reaching maturity and should be discontinued by selling it in the market as soon as possible.

Clearly, the crown jewel in SONAE's holding is MC. The ambition to become the Portuguese Berkshire Hathaway might be the end of the company if not managed properly. Luckily, Net Debt to Equity ratio is 15% (Prudent). But if Sonae's Board decides to invest more in Sierra, the real estate business that looks like a "REIT", in the midst of high interest rates environment; more volatility/monotony could be expected to be seen in the stock price. Besides, Sierra's accounts from 2023 record an Indirect income of 62M€ compared ot -24M€ in 2022 (did they sell a fixed asset and we don't know anything about it?). Sierra's Long term debt has increased 51% while short-term debt has decreased -47%. These are great news in the current high interest rates environment as it levies short-term burden.

· Sierra's Equity is 981 (+13% YoY), compared to the total holding Equity of 3462M€, this amounts to 28% of Sonae's Holding (weighted Invested Capital 22% and weighted Net debt MC+Sierra 21%).

· MC's Equity is 807 (-7% YoY), compared to the total holding Equity of 3462M€, this amounts to 23% of Sonae's Holding (weighted Invested Capital 49% and weighted Net debt MC+Sierra 79%).

These two points mean that Sonae Holding is growing Sierra's Equity at the expense of MC's but using less Net Debt than for MC. Did the Board envision a great financial opportunity within the Holding accounts? Could be, but they only got a +6.76% YoY in Sierra's EBITDA while MC's increased +13.45% YoY as previously mentioned.

It's important not to overlook that in terms of net debt, they increased MC's 19% and Sierra's 30% YoY. Bright Pixel and Holding & other have negative Net debt, which means the companies possess more cash and cash equivalents than their financial obligations and are hence more financially stable. They may have more cash due to raising capital capacity in 2023 (as they are the VC technology investment arm from Sonae) but should we take them out of the equation and consider Sonae as a two business operating company MC+Sierra, net debt ratios would have changed from 508M€ in 2022 to 616M€ in 2023 (+21%). With this appreciation, the Net Debt to Equity ratio (and considering Equity only MC's and Sierra's) would be: 616 / (981+807) = 34%. Not so bad either as according to AVATRADE's Gearing Ratio Meaning article:

The consensus is that:

· A ratio of above 50% is considered High. It indicates that a company uses debt to finance its operations and may suffer financial difficulties or even potential bankruptcies during economic recessions or higher.

· A ratio of below 25% is considered Low. It indicates that a company is financially conservative and uses shareholder equity to finance its operations. Such a company is not at risk of financial difficulties during bad economic times or unfavourable monetary environments.

· A ratio of between 25% and 50% is considered Optimal. It indicates that a company is financially responsible and continually seeks to strike a healthy balance between debt and shareholder equity financing its operations.

Sonae is Optimal following AVATRADE's arguments.