Sendas Distribuidora Q2: High Leverage Shades Profitability (NYSE:ASAI)

investment thesis

I recommend holding Sendas Distribuidora (NYSE:ASAI) shares after Q2 results. The company reported mixed results, with healthy revenue growth of 11.8% and margin gains.

However, there was a slowdown in same-store sales growth and profitability was negatively impacted by higher finance charges, which makes me cautious and reiterate the recommendation from my last report.

In the period after the results there were also rumors of a possible merger between Sendas Distribuidora and Grupo Mateus, with shares traded on the Brazilian stock exchange, but no major developments until then.

Review of Sendas Distribuidora results for 2Q24

Sendas Distribuidora released its results on August 8, and as we can see below, they came in slightly below expectations.

Below, I will provide a full report on Sendas Distribuidora’s Q2 results. It is important to note that the company releases its results in BRL, and I will convert them to dollars using the exchange rate of 1 dollar = 5.59 reais, as this was the exchange rate on the last day of the second quarter. Enjoy reading!

Revenue – Slowing same-store sales growth

Sendas Distribuidora achieved an 11.8% annual increase in net income to BRL 17.8 billion ($3.2 billion). This was due to its expansion strategy, with the opening of 24 stores, of which 9 were renovated.

However, the company also said same-store sales were up just 2.9% year-over-year, down 0.5% from 1Q24. The increase was also below competition Atacadão ( OTCPK:ATAAY ) which was 7.4% y/y, and this makes me skeptical of the thesis.

Costs, expenses and margins – good trends

With strict cost and expense control, Sendas Distribuidora achieved gross margin and adjusted EBITDA expansion in Q224. The company attributed the improvement to store maturation and an effective merchandising strategy with no promotional campaigns in the quarter.

On the outlook, I believe continued store expansion and maturation should keep the EBITDA margin healthy, even if it brings an increase in operating expenses at first.

Debt – Reducing leverage

The company performed well on a year-over-year basis, reaching 3.6x EBITDA (4.25x in Q223). Net debt reached BRL 13.9 billion ($2.48 billion).

In my view, one of the major triggers for the company’s stock surge is the deleveraging to levels below 1x EBITDA. I think this process is underway, but will take some time, and this confirms my recommendation to hold the stock.

Net income – Reduction of leverage

After good revenue growth and margin gains, offset by higher financial expenses and accounting adjustments, Sendas Distribuidora posted a 21% annual decline in net income to BRL 123 million ($22 million).

In my view, the outlook is for this level of profitability to be maintained, with the company able to see an increase in operating margins, but pending a drastic deleveraging, results will remain stagnant, which supports my hold recommendation on the stock .

Rating – I don’t find it attractive

To perform the valuation, I will use the P/E benchmarking method with Sendas and its Brazilian competitors, Carrefour Brasil (CRFB3) and Grupo Mateus (GMAT3).

By average P/E (NTM), we have a P/E of 12.4x, which implies a downside of 6.7% for Sendas Distribuidora shares. As the margin of safety is small, I reiterate the recommendation to hold the stock. I would like to point out that the Seeking Alpha tools already point to a different scenario.

The qualifying factor indicates weak profitability, momentum and revisions. But I will counter my skeptical thesis and Quant Rating’s sell recommendation with the risk chapter below.

Potential risks to the bear thesis

One fact could completely change my assessment and the entire market. In September, there were rumors that Grupo Mateus, which has shares traded on the Brazilian stock exchange, would make a merger offer to Sendas Distribuidora.

It is true that the rumors have been denied, but episodes of this type involving the closure of operations have already appeared several times. The merger could begin the player’s consolidation of the Brazilian sector and would also bring a more diversified business model to the new company.

conclusion

Sendas Distribuidora reported mixed results with ups and downs in T224. Although the expansion strategy is increasing revenue, same-store sales are showing signs of slowing.

Likewise, although the company has been able to control costs and expenses well to improve its operating margins, the bottom line is still burdened by heavy leverage.

Based on this analysis, I recommend holding Sendas Distribuidora shares. With no further developments since the merger with Grupo Mateus, I think it is necessary to wait for the company to unravel further.