3G Capital Management LLC Nicosia, Cyprus September 29-30, 2016
3G Capital at a Glance Global value-oriented investment vehicle that seeks to invest in a • concentrated porAolio of high-quality publicly traded businesses InvesFng Focus: Good Business, Good Management, Good Price (3 ‘Gs’) • Over 12 years in business – founded in 2004 • Track record of significant market outperformance (through Sep 2016) • – CumulaFve return (net of fees) since incepFon of 222% as compared to 141% for the S&P 500 and 61% for MSCI All-Country ex USA – Maintained an average cash posiFon of approximately 10% since incepFon
Investment Philosophy Good Business • – CompeFFvely entrenched (simple and predictable business in an industry with a track record of leadership longevity) – Above average returns on capital (15% or more) – Solid Financial CondiFon (debt/FCF of less than 3-5 years) Good Management • – Capable capital allocators and skillful operators (track record) – Proper alignment of incenFves – Skin in the game Good Price • – 8-11X Free Cash Flow – Focus on normalized sustainable cash flow as opposed to current-period cash flow – Current look-through FCF mul=ple for the por?olio is approximately 5X with a corresponding dividend yield of over 6% vs. 18X and 2%, respec=vely, for the S&P 500
Investment Idea – Banrisul SA Regional retail bank in the Brazilian state of Rio Grande do Sul • – Founded in 1928 to serve the needs of the residents of the state – Largest bank in the state by share of deposits and retail network size – Dominant posiFon in payroll lending and working capital financing for SMEs – ConservaFvely financed and well capitalized Selling at a significant discount to the underlying private market value • Wonderful business at a fair price OR fair business at a wonderful price? • – Picking a second-rate business in the banking arena makes as much sense as picking a second-rate parachute – Paying a fair price produces an acceptable return, but paying a wonderful price is what really makes the cash register sing
Banrisul – Good Price AgracFvely priced even on current-period financial metrics, which are • depressed due to a historic economic slump in the company’s core markets: – Price of R$11 vs. Book value of R$17 = selling for 0.65X BV • Banrisul’s historical valuaFons ranged from 1.5X BV to 2X BV • Brazilian peers are currently trading at 1.6X BV • Recent buyouts in the Brazilian banking space took place at a premium to book value even for second-rate banking insFtuFons – Price of R$11 vs. EPS R$2.00 = PE of 5.5X NFY – Dividend of R$0.80 vs. R$11 Price = 7% Dividend Yield Even more agracFve on a normalized basis: • – Price of R$11 vs. EPS of ~R$3.00 = PE of 3.7X normalized EPS (based on 10-year average ROA) – Dividend of R$1.20 vs. R$11 Price = 11% Dividend Yield
Banrisul – Good Business Strong compeFFve posiFon • The most dominant consumer banking franchise in Rio Grande do Sul by virtue of its reach – and reputaFon Boasts the largest share of deposits in the state at 47% and the largest deposit-gathering – network in the state reaching 99% of the populaFon Reach and reputaFon result in deposit cost that is 20% lower than that of the compeFFon, – which represent a significant barrier to entry Complements the low-cost finding advantage with conservaFve underwriFng pracFces in – order to generate low-risk growth Well-diversified loan porAolio with a roughly 60/40 split between lending to consumers and • businesses Bulk of consumer loans (3/4) are structured on a “payroll deducFon” basis to government employees • Bulk of business loans (3/4) represent working capital lending in which the bank has decades of • experFse Banrisul’s 10-year loan loss raFo stands at 3.0% vs. 4.5% for the bank’s peers signaling solid credit • quality As a result, Banrisul produces enviable performance over the past five years despite – significant headwinds faced by the Brazilian economy in 2014 and 2015 NIM = 8% vs. 3% industry average, ROA = 1.7% vs. 0.5% industry average, ROE = 17% vs. 6% industry • average Examining the history of mulFple banking franchises across the globe reveals enduring – leadership longevity – provided management sFcks to its kniqng
Banrisul – Good Business • Growth potenFal – Grew book value at 20% per annum over the past 10 years – Going forward growth is desFned to be slower, but sFll likely to be very good… • Brazil’s banking services penetraFon is about 1/3 of the developed markets’ penetraFon, suggesFng a long growth runway • Banrisul is developing addiFonal income streams to complement its core banking offerings: payment processing, insurance, asset management, bank cards • The complementary income streams are growing at a 25% rate
Banrisul – Good Business • Solid financial condiFon – ConservaFvely capitalized with Basel III raFo of 17%, more than double the global regulatory requirement of 8% – Stable funding profile with Loan-to-Deposit raFo of less than 80%, almost twice as good as the rest of the Brazilian banking sector • Above average returns on equity – Historically generated 15-20% ROEs despite a highly conservaFve Basel III raFo and a highly conservaFve loan-to-deposit raFo
Banrisul – Good Management • Operator skills (Grade: A) – Long-term track record of growing book value at high rates in a low risk manner – Grew book value nearly 6-fold over the past 10 years while keeping loan loss raFo 35% below industry average – Delivered on promises of operaFonal improvements following the privaFzaFon in 2007 • Cost/Income raFo improved from 62% to less than 50% (vs.~ 50% for the peers) • Fee income as a % total income improved from 25% to 29% (vs. ~30% for the peers) • Capital allocator skills (Grade: A) – The bulk of the free cash flows is returned to shareholders via generous dividends – Banrisul’s by-laws specify a minimum payout of 25%, yet the bank historically paid out 40% of earnings – Over the past five years Banrisul returned to the shareholders nearly 40% of the current stock price
Banrisul – Risks • Currency risk – Operates in a highly dollarized economy – Local currency depreciaFon leads to higher inflaFon, which eventually lius banking assets to the pre-depreciaFon USD equivalent (while also widening NIMs in the meanFme) – Net long-term impact is nil • PoliFcal risk – Majority-controlled by the government of the State of Rio Grande do Sul, but… – LegislaFvely prohibited from lending to the government and its enFFes – Public sector funding consFtutes less than 1% of total loans – Track record of treaFng minority shareholders well as evidenced by superior profitability and willingness to share these economics with the minority shareholders – Exclusive payroll management contract non-renewal with the state is a potenFal risk, but not for another 10 years
Banrisul – Conclusion Simple high-quality business in an industry with a long-term track record • of success conFnuity... Management team willing to generously share the spoils with the • shareholders… Cigar-bug like price… • Risks exist, but are easily absorbed by an enormous margin of safety • implied by the significantly undervalued equity… Therefore we should do well as investors in Banrisul even if some of the • risks come to pass – and we will knock the cover off the ball if they don’t
3G Capital Contact Info Pavel Begun, CFA 3G Capital Management LLC One Yonge Street 1801 Toronto, ON M5E 1W7, Canada +1 (314) 918-8180 pavel.begun@3gcapital.com
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