ATTO - Atento

[valuedontlie]

Woops... was looking at the Brazil region revenue...

 

So $1.7bn at LSD growth call it ~$1.75bn @ 12.5% EBITDA margin is $220m... 4.25% cash capex is another $75m... $37.5m interest expense = $108m before income taxes and WC... no?

 

 

 

 

[valuedontlie]

Finally got around to looking at this name... pretty interesting really...

 

Revenue growing (despite huge customer concentration issue)... good balance sheet... generates cash... margins improving...

 

I typically steer clear with these levels of customer concentration. Also, they are doing themselves a huge disservice by recording op leases as debt... especially if they compare it to EBITDA instead of EBITDAR... they didn't just magically add 2.5 turns of leverage this year.

[StevieV]

Hey Safety.  Q1 report this week.

 

Looks like Bain is out.  Consortium of others in.

 

[SafetyinNumbers]

Hey Safety.  Q1 report this week.

 

Looks like Bain is out.  Consortium of others in.

 

Yeah, the consortium of others were the PIK note holders (HPS, GIC, Farallon). The two year lock up was a good result and ties in with the senior notes that are due August 2022. Presumably, if they haven’t refinanced the notes by 2022, they will run a sale process.

 

Overall, the results were decent given the circumstances. They were able to generate positive operating cash flow in what is usually a negative quarter due to seasonality. On the conference call, they were less concerned about the liquidity situation than the market is so hopefully that can ease concerns a bit.

 

Obviously, this was a terrible idea and has been since I posted it so my apologies to anyone else that got hurt too. I didn’t expect a pandemic or the impact it would have on Latin American currencies. So I have held all the way down and still think the stock is cheap. With USD debt though, if the currencies keep falling, I think they will have to move quick to sell to a strategic buyer but the equity value could get hit.

[SafetyinNumbers]

The stock has bounced a bit in the last few days.

 

- Perhaps the big move in the BRL off of the lows is helping or the general weakness in the USD.

- the company could be buying stock back which would be a big signal and relatively cheap to send

- the company might be able to convince one of its new large sophisticated shareholders to lend it’s some money to buy back some of the 2022 debentures. Those bonds traded as low as 58 and are now around 72. It would be very accretive to equity to buy them back.

 

From a fundamental perspective, Covid should keep pressure on revenues and EBITDA. They are operating under capacity so fixed costs are going to cut into margins. They were doing about $50m run rate EBITDA for Q1 pre-Covid and they might be lucky to do $20m in Q2.

 

 

[StevieV]

Safety - Any idea what is going on this week?

[SafetyinNumbers]

Safety - Any idea what is going on this week?

 

I think people or computers got excited about the multiple 13D filings (from HPS and GIC) but other than that, I have no idea. They were filed Monday night and the stock jumped in after hours and continued yesterday.

 

 

 

[SafetyinNumbers]

Some recent updates:

 

- ~5 for 1 share consolidation approved  yesterday and effective tomorrow for trading.

 

- The new board members from HPS, GIC and Farallon were all officially appointed to the BOD as well.

 

- The company's 2022 bonds traded above 90 for the first time since March.

 

- recent USD weakness could translate to BRL strength which would be incredibly bullish but we are still a long way to get back to pre-covid levels.

 

I expected EBITDA to be down significantly quarter over quarter when they report next week but they might be able to defer enough payables to be free cash flow positive. We'll also find out if they were active on the buyback which might send a signal over their comfort on liquidity.

[SafetyinNumbers]

My working theory is that today's sell off is people not realizing the shares are consolidated and selling their win fall profits.

 

Obviously, it's a volatile stock but the volume on an adjusted basis is the highest this year and I can't see another catalyst for big volume.

 

It sounds silly even writing it but 2020 has been anything but normal.

[capitalg]

Strange trading action today...

[SafetyinNumbers]

I think related to my comment from yesterday. Overselling kicked off some short covering and then momentum traders also jumped on. Wild stuff.

