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Companhia Melhoramentos Stock (MSPA3) – Investment Analysis

Common Stock: Companhia Melhoramentos (MSPA3)

Current Market Price: R$ 48.00

Market Capitalization: R$ 307 million

*All values in this article are expressed in Brazilian Reais (BRL) unless otherwise noted.

**The bulk of this analysis is based on the company’s most recent audited financial report, which can be found by following this link.

Companhia Melhoramentos (MSPA3) - Stock Chart
Companhia Melhoramentos (MSPA3) – Stock Chart

Companhia Melhoramentos – Summary of the Company

Companhia Melhoramentos is a Brazilian pulp, paper, and publishing company. They have four business lines; publishing, high quality fibers, forest management, and real estate. The company was founded in 1880 and is headquartered in Sao Paulo, Brazil.

Revenue and Cost Analysis

Companhia Melhoramentos had revenue of R$121.7 million in 2019, a decrease from R$ 137.6 million in 2018. Their COGS was R$ 76.4 million in 2019, representing a gross margin of 37%, also a significant decrease compared to 48% the previous year.

The company had a net loss of R$ 36.5 million in 2019, a significant deterioration compared to a profit of R$ 4.7 million in 2018. However this profit was due to higher income from financing. The company had an operating loss in both 2019 and 2018.

Balance Sheet Analysis

Companhia Melhoramentos  has a decent balance sheet. They have sufficient liquidity in the near term and reasonable liability levels.

Companhia Melhoramentos – Debt Analysis

As of year-end 2019 the company has R$ 44.5 million in total debt outstanding, R$ 3.5 million of which is classified as current.

Companhia Melhoramentos - Debt Table
Companhia Melhoramentos – Debt Table

Companhia Melhoramentos Stock – Share Dynamics and Capital Structure

As of year-end 2019 the company has 5.6 million common shares outstanding and 773 thousand preferred shares outstanding. Total shares outstanding is around 6.4 million shares.

Insiders and institutional investors own around 88% of the company’s outstanding shares, with the remaining 12% being owned by smaller shareholders with an ownership position of less than 5%.

Companhia Melhoramentos Stock (MSPA3) - Share Structure
Companhia Melhoramentos Stock (MSPA3) – Share Structure

Companhia Melhoramentos Stock – Dividends

The company does not currently pay a dividend.

Companhia Melhoramentos Stock – 3 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

R$ 547 million / R$ 883 million = .62

A debt to equity ratio of .62 indicates that the company uses a mix of debt and equity in its capital structure, but relies more heavily on equity financing to fund itself.

Working Capital Ratio

Current Assets/Current Liabilities

R$ 110.6 million / R$ 41.7 million = 2.7

A working capital ratio of 2.7 indicates a sufficient liquidity position. The company should not have problems meeting its near term obligations.

Price to Book Ratio

Current Share Price/Book Value per Share.

R$ 48.00 / R$ 138 = .35

Based on total shares outstanding the company has a book value per share of R$ 138. At the current market price this implies a price to book ratio of .35, meaning the company’s stock currently trades at a significant discount to the book value of the company.

Companhia Melhoramentos Stock – Summary and Conclusions

I am impressed by any company that has managed to survive for over 130 years. However in an increasingly digital world, it is hard to imagine a bright future for publishing companies. Companhia Melhoramentos operating results have been deteriorating significantly. The company has faced significant difficulty due to the bankruptcy of one of the largest bookstores in Brazil, Livrarias Saraiva. There is no turn around in sight.

I am not willing to invest in Companhia Melhoramentos stock at any price. If I were looking to allocate to a Brazilian pulp and paper company there are much more attractive opportunities, such as Klabin stock.

Disclaimer

This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.

This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.

Patrick Flood, CFA

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