| | | | | Sell (Price target R$16.50) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | OUR THESIS IN PICTURES→ | | Q: Can daily equities volumes reach $10bn by 2018? Yes, Brazilian capital markets remain shallow. We remain optimistic about long term equities trends and expect growth driven by a macro normalization (R$10bn in ADTV by ‘18). We analyse the depth and turnover of Brazilian capital markets in a global perspective: Brazilian markets have room to grow,... more→ Q: How do Bovespa's margins and cash flows compare with global peers? Bovespa has among the highest Ebitda and cash flow trends globally. In order to avoid issues with earnings adjustments, we focus on EBITDA and cash flows. Bovespa's EBITDA margin / Ebitda growth are among the highest globally, although not dramatically different from GEM peers. Cash flows illustrate... more→ Q: What is the fair discount/premium versus EM peers? We think BVMF3 should trade in line with GEM peers in terms of EV/Ebitda and at a small discount on an adjusted P/E basis. BVMF3 trades on 14x 2017E Ebitda (in line with EM-ex HK). BVMF3 trades on 14x adj. 2017E P/E (17% discount to EM at 17x). On the one hand, Bovespa has one of the healthiest... more→ | | BM&F Bovespa has a strong cash generation, solid risk management and is a high dividend paying company. The stock has traded as a proxy for the index and domestic market, more than on fundamental trends. We see weak growth at the company on an adjusted EPS basis in the coming three years. We also see limited potential for multiple rerating and believe structural reforms in Brazil and a meaningful macro improvement will take time to materialize. | | Equities volumes year-to-date remain roughly in line with the 2015 average at R$7.0bn. Volatility has decreased, limiting the upside in the derivatives business. We now expect volumes to reach to R$7.3bn in 2016, from R$6.8bn in 2015. | | The stock rally of 60% YTD assumes a blue sky scenario: BVMF3 trades on 14x adjusted EPS 17E. A simple reality check shows still weak volumes. We believe consensus expects not only a rebound in volumes (as we do), but margin expansion and strong benefits from the Cetip transaction, which we find premature. . | | 
Value drivers | Equities growth | Derivatives growth | | | | R$19.5 upside | 39.4% | 16.6% | | | | R$16.5 base | 7.3% | 9.0% | | | | R$13.5 downside | 7.3% | 6.8% | | | | Source: UBS | | | | | |
more→ | | BM&F Bovespa is one of the largest exchanges in the world in total listed market capital and in total derivatives contracts traded. It is a vertically integrated exchange with... more → |
| | | OUR THESIS IN PICTURES | return ↑ | 
| We adjust our estimates for trading volume (ADTV), following the latest monthly data. We have an optimistic view with volumes reaching R$10bn by 2018E. | 
| We find that BM&F Bovespa has one of the highest Ebitda margins globally at 70% (2017E), compared to an EM average of 68%. | 
| BM&F Bovespa should report the highest cash flow yield of 7%, slightly above the EM average of 6% in 2017E. | 
| The current trading discount of BVMF3 is roughly in line with historical averages | Sources for exhibits above: Company data, UBS Research |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can daily equities volumes reach $10bn by 2018? UBS VIEW Yes, Brazilian capital markets remain shallow. We remain optimistic about long term equities trends and expect growth driven by a macro normalization (R$10bn in ADTV by ‘18). We analyse the depth and turnover of Brazilian capital markets in a global perspective: Brazilian markets have room to grow, but we flag that they do not stand out in a LatAm context. Morevoer, equities represent just 1/3 of revenues at Bovespa, and therefore higher volumes have a small impact on earnings. Every additional R$1bn in equities trading volume translated into an extra 4% in EPS, hardly a game changer. Even assuming healthy growth in equities volumes, reaching R$10bn by 2018E, we find only limited upside potential to our EPS estimates. We think markets overestimate the relevance of equities on earnings, as BM&F Bovespa derives 43% of its earnings from derivatives. Turnover velocity could increase a few percentage points in the coming years, as collateral management becomes more efficient. EVIDENCE Capital markets in Brazil have limited depth, but they don’t stand out in an EM context. With 43% of market-cap-to-GDP, Brazil stands in the Latam average (43%), but well below the EM average of 81%. Moreover, turnover at 71% (trading/market cap) remains well above the Latam/EM averages of 23/32%. While those low numbers suggests EM capital markets are shallow, they do not suggest that equities should pick up strongly. So far, 2016 YTD volumes have reached R$7.0bn in equities (+4.5% vs 2015) and 3.0mn contracts in derivatives (+3.3% vs 2015). We now expect ADTV of R$7.3bn in 2016 (+6.9% yoy) and R$8.7bn in 2017. We also expect derivatives of 3.1mn in 2016 (+8.5%yoy) and 3.4mn in 2017. We expect the IBOV to reach 60k by the end of 2016, and 69k by the end of 2017, with turnover velocity of 77% in 2016/17 (see tables below). WHAT'S PRICED IN? In our Downgrade to Sell: Risk/reward unattractive from March 15, we noted that the rerating in BVMF3 was mostly driven by multiple expansion, and not earnings revisions. BVMF3 trades on 15x adjusted 2016E EPS, well above the historical average of 12x, and in line with EM peers. We think consensus is pricing in a very optimistic scenario for capital markets. |
