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CFA SOCIETY OF BRAZIL
Student Research
Este Relatório de Análise está sendo publicado
somente para propósitos educacionais e não pode
ser utilizado como avaliação de investimento com a
finalidade de produção de recomendação ou para
divulgação ao público nos termos da Instrução
CVM nº 388 de 30 de abril de 2003.
Consumer Goods
52 Week Price Range BRL 37.5 - 9.7
Average Daily Volume 0.28M
Beta 0.5898
Average Daily Volume (3 months) -
Shares Outstanding 223.1M
Market Capitalization 7,585.4M
Book Value per Share BRL 9.59
Debt to Total Capital 35.50%
Return on Equity -1.04%
S o urce: Gro up's Es tim ates , Capital IQ
Market Profile
Ticker: HYPE3 Recommendation: Buy
Price (10/23/2009): BRL 34.00 Price Target: BRL 41.46
Mar. Jun. Sept. Dec. Year P/E Ratio
2008 -0.03 0.17 -0.57 -0.59 -1.05 N/A
2009E 0.38 0.67 -0.56 -0.5 -0.12 N/A
2010E 0.43 0.75 -0.54 -0.69 -0.04 N/A
2011E 0.62 1.07 -0.38 -0.99 0.31 151.99
Earnings per Share (BRL)
Source: Economática, group’s estimates
Highlights
Valuation: We are beginning our analysis of Hypermarcas (HYPE3) with a buy
recommendation and a YE10 fair value of BRL 41.46 per share. This target price was
reached with a three-stage DCF model, considering higher growth opportunities for
YE10-11. Sensitivity analysis showed upside of 7.98 % even for the worst-case scenario.
HYPE3 is trading at 21.6x TEV/EBITDA, while the industry trades at 10.0x.
Consumer goods industry: The industry is very competitive and demand is barely
affected by the recession. After the financial crisis, it was one of the first Brazilian
industries to come out of recession; it has accelerated GDP expansion and helped Brazil
recover from the crisis on 2Q09. In the past years, the industry has excelled at innovation
and nowadays sees little return on P&D.
The Company: Hypermarcas is a Brazilian conglomerate that develops, produces
and markets consumer staple products. HYPE operates in four business lines: foods,
beauty and personal care, OTC pharmaceuticals, and home care. Its‟ strategy is to acquire
„partially forgotten‟ brands and extend them. Controlling over 160 brands, its prices are
generally 15% lower than competitor‟s. Underpenetrated markets, well established brands
and exposure to growing income classes B, C and D bestow opportunities for high
growth.
Investment Risks: Having substantial goodwill and intangibles accounts, the risk of
impairment cannot be ruled out. The currency exposure and the difficulty to forecast
partial hedges amplify operational risks for the following years. The forecasted
concentration of revenues from OTC and personal care sectors will slightly reduce the
company‟s risk diversification. Finally, strategic movement from multinationals shifting
investment to markets where consumption was quickly restored after the crisis (Brazilian
market) may rough competition.
Hypermarcas S.A.
Luciana Vilar
Marina Trindade
Rodrigo Munhoz
10/26/2009
Source: Capital IQ
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 2
Investment Summary
We begin our coverage of Hypermarcas, the largest Brazilian maker of toiletries and over-
the-counter medicines that is also in foods and house care markets, placing a buy
recommendation on HYPE3. From a three-stage DCF analysis, the target price in YE10 is
BRL 41.46, a potential upside of 21.94%.
HYPE‟s growth strategy is based on M&A and organic growth. Its modus operandi is to
buy undervalued, forgotten brands and expand their potential. Synergy from acquisitions
(same logistics and distribution channels, cost dilution by using the same administrative
center) grants the lowest SG&A costs in the industry. HYPE is one out of the 3 Brazilian
companies to own their own in-house marketing agency. This competitive advantage
reduces costs by 40% and, along with lean structure and non-bureaucratic decision
process, guarantees the largest margin in the industry. Furthermore, the goodwill paid on
the acquisitions exempts HYPE from income tax payments during 6 years. On the other
hand, goodwill has an intrinsic risk to it that, if concretized, means loss by impairment.
Although the consumer goods industry was not very affected by the crisis, HYPE‟s focus
on lower price products paid off when consumers shifted their preferences to same quality
but lower-priced goods due to a purchasing power reduction. For the past four years,
Brazilian middle-class (HYPE‟s target) has been growing as a consequence of income
concentration reduction policies. On the first semester of 2009, restoring from the crisis,
consumption of non-durables rose. As Brazil emerged from the crisis earlier than many
other countries, there‟s the risk of multinationals (such as Procter&Gamble and Unilever,
HYPE‟s competitors) shifting their investments to the country, which could reduce
HYPE‟s profit margin and market share.
Underpenetrated markets in personal care and food markets, established brands (some are
leaders or vice-leaders in their segments), idle capacity of 60%, growing income classes
B, C and D and the announced strategy to keep up the M&A until 2010, on the amount of
BRL 2bn bestow opportunities for high growth. Because HYPE is a relatively new
company that lives on M&A, its financial demonstrations are unstable. As it matures, it
will solidify its growth (under historical growth) and consolidate itself in the Brazilian
market. When M&A opportunities become less profitable, its growth will become mainly
organic.
