IRB (IRBR3): After 78% drop in 2022 and Ibovespa exit, what to expect for equities in 2023?

With a decline of almost 80% in 2022 (more precisely by 78.61%) and since the beginning of 2023 of Ibovespa due to the value of its shares below R$ 1, the reinsurer IRB (IRBR3) continues to be subject to great caution by investors and market analysts.

Some believe that the shares have already fallen too much. Still, there’s not much reason to be excited about the company nearly three years after a crisis of confidence rocked the asset, after the Squadra manager highlighted a number of “inconsistencies” in the balance sheet in February 2020. Thus, the shares continue (far) away from the highs of R$ 41.50 recorded earlier that year.

According to Refinitiv, out of seven houses that cover the paper, seven have a neutral rating. That is, he defends keeping the shares for those who own them, but advises against buying or selling the assets. In early December, a home had a For Sale rating on assets. However, it was Credit Suisse that stopped hedging the asset in the second half of the last month of 2022, not without first cutting the target price of the asset from 3.35 BRL to 0.70 BRL (i.e. by 79%).

In the second half of the year, by the way, some houses, such as Citi and JPMorgan, raised their recommendation for IRB shares from sell-equivalent to neutral, but much more on the basis that their shares had fallen significantly. that because of an optimism with assets.

In mid-November, shortly after the IRB posted weak numbers in the third quarter, Citi raised its recommendation for IRB assets from sell to neutral, but cut its target price from BRL 1.10 to BRL 0.90. For them, the reinsurer’s losses and lack of visibility to make projections still lead to a cautious view for the business, but the steep fall in the business eliminates the potential for even steeper falls.

Before that, in September, shortly after a new IRB capital raise to comply with Susep rules in the amount of R$1.2 billion, JPMorgan brought its asset recommendation to neutral. Without a defined target price, in early December the bank highlighted a fair price between R$ 0.50 and R$ 1, compared to the previous projection between R$ 1 and R$ 1.40, but maintaining a neutral recommendation.

But in a report on the outlook for Latin America in 2023, JP listed IRB as a stock to avoid, highlighting the lack of catalysts for assets.

Along the same lines, Santander maintained its neutral recommendation at the end of December, but the target price was reduced from R$ 1.20 to R$ 0.80. “We believe the company’s turnaround should take longer to materialize than previously anticipated,” noted the analysts, who reduced the 2023 return on equity (ROE) projection from 12% to 9%.

IRB’s loss rate will continue to be higher, which will affect the company’s results and overall profitability, they estimate, which warrants increased caution.

It should be noted that after a net loss of R$ 298.7 million in the third quarter of 2022 (3Q22), a leap of 91.84% in the year-on-year comparison basis (due to capitalization leading to a steep asset discount) , the company was relieved in its Dec. 21, 2022 session, when it jumped about 25% on its October numbers presented to Susep, its regulator. The reinsurer reported a net profit of BRL 6.4 million in October 2022. In that session, the shares again closed above BRL 1.

For BTG Pactual, the October result was “clearly good news,” although it still sees how difficult it is to accurately estimate the November and December numbers. The assessment is that, if the company does not show positive results in the coming months, another capital raise may be needed in early 2023.

The bank’s analysts point out that “the sale of IRBR3 – so far a winning strategy – could start to become more dangerous”. Among the reasons for this view are the prospects with the change of president of the company, as well as the surveys on the underwriting of the agribusiness. “But the problem remains the same: building the ‘bridge’ to get there, on the other side of this ‘wild’ river… We have to wait a few more months to have a clearer vision”, they underlined. BTG’s current recommendation for assets is neutral, with a price target of BRL 0.90.

Along the same lines, Guide Investimentos highlighted the news as neutral, since the IRB is still in a delicate situation with respect to its numbers, posting a net loss of 542 million reais in the year and a loss ratio of 106%. .

Citi noted that the IRB’s October profit eased liquidity concerns, but there are plenty of challenges on the radar. “Taking everything into account, while the month’s profit is certainly a breath of fresh air, we still question the sustainability of the results and remain on the sidelines for now”, underlined the analysts, who maintained their view on the assets .

After this breather, equities, which continued with strong volatility in 2022, took a sharp decline at the end of the year. From 21 to 29, the shares fell by almost 15% and closed the year at R $ 0.86.

It should be noted that, in the last part of 2022, the company’s shareholders’ meeting resolved the reverse split of shares at a ratio of 30 to 1, which will take effect from 25 January, in order to comply with regulation B3. Trading below R$ 1 culminated in the company withdrawing from the first Ibovespa wallet of 2023, valid for the first four months. An exit from Ibovespa could drive shares away from investors and reduce asset liquidity.

Looking to the future, in a recent interview with the Reuters agency, the new president of the IRB, Marcos Falcão, director of the company since May 2020 and former president of Icatu Seguros, said that the reinsurer has no intention of making a new increase in capital and is focusing on an improvement in management and operational numbers in the coming months to return to the blue in 2023.

This year’s early trading sessions outside of Ibovespa have been positive, with the stock closing the previous session at BRL 0.97, an amount 12.8% higher than its 2022 close, but one has to also take into account the low value of the counter assets, which lead to a large percentage change with small fluctuations in the absolute prices of the securities. Analysts see the stock as having “fell too much,” but still wait and see before turning more bullish.

(with information from Reuters)

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