Randon S.A. Implementos e Participações CFA Institute Research Challenge Brazil Student Research November 21 st , 2013 São Paulo, Brazil
Summary Randon’s stock price (history) and target. 16 Why Randon? Target price: BRL 15.05 15 (end-of-2014) Inimitable commercial strength 14 13 Stock price: BRL 12.29 Increasing ROICs (as of 10/23/2013) 12 Successful entry into auto parts 11 22.5% upside 10 Technology 9 B UY 8 Margins 7 Absorption of sectorial upsides 6 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Infrastructure and Roads Source: Thomson Reuters and T Sour ce: Thomson Reuters and Team’ eam’s estimates s estimates Stock quotes updated until 10/23/2013
Agenda S ECTION I : Company Overview S ECTION II : Why Randon? S ECTION III: Financial Analysis S ECTION IV: Valuation S ECTION V: Risks W RAP UP
Company Overview I. Company Overview Randon’s revenue breakdown per business unit. 51.5 % 46.2 % 2.3 % % of revenues Special Vehicles and Auto Parts Financial Services Road Equipment Sour Source: Randon’ ce: Randon’s disclosur s disclosure Data relative to 9M2013.
Why Randon II. Why Randon? Our investment thesis on a top-down approach: Upcoming investments in infrastructure Roadway network to be expanded Truck demand Randon’s competitive positioning: full exposure to market upsides
Why Randon Infrastructure II.I. Why Randon? Infrastructure Public investments (in BRL billion) and regulatory Brazil’s infrastructure shortcomings updates 25 % 509 408 New Ports Law New Railroad model Updates on the Law 7th largest domestic market largest domestic market for PPPs 71st in overall infrastructur in overall infrastructure 2009-2012 2014-2017 Source: WEF Global Competitiveness Sour ce: WEF Global Competitiveness Sour Source: BNDES ce: BNDES Report 2013-2014 Report 2013-2014
Why Randon Roadways II.II. Why Randon? Roadways Roadways are a natural pick for forthcoming investments. Brazil’s freight transportation modes (% of TKUs) Road density (road km per 1000 km 2 ) Air Pipeline 1,427 0.4% 4.2% Water 13.6% 671 Rail 428 20.7% 186 Road India United States China Brazil 61.1% Source: CNT Sour ce: CNT Source: CIA World Factbook, CNT, U.S. Highway Statistics
Why Randon Roadways II.II. Why Randon? Roadways Roadways are a natural pick for forthcoming investments. Brazil’s freight transportation modes (% of TKUs) Road density (road km per 1000 km 2 ) Air Pipeline 1,427 0.4% 4.2% Water 13.6% 671 Rail 428 20.7% 186 Road India United States China Brazil 61.1% Source: CNT Sour ce: CNT Source: CIA World Factbook, CNT, U.S. Highway Statistics
Why Randon Leadership II.III. Why Randon? Leadership in Road Equipment Long-tail consumer base. Qualified Unqualified
II.III. Why Randon? Leadership in Road Equipment The consumer profile at the tail encourages fiercer competition. Evolution of HHI 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.24 0.19 0.19 0.16 0.15 0.14 0.19 0.18 0.17 0.15 Source: Randon’s disclosure and FGV’s estimates
II.III. Why Randon? Leadership in Road Equipment At the head, the demand is less price-elastic but more demanding. Distribution of road equipment market share* (% of sales) 30.4% 26.2% Randon Guerra Facchini Librelato 9.7% Noma Others 12.2% 11.2% 10.4% Source: Randon’s disclosure * Data from 2012
II.III. Why Randon? Leadership in Road Equipment Randon leads the head: Consumer perception (grades 1 to 10) Number of distributors (Brazil) Randon 90 8.9 8.7 8.6 Noma 51 7.8 7.8 7.7 Librelato 50 Guerra 42 Facchini 30 Commercial Product General Conditions Satisfaction Randon Competition Source: Randon, Facchini, Guerra, Librelato & Noma disclosures.
II.III. Why Randon? Leadership in Road Equipment Why Randon will keep the head in the future Facchini Randon Librelato Guerra 0.45 0.42 0.40 2010 Not the largest 0.20 0.18 0.16 ROIC (%) … 0.08 2011 (0.05)
II.III. Why Randon? Leadership in Road Equipment Why Randon will keep the head in the future Facchini Randon Librelato Guerra 0.45 0.42 0.40 2010 Not the largest 0.20 0.18 0.16 ROIC (%) … 0.08 2011 (0.05) Facchini Randon Librelato Guerra 134 … but the 93 2010 61 largest EVA 49 20 2011 5 (BRL million) (5) (31) Source: Valor 1000, Serasa, FGV’s calculations.