Figure 1: Annotated Stock Chart Stock chart with relevant factors to Hypermarcas
Source: Economática, Company
Phase III (up to 3 years)
Increase market share and
marketing efforts; new product
and brand revitalization
Phase II (3-6 months)
Plant restructuring, synergy
from raw material, packaging
and logistics
Phase I (3 months)
Quick gains through:
S&A Reduction and
changes in manufacturing
process
Synergy from Acquisitions
Source: Company
Phase III (up to 3 years)
Increase market share and
marketing efforts; new product
and brand revitalization
Phase II (3-6 months)
Plant restructuring, synergy
from raw material, packaging
and logistics
Phase I (3 months)
Quick gains through:
S&A Reduction and
changes in manufacturing
process
Synergy from Acquisitions
Phase III (up to 3 years)
Increase market share and
marketing efforts; new product
and brand revitalization
Phase II (3-6 months)
Plant restructuring, synergy
from raw material, packaging
and logistics
Phase I (3 months)
Quick gains through:
S&A Reduction and
changes in manufacturing
process
Phase III (up to 3 years)
Increase market share and
marketing efforts; new product
and brand revitalization
Phase II (3-6 months)
Plant restructuring, synergy
from raw material, packaging
and logistics
Phase I (3 months)
Quick gains through:
S&A Reduction and
changes in manufacturing
process
Synergy from Acquisitions
Source: Company
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 3
Hydrogen Pompom Olla+Jontex
Price paid 25 300 364
Goodwill 0 270 349
Net Revenues 19 185 90
Gros Profit 13 65 62
Incremental EBITDA 9 40 52
Price/EBITDA 2.78x 5.21x 7x
S o urce: Co m pany
Numbers of Latest Acquisitions (in BRL M)
Valuation
Why we chose DCF Model
We chose three-stage DCF model to estimate the company‟s intrinsic value because we
believe it to be the most adequate valuation model for companies in a rapid expansion
phase. This kind of company has strong sales growth in its initial phase, pass through a
transition period and then reach maturity. Furthermore, the absence of historical data and
negative earnings do not affect DCF model, since it depends only on future performances.
We acknowledge that incorporating M&A in a valuation model can be tricky since there‟s
a lot of uncertainty involved. Nonetheless, ignoring the benefits of acquisitions will result
in an under valuation for a firm like HYPE, that has established a reputation for
generating value from acquisitions. In a conservative way, we decided to compute higher
growth until 2011 because the company has announced its intention to make M&A until
2010 on the amount of BRL 1.5-2bn; while BRL 700M has already been done in 3Q09.
Why we did not use other valuation models
We did not use other valuation models because HYPE’s supernormal growth renders
short-hand valuation approaches, like price-to-earnings and revenue multiples,
meaningless, as they cannot account for the company’s uniqueness. Moreover, the
absence of meaningful historical data and positive earnings to serve as the basis for this
approach also makes it difficult to use other kinds of valuation models within HYPE.
Recommendation
We reached a fair price of BRL 41.46 to HYPE‟s stock in YE10, yielding a growth of
21.94% relative to current price of BRL 34.00 with a buy recommendation.
HYPE‟s expected growth was estimated based on three factors:
Population growth in B, C and D income classes and their shift within classes;
Expected growth of the industries in which HYPE operates, weighted by revenues and
market share growth. This allows us to capture in a better way the elements that affect
the company‟s results;
For 2010 and 2011 we considered a higher growth, as these years will reflect recent
and short-term planned M&A. As we believe that the expansion possibilities through
M&A of forgotten brands tend to decrease after 2011, we forecast the growth to be
mainly organic from this year onwards, resulting in growth rates below the historical
growth.
Figure 2: Growth Projection
Source: BCB, IMF, Group’s estimates
Our forecast is based on a Debt/Capital structure of 35.5%. The cost of long-term debt
varies according to SELIC and exchange rate variation. Based on the fact that HYPE
today uses only 40% of its plant and property capacity, and on our sales forecast, the
installed assets are increased BRL 250M in order to support the expanding production as
of 2013.
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 4
The discount rate for stockholders was determined from the perspective of a diversified
global investor using the CAPM model. We used USA variables as a benchmark, and
found its equivalent values in the Brazilian market considering exchange, interest and
inflation rates in both countries.
We used US-Treasury Bond 10 years‟ current value, 3.47% per year, as the risk-free rate.
We believe that this rate will maintain a low standard until U.S. economy recovers from
the crisis. For 2011, we upgraded the rate value to 4.30% per year, a similar level to the
one seen after the .com crisis recovery.
The market risk premium for 2009 and 2010 we used was 6%. From 2011 onwards we
forecast a declination to 4.79%; this represents the geometric mean return of a diversified
portfolio in US dollars (observed between 1928 and 2007) minus the T-Bond rate values
in the same period.
Brazil‟s risk was assessed by the current difference between C-Bonds and T-Bonds,
adjusted by both countries‟ inflation rates. Thus, we estimate a Brazilian risk of 3.38%.
We did not add in our main model specific additional risk to HYPE, as we believe a
diversified investor will diversify systematic risk. Perpetuity estimated growth is 4%,
based on Brazilian GDP growth expectation.
The beta calculation considered the betas of each industry where HYPE is present. Foods
(βf=0.45), Pharmaceuticals (βp=0.60), Personal Care (βpc=0.64) and Household (βh=0.44)
markets. The data was benchmarked from emerging markets‟ industries‟ unleveraged
betas. They were then weighted by their participation on the company‟s revenues. The
resulting beta was levered according to the capital structure (βL=0.59).
For the years after 2012, because we forecast that HYPE will grow in pharmaceuticals and
personal care products, we put a greater weight on those sectors‟ betas to form the new
global beta (βL2 =0.60).
Based on this analysis, the company‟s fair value is BRL 9,248.65M. Hence, as its current
market value is BRL 7,925.43M, we forecast that the stocks have a bullish tendency.
Sensitivity Analysis
Due to market uncertainty, a sensitivity analysis was made to verify the impact of changes
in the key variables of our model. Thus, we created different scenarios with variations on
WACC and growth rate in perpetuity, for 53.95% of company value projected is
ascribable to the stable growth period.
