ATTO - Atento

[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.

 

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 think sometimes in this cases, it helps to step back and look at the thesis a bit. If the thesis is that this is a 20% FCF next year, my immediate inclination would be too look at other stocks that have a similar FCF yield and we now they compare.

 

I actually did so a while ago and came up with 3 high FCF yield stocks back then - CX (cement), MPC (refinery, midstream) and BRY (packaging). I guess you could add ATTO tot his mix.

 

Then I ranked the 3 companies , based on my confidence that they would make their numbers and  my  perception of risk.

 

My ranking was BRY> MPC> CX. I admit it is entirely subjective of course, but I decided to buy BRY.

 

If I would add ATTO to this mix, it would probably dead last. Again, this is my subjective rating and to be fair, ATTO projected FCF yield is higher than BRY (~15%). I also want to point out they I did this a couple of month ago, when all these were priced lower.

 

Anyways , it may not worth going into details, but I think it is worthwhile  to look at other stocks that may sort of fit under the same thesis or umbrella so it speak. I always try to make a comparison of any investment and play out why I should buy X and not Y and Z. Often when I do that, I end up buying  Y or Z.

[SafetyinNumbers]

I'm much more bullish on the company's prospects but I don't think we'll have a remotely clear picture of what the market thinks it's worth until the Bain PIK note negotiation is over.

 

 

[SafetyinNumbers]

This acquisition by TELUS sparked my interest as I think it illustrates the divide between public and private market valuations at this time.

 

https://www.globenewswire.com/news-release/2019/12/04/1956543/0/en/TELUS-Corporation-announces-agreement-to-acquire-Competence-Call-Center-through-TELUS-International.html

 

TELUS International seems to compete in the high end of what ATTO does and probably doesn’t have a low margin legacy contract like ATTO has with Telefonica.

 

By my math TELUS paid about 13x EV/EBITDA and the pro forma business has margins of ~22% which are about double ATTO. If ATTO management is successful in getting EBITDA margins to 15% by 2022 and have revenues stabilized at say 1.6bn, what multiple would the private market be willing to pay for that?

 

 

[Homestead31]

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.

 

Can you share any documentation you have seen around those Bain PIK notes?  i have been looking on sec.gov for the source docs that describe the arrangement, but haven't been able to find?

 

thanks

[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.

 

Can you share any documentation you have seen around those Bain PIK notes?  i have been looking on sec.gov for the source docs that describe the arrangement, but haven't been able to find?

 

thanks

 

I haven't been able to find much but I included some references I found below. My understanding is that all of the proceeds from the IPO for shares sold by Bain and from the secondary sold by Bain were used to reduce the loan outstanding. I have been told the PIK rate is 13% but I haven't been able to corroborate that. My math suggests, Bain starts to participate in returns once the share price is over $8-8.50.

 

Details from page 163 of the final prospectus filed on 10/3/2014

PIK Notes due 2020

 

"On May 30, 2014, PikCo, our parent company, issued €137.5 million and $191.5 million aggregate principal amount of PIK Notes pursuant to an indenture, dated May 30, 2014, among PikCo, as issuer, Topco, the direct holding company of PikCo, as security provider, Citibank, N.A., London Branch, as trustee, security agent and paying agent, and Citigroup Global Markets Deutschland AG, as registrar, governing the Senior PIK Toggle Notes. The PIK Notes are senior secured obligations of PikCo and are not guaranteed by any party.

 

The PIK Notes will mature on May 30, 2020. PikCo may decide in its sole discretion to pay all or a portion of the interest payable for any interest period in cash or in kind.

 

The indenture governing the Senior PIK Toggle Notes contains covenants that, among other things, restrict the ability of PikCo and certain of its subsidiaries, including us, to: incur or guarantee additional indebtedness; issue, redeem or repurchase certain debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting certain subsidiaries’ ability to pay dividends; and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of important exceptions and qualifications. In addition, in certain circumstances, if PikCo sells assets (including a sale of capital stock to third parties pursuant to a public equity offering or otherwise), or experiences certain changes of control, it must offer to purchase all or a portion of the Senior PIK Toggle Notes at a price equal to par plus a premium."

 

Details from the 20-F filed on 3/31/2015 page 86

 

A proportion of the PIK Notes were redeemed at the time of the IPO, amounting to 24,368,574.97 of the EUR tranche and 33,747,581.60 of the USD tranche.