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Figure 1: Depth of markets (market cap / GDP) | | Figure 2: Turnover of markets (trading volume / market cap) | 
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| Source: WFE, UBS | | Source: WFE, UBS |
We compare Brazil with other capital markets to assess the potential for growth. In particular, we analyse depth and turnover. We define depth of capital markets as the ratio of market capitalization of listed companies divided by the GDP of the country. We define turnover as the traded volumes divided by the total market cap of companies. The depth gives an idea of the reliance of a country on its public capital markets. Some countries seem to favour access to financing through their banking sector while others have strong public capital markets for equities and debt. Obviously, another category of markets has neither an optimal banking intermediation nor deep capital markets, and we would categorize Brazil or Latin American markets in that last category. In fact, Brazil reports a loan/GDP penetration of 51%. In terms of depth of capital markets, Brazil’s depth at 43% is above the average of Latin American markets, where market cap / GDP ranges from 14% in Argentina to 90% for Chile, where the reform of pension funds in the 1980s and the implementation of a capitalization system is often considered as a key trigger for local markets. BRICS and larger economies present higher depth ratios, with China at 85%, India at 132%, and the US at 139%, for example. This suggests Latin America as a whole has a limited level of capital market intermediation. LatAm companies typically do not resort to equities capital markets to fund their investment or expansion. Figure 3: Depth of capital markets (market cap of listed companies / GDP) | 
| Source: WEF, UBS. For Euronext, we count the GDP of France, Belgium, the Netherlands and Portugal. For the US, we count only the market cap of NYSE and Nasdaq. For China and HK, we add the market cap of Shenzhen and Shanghai. For India, we add the market cap of BSE and NSE. |
If we look at turnover, the conclusion is more encouraging for Brazil. Brazil presents a turnover ratio (also known as churn) of 71%. This is way above the average for Latin America, which ranges from 4% in Peru to 71% in Brazil. Even in Chile, with its developed market, turnover is limited, suggesting pension funds do not trade actively their positions. Mexico also presents a low turnover at 31%, due to 1) the low weight of some sectors from the local markets, such as oil & gas and banks, due to monopolies or foreign ownerships, and 2) the limited free float of listed companies. We also note that a number of LatAm companies are dual listed, in their local market and on a foreign exchange, mostly the NYSE. This translated into lower domestic trading levels, as a considerable part of trading activity is done on the ADR market, as opposed to the local market. For Brazilian dual-listed companies, ADR volumes typically represent half of total trading. Figure 4: Turnover of equities capital markets (equities volumes traded / listed market cap) | 
| Source: WEF, UBS. We annualize 1H16 traded volumes (multiplied by 2). |
Turnover increases by steps, not linearlyThis is a recurring debate, as markets try to predict the future behaviour of equities volumes. Turnover does not increase in a linear fashion, but more by steps. In fact, the turnover of the Brazilian market has been relatively stable over the past decade, increasing more significantly in 2008 and then in 2012. As noted in a previous Global I/O report: global turbulence and the impact on volumes, we highlighted the four drivers of average daily trading volumes for exchanges: 1) Flows, undoubtedly the main driver of the recent rally in Brazilian equities, as global and GEM investors drove the outperformance; 2) IBOV level, as the higher level of share prices naturally drives higher volumes. We expect IBOV at 60k by the end of 2016 and 69k for the end of 2017; 3) Velocity (or churn), as investors were more active in their portfolios, even though we note that structural changes in velocity are typically driven by new technologies (upgrades in trade matching engines for example) or a change in mix of investors (more high frequency for example). In the case of Brazil, there have been no such changes recently, suggesting velocity should remain stable; 4) Asset allocation, which remain unfavorable in Brazil, as investors are incentivized to allocate funds into fixed incomes, especially government paper, in a classic example of crowding out. This asset allocation issue has not changed and will take time to be reverted. We find that external drivers are the main driver of turnover. External drivers include a change in technology (better matching system that allows for a higher presence in high frequency trading for example) or a more efficient system (the integration of clearing houses at BVMF can make trading cheaper in terms of collateral management and incentivize trading). Figure 5: Evolution of IBOV level: back to 2009 | | Figure 6: Evolution of equities turnover at BM&F Bovespa | 
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| Source: Company data and UBS estimates | | Source: Company data and UBS estimates |
