Bank of America has just downgraded its recommendation for Viveo from ‘neutral’ to ‘sell’, saying that the medical supplies distributor’s high cash burn could lead to some “liquidity event”, such as a capital increase.
The company’s shares fell 17% on the news, on a day when the Ibovespa rose.
Analyst Fred Mendes said that Viveo’s thesis has deteriorated a lot, as high leverage — 3.2x EBITDA, considering M&As — has impacted operating results given low margins and high working capital needs.
The bank said the hospital sector remains under pressure and that distributors are “the weak link in the chain,” which should limit improvements in working capital this year.
In this scenario, Mendes expects weak results in the first quarter, which made him lower his estimate for 2024 profit to R$200 million. With the 30% drop in earnings guidance, BofA is now 45% below consensus Bloomberg.
“The competition in complex products is increasing, and hospitals are more selective in terms of prices for materials and medicines, putting pressure on the entire chain,” Mendes wrote. “This has been reflected in pressured margins for Viveo.”
In the fourth quarter, Viveo’s gross margin fell 1 percentage point year-on-year, a compression that according to the bank will continue this year.
“As a result, we are reducing our estimate for the EBITDA margin to 6.8% in 2024 and 7% in the long term, a reduction of 100 basis points compared to our previous estimate,” the bank wrote.
For Mendes, this scenario — added to the company’s need for cash to pay debts, M&As and dividends — creates a risk that Viveo will continue to burn cash and potentially need a liquidity event, such as a capital increase.
“We see the company with R$1 billion in cash after the first quarter, while it burned R$1.6 billion last year, leading to a leverage of 3.2x EBITDA, with M&As,” wrote the analyst.
“On the positive side, Viveo has done a good job in terms of issuing debt (debentures) at a low cost of CDI + 1.6%, even though in the secondary market its debt is already priced at CDI + 4%.”
BofA also said that, although Viveo is trading in line with its history, at 8x estimated earnings for this year, “the greater operational risks led us to a more cautious view of the stock.”
