Seeing worrying deterioration, Itaú BBA downgrades Mosaico’s stock recommendation (MOSI3) and cuts target price by 67%

Event with the ringing of the opening bell of the trading session marked Mosaico’s public offering (Credits: Cauê Diniz/Disclosure)

Itaú BBA downgraded the recommendation for the shares of Mosaico (MOSI3), which owns the Zoom and Buscapé websites. Analysts at the bank assess the company’s quarterly results, released this month, as a negative surprise, indicating not only a transient weakness but also a worrying deterioration in the growth outlook for the company’s core business.

Analysts assessed Mosaico’s recent performance based on a detailed analysis of its website traffic, app usage and referrals to online stores.

The bank assesses that the company’s recent slowdown not only affects its forecasts for short-term growth, but indicates challenging longer-term trends for the price-comparison business.

Thus, it downgraded the recommendation for MOSI3 from outperform (performance above the market average) to marketperform (performance in line with the market average) and reduced the target price by 67%, from BRL 39 for 2021 to BRL 13 in 2022, representing an increase of only 2.4% compared to Tuesday’s price of R$ 12.70.

Website traffic and the use of mobile apps point to intensifying competition in the reference environment, analysts assess, noting that the results recently released by Mosaico show a continuous trend of falling quarter-on-quarter. Its share of the online sales market in Brazil dropped from 4.2% in the first quarter of 2020 to 2.3% in the second quarter of 2021, dropping by almost half in just over a year.

“We investigated this poor performance by running a structured analysis of website and mobile app traffic
of use for reference platforms collected by Similarweb. Our conclusion was that price comparison tools are losing ground to cashback, coupons and social commerce platforms”, they assess.

Analysts say that while there are several potential reasons for this trend, they emphasize the progress of online channels into less ‘commoditized’ and low-cost categories (such as clothing and beauty), as well as refusing to re-engage through tools such as offer personalization (because a significant portion of price comparison visitors are not logged in and therefore cannot be identified).

They also looked at trends from an online store perspective, looking at how leads from Mosaico have performed over the past 12 months. “What we’ve seen is that the company is bringing the same percentage of visitors to online store sites, but those visitors are generating GMV [vendas brutas de mercadorias] lower, which may indicate lower conversion rates.

This trend could be explained by the growing number of options that consumers have in seeking the lowest possible price, before closing their purchases. In this scenario, an online consumer can go to Zoom or Buscapé to see which online store is offering the desired product at the lowest price, and then can go to a cashback or coupon platform to take advantage of an additional discount at that store.

Thus, analysts assess that the stock’s correction is attributable not only to lower estimates, but also to a considerable reduction in the assessment of the company’s prospects.

“In our estimates, we are now working with much more conservative GMV projections – around 40% lower in the coming years. Meanwhile, the de-rating – which we estimate to be responsible for the remaining 12% of the stock correction – can be attributed, we think, to two main factors: i) the faster-than-expected deterioration in the outlook for the core business of the Mosaico, with competitors gaining ground in recent quarters; and ii) the market’s disappointment with the company’s slow response to this new competitive environment, with its cashback initiative not yet fully implemented”, they assess. The shares have fallen 52% since BBA began hedging for the asset.

In its modest May launch, analysts note, the cashback feature was only enabled for a limited portion of Mosaico’s partners.

“In our opinion, the likelihood of an inflection point in Mosaico’s current downtrend depends heavily on the outcome of its cashback initiative. Why [avaliam que] More steps remain before this feature can be considered fully implemented, we anticipate a still challenging scenario in the near term, which should dampen investor excitement and which justifies our more cautious approach to investment history. We expect the coming months to be decisive for the case, with the initial results of the cashback initiative, and we will be ready to quickly adjust our forecasts and posture in case convincing numbers are reported,” they highlight.

Generators are also reviewed by the bank

Also highlighted, Itaú BBA analysts also renewed the estimates for the companies generating its coverage, updating the target prices from 2021 to 2022 and downgrading Cesp shares (CESP6) to marketperform (performance in line with the average of the market), maintaining the outperform recommendation (performance above the market average) for Engie (EGIE3) and Omega (OMGE3).

Analysts point out that generator shares underperformed the Ibovespa and the sector index, IEE, due to: i) higher interest rates; ii) worsening of the hydrological crisis, impacting the GSF [medida de risco hidrológico] and spot energy prices; and iii) an increase in investors’ appetite for risk after the reopening of the economy and upward revisions to the GDP figures.

“However, we believe this trend may start to change as the macro outlook has deteriorated and we now expect investors to buy high quality defensive names that are trading at a very attractive valuation,” they point out.

The changes in the main assumptions for the assessments of generators, due to the worsening of the hydrological crisis and macro perspective, are as follows: i) higher cost of equity (increase of 1 percentage point); ii) worst GSF deficit (20% for 2022 and 10% for 2023 onwards versus previous assumption of 5% for both cases); and iii) lower long-term energy price assumptions (R$150 / MWh for conventional energy versus previous assumption of R$160 / MWh). In addition, analysts updated the macro assumptions to incorporate higher inflation and higher
Selic rate

With these new premises, analysts cut the outperform recommendation for marketperform Cesp’s shares and reduced the target price (ex-dividends), reducing the target price from R$38 for 2021 to R$24.50 for 2022. Although they emphasize that Cesp is trading at an attractive implicit valuation (with an Internal Rate of Return [TIR]]of 8.9%), see no reason to buy the shares in the short term, given: i) the water crisis and the challenging prospects for the GSF; i) little visibility on the payment of the Três Irmãos Indemnity; iii) potential increase in the pension fund deficit; iv) low visibility of its growth strategy and v) increase in interest rates.

Engie, on the other hand, maintained its outperform, but the target price was reduced from R$49 to R$43.80. “We see Engie as a
high quality company, with an excellent history of capital allocation and attractive valuation (traded at an implicit IRR of 8.7%)”, the analysts point out.

Furthermore, despite the challenging hydropower prospects, Engie is one of the few companies with a relatively comfortable energy balance to offset the impact of the GSF. Finally, analysts expect Engie to complete the sale of the Jorge Lacerda and Pampa Sul coal plants by the end of the year, ending its coal exposure in line with its focus on ESG.

Omega was also maintained with an outperform recommendation, but with a cut in the target price from R$ 44 for 2021 to R$ 37.80 in 2022.

“In our opinion, Omega is one of the few companies to benefit from this challenging hydropower outlook, given its exposure to wind and solar assets. We expect positive earnings trend going forward, as the second half of the year will be much better given the ‘wind seasonality’. In addition, we like their history of capital allocation and the latest acquisitions have added value”, they assess.

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