3G Capital Management LLC Nicosia, Cyprus September 29-30, 2016 3G - - PowerPoint PPT Presentation
3G Capital Management LLC Nicosia, Cyprus September 29-30, 2016 3G Capital at a Glance Global value-oriented investment vehicle that seeks to invest in a concentrated porAolio of high-quality publicly traded businesses InvesFng Focus: Good
– CompeFFvely entrenched (simple and predictable business in an industry with a track record of leadership longevity) – Above average returns on capital (15% or more) – Solid Financial CondiFon (debt/FCF of less than 3-5 years)
– Capable capital allocators and skillful operators (track record) – Proper alignment of incenFves – Skin in the game
– 8-11X Free Cash Flow – Focus on normalized sustainable cash flow as opposed to current-period cash flow – Current look-through FCF mul=ple for the por?olio is approximately 5X with a corresponding dividend yield of over 6% vs. 18X and 2%, respec=vely, for the S&P 500
– Picking a second-rate business in the banking arena makes as much sense as picking a second-rate parachute – Paying a fair price produces an acceptable return, but paying a wonderful price is what really makes the cash register sing
depressed due to a historic economic slump in the company’s core markets: – Price of R$11 vs. Book value of R$17 = selling for 0.65X BV
even for second-rate banking insFtuFons
– Price of R$11 vs. EPS R$2.00 = PE of 5.5X NFY – Dividend of R$0.80 vs. R$11 Price = 7% Dividend Yield
– Price of R$11 vs. EPS of ~R$3.00 = PE of 3.7X normalized EPS (based on 10-year average ROA) – Dividend of R$1.20 vs. R$11 Price = 11% Dividend Yield
– The most dominant consumer banking franchise in Rio Grande do Sul by virtue of its reach and reputaFon – Boasts the largest share of deposits in the state at 47% and the largest deposit-gathering network in the state reaching 99% of the populaFon – Reach and reputaFon result in deposit cost that is 20% lower than that of the compeFFon, which represent a significant barrier to entry – Complements the low-cost finding advantage with conservaFve underwriFng pracFces in
businesses
experFse
quality
– As a result, Banrisul produces enviable performance over the past five years despite significant headwinds faced by the Brazilian economy in 2014 and 2015
average
– Examining the history of mulFple banking franchises across the globe reveals enduring leadership longevity – provided management sFcks to its kniqng
– Grew book value at 20% per annum over the past 10 years – Going forward growth is desFned to be slower, but sFll likely to be very good…
markets’ penetraFon, suggesFng a long growth runway
banking offerings: payment processing, insurance, asset management, bank cards
– ConservaFvely capitalized with Basel III raFo of 17%, more than double the global regulatory requirement of 8% – Stable funding profile with Loan-to-Deposit raFo of less than 80%, almost twice as good as the rest of the Brazilian banking sector
– Historically generated 15-20% ROEs despite a highly conservaFve Basel III raFo and a highly conservaFve loan-to-deposit raFo
– Long-term track record of growing book value at high rates in a low risk manner – Grew book value nearly 6-fold over the past 10 years while keeping loan loss raFo 35% below industry average – Delivered on promises of operaFonal improvements following the privaFzaFon in 2007
– The bulk of the free cash flows is returned to shareholders via generous dividends – Banrisul’s by-laws specify a minimum payout of 25%, yet the bank historically paid out 40% of earnings – Over the past five years Banrisul returned to the shareholders nearly 40% of the current stock price
– Operates in a highly dollarized economy – Local currency depreciaFon leads to higher inflaFon, which eventually lius banking assets to the pre-depreciaFon USD equivalent (while also widening NIMs in the meanFme) – Net long-term impact is nil
– Majority-controlled by the government of the State of Rio Grande do Sul, but… – LegislaFvely prohibited from lending to the government and its enFFes – Public sector funding consFtutes less than 1% of total loans – Track record of treaFng minority shareholders well as evidenced by superior profitability and willingness to share these economics with the minority shareholders – Exclusive payroll management contract non-renewal with the state is a potenFal risk, but not for another 10 years