We adjust our estimates for trading volumes (ADTV) following the latest monthly data, as per our latest Monthly LatAm Tracker. Equities ADTV for BVMF has been R$7.0bn year-to-date, 3.3% above the level for full year of 2015. We make no significant changes to our estimates for derivatives. Figure 7: Equities ADTV | | Figure 8: Derivatives ADV | 
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| Source: Company data and UBS estimates | | Source: Company data and UBS estimates |
Finally, we show the number of companies listed on Bovespa, including all segments. As shown below, the number of companies is in decline and reaches 438 today, versus 468 15 years ago. The 10 largest companies represent 53% of total trading volumes on Bovespa. Figure 9: Number of listed companies on the Brazilian stock exchange | 
| Source: Company data |
| | | PIVOTAL QUESTIONS | return ↑ | Q: How do Bovespa's margins and cash flows compare with global peers? UBS VIEW Bovespa has among the highest Ebitda and cash flow trends globally. In order to avoid issues with earnings adjustments, we focus on EBITDA and cash flows. Bovespa's EBITDA margin / Ebitda growth are among the highest globally, although not dramatically different from GEM peers. Cash flows illustrate the overall efficiency of the business, as investors need to take into account leverage and tax efficiency to compare exchanges. The cash flow yield of Bovespa is the highest globally, although not significantly higher than GEM peers (excluding the HK exchange). We flag that the high cash flows are largely driven by high interest income and the tax benefit from goodwill amortization, which we do not see as sustainable. EVIDENCE In our estimates, Bovespa's EBITDA margin is slightly higher than the average for global exchanges in 2016 and 2017. Bovespa is in line with the EM average and is faring better than DM exchanges. Bovespa also reports Ebitda growth (proxy for the health of operating trends) in line with EM peers at 11%. On the cash flow side, Bovespa has the highest cash flow yield at 7%, versus an average of 5% for EM peers. WHAT'S PRICED IN? Based on conversations with investors, we believe markets expect a strong uptick in trading volumes leading to margin expansion, as the exchange benefits from 1) scale advantages, and 2) the consolidation of its clearing systems leading to cost efficiencies to be captured in the coming 2-3 years. | |
Consensus earnings from Bloomberg can be ambiguous as estimates are subject to a number of adjustments by analysts and the company itself. Averaging those estimates is therefore not always very enlightening. At UBS, we adjust the reported earnings for the tax benefit (to calculate cash earnings) and revert exceptional items (such as the sale of CME shares). We do not adjust for items such as stock option payments, which we view as recurring. Ebitda analysis and operating trendsTo avoid the discrepancy often seen in earnings and adjusted earnings, we decide in this note to focus less on earnings and ROE/ROA, and analyse Ebitda and cash flows and compare Bovespa in a global perspective. We find that BM&F Bovespa has one of the highest Ebitda margins globally at 69.8% (2017E), compared to an EM average of 68.3%. We believe this is partly due to the vertical integration and cross-asset nature of the market structure entity. The company’s dominant position and integrated model (de facto monopoly in Brazil for equities and listed derivatives) can also explain the higher pricing, although we flag that international comparisons are made difficult as Bovespa provides a more complete service than most global peers (settlement at the final beneficiary level). Figure 10: Ebitda margin 2017E | 
| Source: UBS estimates |
We also find that the growth in Ebitda between 2015 and 2017E at Bovespa should be close to 11%, broadly in line with the EM average at 11%. Ebitda growth gives a good idea of the health of operations, and excludes the impact from leverage (financial expenses or interest income from float) and taxes (of fiscal benefits). Figure 11: Ebitda growth 2015-17E | 
| Source: UBS estimates |
Cash flow analysisWhile Ebitda suggests that the operating trends at Bovespa are healthy and broadly in line with its EM peers, we believe it is also important to analyse cash flows. At the end of the day, financial leverage or tax efficiency are not independent variables and affect how investors should compare companies. BM&F Bovespa should report the highest cash flow yield among large global peers in 2017. This is also the case if we consider 2015 or 2016. 2017 yield should reach 6.8%, versus an average of 6.2% for EM exchanges excluding HK, and 4.5% for the full group of EM peers. Figure 12: Free cash flow yield (2017E) | 
| Source: UBS estimates |
In 2014 and 2015, the extraordinary sale of CME shares helped the very high cash flow yield of BVMF. Going forward, the high level of cash and high local interest rates (policy rate Selic: 14.25%) explain the high financial revenues, while the tax benefit of goodwill amortization (a country-specific regulation that incentivizes Brazilian companies to drive M&A) also boosts cash flow yield. We note that the tax benefit is temporary (while there is a goodwill to be amortized and the law applies) and financial revenues should normalize as policy rates come down in the long run. While we would not perpetuate the high level of cash flows, we also do not think they would adjust down quickly.
