Americanas (AMER3): Banks put stock recommendation under scrutiny, highlight risks after ‘unprecedented’ accounting blunder

In addition to the expectation of a sharp drop in shares, several banks and analyst houses have put the recommendation for Americanas shares (AMER3) under review after the announcement of “accounting mismatches” in the amount of R$ 20 billion, which led to the resignations of CEO Sergio Rial and CFO André Couvre.

XP, Itaú BBA, Morgan Stanley and Bradesco BBI were among the houses that put the asset recommendation “under scrutiny”, citing a lack of visibility after an unprecedented accounting error. Analysts expect the impact of the inconsistencies to be detailed to revise their estimates for the company, which, at first, are not positive. Rial, former CEO of Americanas, spoke to the market this morning on the subject, a conference surrounded by expectations for further clarifications.

XP, which previously had a neutral recommendation for AMER3 with a price target of BRL 20 (67% appreciation potential since last Wednesday’s close), stressed that despite the company’s claims that the impact could be limited for the cash, yesterday’s press release adds several uncertainties to the thesis of investment in the company. It also provides little visibility into what actually happened and what the impacts of these measures are on the company’s balance sheet.

Danniela Eiger, Gustavo Senday and Thiago Suedt, analysts who signed the report, assess that the announcement could have three negative effects: i) higher financial leverage, given that Americanas’ debt could increase as a result of its balance sheet adjustments; ii) higher cost of debt, due to the greater perception of credit and liquidity risk; and iii) deterioration in working capital, as the company may have problems maintaining supplier paydays, due to its worse cash cycle.

US lawsuit risks remain, given that the company has American Depositary Receipts (ADRs, essentially corporate assets traded on the US stock exchange), as seen in similar cases where minority shareholders have been harmed by enforcement decisions (such as JBS and IRB).

Rial’s exit was also seen as quite negative, with Itaú BBA emphasizing that the stock should suffer significantly during this Thursday’s trading session, as recent (positive) asset performance has been guided, mainly from market expectations in relation to Sergio Rial’s deliveries in the medium and long term.

“In light of the unfavorable news, we have decided to reevaluate our coverage until we can better understand the situation. In this way both the recommendation and the target price of AMER3 are under review”, pointed out the BBA analysts, who previously had a recommendation marketperform (performance in line with the market average, equal to neutral) for AMER3, with a target price of BRL 15 (25% above the previous day’s closing price).

Read also: “It is true that the impact can be significant,” says Rial on the billionaire gap in the American budget (AMER3)

Bradesco BBI, also with a neutral recommendation, but with a lower target price of BRL 10.50 (12.5% ​​below Wednesday’s close), placed assets under watch due to the magnitude of the event and the lack of information, but already anticipating a sharp decline in activity. House analysts called the accounting inconsistency remarkable and unprecedented.

“[O anúncio é] very negative. We (and the market) still lack the details to effectively measure how – and for how long – the balance sheet and income statement [Demonstrativo de Lucros e Perdas] can be affected. The potential impact on future results is also unclear. Even considering an alleged non-monetary impact, we view the announcement as decidedly negative. The first reason is due to its anomalous size: of R$ 20 billion, which is equivalent to 2 times the market value, 1.3 times the book value or 0.6 times the gross sales of the last twelve months, which suggests that the company has accumulated too many errors or too many years of bad accounting practices. Second, this announcement raises major concerns about the company’s credibility and ultimately its financial standing,” BBI analysts summarize.

Morgan Stanley, in turn, revised the recommendation given a previously positive view for assets. On January 5, internal analysts had increased the exposure overweight (above the market average, equivalent to a purchase) for AMER3 within the e-commerce universe, highlighting the positive prospects with the new management. At the time, the target price had been reduced from R$21 to R$16, but still represented a 33% appreciation potential.

“We have withdrawn our recommendation as the operational turnaround we had anticipated has completely faded and we have limited visibility into the extent of the accounting inconsistencies. When we raised the recommendation for AMER3 a overweight in October 2022, a key pillar of our thesis was the potential of the new administration to lead an operational turnaround that, coupled with a better consumption scenario for 2023, could lead to a positive cycle of margin expansion,” says the bank.

“Thus, with the departure of the new CEO and CFO in less than two weeks on the job, we now see limited catalysts critical to reversing the situation for Americans in online and offline sales and margin pressures,” he underlines, also highlighting the great value of the accounting inconsistency in relation to the size of the company.

“The investigation is ongoing, initial details are limited, and the P&L and balance sheet impacts are currently unknown,” Morgan’s analyst team assesses, adding that it expects more detail to revise opinions.

JPMorgan continues with a sell recommendation for the assets

JPMorgan, in turn, followed up on his recommendation underweight (below market average exposure, equivalent to sale) for AMER3 assets. The rating was cut in early November 2022 in view of high leverage and challenge in physical stores, with a price target of BRL 12.50 (4% higher than the previous closing date).

“We look at the company’s cash flow situation, which is why we recently reduced the stock recommendation to underweightas much more delicate than expected, with the company leveraging significantly
supplier financing operations – apparently not adequately accounted for – to finance its working capital. So when new management walks away citing changes in company priorities, we believe capital structure rebalancing and liability management are the most likely near-term goals,” JP says.

Prior to the announcement, banking analysts estimated the need for around BRL 4 billion to BRL 6 billion to address the capital structure, which compares with the company’s market capitalization of BRL 11 billion.

“Taking a broader view, the company needs to recognize BRL 20 billion of additional liabilities, which are likely to be accounted for in the near term given the typical nature of such transactions. And that amount will likely be recorded primarily in equity, even after any adjustments. The equity value was around BRL 15 billion in 3Q22, suggesting potential negative equity ahead,” he points out.

Furthermore, the size of the supplier financing deals is close to the projected cost of goods sold (COGS) for the year 2022 (R$19 billion), which could mean that the company was potentially paying suppliers only through the financing transactions, which are typically short-term transactions, indicating an even worse financial situation than JP believed.

Furthermore, it may also imply that the company has long had supplier financing debts with financial institutions, which would be surprising given the large amount of the sum and the absence of (at least public) complaints from financial institutions on the matter.

“That said, further discussions about a possible capitalization round may arise, as the company has a BRL 9 billion cash position with BRL 5 billion receivables and BRL 6 billion inventories as of 3Q22 amid potential BRL 20 billion increase in short-term liabilities,” the bank says.

Furthermore, depending on the impact on the Income Statement, the company could violate the covenants on the debt by 3.5 times the net debt compared to the Ebitda (result before interest, taxes, depreciation).

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