Rating Update: Stock Rating D-Negative (7/9/19)-Ultrapar Participacoes SA (UGP).

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BUSINESS

Ultrapar Participacoes S.A. engages in gas distribution, fuel distribution, chemicals, storage, and drugstores businesses in Brazil, Mexico, United Stated, Uruguay, and Venezuela. The company’s Gas Distribution segment distributes liquefied petroleum gas to residential, commercial, and industrial consumers, as well as independent dealers, primarily in the South, Southeast, and Northeast regions of Brazil. Its Fuel Distribution segment distributes and markets gasoline, ethanol, diesel, fuel oil, kerosene, natural gas for vehicles, and lubricants and related activities through a network of 8,005 Ipiranga service stations. The company’s Chemicals segment produces ethylene oxide and its derivatives, as well as fatty alcohols, which are raw materials used in the home and personal care, agrochemical, paints, varnishes, and other industries.
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INVESTMENT RATING

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UGP is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

UGP has a current Value Trend Rating of D (Negative).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. UGP has a neutral Appreciation Score of 47 but a poor Power Rating of 27, producing the Negative Value Trend Rating.

UGP’s stock is selling below targeted value. The current stock price of $5.24 compares to targeted value 12 months forward of $6.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
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UGP has a Power Rating of 27. (This poor Power Rating indicates that UGP only has a better chance of achieving attractive investment performance over the near to intermediate term than 27% of companies in the universe.)
Factors contributing to this poor Power Rating include: UGP’s earnings estimates have fallen very significantly in recent months; and recent price action has been unfavorable. An offsetting factor is is in a strong phase current.

INVESTMENT PROFILE

UGP’s financial strength is above average. Financial strength rating is 62.
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Relative to the S&P 500 Composite, Ultrapar Participacoes SA has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that UGP is normal risk. Low stock price volatility is a positive for UGP. Relative weaknesses include: low financial strength, high financial leverage, low expected growth, and low historical growth. UGP’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. UGP has unusually low market capitalization.

CURRENT SIGNALS

UGP’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

UGP’s current technical position is mixed. The stock price is in a 3.7 month down move. The stock has declined 27.8% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

Positive development: significant quarterly earnings acceleration occurred. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated D.
Ultrapar Participacoes SA (NYSE: UGP) stock closed at $0.76 on 7/9/19 after a major decline of -24.0%. However, exceptionally low trading volume at 49% of normal accompanied the decline. The stock is unchanged during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, UGP experienced a very significant reduction in cash of -$880.3 million (-46%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$674.2 million. Non-operating sources contributed +$239.2 million (+35% of EBITDA). Cash taxes consumed -$174.2 million (-26% of EBITDA). Re-investment in the business amounted to -$497.1 million (-74% of EBITDA). On a net basis, debt investors received -$433.3 million (-64% of EBITDA) while equity investors removed -$689.0 million (-102% of EBITDA).
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UGP’s Non-operating Income, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by stability for the Ultrapar Participacoes Sa Peer Group. (Since 2015 Non-operating Income, %EBITDA has sharply accelerated.) In most years, UGP was in the top quartile. Currently, UGP is upper quartile at +35% of EBITDA (+$239.2 million).

UGP’s Cash Taxes, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Ultrapar Participacoes Sa Peer Group. In most years, UGP was in the top quartile. Currently, UGP is lower quartile at -26% of EBITDA (-$174.2 million).

UGP’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Business Re-investment, %EBITDA has sharply accelerated.) In most years, UGP was in the third quartile and top quartile. Currently, UGP is substantially below median at -74% of EBITDA (-$497.1 million).

UGP’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -64% of EBITDA (-$433.3 million).

UGP’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -102% of EBITDA (-$689.0 million).

UGP’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -131% of EBITDA (-$880.3 million).
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UGP’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Ultrapar Participacoes Sa Peer Group as well. In most years, UGP was in the second quartile and top quartile. Currently, UGP is substantially above median at +4%.