| | | PIVOTAL QUESTIONS | return ↑ | Q: What is the fair discount/premium versus EM peers? UBS VIEW We think BVMF3 should trade in line with GEM peers in terms of EV/Ebitda and at a small discount on an adjusted P/E basis. BVMF3 trades on 14x 2017E Ebitda (in line with EM-ex HK). BVMF3 trades on 14x adj. 2017E P/E (17% discount to EM at 17x). On the one hand, Bovespa has one of the healthiest operating trends globally, in terms of Ebitda growth and margins. On the other hand, Brazilian local rates and cost of equity remains higher than EM peers (we use COE of 13%), justifying some discount to EM peers. Moreover, while cash flow yields are high, we argue that interest income and the fiscal benefit are temporary and cannot be perpetuated. EVIDENCE At current levels, BVMF3 trades on 14x 2017E adjusted earnings, and 19x reported earnings, vs. 17x for GEM peers – ex Hong Kong. BVMF3 trades on 14x 2017E Ebitda, vs 15x for GEM peers. We decide to exclude the Hong Kong exchange from our analysis, as HK multiples are outliers in the global peer group. At our new price target of R$16.5, BVMF3 would be trading on 15x forward adjusted earnings (2018E) and 13x forward Ebitda. This would be in line with EM peers on an EV/Ebitda basis, and a 13% discount to EM peers on a P/E basis. WHAT'S PRICED IN? The current price of BVMF3 suggests that the exchange should trade at a premium vs EM peers, which we find too optimistic, considering the high levels of policy rates, inflation and cost of equity. | | Figure 13: EV/Ebitda (2017E) | | Figure 14: P/E based on adjusted earnings (2017E) | 
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| Source: UBS estimates | | Source: UBS Estimates |
We then take a historical approach and compare current P/E and EV/Ebitda for BVMF3 today vs a few global peers, including ICE and Nasdaq. If we were to compare vs. Hong Kong Exchange, on a P/E basis, we would find that BVMF3 today trades at a discount of 55% compared to HKEx. By comparison, the historical discount has been 57%. If we look at other pairs (BVMF-ICE; BVMF-Nasdaq), the conclusion is relatively similar: the current trading discount of BVMF3 does not stand out versus historical averages. Figure 15: Historical EV/Ebitda | | Figure 16: Historical forward P/E | 
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| Source: Bloomberg. We do not include HKEx in this chart due to data discrepancies. | | Source: Bloomberg | Figure 17: Historical discount on EV/Ebitda | | Figure 18: Historical discount on P/E | 
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| Source: Bloomberg, UBS | | Source: Bloomberg, UBS |
ValuationWe revise our estimates to incorporate a higher IBOV level and equities volumes. We now expect the IBOV to reach 60k by the end of 2016 (vs 55k before) and 69k by the end of 2017 (vs 60k before). While our estimates for 2016/17 change little, we raise our long term earnings estimates by 3%+. We also lower the cost of equity to 13% (from 15% before) to incorporate a more favourable macro scenario, as illustrated by Central Bank upward revisions of potential GDP growth for 2016 and 2017.