[SafetyinNumbers]

I really liked the Q2 results reported last night. It was much better on free cash flow and overall profitability appears to have recovered in June. Revenue in USD is down a lot given their exposure to Latin American currencies but that was expected.

 

https://s3.amazonaws.com/mz-filemanager/89e54f51-9039-43b3-9c2c-45e55fab990c/61af9c48-ac2d-4ad6-a83c-d65bef0e18fa_fiscal%202020%20q2%20earnings%20release%20080520.pdf

 

The most important news is they have started the process to refinance the senior notes due in August 2022 and unlock shareholder value. The bonds should trade up from the recent price of 92.

[StevieV]

I thought it was positive as well.  The stock has bounced around a bit today, but up a bit as I type.

 

I didn't view the announcement of beginning the financing process as that significantly favorable as you appear to have.  I think that is pretty much a given.  The key will be getting the financing done and at what terms.

 

Is your assumption that the announcement that they have started the process means they think things are or will go reasonably well?

 

Anything from the conference call of note?

[SafetyinNumbers]

I thought it was positive as well.  The stock has bounced around a bit today, but up a bit as I type.

 

I didn't view the announcement of beginning the financing process as that significantly favorable as you appear to have.  I think that is pretty much a given.  The key will be getting the financing done and at what terms.

 

Is your assumption that the announcement that they have started the process means they think things are or will go reasonably well?

 

Anything from the conference call of note?

 

They didn’t get into too much detail on the financing except that new financing would be done at terms that are beneficial to all stakeholders including shareholders which includes the cost of debt.

 

They bought about 80k shares (post consolidation basis) and it sounds like buybacks would continue.

 

It’s worth a watch. It’s the first company I have seen do a video chat for a conference call. I think they are saying and doing the right things. Hopefully, it’s just a matter of time.

 

At least the Robinfolk got everyone to keep sell orders outstanding so if any new buyers want in, there should be more supply this time around between 8 to 18 than there was last week.

 

 

[StevieV]

Looks like it is going to be another crazy day in Atento trading.

[SafetyinNumbers]

The float looks really small post consolidation (even though it’s unchanged on a $ basis). 4m shares is hardly anything and about half of that think it’s worth at least $40.

[SafetyinNumbers]

Forgot to put this recent seekingalpha article here:

 

https://seekingalpha.com/article/4369479-atento-deeply-undervalued-significant-potential?v=1597840895&comments=show

[SafetyinNumbers]

Nice twitter thread from the recent conference call on refinancing the debt after Labor Day.

 

 

The bonds traded at 98 yesterday and there is a 103 call provision so there might be some incentive for existing holders to push it through.

 

The stock has been pulling back on low volume which might be an interesting entry point. The float is tight with only about 4m shares outside of GIC, HPS and Farallon.

 

Net debt is $525m (includes leases), market cap $125m and normalized EBITDA over $200m.

 

Post debt refinancing (if it happens) I think we see $40 and not $4 (again) but I am also long and biased. Even if the market doesn’t care to revalue the equity if they begin applying free cash flow to buybacks it will have the same impact. Q2 free cash flow (permanent working cap improvements) was enough to buy the entire float at current prices.

[Broeb22]

Is there any possibility/likelihood of a sale here? Seems Atento would be a much better fit inside a larger company to reduce customer concentration.

 

I'm just thinking out loud here since Synnex recently announced they're moving forward with their Concentrix spin. I think Concentrix has some overlap with Atento in what they do.

 

Seems like Concentrix will be priced at a much higher multiple post-spin based on Synnex's current valuation than Atento currently trades.

 

Is there a stubborn majority owner here who would not accept a 4-5x EBITDA multiple buyout? You could provide equity owners a nice gain.

 

[SafetyinNumbers]

Is there any possibility/likelihood of a sale here? Seems Atento would be a much better fit inside a larger company to reduce customer concentration.

 

I'm just thinking out loud here since Synnex recently announced they're moving forward with their Concentrix spin. I think Concentrix has some overlap with Atento in what they do.

