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Grupo Soma Stock (SOMA3) – Investment Analysis

Common Stock: Grupo Soma (SOMA3)

Current Market Price: R$ 15.71

Market Capitalization: R$ 7.5 billion

*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.

Grupo Soma (SOMA3) - Stock Chart
Grupo Soma (SOMA3) – Stock Chart

Grupo Soma Stock – Summary of the Company

Grupo Soma is a Brazilian clothing and accessories manufacturer and retailer. The company owns and operates 7 distinct brands. They are present throughout most of Brazil with a total of 221 retail stores. Grupo Soma was founded in 2004 and is headquartered in Rio de Janeiro. The company had its IPO on the Brazilian stock market in July of 2020, raising R$ 1.8 billion.

Grupo Soma - Stores by Brand
Grupo Soma – Stores by Brand

Revenue and Cost Analysis

Grupo Soma had revenue of R$ 1.3 billion in 2019, a significant increase from R$ 1.1 billion in 2018. Their COGS was R$ 442.1 million, representing a gross margin of 66%, also an improvement compared to 63% the previous year.

The company has been profitable in each of the last three years. In 2019 Grupo Soma had net income of R$ 126.8 million, representing a profit margin of 9.7%, an increase compared to 7.9% the previous year. This increase in mostly attributable to improving gross margins.

Balance Sheet Analysis

Grupo Soma has a decent balance sheet. They have a base of long term asset and sufficient liquidity in the near term. However they are leveraged, with relevant amounts of debt outstanding.

Grupo Soma – Debt Analysis

As of year-end 2019 the company has R$ 209.4 million in total debt outstanding, R$ 53.5 million of which is classified as current.

Grupo Soma - Debt Table
Grupo Soma – Debt Table

Grupo Soma Stock – Share Dynamics and Capital Structure

As of July 2020 Grupo Soma has 477.1 million common shares outstanding. Insiders and institutional investors own around 69% of the company’s outstanding shares. The remaining 31% are owned by smaller shareholders with an ownership position of less than 5%.

Grupo Soma Stock (SOMA3) - Share Structure
Grupo Soma Stock (SOMA3) – Share Structure

Grupo Soma Stock – Dividends

Based on 2019’s results management approved total dividends of R$ 29.8 million, implying a dividend per share of R$ 0.06. At the current market price this implies a dividend yield of 0.4%.

Grupo Soma - Dividend Table
Grupo Soma – Dividend Table

Grupo Soma Stock – 3 Metrics to Consider

Debt to Equity Ratio

Total Liabilities/Total Share Holder Equity

R$ 911 million / R$ 345 million = 2.6

A debt to equity ratio of 2.6 indicates that Grupo Soma is leveraged and relies heavily on debt financing to fund itself.

Working Capital Ratio

Current Assets/Current Liabilities

R$ 672 million / R$ 619 million = 1.1

A working capital ratio of 1.1 indicates a sufficient, but not strong liquidity position. Grupo Soma should not have problems meeting its near term obligations.

Price to Book Ratio

Current Share Price/Book Value per Share.

R$ 15.71 / R$ 0.72 = 21.8

Grupo Soma has a book value per share of R$ 0.72. At the current market price this implies a price to book ratio of 21.8, meaning Grupo Soma stock currently trades at an extreme premium to the book value of the company.

Grupo Soma Stock – Summary and Conclusions

Grupo Soma is a decent company. They own a portfolio of brands focused on the high end Brazilian market. The company is present throughout Brazil and has been profitable in each of the last three years.

However the company looks ridiculously overvalued. They currently trade at a very high premium relative to book value. They are financially healthy, but have a leveraged balance sheet. When compared to Brazilian retail group Restoque, which has roughly the same number of retail locations, but trades at a significant discount to book, it is hard to justify Grupo Soma’s valuation. The only reason I can think of is exuberance surrounding its IPO. I am not willing to invest in Grupo Soma stock at its current valuation. I will leave the company on my watch list and reconsider my decision if the share price falls significantly.

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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