 

 

[Amitsham]

I doubt the company will stay public if the price continues to be so ridiculous.

I believe we will see a shareholders' meeting very soon (Jan 2020) to approve a new capital return plan. We want to see a tender offer.

 

From many converations with management, they understand this situation well and think the company is worth much more. I would expect them to act faster rather than just focus on operational improvement.

 

I guess we won't have to wait until the last minute to know who is the controlling shareholder of the company.

 

 

[SafetyinNumbers]

I doubt the company will stay public if the price continues to be so ridiculous.

I believe we will see a shareholders' meeting very soon (Jan 2020) to approve a new capital return plan. We want to see a tender offer.

 

From many converations with management, they understand this situation well and think the company is worth much more. I would expect them to act faster rather than just focus on operational improvement.

 

I guess we won't have to wait until the last minute to know who is the controlling shareholder of the company.

 

It would be nice if they can buy some stock back before they report in March. Even with FCF in Q4 likely over $40m and TTM EBITDA likely up at least $10m. Even if it can just keep its discounted multiple of 4.5x EV/EBITDA, the stock would tick up over US$4 from US$2.80 now.

[Amitsham]

It will be difficult for them to buy a significant amount of shares in the market. The better way would be to make a tender offer.

For that we need a sharholders' meeting, which will hopefully be in January.

I told the management that we were disappointed with their slowness as the stock trades as if the company was going bankrupt.

I believe that in the end of the first quarter of 2020 we will be after the sharholders'  meeting and with a solution for Bain's PIK loan.

[SafetyinNumbers]

It will be difficult for them to buy a significant amount of shares in the market. The better way would be to make a tender offer.

For that we need a sharholders' meeting, which will hopefully be in January.

I told the management that we were disappointed with their slowness as the stock trades as if the company was going bankrupt.

I believe that in the end of the first quarter of 2020 we will be after the sharholders'  meeting and with a solution for Bain's PIK loan.

 

Yeah, a few catalysts ahead of the earnings catalyst. I will add the end of tax loss selling tomorrow which may alleviate selling by tax sensitive disenchanted shareholders.

 

I think we could trade to 6x EV/EBITDA once the Bain PIK is out of the way, which is pretty close to $8 post Q4 results.

[SafetyinNumbers]

Wrote this up

 

‪https://seekingalpha.com/article/4314926-atento-deserves-your-attention?source=tweet ‬

[SafetyinNumbers]

Wrote this up

 

‪https://seekingalpha.com/article/4314926-atento-deserves-your-attention?source=tweet ‬

 

I added a couple of comments to the article, yesterday afternoon and this morning with respect to recent pressure on the shares presumably due to RSUs vesting a few days ago and the company filing for a shareholder meeting to authorize a share tender at a premium or discount to the current share price.

 

 

[StevieV]

Thank you.

 

They also filed yesterday for a shareholder meeting to be held on Feb 4 to authorize the BOD to pursue a premium (or discount) tender for up to 30% of the shares at their discretion over the next 5 years.

 

https://www.sec.gov/Archives/edgar/data/1606457/000119312520003870/0001193125-20-003870-index.htm

 

More details in the article above as well.

 

Safety - Above is what you said in the buying today thread.  Seems important, but somewhat undefined.  Up to 30% is big, but over the next 5 years is a long time.  Plus, they issue a good number of shares.

 

I see a big move up as I check the quote right now. The stock is too thinly traded to put much weight behind every move, but up is better than down and comparatively big volume this morning.

[SafetyinNumbers]

Thank you.

 

They also filed yesterday for a shareholder meeting to be held on Feb 4 to authorize the BOD to pursue a premium (or discount) tender for up to 30% of the shares at their discretion over the next 5 years.

 

https://www.sec.gov/Archives/edgar/data/1606457/000119312520003870/0001193125-20-003870-index.htm

 

More details in the article above as well.

 

Safety - Above is what you said in the buying today thread.  Seems important, but somewhat undefined.  Up to 30% is big, but over the next 5 years is a long time.  Plus, they issue a good number of shares.

 

I see a big move up as I check the quote right now. The stock is too thinly traded to put much weight behind every move, but up is better than down and comparatively big volume this morning.

 

Stevie, what do you mean by “Plus, they issue a good number of shares”?

 

The stock could just be bouncing because it’s down big in the last few days presumably helped down by the RSU vesting and related sales.

