ATTO - Atento

[SafetyinNumbers]

Borrowing this from Maran Capitals Q419 letter:

 

Atento (ATTO)

Atento was another frustrating holding last year. I think intrinsic value is in the teens per share, yet over the last few months, the stock fell from ~$8 to ~$4 on no major change in the company’s fundamentals.

I never have a single “price target” for any of my investments. While I do estimate intrinsic value of companies I study and own, I try to think probabilistically, and in ranges. I can come up with what I think are reasonable scenarios that put Atento anywhere from ~$8/sh to ~$25/sh over the next few years. It is very hard for me to come up with a scenario that justifies the current ~$4 price. ATTO is trading at around 3x EBITDA on estimates of trough EBITDA, and at under 5x FCF (after maintenance capex). I think this is very far below private market value for the business. Of course, it could trade lower in the near term, but I am confident that the business is less volatile than the market seems to think it is, and that the business is worth considerably more than where shares are currently exchanging hands.

The company, controlled by a 66%+ owner who I believe to be rational and committed to a successful outcome, instituted a share buyback in the second half of last year. At current prices, share buybacks are the single best use of the company’s copious FCF generation, above M&A or growth capex.

[SafetyinNumbers]

I own ATTO and think besides it’s inherent cheapness (~6x EPS), another catalyst might be a regular dividend.

 

The company paid a special dividend in Nov 17 but hasn’t paid one since. When the CEO retirement announcement was put out a few weeks ago, one of his achievements noted was a dividend policy.

 

I followed up with IR, and the dividend policy is 25-35% of recurring income and will be determined in March/April if the BOD decides it’s appropriate. With adjusted EPS around $0.70, a 25% payout ratio, would be a dividend yield above 4% so perhaps it will catch the interest of dividend funds but it also might surprise quant funds.

[petec]

How do you think about the quality of the business vs the debt load?

[SafetyinNumbers]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

[petec]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

 

Consensus seems to have FCF at 60-80 and debt at nearly 500. I’ll take a deeper look.

[Spekulatius]

Interesting stock. looks like net debt is increasing and EBITDA is falling. It’s supposed to be the other way around. I am always surprised to see companies raising their debt in USD and having their revenues in emerging market currencies (BRL etc). I know that borrowing in USD is cheaper, but it’s also risky, if the local currency goes down against the USD making credit metrics worse. Why don’t these companies just pay more interest in local currencies and forget about gambling with the exchange rate? I guess these currencies shifts causing losses every couple of years can be discounted as extraordinary events losses and it’s all good?

[SafetyinNumbers]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

 

Consensus seems to have FCF at 60-80 and debt at nearly 500. I’ll take a deeper look.

 

I was using net debt and EBITDA for my calculation.

[SafetyinNumbers]

This has not been a good pick but has started to show some signs of life lately.

 

I theorized about a potential dividend earlier in the year but instead a new CEO came in and shelved the dividend and buyback until he assessed the situation. In August, they decided to renew the buyback which is over 30% of the float (higher when they announced it). This seems to have recently started to impact the stock although we won’t know how active they have been until November. I believe they have bought at least 2m shares back.

 

I recently learned that Bain (the controlling shareholder) issued some PIK Notes that are due in 2020 that use the ATTO shares as collateral. This might be incentivize to sell their shares but selling the whole company would get a bigger premium.

[SafetyinNumbers]

Anyone else looking at this name?

[Amitsham]

Yes, Atento is one of our fund's large positions. Wellington and other funds sold their positions and caused to collapse of the share price.  We talk with the new management and other large investors. Management understands that the company is trading at a significant discount (more than 100%). They will continue to return capital to shareholders, investing in growth and lowering leverage. They bought back ~3M shares in Q3, but we think it's the time for a large tender offer and we told that to the CEO. Based on our analysis of 13F database, we are very close to or at the point where there aren't big sellers. The company will continue to buy them out and to shrink the outstanding shares via a buyback or tender.