Global valuation table Figure 19: Global exchanges comps | 
| Source: UBS estimates. Note Price as of September 1st. |
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers | Equities growth | Derivatives growth | | | | R$19.5 upside | 39.4% | 16.6% | | | | R$16.5 base | 7.3% | 9.0% | | | | R$13.5 downside | 7.3% | 6.8% | | | | Source: UBS | | | | | |
| BVMF3 is trading at 14x 2017 adj. EPS (as of September 1) |
Upside (R$19.5): We assume equities volumes higher than 2Q16 levels, at R$9.4bn, and then growth in equities volumes at close to 39.4% p.a. We assume derivatives volumes higher at 3.3mn contracts, and a growth in contracts close to 16.6%. We also assume higher investors’ appetite, which should translate into higher multiples. Specifically, we assume a target multiple of 15x EV/EBITDA. Base (R$16.5): We assume 7.3% growth in equities volumes, 9.0% in derivatives volumes, and still growth close to 7.3% in other revenues. We expect low opex growth of 0.4% in 2016 and expect lower cost growth in subsequent years. Downside (R$13.5): We assume equities volumes to be at R$7.3bn for 2016, and then growth in equities volumes at close to 7.3% p.a. We assume derivatives volumes lower at 3.0mn contracts, and a growth in contracts close to 6.8%. We also assume investors’ appetite will remain weak and assume a target multiple of 10x EV/EBITDA.
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | US$7.76bn | US$26.5bn | Shares Outstanding | 1,900 (ORD) | 77m (COM) | Industry | Financials, Exchanges | Industrial, Diversified | Region | Americas | | Website | www.bmfbovespa.com.br | www.eaton.com |
BM&F Bovespa is one of the largest exchanges in the world in total listed market capital and in total derivatives contracts traded. It is a vertically integrated exchange with trading and post trading in both its derivatives and equities platforms. The clearings work as a central counterparty for the trades executed in the exchange's platform. Industry outlook Exchanges globally are undergoing a consolidation trend, with mergers and international agreements being the rule rather than the exception. Bovespa has been involved in some small regional transactions and maintains a long standing relationship with CME. We view the space as increasingly competitive, despite the presence of national champions in most Latin American countries. | Revenues by segment (FY16e %) 
Source: Company Data and UBS estimates |
| | | | BM&F Bovespa (BVMF3.SA) | | | | | | | | | | | Revenues | 2,131 | 2,034 | 2,217 | 2,337 | 5.4 | 2,626 | 12.4 | 2,946 | 3,267 | 3,603 | Gross profit | - | - | - | - | - | - | - | - | - | - | EBITDA (UBS) | 1,454 | 1,344 | 1,477 | 1,546 | 4.7 | 1,845 | 19.4 | 2,137 | 2,425 | 2,728 | Depreciation & amortisation | (120) | (119) | (111) | (98) | -11.4 | (121) | 23.3 | (144) | (145) | (145) | EBIT (UBS) | 1,334 | 1,225 | 1,366 | 1,448 | 6.0 | 1,724 | 19.1 | 1,993 | 2,281 | 2,583 | Associates & investment income | 171 | 212 | 136 | 0 | - | 0 | - | 0 | 0 | 0 | Other non-operating income | 0 | (7) | 796 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | 182 | 209 | 509 | 85 | -83.3 | 867 | NM | 802 | 818 | 858 | Exceptionals (incl goodwill) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 