PROFITABILITY

UGP’s return on equity has improved slightly since 2009 even as it experienced a very sharp decline after the 2015 high.
This slight improvement was due to small negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of UGP’s assets declined over the full period 2009-2019: asset turnover has experienced a minor downtrend that acccelerated very sharply after the 2013 level.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend although it experienced a very sharp decline after the 2013 high.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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UGP’s return on equity is substantially above median (13.6%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is above median (6.6%) reflecting asset turnover that is upper quartile (2.81X) and below median pretax margin (2.4%).
Tax “keep” rate (income tax management) is lower quartile (62.9%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is at median (3.26X).

GROWTH RATES

There are no significant differences between Ultrapar Participacoes SA’s longer term growth and growth in recent years.
Ultrapar Participacoes SA’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -4.5% per year. (More recently it has been 3.2%.)

Total asset growth has been -2.7% per year. (More recently it has been 9.3%.)

Annual E.P.S. growth has been -1.3% per year. (More recently it has been -16.9%.)

Equity growth has been -5.8% per year. (More recently it has been 3.4%.)

Ultrapar Participacoes SA’s consensus growth rate forecast (average of Wall Street analysts) is 3.9% — substantially above the average of the historical growth measures.
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Relative to the Ultrapar Participacoes Sa Peer Group, UGP’s historical growth measures are consistently lower quartile. Revenue growth (-4.5%) has been lower quartile. Total asset growth (-2.7%) has been lower quartile. E.P.S. growth (-1.3%) has been lower quartile. Equity growth (-5.8%) has been lower quartile.

In agreement with this pattern, consensus growth forecast (3.9%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, Ultrapar Participacoes SA’s stock price performance has been variable and below market. Between September, 2008 and July, 2019, Ultrapar Participacoes SA’s stock price rose +68%; relative to the market, this was a -34% loss. Significant price moves during the period: 1) January, 2018 – September, 2018: -64%; and 2) October, 2008 – April, 2013: +477%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -8.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through June, 2019 of -8.9% is slightly below median relative to Ultrapar Participacoes SA Peer Group.

Current 5-year total return performance of -12.8% is lower quartile relative to the S&P 500 Composite.
Through June, 2019, with lower quartile current 5-year total return of -12.8% relative to S&P 500 Composite, UGP’s total return performance is lower quartile relative to Ultrapar Participacoes SA Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, UGP’s overall valuation is low. The highest factor, the price/earnings ratio, is below median. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/assets is below median. Price/equity ratio is below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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UGP has a major value gap compared to the median valuation. For UGP to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.41X to 0.50X. If UGP’s ratio of enterprise value/revenue were to rise to 0.50X, its stock price would be lower by $2 to $7.
For UGP to hit lower quartile valuation relative to the Ultrapar Participacoes SA Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.41X to 0.32X. If UGP’s ratio of enterprise value/revenue were to fall to 0.32X, its stock price would decline by $-2 from the current level of $5.24.

VALUE TARGETS

UGP is expected to continue to be a major Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Ultrapar Participacoes SA’s current Price Target of $6 represents a +15% change from the current price of $5.24.
This neutral appreciation potential results in an appreciation score of 47 (53% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 47, the low Power Rating of 27 results in an Value Trend Rating of D.
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Ultrapar Participacoes SA’s current Price Target is $6 (+23% from the 2018 Target of $5 and +15% from the 07/09/19 price of $5.24). This rise in the Target is the result of a +0% decrease in the equity base and a +23% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 17.6% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2010 low of 9%.

PTR’s growth forecast is 3.0% — above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 22%.

PTR’s cost of equity forecast is 8.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2011 peak of 9.9%.
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At Ultrapar Participacoes SA’s current price of $5.24, investors are placing a positive value of $0 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 14.5% versus a cost of equity of 7.6%.
PTR’s 2020 Price Target of $6 is based on these forecasts and reflects an estimated value of existing assets of $5 and a value of future investments of $1.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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