In a primary analysis we found results that we judged unrealistic, given our micro and
macro expectations. For this reason we emphasized the variations with greater probability
of happening (light blue shaded area; GDP growth between 3-5%).
Based on the current capital structure (D/E=6.03%), we have altered the D/E ratio in order
to see the changes in the WACC. Because the cost of capital (Ke) and the cost of debt (Ki)
are so close, changing the capital structure didn't change much the WACC.
Figure 3: WACC variation due to D/E changes Figure 3: WACC Variation due to D/E Changes
D/E Ki Levered Beta Ke in Brazil WACC
61.00% 13.80% 0.796 13.80% 13.81%
28.21% 13.80% 0.673 13.20% 13.34%
13.77% 13.80% 0.619 12.90% 13.05%
6.03% 13.80% 0.59 12.72% 12.79%
Source: Group's Estimates
Source: Group’s estimates
Major changes on WACC happen either when economic scenario or unsystematic risk
change abruptly: that would impact new acquisitions costs. Considering this, we used 0.25
percentage point variation around the current WACC to simulate small adjustments on the
capital structure and 0.5 percentage point variations to simulate more striking changes.
Nevertheless, we believe that WACC‟s future value will be between 12.55 and 13.3%, for
a level lower than 12.55% is inconceivable in the current capital structure.
Source: Group’s estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 5
Figure 4: Risk variation on WACC
Price in BRL
11.80% 12.30% 12.55% 12.80% 13.05% 13.30% 13.80%
0% 37.257 35.409 34.544 33.714 32.918 32.153 30.713
1% 39.079 37.02 36.06 35.143 34.266 33.426 31.85
2% 41.273 38.943 37.864 36.837 35.858 34.924 33.179
3% 43.966 41.28 40.046 38.876 37.767 36.712 34.755
4% 47.348 44.18 42.738 41.397 40.097 38.886 36.652
5% 51.726 47.875 46.143 44.524 43.007 41.583 38.98
6% 57.613 52.743 50.588 48.594 46.742 45.018 41.906
Perp
etu
ity
Gro
wth
WACC
Source: Group’s estimates
Consequently, we reinforce a buy recommendation, once the worst-case scenario inside
the framework of possibilities grants an upside of 7.98 %.
Value creation through M&A
Despite the fact that growth rate and WACC are extremely important to identify the fair
value, the lack of a detailed study about the future acquisitions possibilities would render
the analysis incomplete, because it has great importance in HYPE future growth.
We drafted three possible future scenarios, HYPE: 1) Stops M&A and grows organically,
2) Continues with aggressive acquisitions in the early years, decreasing slowly over time
due to less desirable opportunities, 3) Maintains the acquisitions until 2011 and, after that,
has mainly organic growth. These simulations take into consideration the investment on
PP necessary to bear the predicted growth in sales.
Figure 5: Growth Scenarios Figure 6: Sensitivity Analysis
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Price
Without M&A 78.00% 28.00% 20.00% 21.00% 22.00% 22.00% 21.00% 17.00% 15.00% 8.00% 35.553
With M&A until 2016 78.00% 40.00% 24.00% 26.00% 25.00% 28.00% 23.00% 19.00% 16.00% 10.00% 47.4
More M&A 2010 / 2011 78.00% 40.00% 24.00% 22.00% 23.00% 22.00% 21.00% 17.00% 15.00% 8.00% 41.455
S o urce: Gro up's Es tim ates
Ex
pec
ted
Gro
wth
Source: Group’s estimates
Once again we can reinforce a buy recommendation, as the worst-case scenario, not
considering further M&A, shows an upside of 4.57%.
The results near minimum and maximum values of both analyses reinforce that the stock‟s
fair value is between BRL 35.55 and 47.40. Because of our assumptions and
macroeconomic forecast, we believe that the third scenario is the most likely to happen,
thus we defined the stock value BRL 41.46.
Business Description
HYPE is one of the major companies in Brazil‟s consumer goods industry and the most
brand-diversified portfolio, including leader and vice-leader brands. HYPE is present in
the following industries:
Pharmaceuticals: the company has a line of over-the-counter drugs (OTC), which
provide a gross margin of 70-80%. HYPE doesn‟t develop patents; it only
commercializes nonprescription medications with great sales volume. Engov,
Merthiolate, Rinosoro, Tamarine®, Benegrip, Doril, Estomazil and Gelol to name
some principal brands in this segment, which responds for 35% of total evenue;
Personal Care: Monange, Paixão, Bozzano, Risqué and Cenoura & Bronze are the
main brands here. The gross margin is around 50-60% and 35% of HYPE‟s revenues
come from this segment. Hydrogen, Pom Pom, Olla, Jontex, are the recent
acquisitions in 20091, emphasizing the company‟s entry into child and youth markets
and the national condom market;
Food products: HYPE has a gross margin of 35-45% in food products, small margin
when compared to the others. Finn® and Zero-Cal are the main brands in this
segment, which represent 14% of global revenue;
1 Acquisition process not completed up until the closing of this report.
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 6
Household and Cleaning Products: Hypermarcas has a gross margin of 35-45%, and
it responds for 16% of total revenues and Assolan is the main brand.
Hypermarcas began its operations in 2001 with household and cleaning products by
acquiring Assolan. The acquisition process in other sectors began in 2006. It has made 26
acquisitions up until today.
The company relies on four distribution centers and six production unities situated in the
states of São Paulo, Goiás and Santa Catarina. The main distribution center is in Cajamar,
SP. Its plants present a lean structure and a capacity to grow in the next years (60% idle).