 

When I was at the Investor Day and if you listen to the webcast, I think you will agree management believes the stock is undervalued. While I expect them to move on the buyback in the next 6 months, I can understand not assuming that they do.

 

[StevieV]

From the Q2 2019 conference call (https://seekingalpha.com/article/4281193-atento-s-atto-ceo-carlos-lopez-abad-on-q2-2019-results-earnings-call-transcript?part=single)

 

You may have noticed that our shares outstanding have increased despite our buybacks. We're compensating more of our management with restricted stock, further aligning management with shareholders.

 

That quarter had a limited number of buybacks because they just resumed the buyback program in the last month of the quarter (214K shares).

 

Quite frankly, I don't have a good idea off the top of my head how many shares they grant/year and how significant it is to the overall share count.  I think I just had recalled this line from the Q2 call and have it on my mind to look into. You mentioned 886K in RSUs vesting this year.  That is a significant number, especially in a less than $200 million market cap company.

 

Also, I agree that it is likely that ATTO does a significant share repurchase in the near term rather than extend the 30% out over 5 years.  Just like to also be aware of specifically what they said.

 

If you have an estimate of yearly dilution due to share grants, I'd be interested to hear it.

[SafetyinNumbers]

Last year was an exceptional year for RSU grants because of all of the management changes and they issued about 3.3m RSUs of which 75% were for management and the balance for the board. In the three years prior to that, they had issued about 2.9m RSUs in aggregate of which ~22% were forfeited so far.

 

The RSUs issued last year were pretty much offset in Q3 when they bought back 3m shares. They have about 71.1m net shares outstanding before what ever RSUs vested last week. I should say on closer inspection of that 866k shares that were supposed to ves last week, 380k were forfeited as of the end of Q3.

 

I think last year was exceptional for RSU issue because of the management change and I like that new management is aligned with shareholders.

 

Thanks for highlighting, I think it's definitely something to keep an eye on going forward.

 

 

 

 

[StevieV]

Wow, this stock moves quickly, both ways unfortunately.  Up 20+ cents today.  Could give it up tomorrow.

[SafetyinNumbers]

Yeah for sure.

 

I think the RSU selling probably accelerated another seller or sellers. So many institutional accounts use percentage of volume/VWAP algos so that they get fills and don't look "bad" doing it. I suspect the RSU program probably used a similar sell strategy. Every time I would buy stock, the stock would plunge lower!

 

I remember when I worked on a prop desk in NYC during the financial crisis and my PM was panicking about someone else's (thankfully) risk arb position. He decided he wanted to sell 100k shares at 25% of the volume and the stock started plummeting. He started asking why it was going down like he didn't realize he was probably the fifth guy to sell at 25% of the volume.

 

In the ATTO situation, part of the thesis here is that fundamental institutional buyers are waiting for the Bain resolution to either initiate or add to positions (if they bothered to look that far). That puts us in a bit of strange situation for where the stock should trade. Any sellers need to be met by fundamental value investors that don't have to worry about short term volatility or drawdowns and there aren't that many of those types of investors around anymore. Those investors stepped up in a big way last week but those are also the type of investors to be spoiled by low prices.

 

All that to say, price discovery will have to wait until we find out Bain's plans and/or a tender offer is initiated by the company following the expected approval on Feb 4. I suspect that the company might pair the news of the tender with Bain's news. The tender price will then act as an anchor for the stock price which might be useful if the objective is trying to buy back as much stock as possible at the lowest price. 

 

 

[SafetyinNumbers]

I thought I would add the SA article as an attachment for reference to those who might not have access.

Atento_Deserves_Your_Attention_-_SA_-_1.18.20.pdf

[Spekulatius]

I thought I would add the SA article as an attachment for reference to those who might not have access.

 

SafetyinNumbers, thanks for attaching the SA article which explains the mechanics about the PIK note. This is very helpful for me and probably for others on the fence.  I have a small position only acquired recently (between $2.5-$2.6) and feel like I have now a better understanding of the situation. If the PIK note indeed becomes due by settling with shares and this flood the market, it would be a great opportunity to just add more shares.

[SafetyinNumbers]

I thought I would add the SA article as an attachment for reference to those who might not have access.