Why Randon Synergies II.III. Why Randon? Exploitation of synergies Randon covered all of its bases by going up the supply chain and into the auto parts business. Supplier Randon Road equipment manufacturers Auto Parts Randon Road Rivals Equipment Gains of scale Tech control Technology Intel
Why Randon Diversification II.III. Why Randon? Successful diversification However, Randon’s auto parts’ segment isn’t just a supplier to road equipment producers… Supplier Randon Truck OEMs Auto Parts Aftermarket Exports Randon’s EBITDA margins (per segment) 16.3% 16.4% 16.4% 16.1% 15.7% 15.5% 15.3% 15.3% 14.1% 13.0% 13.1% 12.8% 12.5% 12.0% 11.7% 11.4% 11.4% Diversification 3.0% 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E Higher margins Vehicles and Road Equipment Source: Randon’s disclosure and FGV’s estimates Auto Parts
Financial Analysis Revenues III. Financial Analysis: Revenues Revenue forecasts follow short and long-run factors. Road Equipment Truck Licensing Industrial Soy BNDES’ Auto Parts Truck Production GDP production Finame Evolves with Prices Financial Services
Financial Analysis Projections III. Financial Analysis: Revenues’ Projections Projected revenues (in BRL billion) 8.1 7.4 6.7 6.0 5.3 4.8 4.6 Consolidated 4.2 4.2 4.1 3.5 3.7 Road Equipment 3.3 2.9 2.3 2.6 Auto Parts 2.1 1.8 3.4 3.1 2.8 2.6 2.0 1.6 1.8 2.1 2.3 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E CAGR for Randon’s (consolidated) revenue growth Perpetuity 7.1% 2020 - 2045 8.2% 2015 - 2019 8.8% Source: FGV’s estimates
Financial Analysis Margins III. Financial Analysis: Margins Randon’s EBITDA margins (%) Randon’s EBITDA (BRL billion) 13.3% 13.5% 13.8% 14.1% 14.3% 14.6% 14.6% 13.4% CAGR 10 % 8.2% 2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2015E 2019E Source: FGV’s estimates Randon’s results for the third quarter of 2013 surpassed consensus. EBITDA margins (%) EBITDA (BRL billion) 3T13E* 13.4% 3T13E* 139 3T13 15.5% 3T13 176 Source: Bloomberg, Randon’s disclosure * Previous market consensus
Financial Analysis Invested Capital III. Financial Analysis: Invested Capital & Balance Sheet and Balance Sheet ROIC (%) Randon’s investment activity and indebtedness (consolidated basis) 2014E 12.3% 300,000 3.0x 250,000 2.5x 2015E 12.8% 200,000 2.0x 150,000 1.5x 2016E 13.6% 100,000 1.0x 2017E 14.1% 50,000 0.5x 0 0.0x 2010 2011 2012 9M2013 2018E 14.7% PP&E and Intangible CAPEX (BRL thousand) PP&E and Intangible CAPEX/D&A 2019E 15.0% Net Debt/EBITDA Source: FGV’s estimates
Discounted Cash Flow Set up IV.I. Discounted Cash Flow: Set-up Sum-of-the parts DCF model, using six Three-stage forecasts Objects of Assessment (OoAs) ∞ ! 2014-2019 2020-2045 2046-+ OoAs Vehicles and Road Explicit period Fras-le Equipment Master Auto Parts Convergence period Suspensys Financial Services Jost Perpetuity
Discounted Cash Flow Price IV.I. Discounted Cash Flow: Price Composition Composition DCF model’s final composition of target price. BRL 15.27 BRL 7.27 BRL 7.67 BRL 0.33 Source: FGV’s estimates
Relative Valuation IV.II. Relative Valuation + Peer multiple analysis. NTM Multiples EV/EBITDA Randon (RAPT4) 6.72 Median Auto parts 6.61 Median Road Equipment 7.22 Average Road Equipment and Auto Parts 6.92 Relative valuation target 6.92 6.92 Average Median Auto Parts verage Median Auto Parts BRL 14.19 7.22 7.22 & Road Equipment & Road Equipment Median Median Road Equipment Road Equipment 6.61 6.61 Median Median Auto Parts Auto Parts Source: Bloomberg and FGV’s calculations
Valuation Target Price IV. Valuation: Final Target Price Our valuation is based on DCF and Relative (Multiple) analyses (see below). BRL 15.27 Discounted Cash Flow Valuation 80% BRL 14.19 Relative Valuation 20% BRL 15.05 Target Price Source: FGV’s estimates
Risks V. Risks Drop in raw Election’s Insufficient GDP growth Euro VI material prices Influence Higher Successful Truck fleet renewal Probability internationalization Compromised Exchange rate Failure to reduce the Corporate fluctuations infrastructure gap Governance Heavier investments in truck production Greater than expected Reduction in credit availability credit expansion Lower Probability Lower Union Influence Truck OEMs pressing for price cuts Lower Impact Higher Impact Risk Classification Downside Upside Source: FGV’s estimates
Risks 2 V. Risks Drop in raw Election’s Insufficient GDP growth Euro VI material prices Influence Higher Successful Truck fleet renewal Probability internationalization Compromised Exchange rate Failure to reduce the Corporate fluctuations infrastructure gap Governance Heavier investments in truck production Greater than expected Reduction in credit availability credit expansion Lower Probability Lower Union Influence Truck OEMs pressing for price cuts Lower Impact Higher Impact Risk Classification Downside Upside Source: FGV’s estimates
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