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CVC Compelling product/cost structure efforts as rivals leave vacuum, demand recovers Rating Change: BUY | PO: 3.70 BRL | Price: 2.59 BRL
Raise to Buy on weaker competition, profitability outlook
09 October 2023
We are raising our rating from Underperform to Buy, as we perceive significant improvement in the competitive dynamics, management product shifts and simultaneous cost structure improvements capable of returning CVC back to profitability in 2024. We are raising our 2023E/2024E/2025E EPS from (R$1.31)/(R$0.52)/(R$0.09) to (R$1.05)/R$0.01/R$0.28. We are also increasing our price objective from R$1.60 to R$3.70, based on a discounted cash flow to equity exercise, using a nominal cost of equity of 18.0% and terminal growth rate of 4.0%, in-line with our prior methodology.
Equity
123Milhas, Hurb leave vacuum, counterparty risk concerns Rival OTA troubles are creating a market vacuum. 123Milhas (R$6bn in bookings) filed for bankruptcy protection on Aug 29th . Hurb (R$2bn in bookings) was ordered to halt its sales of un-hedged flexible date travel on May 29th . Both are facing financial uncertainty while simultaneously raising consumer counterparty concerns, likely to favor CVC.
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New management, higher margin mix, cost cuts, CRM tools Simultaneous to a recent R$550mn add-on financing, new management is moving aggressively toward higher margin leisure packages based on charter and block charter flights and favored hotel partners in core destinations, improving margins and lowering working capital requirements, while it sheds low margin B2B partnerships. Heavy systems investments are also enabling it to cut costs, while adding client relationship management (CRM) tools capable of more effectively leveraging firm data to activate demand. Improvements are rekindling franchise interest.
Travel demand continues to recover, franchisee demand Domestic passenger volumes rose 12.8% in August on prior year growth of 31.3% (Exhibit 1), while scheduled available seat miles surpass pre-pandemic capacity for domestic routes (Exhibit 2). International routes, which initially lagged, are recovering sharply, August traffic rose27.7% on a prior year rise of 2.7x (Exhibit 3). Recovery and management changes further validated by apparent franchisee store demand.
Key Changes (BRL)
Previous
Current
Inv. Opinion
C-3-9
C-1-9
Inv. Rating
UNDERPERFORM
BUY
Price Obj.
1.60
3.70
2023E Rev (m)
1,343.8
1,248.2
2024E Rev (m)
1,483.8
1,469.9
2025E Rev (m)
1,668.7
1,638.6
2023E EPS
-1.31
-1.05
2024E EPS
-0.52
0.01
2025E EPS
-0.09
0.28
Robert E. Ford Aguilar, CFA Research Analyst BofAS robert.e.ford@bofa.com Melissa Byun, CFA Research Analyst BofAS melissa.byun@bofa.com Vinicius Pretto >> Research Analyst Merrill Lynch (Brazil) vinicius.pretto@bofa.com Wellington Santana >> Research Analyst Merrill Lynch (Brazil) wellington.santana@bofa.com
Stock Data Estimates (Dec) (BRL) EPS EPS Change (YoY) DPS Valuation (Dec) P/E Dividend Yield EV / EBITDA* Free Cash Flow Yield*
2021A (2.28) 69.9% 0
2022A (1.72) 24.6% 0
2023E (1.05) 39.0% 0
2024E 0.01 NM 0
2025E 0.28 NM 0
NM 0% NM -54.3%
NM 0% 12.9x -46.1%
NM 0% 13.8x -32.3%
259x 0% 4.83x 4.16%
9.25x 0.06% 3.85x 12.4%
>> Employed by a non-US affiliate of BofAS and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Securities entities that take responsibility for the information herein in particular jurisdictions. BofA Securities does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 6 to 8. Analyst Certification on page 4. Price Objective Basis/Risk on page 4. 12609155
2.59 BRL
Price Objective
3.70 BRL
Date Established
9-Oct-2023
Investment Opinion 52-Week Range
* For full definitions of iQ method SM measures, see page 5.
Timestamp: 09 October 2023 05:30AM EDT
Price
Mrkt Val (mn) / Shares Out (mn)
C-1-9 2.17 BRL - 7.66 BRL 1,366 BRL / 527.2
Average Daily Value (mn)
11.06 USD
BofA Ticker / Exchange
CVCBF / SAO
Bloomberg / Reuters
CVCB3 BZ / CVCB3.SA
ROE (2023E)
-83.3%
Net Dbt to Eqty (Dec-2022A)
61.5%
CRM: Customer Relationship Management OTA: Online Travel Agency y/y: year-over year q/q: quarter-over-quarter