Growth Strategy
HYPE‟s growth strategy is based on M&A and organic growth. With respect to
acquisitions, the company buys forgotten, undervalued brands to expand its potential,
either extending or creating new product lines. These brands are chosen from companies
with financial or heritage problems, or from multinational companies that are closing their
operations or a specific line in Brazil.
With respect to organic growth, HYPE intends to expand its control of Brazilian market
by expanding product lines and stimulating its low-cost products‟ sale through the
upgrade of distribution channels.
Synergy guarantees lowest SG&A and major gross margin in the industry
HYPE is 3rd place in the consumer goods industry rank and its major competitors are
Unilever and Procter & Gamble. No Brazilian companies are direct competitors, except
for those which operate only in a specific business sector where HYPE operates.
The company achieved synergy gains in distribution channels and cost dilution by using
the same administrative center, which makes it the lowest G&A cost of the industry.
These competitive advantages, added to the attention on high margin businesses and
efficient supply chain management help HYPE achieve the highest margin in the industry.
We do acknowledge that HYPE‟s biggest competitors are not directly comparable, for
they don‟t have the exact same products (or are in the same segments), nor do they follow
the same accounting principles.
In-house Marketing
Another competitive advantage is that HYPE has its own in-house marketing agency,
which reduces costs by 40% compared to competitors. The policy of investing about 20%
of the net profit in marketing maximizes the return with cost reduction.
Stockholder Structure
Igarapava S.A. is the major stockholder, owning 34.15% of the company‟s stock; while
Maiorem S.A. owns 21.36%. Free float accounts for 30.20% and the remaining 14.29% of
HYPE‟s stocks belong to individual and corporate shareholders. HYPE follows the rules
of Novo Mercado (New Market): with corporate governance, the company improves its
institutional image, presents a low cost of equity and increases its stock demand,
guaranteeing its liquidity and future price growth.
Other Headings Relevant to Company
Financial crisis impact: less than expected
Right before 2008‟s financial crisis, Brazil‟s economy reached its peak; elevated degree of
investment, credit and consumption expansion and sovereign risk lowered by S&P and
Fitch. The crisis reduced external and domestic credit supply, which lead to an abrupt
reduction of growth and macroeconomic uncertainty rose. The economic flexibility,
shown by the quick GDP contraction, along with the absence of financial stress on the
bank system granted a rating upgrade to Baa3 by Moody‟s in September 2009.
However, Brazil was one of the first countries to recover from the global crisis, in 2009‟s
second quarter, because of consumption increase, as a result of monetary, political and tax
policies. Such policies increased minimum wage and reduced inflation and interest rates,
Source: Company
Source: Company
Stockholder Structure 2009
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 7
created Bolsa Família (a Brazilian grant aid for poor people) and reduced taxes, such as
automobile‟s IPI (tax on industrialized products).
As a result, the middle class income rose (the reduction of Gini index, which measures
income concentration level). Along with the evolution of income classes E to D and D to
C in the last years2, the consumer goods industry grew, and HYPE did too.
Figure 6: Macroeconomic Indicators
Figure 7: Macroeconomic Indicators
Explanation
2009E 2010E 2011E 2012E 2013E
Selic 8.75% 10.38% 11.00% 10.38% 9.88%
GDP 0.14% 4.69% 4.28% 4.26% 4.22%
IGP-M -0.72% 4.27% 4.50% 4.50% 4.50%
Exchange Rate 1.8 1.78 1.90 1.95 2.00
S o urce: B CB , Gro up's Es tim ates
Source: BCB, Group’s estimates
Government intervention
The National Agency for Sanitary Measures (ANVISA) revisited the resolutions about
medication communication on December of 2008 and medication trade on January, 2009.
Since June of 2009, celebrities cannot take or suggest a nonprescription during the
advertisement and the warning about the implications of the drug must occupy 12 of the
30 seconds for each advertisement.
HYPE‟s revenues depend 35% on OTC. When adapting its marketing strategies to the
2008 law, it lost brand visibility. However, it was not affected by the 2009 law that
obliges the medications to be behind the counter in the drugstores. OTCs may remain
within reach of users because they have therapeutic function and low risk to health.
Law 11.638/2007
HYPE is exempted from income tax payments for 6 years due to goodwill from M&A in
the last years. Although for taxes purposes there is still goodwill amortization, on the
balance sheet it is now differently recognized since January 2009. The last fact doesn‟t
interfere in our valuation, because it merely affects accruals.
Currency risk: opportunities for Hypermarcas
We believe that the exchange rate will maintain a baseline between 1.70 - 2.10 BRL/USD,
below the historical mean of 2.34. Such assumption considers inflation rates and the
increase of foreign capital entrance as Brazil becomes more relevant in the global
framework (commodities exportation, hosting both Soccer World Cup and the Olympics,
tourism, etc.).
HYPE imports between 10 and 15% of its raw material and around 35% of its gross debt
is tied to currency variation. Only debts with maturity within the next 12 months are
hedged. The major currency risk comes from the company‟s expenses. HYPE is only
negatively affected if BRL devaluates. However, as we have forecasted a BRL
appreciation compared to historical data, HYPE shall beneficiate from costs and financial
expenses reduction.
For that reason, the company will consolidate itself: lower production costs can be passed
on to the sale price of HYPE‟s non-leading products; on the products in which HYPE
leads sales, the cost reduction will increase the margin, for their price reduction is not
expected.
2 Classification of Brazilian consumers, according to Credit Suisse: Class E: US$419 per month; Class D: US$420-580 per month;
Class C (Middle Class): US$581-2,508 per month; Classes A and B: from US$2,508 on per month.
