Natura&Co (NTCO3): What is the potential to unlock share value with an IPO or spin-off of Aesop?

Down almost 50% year-to-date (through last Monday’s close), shares of Nature&Co ( NTCO3 ) have seen strong volatility amid rumors of a restructuring of the cosmetics company, following a string of very poor results. recent quarters.

However, after months of speculation, last Monday evening (17) the company officially confirmed news that has great potential to unlock value. Its Board of Directors has approved the start of a comparative study between an initial public offering (IPO) of Aesop, a luxury and wellness brand and business unit, and a spinoff, which could be followed by a potential public offering.

According to the statement, the IPO has been evaluated in recent months as an alternative to finance Aesop’s accelerated growth, and Nature &Co’s management has taken steps to make it viable. “The strategy is also aligned with Nature & Co’s aim to provide greater autonomy and responsibility to its brands and business units,” he emphasized.

Daniella Eiger, Gustavo Senday and Thiago Suedt, analysts at XP, indicated that they believe this transaction will unlock value, as they see NTCO ​​trading at an asymmetric valuation, with the work of Natura&Co. LatAm, at a 40% discount (8.5 times the company’s earnings before interest, taxes, depreciation and amortization or EV/Ebitda) to global competitors, assuming all other business units (Avon International, The Body Shop and Aesop) had their value reset to zero.

“In addition, we see this announcement as the first step in the reorganization of NTCO’s new management, which may pave the way for new announcements. We reiterate our buy recommendation,” the analysts point out.

However, despite the belief that the transactions would unlock value, they do not believe that now is the best time to implement them, as i) Aesop is going through a more difficult investment cycle to enter China, which puts pressure on profitability in the short term; ii) China is Aeosp’s main growth path and the country is currently facing a challenging macro scenario; and iii) the US stock market also faces challenges related to high inflation and risks of recession.

Goldman Sachs points out that since the format of the transaction is still being considered, it is not clear how
the company’s debt would be split between the entities. In addition, Natura&Co noted that any potential corporate reorganization requires the approval of shareholders, creditors and regulators.

Aesop is Natura&Co the most luxurious cosmetic brand that operates through 275 stores, counters of department stores and e-commerce. In 2013, Natura bought a 65% stake in Aesop for around BRL 150 million (current exchange rate). Aesop is currently focused on strengthening its presence in Asia (56% of sales) and entering China while expanding the brand’s presence in its core markets.

Following the announcement, Itaú BBA in turn restarted its coverage of NTCO3 shares with an outperform recommendation (outperform market average) and a fair price of R$17 for 2023, a potential appreciation of 31%.

“Our bullish view is based on what we see as an outstanding risk-reward proposition, with the stock not reflecting the current assets under its umbrella today. Also, we don’t see a liquidity problem for NTCO3
after the recent debt restructuring”, say analysts.

There is no doubt that Natura’s short-term operating momentum will continue to be difficult, especially at The Body Shop, they point out. However, there has been a major sell-off in NTCO3, and at current levels you see that the risk-reward ratio for this asset is skewed to the upside. “Our estimates are much more conservative than consensus, but we still find reasonable upside potential to our fair value.”

As for Aesop’s potential IPO, analysts see the main downside as holding a smaller stake in a large asset. On the other hand, it deleverages assets in an environment of rising interest rates globally, properly aligns Aesop’s management, reflecting real asset trends and potentially drives short-term price-to-earnings (P/E) ratios higher. levels. tasty.

“Leverage is increasing, but Natura has no liquidity problems. The company recently went through a debt restructuring process that extended debt repayment beyond 2025 while reducing the cost of debt. Now only 13% of current long-term debt matures in 2024; the rest will be paid from 2025,” BBA points out.

How much value can be unlocked?

XP points out that, based on a sum of the parts exercise, and assuming all business units trade at NTCO3’s current valuation of 5.3 times the ratio of EV to expected 2023 Ebitda, a possible Aesop transaction could unlock a up (potential increase) up to 50% compared to current prices.

“If we assume that TBS and Avon Internacional are worth zero, current NTCO ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​parts assume a multiple of 7 times EV/Ebitda for both Natura&Co LatAm and Aesop. In that case, the additional growth potential would be reduced to as much as 45%,” analysts predict.

Given that Natura&Co’s aim is to find alternatives to finance Aesop’s growth given its high leverage (at 2.5 times net debt to Ebitda), XP analysts see an initial public offering as a priority. However, a secondary offer may also appear to help you in the debt relief process.

An Aesop IPO would be a net positive, according to BBA analysts, although analysts understand that some may not like the fact that some of the group’s best assets would be sold.

“In this regard, we believe that it is necessary to properly align the interests of Aesop’s management (there was a large mismatch between the performance of NTCO3 shares and specifically Aesop’s operational momentum),” BBA points out. A potential transaction would also reduce leverage to more benign levels and lead to some reduction in short-term multiples.

In the base case estimated by the bank (of 15 times EV/Ebitda for Aesop and 40% secondary offering), analysts estimate that the profit potential for Natura in 2024 could increase from R$972 million to R$1.499 billion and its P/ E for 2024 would increase up to 12 times – which is a much more reasonable level than today’s values.

For Goldman Sachs, while a potential Aesop spin-off or IPO could ultimately unlock value for Nature&Co shareholders, it would depend on the format and the value the market places on the separate entities.

Analysts see a multiple of NTCO3 currently at 5.8 times EV to Ebitda expected in 2023.

Assuming that the spin-off entity from Aesop would trade to global beauties with a similar growth profile, at 10x to 16x expected 2023 EV/Ebitda, and that the rest of the group would continue to trade between 5x and 6x this multiple, the potential spin- off or an IPO could mean an increase of up to 50% of the currently estimated market value, the house also estimates. “Our analysis is for illustrative purposes only. We realize that there are numerous outcomes outside of this scenario,” they reason.

Goldman maintains a neutral rating on NTCO ​​shares3: while they acknowledge that certain trends (Natura Brasil, Aesop) and the new CEO’s focus on accountability and cost cutting are encouraging, they also recognize that NTCO ​​is exposed to challenging demand and margin prospects across key markets (especially in Europe), where brand positioning and pricing power may not be strong enough to offset these macroeconomic headwinds.

Bradesco BBI points out that at first glance the first opinion on this move is positive, as the “endgame” for Aesop is the same for any of the options on the table (which is listed as an independent company in the US). There may be a possible revaluation of the multiplier, as investors may be attracted by Aesop’s better growth prospects, although it is too early to determine how much of this value will flow to the existing Natura&Co structure and shareholders, as the main parameters of such a reorganization remain unknown for now.

“However, the board’s signal that it will seek alternatives that take into account value creation for all players (Aesop, N&Co. and their shareholders) actually sends a good message to investors. We believe the current multiple is greatly discounted (our FMCG coverage is currently negotiated at 10 times EV/Ebitda),” BBI assesses.

Therefore, the bank’s analysts repeat their recommendation outperform for NTCO3 with a target price of BRL 29 (up of 123%), although they recognize that this move is only a potential first step, but does not solve all the company’s problems.

For XP, two other possible announcements could be on the radar: i) Natura LatAm and Avon Internacional merged into one business unit. XP analysts see no reason for the existence of two business units for the Avon brand, while the focus should be on the main markets of Avon International, leaving less profitable countries; and ii) the sale of TBS, which would rate this move as positive, as it would reduce the complexity of the company, in addition to representing the sale of assets that require attention and capital.

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