ATTO - Atento

[SafetyinNumbers]

Borrowing this from Maran Capitals Q419 letter:

Atento (ATTO)
Atento was another frustrating holding last year. I think intrinsic value is in the teens per share, yet over the last few months, the stock fell from ~$8 to ~$4 on no major change in the company’s fundamentals.
I never have a single “price target” for any of my investments. While I do estimate intrinsic value of companies I study and own, I try to think probabilistically, and in ranges. I can come up with what I think are reasonable scenarios that put Atento anywhere from ~$8/sh to ~$25/sh over the next few years. It is very hard for me to come up with a scenario that justifies the current ~$4 price. ATTO is trading at around 3x EBITDA on estimates of trough EBITDA, and at under 5x FCF (after maintenance capex). I think this is very far below private market value for the business. Of course, it could trade lower in the near term, but I am confident that the business is less volatile than the market seems to think it is, and that the business is worth considerably more than where shares are currently exchanging hands.
The company, controlled by a 66%+ owner who I believe to be rational and committed to a successful outcome, instituted a share buyback in the second half of last year. At current prices, share buybacks are the single best use of the company’s copious FCF generation, above M&A or growth capex.

[SafetyinNumbers]

I own ATTO and think besides it’s inherent cheapness (~6x EPS), another catalyst might be a regular dividend.

The company paid a special dividend in Nov 17 but hasn’t paid one since. When the CEO retirement announcement was put out a few weeks ago, one of his achievements noted was a dividend policy.

I followed up with IR, and the dividend policy is 25-35% of recurring income and will be determined in March/April if the BOD decides it’s appropriate. With adjusted EPS around $0.70, a 25% payout ratio, would be a dividend yield above 4% so perhaps it will catch the interest of dividend funds but it also might surprise quant funds.

[petec]

How do you think about the quality of the business vs the debt load?

[SafetyinNumbers]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

[petec]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

Consensus seems to have FCF at 60-80 and debt at nearly 500. I’ll take a deeper look.

[Spekulatius]

Interesting stock. looks like net debt is increasing and EBITDA is falling. It’s supposed to be the other way around. I am always surprised to see companies raising their debt in USD and having their revenues in emerging market currencies (BRL etc). I know that borrowing in USD is cheaper, but it’s also risky, if the local currency goes down against the USD making credit metrics worse. Why don’t these companies just pay more interest in local currencies and forget about gambling with the exchange rate? I guess these currencies shifts causing losses every couple of years can be discounted as extraordinary events losses and it’s all good?

[SafetyinNumbers]

Doesn’t seem too levered at 1.8x and free cash flow conversion seems pretty high. I guess currency mismatching is probably my biggest concern.

Consensus seems to have FCF at 60-80 and debt at nearly 500. I’ll take a deeper look.

I was using net debt and EBITDA for my calculation.

[SafetyinNumbers]

This has not been a good pick but has started to show some signs of life lately.

I theorized about a potential dividend earlier in the year but instead a new CEO came in and shelved the dividend and buyback until he assessed the situation. In August, they decided to renew the buyback which is over 30% of the float (higher when they announced it). This seems to have recently started to impact the stock although we won’t know how active they have been until November. I believe they have bought at least 2m shares back.

I recently learned that Bain (the controlling shareholder) issued some PIK Notes that are due in 2020 that use the ATTO shares as collateral. This might be incentivize to sell their shares but selling the whole company would get a bigger premium.

[SafetyinNumbers]

Anyone else looking at this name?

[Amitsham]

Yes, Atento is one of our fund's large positions. Wellington and other funds sold their positions and caused to collapse of the share price.  We talk with the new management and other large investors. Management understands that the company is trading at a significant discount (more than 100%). They will continue to return capital to shareholders, investing in growth and lowering leverage. They bought back ~3M shares in Q3, but we think it's the time for a large tender offer and we told that to the CEO. Based on our analysis of 13F database, we are very close to or at the point where there aren't big sellers. The company will continue to buy them out and to shrink the outstanding shares via a buyback or tender.