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 8
STRENGHTS 1. Ability to detect and buy famous, forgotten,
underinvested brands and develop them
2. Risk diversification due to presence in
different product lines and market segments
3. Strong lower cost brands (15% cheaper)
4. Customers diversification
5. Marketing in-house agency
6. Economies of scale (from synergy),
combined with a lean structure and low
SG&A cost
7. Nationwide sales and distribution structure
8. Minor downturns during economic crisis
9. Minimal currency exposure due to hedges
and expected exchange rate
WEAKNESSES
1. Dissociation between the brand and
company name
2. Risks increase because of the tendency
of revenues concentration in only two
segments (OTC and Personal Care)
3. Low appealing to income classes A and
B.
4. Low bargain power compared to
competitors
5. Difficulty to maintain M&A in the long
term
6. High idle capacity (60%)
OPPORTUNITIES
1. Population increase on C and D income classes
2. Development of new distribution channels
3. Brands and product line extensions
4. Growth through new acquisitions
5. Growth through market share gains
6. Growth in segments with higher profit
margins, such as OTC, cosmetics and personal
care
THREATS
1. Brand dilution (over extension)
2. Exposure to regulatory uncertainties
3. Promising Brazilian market attracts large-
scale direct competitors
4. Competition from private label retail
companies
5. Operations in sectors with strong
government regulation
6. Difficulty to manage broad portfolio
Industry Overview and Competitive Positioning
The rapid upturn of Brazil‟s economy can be traced to the internal consumption
development. The non-durable goods consumption rose 19% on the first semester of
2009, according to LatinPanel‟s research, which mainly blamed inflation over the crisis‟
effects on consumption rates. Another factor that positively increased consumption was
the increase of the population in HYPE‟s target income classes (B, C and D).
Figure 7: Evolution of Target Composition Groups % of Brazil‟s population
Source: FGV, Group’s estimates
HYPE‟s sales tagged along this uptrend. While the natural impact on consumption caused
by uncertainty is cost reduction, HYPE had a significant advantage, once its products are
aligned to offer quality at a low price.
The main factors that impact the four markets in which HYPE operates are 1) local and
national economic conditions, 2) real income of target consumers, 3) GDP growth rates.
Sales in all sectors are negatively affected by purchasing power decrease, and positively
affected by the increase of our target consumer income classes (B, C and D).
SWOT ANALYSIS
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 9
Figure 8: Income expenditure breakdown Figure 9: Income Expenditure Breakdown
% of income spent on Class B Class C Class D
Food 15.92% 25.65% 29.28%
House Care 0.62% 0.95% 1.14%
Personal Care 1.74% 2.67% 2.70%
Pharmaceuticals 2.12% 3.03% 3.42%
Source: IBGE
Source: IBGE
Household and Cleaning Products Market Analysis
This sector has approximately 30 companies representing 85% of total sales. The
competition is both with large international players and S&M national companies, formal
or informal (prices far below the average). The average real growth of the sector in the
last five years was 5.98% per year.
Sales depend on 1) changes in consumer needs for more practical products, 2) concern for
safe products, 3) precaution against new diseases and 4) search for environmentally
friendly products. In Brazil, ANVISA regulates and registers all the products in this
sector. Regulation and a difficulty to insert new products in the distribution channels
hamper the entrance of new competitors.
Household and cleaning products’ future: stable environment
We estimate a stable environment: the market is mature, there‟s the possibility of market
share expansion as the population begins to choose lower cost products and sales may
increase due to marketing exposure.
However, we do forecast uncertainties. Products are vulnerable to income reduction
because there‟s little differentiation and low consumer involvement. Large
slaughterhouses have adopted growth strategy through vertical integration forward,
extending its product lines to cosmetics and personal care, using the byproduct (tallow) as
raw material.
We believe HYPE will maintain its current position in this sector, but we do not expect
major investments, as it is the most vulnerable segment compared to the others.
Food sector analysis
Food sector is highly competitive and mature, with national companies of all sizes,
international companies and private brands of major retailers. HYPE operates in
“grocery” and “well-being and health” segments, specifically in tomato and „light and
diet‟ products. The sector‟s average real growth in the last five years was 8.22% per year.
HYPE‟s main competitor in tomato products is Unilever, that holds 50% of the market,
while HYPE has only 7%. On the other hand, HYPE is the leader in sweeteners segment,
controlling 65% of sales. Sales are influenced by product practicability, consumer concern
for healthy and nutritious products, time scarcity due to hectic living and women entrance
in the labor market.
The entry barriers for new competitors are the great number of existing products, strict
regulation, and high investment required in distribution channels and marketing.
Food sector’s future: growth opportunities
1) Capturing new consumers, both the ones reducing food expenses without affecting the
amount consumed and the ones who changed their income class and will experiment other
brands, especially those known and at an accessible price.
2) Extending light and diet lines, stimulating that habit on households where people do not
consume this kind of product (especially classes C and D): demand can increase by 65%.
However, we expected few investments in this segment, for much of the marketing efforts
are canceled by competition movements in response of these investments.
The uncertainties we forecast are related to the large number of competitors, the size of
players and the difficulty in reducing production costs (economy of scale) caused by the
high number of products in each product line.
House Care industry
Segmentation
Source: ABIPLA
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 10
Pharmaceutical sector analysis
HYPE operates in OTC pharmaceuticals which are regulated by ANVISA to guarantee
quality, efficiency and safety of medications. The sector‟s average real growth in the last
five years was 11.55% per year. In OTC industry the ten major players are responsible for
45% of the sector‟s invoicing. HYPE is the national leader and its main competitors are
multinational companies.