[Spekulatius]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

[SafetyinNumbers]

Yes, Atento is one of our fund's large positions. Wellington and other funds sold their positions and caused to collapse of the share price.  We talk with the new management and other large investors. Management understands that the company is trading at a significant discount (more than 100%). They will continue to return capital to shareholders, investing in growth and lowering leverage. They bought back ~3M shares in Q3, but we think it's the time for a large tender offer and we told that to the CEO. Based on our analysis of 13F database, we are very close to or at the point where there aren't big sellers. The company will continue to buy them out and to shrink the outstanding shares via a buyback or tender.

 

It's one of my biggest positions now too. I thought the investor day was very impressive.

 

We'll see how the Bain PIK bond works itself out but I think it's fascinating game theory.

[SafetyinNumbers]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

 

I don't think FCF before interest is a "moronic" metric. It just gives you an idea of what FCF yield on the EV is which some people find interesting for valuation.

[Spekulatius]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

 

I don't think FCF before interest is a "moronic" metric. It just gives you an idea of what FCF yield on the EV is which some people find interesting for valuation.

 

It is easy to make very wrong capital allocation decisions using this metric, like acquisitions that would be adding debt. I would hope that they don’t get paid using this metric.

[Amitsham]

So, don't use this metric, value the company base on the levered FCF, at any case it is extremely undervalue.

The company is the largest CRM/BPO provider in Latin America and trading at above 50% discount to peers.

There is money on the table and someone will take it soon.

 

 

[Amitsham]

"We apply a 2020E EV/EBITDA multiple of 6.0X, consistent with current valuation for Global CRM/BPO peers, yielding a theoretical M&A value of $7.0 per share" - Goldman Sachs, July 2019

[SafetyinNumbers]

"We apply a 2020E EV/EBITDA multiple of 6.0X, consistent with current valuation for Global CRM/BPO peers, yielding a theoretical M&A value of $7.0 per share" - Goldman Sachs, July 2019

 

Who do they throw in their peer group?

 

 

[Broeb22]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

 

I don't think FCF before interest is a "moronic" metric. It just gives you an idea of what FCF yield on the EV is which some people find interesting for valuation.

 

It is easy to make very wrong capital allocation decisions using this metric, like acquisitions that would be adding debt. I would hope that they don’t get paid using this metric.

 

Isn't that true of probably any valuation metric? Is P/E ever misleading? Do firms with low multiples of owner earnings ever underinvest in equipment and new products and kill their golden goose? It happens.

 

I think what these folks are saying is qualitatively they like the company and they think it is cheap. It has a lot of debt, which makes it more like an option in my opinion, but attacking the use of EV/FCFF as a moronic metric even though its commonplace says more about the poster than the metric.

 

 

[SafetyinNumbers]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

 

I don't think FCF before interest is a "moronic" metric. It just gives you an idea of what FCF yield on the EV is which some people find interesting for valuation.

 

It is easy to make very wrong capital allocation decisions using this metric, like acquisitions that would be adding debt. I would hope that they don’t get paid using this metric.

 

Isn't that true of probably any valuation metric? Is P/E ever misleading? Do firms with low multiples of owner earnings ever underinvest in equipment and new products and kill their golden goose? It happens.

 

I think what these folks are saying is qualitatively they like the company and they think it is cheap. It has a lot of debt, which makes it more like an option in my opinion, but attacking the use of EV/FCFF as a moronic metric even though its commonplace says more about the poster than the metric.

 

The debt certainly looks worse post IFRS changes but it seems entirely manageable. At what point of leverage does the equity become an “option” in your view?

[Spekulatius]

Moronic is probably too strong of a word , but Their FCF before interest is pretty misleading. It looks like after I retest, their FCF is close to zero.

 

They are in a crummy business ( call center etc) with a high debt loss operating in countries that are economically struggling with a high customer concentration. If their main customer ( Telefónica ) leaves, they are most likely toast.

[Amitsham]

"We apply a 2020E EV/EBITDA multiple of 6.0X, consistent with current valuation for Global CRM/BPO peers, yielding a theoretical M&A value of $7.0 per share" - Goldman Sachs, July 2019

 

Who do they throw in their peer group?

 

I don't know. Mybe SYKE, TTEC, SRT, TELEPERFORMANCE, CNDT

[Amitsham]

Moronic is probably too strong of a word , but Their FCF before interest is pretty misleading. It looks like after I retest, their FCF is close to zero.

