On Monday, JPMorgan adjusted its stance on shares of Assai Atacadista (NYSE: ASAI), downgrading the stock from Overweight to Neutral and setting a new price target of $10.50.
The investment firm cited concerns about the company's limited capital flexibility and high leverage, which could put short-term investment plans at risk and obscure the visibility of medium to long-term operations. Assai Atacadista's adjusted net debt-to-EBITDA ratio stands at 3.8x as of the second quarter of 2024.
The company has already scaled back its expansion plans in the past two years, and with potential interest rate hikes on the horizon, it might further limit new store openings to less than ten to conserve capital expenditure and improve free cash flow. The analyst also noted that anticipated higher interest rates could pose risks to the company’s payable terms and working capital financing.
Assai Atacadista faces a highly competitive market, and there is little room for increasing commercial aggressiveness to boost sales and operating profits. Since the fourth quarter of 2023, the company has implemented major efficiency initiatives, which limits its ability to further reduce selling, general and administrative expenses (SG&A) to support gross margin investments.
The report states that Assai could enter a negative cycle of slowing growth and limited de-leveraging, potentially necessitating further capital expenditure rationalization. Despite a high intrinsic value indicated by discounted cash flow (DCF) models, Assai's shares have significantly underperformed, dropping 50% in the last 24 months compared to a 22% increase in the Ibovespa index.
This underperformance is attributed to rationalized capital expenditures, cannibalization, and competition leading to successive downward earnings per share (EPS) revisions.
JPMorgan has significantly reduced its EPS estimates for 2024 and 2025 by 20%, placing them approximately 20% below the Street consensus. The firm also points out that Assai is trading at a 13x price-to-earnings (P/E) multiple for 2025 estimates, which is a premium compared to other better-performing Brazilian retailers.
Without a capital increase, which management has recently dismissed, JPMorgan sees limited short-term catalysts for Assai and a lack of clarity on growth prospects in the medium to long term.
The new December 2025 price target of R$11.50 per share is based on a target 2026 P/E multiple of 11.5x, which aligns with the median for Brazilian retail estimates for 2025. This new target replaces the previous DCF-derived December 2025 price target of R$18 per share. Despite the downgrade, JPMorgan continues to prefer Assai Atacadista over Carrefour (EPA:CARR) Brasil, which holds a Neutral rating.
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