The consumer sensibility related to income improvements is particularly high in this
market; target income classes‟ migration increase OTCs sales. Furthermore, the OTCs
essentiality degree contributes to reduce the negative impacts on sales whenever there‟s a
reduction in consumer income. When that happens, there‟s a substitution process from
expensive drugs to those with the same active principle, but lower price. Nevertheless, the
buying decision for OTC drugs depends not only on price, but also on reputation, image
and history. Thus, a known brand is synonym of consumer trust in product‟s quality and
effectiveness.
Specific factors that influence sales are 1) population aging, 2) acceptance of generic
medications, 3) effectiveness of new drugs, 4) new diseases, 5) disease-prevention drugs
and 7) development of a self-medication culture.
New companies‟ entrance in OTC segment is low because it demands investment in
advertising and technology to develop a strong brand, there‟s strict regulation and there‟s
difficulty to insert new products in the distributors.
Pharmaceuticals sector’s future: opportunities to explore its competitive advantage
HYPE is bound to invest in this sector because consumer reacts favorably to advertising
and links brand with quality. Thus, there‟s the opportunity to explore even more its low
marketing costs competitive advantage, using advertising to create an effective bond with
consumers, improving their recognition of product‟s quality.
ANVISA‟s resolution, limiting drugs advertisement, may reduce brand visibility for
HYPE, being this is our main concern.
Cosmetics and personal care sector analysis
Despite the great number of competitors, the 15 major companies of the sector are
responsible for 70% of invoicing. An important factor is the number of micro and small
informal companies, reaching 40% out of the 1694 companies operating in this sector.
The sector‟s average real growth in the last five years was 10.6% per year.
In this segment, 78% of consumers are faithful to brands and willing to pay for it. Sales
depend on emotional appeal, marketing, innovation degree, safety and women‟s entrance
in the labor market.
The high number of firms is imputable to low initial investments and to the simplicity of
the production processes. However, when companies wish to gain market share they need
to make high investments in distribution channels, product development and marketing
(brands and packaging).
Cosmetics and personal care sector’s future: the most promising sector
We forecast the sector will receive the majority of HYPE‟s investments, once the
consumer is less sensible to prices variation and more faithful to brands, which reduces
risks. In addition, the sector has growth projections well above GDP growth.
HYPE‟s opportunities will be to use the in-house marketing structure to come closer to
consumers and to focus on products for B and C income classes, which responds for
72.8% of the consumption in personal care sector. Uncertainties arise from the large
number of competitors who may decrease profitability.
What we foresee for Hypermarcas
We believe that HYPE will use its strong brand-revitalization know-how to make new
acquisitions in OTC medications and personal care. These sectors have the biggest profit
margins and historical growth, and their marketing efforts are effective. We also forecast
Personal Care industry
Segmentation
Source: ABIHPEC
Source: Company
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 11
investments in diet and light food product lines. Household products will have less
importance on the portfolio, with investments merely intended for activities‟ maintenance.
Figure 9: Attractiveness Matrix Attractiveness Matrix
Source: Group
5.00 3.67 2.33 1.00 Strong Medium Weak
1.00
2.33
3.67
5.00
Low
Medium
High
Ma
rket Attra
ctiveness
Competitive Strength
OTC Food Personal Care Household
Source: Group’s estimates
Financial Analysis Revenues
Most of the company‟s growth since its beginning comes from M&A. To account for the
current acquisitions, we forecast a major growth for 2009 and 2010, of 78 and 42%,
respectively. The company has announced the intention to continue acquiring brands until
2010, and there‟s still BRL 1.3 bn to spend from the projected amount revealed.
Due to the company‟s strategy showed on recent acquisitions, we expect cosmetics and
personal care product‟s sales to increase its importance at HYPE‟s invoicing. OTC is also
expected to improve its revenues importance. Thus, we estimate that both sectors will
respond for more than 75% of total revenues.
Earnings
Free from financial results, the company‟s EBITDA grows above the industry‟s mean.
EBITDA of BRL 542.5M in 2009 is in line with the company‟s performance, yielding a
robust 27.4% margin with a CAGR 2009-2017 of 20.2%.
Figure 10: EBITDA Margin Evolution
Source: Company, group’s estimates
The high EBITDA margin shows HYPE‟s operational efficiency, supported by the ability
to maintain SG&A expenses under control. Net Income is negative until 2010, but EPS is
forecasted to grow from BRL -.12 in 2009 to 5.10 in 2017, a 59% CAGR.
Net Revenues Breakdown
Source: Group’s estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 12
Gross Margin
The increased focus on light and diet products, along with the new product lines recently
acquired in personal care are expected to increase the margin from 59.5 to 61.1% in 5
years. Pharmaceuticals are expected to have steady but small growth.
We raise our operational margin forecasts due to cost cutting obtained with the synergies
from acquisitions: plant restructuring, cost reduction from shared raw material, packaging
and logistics. Finally, operational margins will improve because of investment reduction
on businesses with mediocre results such as the household products.
Figure 11: Net Revenues and Gross Margin
Source: Company, group’s estimates
Cash Flow
During the financial crisis of 2008, credit scarcity affected suppliers and distributors so
that HYPE had to increase its average day‟s receivable, which became bigger than the
average days payable. As a consequence, sales decreased and inventory built up. For that
reason, free cash flow to firm decreased 29.6% in 2009 to BRL 440.0M.
In order to support the revenues growth in the coming years, production will use all of
today‟s idle capacity and there‟s a need to invest in PP in 2013. The proportional amount
of the investment is BRL 250M, showed on the CAPEX account. The new acquisitions
would also affect CAPEX values, but we cannot exactly forecast their amounts. The FCFF
yield for YE10 is 5.2%.
Balance Sheet
The capital structure for the following years was maintained at 35.5% (debt/capital), for
WACC calculations don‟t show much difference coming from plausible variations on
D/E. Thus, the return on equity for Y10 is 1.64% and the return on investment is 1.55%.