 

They are in a crummy business ( call center etc) with a high debt loss operating in countries that are economically struggling with a high customer concentration. If their main customer ( Telefónica ) leaves, they are most likely toast.

 

I agree that in 2019 we will see ~$0 of FCF.

I think they can generate ~$40M of FCF in 2020 (after interest). The Market Cap is ~$205M

For me, it looks undervalue and they have a plan to return capital to shareholders.

The debt was effected from IFRS16

 

 

[cameronfen]

Moronic is probably too strong of a word , but Their FCF before interest is pretty misleading. It looks like after I retest, their FCF is close to zero.

 

They are in a crummy business ( call center etc) with a high debt loss operating in countries that are economically struggling with a high customer concentration. If their main customer ( Telefónica ) leaves, they are most likely toast.

 

I agree that in 2019 we will see ~$0 of FCF.

I think they can generate ~$40M of FCF in 2020 (after interest). The Market Cap is ~$205M

For me, it looks undervalue and they have a plan to return capital to shareholders.

The debt was effected from IFRS16

 

I looked at this company and reached the same conclusion as Spek.  Bad business too much debt.  Why will FCF improve significantly next year?  I didn’t research than in depth before moving on. 

[SafetyinNumbers]

Moronic is probably too strong of a word , but Their FCF before interest is pretty misleading. It looks like after I retest, their FCF is close to zero.

 

They are in a crummy business ( call center etc) with a high debt loss operating in countries that are economically struggling with a high customer concentration. If their main customer ( Telefónica ) leaves, they are most likely toast.

 

I agree that in 2019 we will see ~$0 of FCF.

I think they can generate ~$40M of FCF in 2020 (after interest). The Market Cap is ~$205M

For me, it looks undervalue and they have a plan to return capital to shareholders.

The debt was effected from IFRS16

 

I looked at this company and reached the same conclusion as Spek.  Bad business too much debt.  Why will FCF improve significantly next year?  I didn’t research than in depth before moving on.

 

I think so. New management came in earlier in the year and made a bunch of investments which hurt FCF this year but should reverse next year and help margins. Also, they have made improvements to accelerate deployments and reduce DSOs which should reduce working capital requirements. Both of these things should help FCF.

 

 

[Broeb22]

FCF before interest is not going to get them very far with their debt load.. My rule to avoid stocks where managements uses moronic metrics seems to be vindicated when I look at ATTO.

 

I don't think FCF before interest is a "moronic" metric. It just gives you an idea of what FCF yield on the EV is which some people find interesting for valuation.

 

It is easy to make very wrong capital allocation decisions using this metric, like acquisitions that would be adding debt. I would hope that they don’t get paid using this metric.

 

Isn't that true of probably any valuation metric? Is P/E ever misleading? Do firms with low multiples of owner earnings ever underinvest in equipment and new products and kill their golden goose? It happens.

 

I think what these folks are saying is qualitatively they like the company and they think it is cheap. It has a lot of debt, which makes it more like an option in my opinion, but attacking the use of EV/FCFF as a moronic metric even though its commonplace says more about the poster than the metric.

 

The debt certainly looks worse post IFRS changes but it seems entirely manageable. At what point of leverage does the equity become an “option” in your view?

 

I guess I would say when the outcome becomes binary, like an option. Heads you win a ton, tails you lose everything.

 

Qualitatively I agree that the customer concentration in Telefonica makes this option like already, except in that respect it’s more like selling puts you kind of grind along never earning great returns until one day it’s worth zero. Not saying that’s what happens here...

 

I’m not saying positions like this don’t have a place in somebody’s portfolio, but I wouldn’t want to put a lot of my money in this.

 

Here are the areas where this sits on a knife’s edge:

Substantial USD debt with foreign cash flows

Substantial debt relative to cash flow...10 years worth of cash flow in debt is a lot of time to get back to a decent balance sheet whether it’s 3 or 5 or whatever many years of cash flow

Customer concentration

Business that is or easily could be disintermediated by technology

 

In the end it’s somewhat qualitative on what makes something option like.