Analysts who cover Magazine Luiza’s shares (MGLU3) saw as positive the news of the company’s private capital increase of up to R$1.25 billion, announced last Sunday night (28). As a result, at the beginning of the session, MGLU3 assets jumped up to 9.62%, at R$ 2.28, this Monday (29), but then lost strength in line with the market movement and closed down. from 0.48%, to R$2.07.
In a report, Goldman Sachs pointed out that it sees strategic merit in the transaction, as it should provide the company with greater financial flexibility to invest in key growth initiatives.
“We also highlight that the proposed transaction may reduce investor concerns regarding the possibility of a subsequent offering weighing on the share price. Furthermore, we see merit in the fact that the controlling shareholders guaranteed a large part of the capital increase (up to 80% of the placement), as it demonstrates their confidence in the strategy outlined”, assesses the bank.
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The family of executive Luiza Trajano will contribute R$1 billion to the operation. BTG Pactual has committed to keeping R$250 million in shares and will also play an important role as a financier in part of the resources that the family will contribute.
André Esteves’ bank, according to the relevant fact, committed to “fully exercising the preemptive rights for the acquisition of shares applicable to the Company’s controllers, as well as participating in the surplus round, and subscribing up to R$1 billion in shares” of Magalu . This will be done through an operation to exchange the results of future financial flows – an operation called “Total Return Swap”.
JPMorgan also highlighted “welcoming the transaction”, which brings some new features to the capital structure, reducing adjusted leverage, from 6.3 times (projected by JPMorgan for 2024) to a still high leverage of 5.7 times, in addition to the weight of financial expenses in the balance sheet. This while maintaining a high rate of investment in key pillars of value creation (marketplace, cloud, ads, etc.).
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“In short, we would expect a positive reaction in the share price, especially considering that MGLU3 is a highly shorted stock (with a large short position) of around 14% of the free-float”, points out JPMorgan.
Bradesco BBI also indicated that it considers a positive reaction to this news to be fair, considering not only the balance sheet relief, but also the firm commitment of the controlling family to inject money into the business.
“Magalu’s onerous capital structure – and, therefore, financial expenses – has been one of the main obstacles to financial results and cash flow in recent years. At the beginning of 2024, this capital increase comes at a favorable time, as interest rates have decreased and credit origination should improve and, therefore, discretionary consumption will be subject to benefit from these conditions”, he points out. Therefore, this movement, combined with the continuous trend of margin expansion, could lead Magalu to reverse its losses and finally present a new positive net profit in 2024.
“We hope to see how the cash generation profile will evolve in the coming quarters supported by an improved/lighter balance sheet structure and easing of macroeconomic conditions”, adds the bank.
Citi highlights that the company’s management reiterated that it has a cash position, while the message is that the capital increase should be an “extra fuel” rather than an urgency in itself. “The commitment of a majority shareholder to inject capital is a positive sign, in our view, especially in the context of high interest rates and fierce competition”, assesses the bank. Citi estimates a drop in the ratio between net debt and Ebitda (earnings before interest, taxes, depreciation and amortization) from 1.9 times to 1.3 times.
“With the renewed focus on profitability, Magalu should expand the Ebitda margin (currently between 6% and 7%) and a subsequent dilution of financial expenses”, he assesses.
Citi has a buy recommendation (but with high risk) for Magalu shares, with a target price of R$3.40, or a potential increase of 63% in relation to Friday’s closing (26). JPMorgan, in turn, has a neutral recommendation for the assets, but without a defined target price; Goldman Sachs also has a neutral recommendation, with a target price of R$2.40, or an upside of 15% compared to Friday’s close.