Because HYPE‟s history was made through M&A, the most important account in the
balance is goodwill, representing 83% of LT assets in Y09-10. HYPE‟s market-to-book
ratio is 3.54x, showing that the shares are selling way above the sum of the company‟s
assets‟ book value. However, P/B ratio is influenced by the depreciation and amortization
rates. HYPE‟s conduct on goodwill amortization is 5 to 5.5 years.
Investment Risks
The crisis had a minor and temporary impact on Brazilian companies’ results when
compared to similar companies in emerging countries. Consumption increased due to
Government’s policies and the economy restored how it was before the crisis. The latter
enlarges the possibility of a strategic movement of multinationals shifting investments to
markets where consumption was less affected; that would increase foreign investments in
the sectors where HYPE operates, making them more competitive and risking its high
margins.
Such movement is less concerning for consolidated multinationals companies who can
rapidly adapt to strategic changes, because they have well-known national brands, solid
productive structure and distribution channels. Furthermore, some multinationals have
been investing in umbrella brands development, extending known brands to diverse
product lines, reducing the number of brands they work with, the opposite strategy
adopted by HYPE.
From the company’s constitution through acquisitions, it is undeniable the risk arising
from goodwill and intangibles such as brands. Because a great part of its assets is in these
Source: Company
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 13
accounts, if that risk concretizes there would be a loss by impairment and not simple
amortization. Nevertheless, stock price might be affected by that risk and also from the
uncertainties of future acquisitions.
Currency exposure combined with difficulty to forecast future exchange rates and partial
hedges may also amplify its operational risks for the next years. Finally, the possible
concentration of HYPE’s results on OTC medications and cosmetics and personal care
can slightly reduce the company’s risk diversification.
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 14
Annex 1: Income Statement
In BRL millions 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Net Revenues 837.4 1333.0 1979.9 2771.8 3437.0 4193.2 5157.6 6292.3 7613.7 8908.0 10244.2
Cost Of Goods Sold 357.9 534.9 801.8 1113.5 1369.3 1653.8 2023.8 2447.7 2961.7 3465.2 3985.0
% of Net Revenues 42.7% 40.1% 40.5% 40.2% 39.8% 39.4% 39.2% 38.9% 38.9% 38.9% 38.9%
Gross Margin 479.5 798.1 1178.0 1658.3 2067.7 2539.4 3133.8 3844.6 4652.0 5442.8 6259.2
Gross Margin % 57.3% 59.9% 59.5% 59.8% 60.2% 60.6% 60.8% 61.1% 61.1% 61.1% 61.1%
Selling General & Admin Exp. 311.9 509.0 752.3 1053.3 1306.1 1593.4 1908.3 2391.1 2893.2 3385.0 3892.8
Amort. of Goodwill and Intangibles 163.2 332.7 526.0 520.0 518.0 476.0 290.0 87.0 61.0 17.0 4.0
Other Operating Expense/(Income) 8.6 8.3 (8.3) 34.0 56.6 90.0 133.4 184.5 355.8 371.7 421.40
EBIT (4.2) (51.9) (92.0) 51.0 187.0 380.0 802.0 1182.0 1342.0 1669.0 1941.0
EBIT Margin % -0.5% -3.9% -4.6% 1.8% 5.4% 9.1% 15.5% 18.8% 17.6% 18.7% 18.9%
Interest Expense (36.8) (44.4) (65.3) (91.5) (113.4) (138.4) (170.2) (207.6) (251.3) (294.0) (338.1)
Interest and Invest. Income 10.2 48.3 47.9 67.1 83.2 101.5 124.8 152.3 184.3 215.6 247.9
Non-operating Income (Expense) 74.3 (322.1) (29.7) (41.6) (51.6) (62.9) (77.4) (94.4) (114.2) (133.6) (153.7)
Profit Before Taxes 43.5 (370.1) (139.1) (15.0) 105.2 280.2 679.2 1032.2 1160.8 1457.0 1697.2
% of Net Revenues 5.2% -27.8% -7.0% -0.5% 3.1% 6.7% 13.2% 16.4% 15.2% 16.4% 16.6%
Income Tax Expense 16.6 (114.2) (111.3) (5.1) 35.8 95.3 230.9 351.0 449.0 501.0 560.0
35.8 95.3 230.9 351.0 394.7 495.4 577.0
Net Income 58.8 (207.9) (27.8) (9.9) 69.4 184.9 448.3 681.3 711.8 956.0 1137.2
% of Net Revenues 7.0% -15.6% -1.4% -0.4% 2.0% 4.4% 8.7% 10.8% 9.3% 10.7% 11.1%
NOPAT (2.8) (34.3) (92.0) 51.0 187.0 380.0 802.0 1182.0 900.0 1105.0 1284.0
% of Net Revenues -0.3% -2.6% -4.6% 1.8% 5.4% 9.1% 15.5% 18.8% 11.8% 12.4% 12.5%
EBITDA 184.1 309.1 542.5 726.2 890.2 1073.5 1315.2 1566.8 1751.1 2048.8 2356.2
EBITDA Margin 22.0% 23.2% 27.4% 26.2% 25.9% 25.6% 25.5% 24.9% 23.0% 23.0% 23.0%
Source: Company Documents. Student Estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 15
Annex 2: Balance Sheet
