Santander sees a difficult path for 2024 and revises target price for BHIA3

Santander maintained a neutral recommendation and revised the target price for Casas Bahia (BHIA3) shares, still seeing a very challenging scenario for the company. Based on its updated model, the bank introduced a new target price for the year 2024 of R$7 (compared to the previous target for 2023 of R$36.20, taking into account the 25-to-1 reverse stock split carried out at the end of last year).

Santander analysts point out that, since the company’s new management took office in August 2023, the Casas Bahia group has undergone a transformation plan that aims to prioritize cash generation and profitability, with the objective of deleveraging and returning to a sustainable growth trajectory.

During 2H23 (second half of 2023), management: i) fulfilled its promises to become leaner, closing 49 stores and deactivating 10 distribution centers, significantly reducing its headcount; and ii) focusing on the main categories (durable goods), migrating more than 20 non-essential categories from 1P (own stock) to 3P (marketplace).

“With the 2nd phase of the transformation plan in force until 2024, we still expect a difficult path for Casas Bahia during the year”, assesses the bank, which believes that the debt rescheduling completed in March gives more time for the recovery effort of the company starting. Santander also predicts that 2024 will be a year of improvement in earnings before interest, taxes, depreciation and amortization (EBITDA).

The bank, in turn, expects heavy financial expenses to persist, leading Casas Bahia to record large net losses and cash burn in 2024. “For these reasons, we reiterate our neutral rating on shares until we see more tangible confirmation of a operational inflection point”, he assesses.

In the short term, investors evaluating Casas Bahia’s recovery trajectory should not look to accelerate sales growth in 2024. Instead, the focus remains on sequential improvements in profitability and cash generation, which should not depend on earnings of operational leverage.

Among the levers that management has at its disposal to increase margins, the bank highlights: i) assortment optimization, aiming to reduce stock-outs of items in main categories; ii) implementation of dynamic prices with the potential to improve sales and margins simultaneously; and iii) alignment of incentives between store managers and the company’s focus on profitability.

“With these adjustments producing results gradually, in the quarter, we expect Casas Bahia’s EBITDA to total R$1.8 billion in 2024, which implies a margin expansion of 230 basis points on an annual basis, even with the expectation that revenue fell 5% year on year”, he reinforces.

According to the bank’s estimates, Casas Bahia is still expected to record a net loss in 2024 and 2025 (-R$1.4 billion and -R$514 million respectively) due to heavy financial expenses on a net debt estimated at R$ 4.5 billion (in 2024, including supplier financing arrangements and headwinds as the company implements its transformation plan.

Therefore, given the limited upside potential and the persistent risks of recovery and financial leverage amid the volatile recovery of the durable goods sector, the bank reiterates its neutral recommendation.