 

SafetyinNumbers, thanks for attaching the SA article which explains the mechanics about the PIK note. This is very helpful for me and probably for others on the fence.  I have a small position only acquired recently (between $2.5-$2.6) and feel like I have now a better understanding of the situation. If the PIK note indeed becomes due by settling with shares and this flood the market, it would be a great opportunity to just add more shares.

 

No problem. I think you are right but either way, I expect a tender offer from the company. Perhaps less of a premium and greater participation if the shares become wildly held.

 

 

 

 

 

[mikazo]

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?

 

Hi, I'm late to the party, but I saw this idea in the multi-bagger opportunities thread and thought I'd do some research. I read through this thread first and then started looking at documents from the Atento website. I'm only just getting started, but a footnote stood out to me in their Q3 2019 results, in answer to your comment about exchange rates affecting interest rates:

 

"(1) Cross currency swaps covers 100% of interest until maturity in Aug/2022" (page 13 https://s3.amazonaws.com/mz-filemanager/89e54f51-9039-43b3-9c2c-45e55fab990c/956c297c-a833-4ee3-ab45-2e24ed5d1705_Q3%202019%20Atento%20Earnings%20Presentation%2011.13.19.pdf)

 

I don't yet know what the cost of these swaps are.

[SafetyinNumbers]

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?

 

Hi, I'm late to the party, but I saw this idea in the multi-bagger opportunities thread and thought I'd do some research. I read through this thread first and then started looking at documents from the Atento website. I'm only just getting started, but a footnote stood out to me in their Q3 2019 results, in answer to your comment about exchange rates affecting interest rates:

 

"(1) Cross currency swaps covers 100% of interest until maturity in Aug/2022" (page 13 https://s3.amazonaws.com/mz-filemanager/89e54f51-9039-43b3-9c2c-45e55fab990c/956c297c-a833-4ee3-ab45-2e24ed5d1705_Q3%202019%20Atento%20Earnings%20Presentation%2011.13.19.pdf)

 

I don't yet know what the cost of these swaps are.

 

I'm not an expert on currency swaps but they seem to just be risk management. Certainly if the USD keeps going up, they will have to reduce their USD debt outstanding which is the plan anyway.

 

From the 20-F disclosure:

 

"In accordance with our risk management policy, whenever we deem it appropriate, we manage foreign currency risk by using

derivatives to hedge any exposure incurred in currencies other than those of the functional currency of the Countries.

The main source of our foreign currency risk is related to the Senior Secured Notes due 2022 denominated in U.S. dollars. Upon

issuance of the Notes, we entered into cross-currency swaps pursuant to which we exchange an amount of U.S. dollars for a fixed amount

of Euro, Mexican Pesos, Peruvian Soles and Brazilian Reais. The total amount of interest (coupon) payments are covered (until maturity

date) and also a portion of the principal (until January 2020). "

 

From the latest 10-Q:

 

"As of September 30, 2019, the estimated fair value of the cross-currency swaps designated as hedging instruments totaled a net asset of 11,047 thousand U.S. dollars (net asset of 11,066 thousand U.S. dollars, as of December 31, 2018)."

[SafetyinNumbers]

Reminder the shareholder vote to authorize the BOD to pursue a tender offer at their discretion is on Tuesday morning.

 

https://www.sec.gov/Archives/edgar/data/1606457/000119312520003870/d849129dex991.htm

 

 

[StevieV]

Safety,

 

I assume that the authorization will be approved.  Seems to me as though the original announcement was more important to tomorrow's authorization vote.

 

Are you expecting anything additional, such as an announcement as to what action they will take on buybacks and when?

[SafetyinNumbers]

Safety,

 

I assume that the authorization will be approved.  Seems to me as though the original announcement was more important to tomorrow's authorization vote.

 

Are you expecting anything additional, such as an announcement as to what action they will take on buybacks and when?

 

I’m not sure if there will be any additional announcement. It’s just that the possibility will be live assuming they get authorization tomorrow.

 

My current belief is that the note holders will be taking equity from Bain. Perhaps, I am being optimistic, but I don’t think they are sellers. If that’s the case there is no reason to rush the conversion of the PIK notes to equity before maturity (May 31) and the company could announce a tender at any time.

 

The BOD also has some special RSUs that vest on March 1 so it might be in their best interest to launch a tender before then.

 

My preferred strategy is to pair the news of the conversion of the PIK notes with the tender because I think it would anchor the share price. I want ATTO to be able to buy as many shares as possible as cheaply as possible.