In BRL millions 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Current Assets 469.1 1045.7 985.6 1571.8 2136.8 2770.7 3094.4 4503.1 5419.1 7080.2 9035.2
Cash And Equivalents 99.3 149.8 14.3 235.1 495.2 784.5 666.5 1559.5 1868.2 2924.0 4255.6
Total Receivables 229.5 659.5 657.1 920.0 1140.8 1391.7 1711.8 2088.4 2527.0 2956.6 3400.0
Inventory 118.4 210.1 262.3 364.2 447.9 541.0 662.0 800.6 968.8 1133.5 1303.5
Other Current Assets 21.9 26.3 51.9 52.4 53.0 53.5 54.0 54.6 55.1 66.1 76.1
Long Term Assets 1501.5 2519.7 3160.3 3229.6 3279.0 3295.5 3521.4 3510.1 3561.8 3738.3 4168.9
Net Property. Plant & Equipment 110.8 138.4 147.4 155.4 166.4 179.4 444.4 468.4 488.4 525.4 565.4
Goodwill 1199.5 2017.9 2631.9 2689.8 2724.8 2724.8 2724.8 2724.8 2724.8 2724.8 2724.8
Other Long-Term Assets 191.2 363.4 381.0 384.4 387.9 391.4 352.2 317.0 348.7 488.2 878.8
TOTAL ASSETS 1970.6 3565.4 4145.8 4801.4 5415.8 6066.2 6615.7 8013.3 8981.0 10818.5 13204.1
Current Liabilities 400.6 644.1 1341.9 1913.5 2574.7 3060.1 3212.1 3800.8 4156.4 4761.3 5626.4
Short-term Borrowings 54.3 210.0 380.7 383.6 498.7 693.1 901.1 991.2 1189.4 1427.3 1570.1
Accounts Payable 36.9 115.4 462.6 809.0 1223.1 1449.2 1350.2 1777.0 1936.8 2305.2 2928.5
Curr. Portion of LT Debt 210.6 153.8 185.2 125.5 198.0 197.2 168.2 259.9 277.9 296.4 415.0
Other Current Liabilities 98.8 164.9 313.4 595.4 655.0 720.5 792.5 772.7 752.2 732.3 712.9
Long-term Liabilities 878.6 1004.8 663.8 758.9 643.4 624.8 719.2 945.7 846.1 1122.7 1506.0
Long-Term Debt 822.9 954.2 578.9 657.2 494.9 394.5 400.5 472.6 661.7 926.3 1296.8
Deferred Tax Liability 29.6 5.7 7.7 8.3 35.4 94.6 156.1 300.0 - - -
Other Non-Current Liabilities 26.2 44.9 77.2 93.5 113.1 135.7 162.6 173.1 184.4 196.4 209.2
TOTAL LIABILITIES 1279.3 1648.9 2005.7 2672.4 3218.1 3684.9 3931.3 4746.6 5002.5 5884.0 7132.4
TOTAL COMMON EQUITY 691.3 1916.5 2140.1 2128.9 2197.7 2381.3 2684.4 3266.7 3978.5 4934.5 6071.7
Source: Company Documents. Student Estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 16
Annex 3: Statement of Cash Flows
In BRL millions
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016 2017
NOPAT (92.0) 51.0 187.0 380.0 802.0 1.182.0 900.0 1.105.0 1.284.0
(+) Depreciation & Amortization 544.0 555.0 555.0 515.0 295.0 125.0 96.0 35.0 19.0
Free Operating Cash Flow 452.0 606.0 742.0 895.0 1.097.0 1.307.0 996.0 1.140.0 1.303.0
(-) CAPEX (27.0) (43.0) (48.0) (52.0) (250.0) (62.0) (55.0) (55.0) (55.0)
∆ Working Capital 15.0 (80.0) (68.0) (62.0) (61.0) (61.0) (61.0) (61.0) (61.0)
Free Cash Flow to Firm 440.0 483.0 626.0 781.0 786.0 1.184.0 880.0 1.024.0 1.187.0
(+) New Debt Issued / repayments (16.8) (58.1) (57.4) (58.1) (128.8) (65.4) (65.6) (68.6) (72.0)
(+) Equity Raised 281.7 0 0 0 0 0 0 0 0
(+/-) Fin. Res. after taxes and non-op. result
Free Cash Flow to Equity 704.9 424.9 568.6 722.9 657.2 1.118.6 814.4 955.4 1.115.0
Source: Company Documents. Student Estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 17
Annex 4: WACC Calculation
2009 2010 2011 2012 2013 2014 2015 2016 2017
US-Treasury 10 3.47% 3.47% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30% 4.30%
Risk Premium 6% 6% 4.79% 4.79% 4.79% 4.79% 4.79% 4.79% 4.79%
Brazil‟s risk (Cb - Tb) 3.38% 3.38% 3.38% 3.38% 3.38% 3.38% 3.38% 3.38% 3.38%
Perpetuity growth 4% 4% 4% 4% 4% 4% 4% 4% 4%
Leveraged Beta 0.59 0.59 0.59 0.60 0.60 0.60 0.60 0.60 0.60
Ke 12.48% 12.72% 12.67% 12.56% 12.56% 12.72% 12.72% 12.72% 12.72%
Ki 13.80% 13.80% 13.80% 13.80% 13.80% 13.80% 13.80% 13.80% 13.80%
Debt/Equity 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
WACC 12.55% 12.79% 12.74% 12.63% 12.63% 12.79% 12.79% 12.79% 12.79%
US inflation 2.15% 2.15% 2.15% 2.15% 2.15% 2% 2% 2% 2%
Brazil inflation 4.08% 4.31% 4.15% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Source: Company Documents. Student Estimates
CFA Society of Brazil October 26th, 2009
INVESTMENT RESEARCH CHALLENGE STUDENT RESEARCH 18
Disclosures:
Ownership and material conflicts of interest:
The author(s). or a member of their household. of this report [holds/does not hold] a financial interest in the securities of this company. The author(s). or a member of their household. of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…]
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implies flat returns over the next twelve months.
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