1,687 | 1,639 | 2,807 | 1,533 | -45.4 | 2,591 | 69.0 | 2,795 | 3,099 | 3,440 | Tax | (607) | (661) | (604) | (577) | 4.4 | (907) | -57.1 | (783) | (868) | (963) | Profit after tax | 1,080 | 978 | 2,203 | 955 | -56.6 | 1,684 | 76.2 | 2,013 | 2,231 | 2,477 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | 1 | (1) | (1) | (1) | 24.0 | 0 | - | 0 | 0 | 0 | Extraordinary items | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 1,081 | 977 | 2,202 | 955 | -56.7 | 1,684 | 76.4 | 2,013 | 2,231 | 2,477 | Net earnings (UBS) | 1,581 | 1,416 | 2,058 | 2,066 | 0.4 | 2,206 | 6.8 | 2,013 | 2,231 | 2,477 | Tax rate (%) | 36.0 | 40.3 | 21.5 | 37.7 | 75.1 | 35.0 | -7.1 | 28.0 | 28.0 | 28.0 |
| | | | | | | | | | | EPS (UBS, diluted) | 0.80 | 0.73 | 1.11 | 1.14 | 2.8 | 1.22 | 6.8 | 1.11 | 1.23 | 1.36 | EPS (local GAAP, diluted) | 0.55 | 0.50 | 1.19 | 0.53 | -55.6 | 0.93 | 76.4 | 1.11 | 1.23 | 1.36 | EPS (UBS, basic) | 0.80 | 0.75 | 1.11 | 1.14 | 2.8 | 1.22 | 6.8 | 1.11 | 1.23 | 1.36 | Net DPS (R$) | 0.44 | 0.30 | 0.51 | 0.21 | -58.7 | 0.77 | 264.0 | 0.92 | 1.02 | 1.14 | Cash EPS (UBS, diluted) | 0.86 | 0.79 | 1.17 | 1.19 | 2.1 | 1.28 | 7.5 | 1.19 | 1.31 | 1.44 | Book value per share | 9.74 | 9.99 | 9.65 | 10.48 | 8.6 | 10.64 | 1.5 | 10.83 | 11.03 | 11.26 | Average shares (diluted) | 1,980.00 | 1,940.00 | 1,857.50 | 1,815.00 | -2.3 | 1,815.00 | 0.0 | 1,815.00 | 1,815.00 | 1,815.00 |
| | | | | | | | | | | Cash and equivalents | 4,050 | 2,463 | 8,239 | 9,065 | 10.0 | 9,793 | 8.0 | 10,150 | 10,546 | 10,987 | Other current assets | 270 | 322 | 434 | 317 | -27.0 | 336 | 6.0 | 356 | 378 | 400 | Total current assets | 4,319 | 2,785 | 8,674 | 9,382 | 8.2 | 10,129 | 8.0 | 10,506 | 10,923 | 11,387 | Net tangible fixed assets | 423 | 421 | 453 | 530 | 17.1 | 630 | 18.7 | 633 | 636 | 635 | Net intangible fixed assets | 16,672 | 16,773 | 15,190 | 15,240 | 0.3 | 15,240 | 0.0 | 15,240 | 15,240 | 15,240 | Investments / other assets | 4,482 | 5,559 | 1,992 | 2,557 | 28.4 | 2,684 | 4.9 | 2,816 | 2,956 | 3,102 | Total assets | 25,897 | 25,538 | 26,309 | 27,710 | 5.3 | 28,682 | 3.5 | 29,196 | 29,755 | 30,364 | Trade payables & other ST liabilities | 2,711 | 1,892 | 2,097 | 3,372 | 60.8 | 3,541 | 5.0 | 3,718 | 3,904 | 4,099 | Short term debt | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total current liabilities | 2,711 | 1,892 | 2,097 | 3,372 | 60.8 | 3,541 | 5.0 | 3,718 | 3,904 | 4,099 | Long term debt | 1,426 | 1,619 | 2,384 | 1,969 | -17.4 | 1,969 | 0.0 | 1,969 | 1,969 | 1,969 | Other long term liabilities | 2,461 | 3,039 | 3,476 | 3,329 | -4.2 | 3,851 | 15.7 | 3,851 | 3,851 | 3,851 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 6,598 | 6,550 | 7,957 | 8,670 | 9.0 | 9,360 | 8.0 | 9,537 | 9,723 | 9,918 | Common s/h equity | 19,284 | 18,980 | 18,342 | 19,030 | 3.8 | 19,312 | 1.5 | 19,648 | 20,021 | 20,435 | Minority interests | 15 | 9 | 10 | 11 | 4.1 | 11 | 0.0 | 11 | 11 | 11 | Total liabilities & equity | 25,897 | 25,538 | 26,309 | 27,710 | 5.3 | 28,682 | 3.5 | 29,196 | 29,755 | 30,364 |