 

Seems like Concentrix will be priced at a much higher multiple post-spin based on Synnex's current valuation than Atento currently trades.

 

Is there a stubborn majority owner here who would not accept a 4-5x EBITDA multiple buyout? You could provide equity owners a nice gain.

 

I will take a look at Comcentrix, thanks.

 

The three big holders own over 60% and I’m guessing they would take fair value. I think management would like to see it through their 2022 plan but would sell at the right price. Presumably the controlling shareholders think ATTO might as well buy as much of the equity back and get margins up as high as possible before pursuing a sale.

 

Each multiple point is worth $15/share so getting 4x or 6x makes a giant difference to returns although both are considerably higher from here.

[SafetyinNumbers]

Atento announces a new debt offering:

 

https://www.prnewswire.com/news-releases/atento-announces-proposed-offering-of-senior-secured-notes-301133930.html

 

To pay for a tender for the existing debt:

 

https://www.prnewswire.com/news-releases/atento-announces-any-and-all-cash-tender-offer-for-outstanding-notes-301133931.html

 

Success on this offering would extend out maturities for at least 3 years and allow the company to use more free cash flow for equity repurchases. The float cap is only 4m shares or less than $40m so it doesn’t take a lot of capital to make a meaningful difference.

[SafetyinNumbers]

Big bond trade reported near the end of the day Friday at 98.875 which perhaps is a good signal that this tender and new issue will be successful.

 

I don't have much experience with US debt markets so take it with a grain of salt!

 

https://finra-markets.morningstar.com/BondCenter/BondTradeActivitySearchResult.jsp?ticker=C701229&startdata-ipsquote-timestamp=09%2F20%2F2019&enddata-ipsquote-timestamp=09%2F20%2F2020

[SafetyinNumbers]

Unfortunately, ATTO pulled the debt refinancing. Markets had become more unfavourable since they announced the proposal a few weeks ago. Brazilian CDS was up and the Real weakened which increased the potential cost of debt by 100bps.

 

The current notes aren’t due until Aug 2022 so there is still lots of time to roll the debt or sell the company.

[SafetyinNumbers]

Atento will have its conference call on Nov 11 for Q320 results.

 

https://investors.atento.com/investor_news/atento-sets-date-for-fiscal-third-quarter-2020-results/

 

I think the street is too low for Q3 so there is an opportunity for a beat. I don't know if the stock will react but we'll find out soon enough.

 

The street is expecting EBITDA of $34m on revenues of $326m or a margin of ~10%. That's despite the company reporting that margins were north of 14% in June as the business normalized somewhat after significant spending on the pandemic response. There might be more of those types of expenses in Q3 but I think a 14% margin assumption makes more sense than 10% which would put EBITDA at $45m on the consensus revenue.

 

I think the consensus revenue is reasonable. I calculate revenues around $320m for the quarter with no growth in local currency but the company did indicate some revenues will come back from Telefonica in Q3 and outside of TEF, they have been growing pretty well. Constant currency sales grew 5%+ in Q2 and 7%+ YTD outside of TEF. On that basis, there is potential for a beat on revenue too, in my opinion.

 

Consensus EBITDA for 2021E is ~150m which at the current share price puts valuation at 4.3x EV/EBITDA ($525m net debt / 14.1m shares / $8.20 share price).

 

Consensus revenue for 2021E is 1.4bn. If margin assumptions lift to 14% for 2021E, the EBITDA estimate would jump to $196m, which at the same multiple of 4.3x, spits out a share price of $22.50.

 

All this of course if anyone notices and if the estimates end up being a reasonable prognostication.

 

 

[StevieV]

The trading volume is nothing.  Really, really low.

 

If they want to raise the share price, they don't need anyone to notice.  They just need to actually hit those margin and EBITDA numbers and refinance the debt so that they can do the tender you mention above.  Tender may not actually retire many shares given the volume.  I don't know, but it should retire shares, raise the price or both.  Earnings and refinancing are very important IMHO.