| | | | | | | | | | | Net income (before pref divs) | 1,081 | 977 | 2,202 | 955 | -56.7 | 1,684 | 76.4 | 2,013 | 2,231 | 2,477 | Depreciation & amortisation | 120 | 119 | 111 | 98 | -11.4 | 121 | 23.3 | 144 | 145 | 145 | Net change in working capital | 1,040 | (872) | 93 | 1,393 | NM | 150 | -89.3 | 157 | 165 | 173 | Other operating | 546 | 557 | 558 | (476) | - | 522 | - | 0 | 0 | 0 | Operating cash flow | 2,787 | 781 | 2,964 | 1,970 | -33.6 | 2,477 | 25.8 | 2,313 | 2,540 | 2,795 | Tangible capital expenditure | (289) | (240) | (227) | (234) | -3.2 | (221) | 5.8 | (147) | (147) | (144) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | (904) | (1,178) | 5,150 | (615) | - | (126) | - | (133) | (139) | (146) | Investing cash flow | (1,194) | (1,418) | 4,923 | (850) | - | (347) | 59.1 | (280) | (286) | (290) | Equity dividends paid | (865) | (577) | (933) | (385) | 58.7 | (1,402) | -264.0 | (1,676) | (1,858) | (2,063) | Share issues / (buybacks) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other financing | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Change in debt & pref shares | 184 | 193 | 765 | (415) | - | 0 | - | 0 | 0 | 0 | Financing cash flow | (681) | (384) | (168) | (801) | -375.9 | (1,402) | -75.2 | (1,676) | (1,858) | (2,063) | Cash flow inc/(dec) in cash | 912 | (1,021) | 7,719 | 319 | -95.9 | 727 | 127.7 | 357 | 396 | 441 | FX / non cash items | (139) | (567) | (1,942) | 507 | - | 0 | - | 0 | 0 | 0 | Balance sheet inc/(dec) in cash | 773 | (1,587) | 5,777 | 826 | -85.7 | 727 | -12.0 | 357 | 396 | 441 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
BM&F Bovespa (BVMF3.SA) | | | | | | | | | P/E (local GAAP, diluted) | 23.5 | 22.2 | 9.4 | 34.2 | 19.4 | 16.2 | 14.6 | 13.2 | P/E (UBS, diluted) | 16.1 | 15.3 | 10.0 | 15.8 | 14.8 | 16.2 | 14.6 | 13.2 | P/CEPS | 14.9 | 13.8 | 9.5 | 15.1 | 14.0 | 15.1 | 13.7 | 12.4 | Equity FCF (UBS) yield % | 9.8 | 2.5 | 13.0 | 5.1 | 6.6 | 6.3 | 7.0 | 7.8 | Net dividend yield (%) | 3.4 | 2.7 | 4.6 | 1.2 | 4.3 | 5.1 | 5.7 | 6.3 | P/BV x | 1.3 | 1.1 | 1.2 | 1.7 | 1.7 | 1.7 | 1.6 | 1.6 | EV/revenues (core) | 9.1 | 8.3 | 6.9 | NM | NM | 8.8 | 7.8 | 7.0 | EV/EBITDA (core) | 13.4 | 12.6 | 10.3 | 17.5 | 14.3 | 12.1 | 10.5 | 9.2 | EV/EBIT (core) | 14.6 | 13.8 | 11.1 | 18.7 | 15.3 | 13.0 | 11.2 | 9.7 | EV/OpFCF (core) | 16.3 | 15.0 | 12.0 | 20.3 | 16.0 | 13.0 | 11.1 | 9.7 | EV/op. invested capital | 1.4 | 1.2 | 1.1 | 2.2 | 2.3 | 2.3 | 2.2 | 2.2 |
| | | | | | | | | Market cap. | 25,380 | 21,519 | 21,101 | 34,162 | 34,162 | 34,162 | 34,162 | 34,162 | Net debt (cash) | (2,624) | (844) | (5,855) | (7,097) | (7,824) | (8,181) | (8,577) | (9,018) | Buy out of minorities | 15 | 9 | 10 | 11 | 11 | 11 | 11 | 11 | Pension provisions/other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total enterprise value | 22,771 | 20,684 | 15,256 | 27,076 | 26,349 | 25,992 | 25,596 | 25,154 | Non core assets | (3,346) | (3,761) | (31) | (30) | (30) | (30) | (30) | (30) | Core enterprise value | 19,424 | 16,923 | 15,225 | 27,046 | 26,319 | 25,962 | 25,566 | 25,125 |
| | | | | | | | | Revenue | 3.2 | -4.6 | 9.0 | 5.4 | 12.4 | 12.2 | 10.9 | 10.3 | EBITDA (UBS) | 4.2 | -7.5 | 9.8 | 4.7 | 19.4 | 15.8 | 13.5 | 12.5 | EBIT (UBS) | 2.5 | -8.2 | 11.5 | 6.0 | 19.1 | 15.6 | 14.4 | 13.2 | EPS (UBS, diluted) | 0.1 | -8.6 | 51.8 | 2.8 | 6.8 | -8.8 | 10.9 | 11.0 | Net DPS | -6.1 | -32.0 | 73.0 | -58.7 | NM | 19.5 | 10.9 | 11.0 |
| | | | | | | | | Gross profit margin | - | - | - | - | - | - | - | - | EBITDA margin | 68.2 | 66.1 | 66.6 | 66.2 | 70.3 | 72.5 | 74.2 | NM | EBIT margin | 62.6 | 60.2 | 61.6 | 61.9 | 65.6 | 67.7 | 69.8 | 71.7 | Net earnings (UBS) margin | 74.2 | 69.6 | NM | NM | NM | 68.3 | 68.3 | 68.8 | ROIC (EBIT) | 9.6 | 8.8 | 10.2 | 11.9 | 14.7 | 17.4 | 19.9 | 22.6 | ROIC post tax | 6.2 | 5.3 | 8.0 | 7.4 | 9.6 | 12.5 | 14.4 | 16.3 | ROE (UBS) | 8.2 | 7.4 | 11.0 | 11.1 | 11.5 | 10.3 | 11.2 | 12.2 |
| | | | | | | | | Net debt / EBITDA | (1.8) | (0.6) | (4.0) | (4.6) | (4.2) | (3.8) | (3.5) | (3.3) | Net debt / total equity % | (13.6) | (4.4) | (31.9) | (37.3) | (40.5) | (41.6) | (42.8) | (44.1) | Net debt / (net debt + total equity) % | (15.7) | (4.6) | (46.9) | (59.4) | (68.0) | (71.3) | (74.9) | (78.9) | Net debt/EV % | (13.5) | (5.0) | (38.5) | (26.2) | (29.7) | (31.5) | (33.5) | (35.9) | Capex / depreciation % | NM | NM | NM | NM | 182.0 | 102.3 | 101.6 | 99.2 | Capex / revenue % | 13.6 | 11.8 | 10.2 | 10.0 | 8.4 | 5.0 | 4.5 | 4.0 | EBIT / net interest | NM | NM | NM | NM | NM | NM | NM | NM | Dividend cover (UBS) | 1.8 | 2.5 | 2.2 | 5.4 | 1.6 | 1.2 | 1.2 | 1.2 | Div. payout ratio (UBS) % | 54.7 | 39.9 | 46.4 | 18.6 | 63.6 | 83.3 | 83.3 | 83.3 |
| | | | | | | | | Others | 2,131 | 2,034 | 2,217 | 2,337 | 2,626 | 2,946 | 3,267 | 3,603 | Total | 2,131 | 2,034 | 2,217 | 2,337 | 2,626 | 2,946 | 3,267 | 3,603 |
| | | | | | | | | Others | 1,334 | 1,225 | 1,366 | 1,448 | 1,724 | 1,993 | 2,281 | 2,583 | Total | 1,334 | 1,225 | 1,366 | 1,448 | 1,724 | 1,993 | 2,281 | 2,583 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation-8.2% | Forecast dividend yield2.3% | Forecast stock return-5.9% | Market return assumption15.6% | Forecast excess return-21.5% |
| Valuation Method and Risk Statement Brazilian financials’ performance is closed linked to the local economic conditions and changes in interest rate and foreign exchange. Also, Brazilian financials may be affected by changes in regulatory framework and the overall local and foreign competition. Furthermore the BM&F Bovespa is highly exposed to the overall capital markets and changes in government policy towards foreign investment could also have a negative impact on the company.
Our PT for BM&F Bovespa is DCF model derived, with a CoE of 13.0%, WACC of 12.3% and long term growth of 6.0%.
Required Disclosures This report has been prepared by UBS Brasil CCTVM S.A., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 05 September 2016 01:21 PM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 47% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 21% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 June 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Brasil CCTVM S.A.: Frederic De Mariz; Mariana Taddeo. UBS Limited: Philip Finch. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | BM&F Bovespa | BVMF3.SA | Sell | N/A | R$17.98 | 02 Sep 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 4.Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity or one of its affiliates. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. BM&F Bovespa (R$) 
Source: UBS; as of 02 Sep 2016 |
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