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VALUATION OF BRAZILIAN TOTVS


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Integral service around a transaction
BY : Diego GutiérrezDecember Mon, 2019

TOTVS, a Brazilian company dedicated to the development and commercialisation of software solutions, has recently acquired Supplier for a total of R$455M.

This follows the company's strategy to offer financial services to its customer base.

We examined and assessed the Latin American company, its economic and financial situation, as well as the deal closed with Supplier.

WHAT IS TOTVS

TOTVS is a Brazilian technology company, mainly dedicated to software applied to business, also known as management software.

In this way, it offers its customers software products, platforms and consultancy services to improve their competitiveness and simplify their operations.

To do this, the tools they offer are integrated and address both the core business as well as the back office of its customers, reaching their entire value chain, end-to-end.

With a presence in more than 40 countries, it is considered the largest corporate software provider in Latin America and the sixth largest in the world.

It offers its services in 11 different sectors to both small and large companies.

VARIOUS SOLUTIONS

The solutions offered are as follows:

  • ERPInventory control tool: a tool that allows inventory control with a high level of detail, flexibility to be able to manage it more adequately to the needs of the client. It provides integrated information in real time, standardisation of processes and better control of inventories, production, purchasing and monitoring of manufacturing processes.
  • TOTVS Fast Analytics: solution of business analytics that consolidates the information available to the company. It facilitates its analysis through the use of dynamic and intuitive data visualisation tools, fully integrated in the cloud.
  • HR SolutionsThe company is focused on providing its clients with a simple, flexible and reliable tool to manage staff, manage recruitment processes and enhance the collaborative environment for greater productivity and innovation.
  • TOTVS CloudThe cloud is a comprehensive management software solution to manage day-to-day business through the cloud, as well as to ensure the flexibility, security, simplicity, agility, accessibility and monitoring of all the information available to the company.
  • Fluigfocused on digital transformation, offers a productivity and collaboration platform that integrates with existing enterprise systems to revolutionise the way companies work.

TOTVS recently created a business unit to offer financial services to its customer base to complement its other products.

They coined the term techfin to underline the fact that they are not aiming to become a financial company.

Therefore, they continue to focus on technology.

THE PURCHASE OF SUPPLIER

TOTVS bought in October 89% of the share capital of Supplier, a firm specialising in B2B lending for an amount close to R$455M.

It did so as part of a strategy to enter the world of financial services.

With the intention to start launching the first solutions through Supplier in 2020, TOTVS aims to complement the wide range of services and products it offers.

It also expects to maintain its position as a leader in the sector, and to continue to offer its customers a complete range of products and services tailored to their needs.

TOTVS RATING

Now, we examine and we value from the point of view of the corporate finance the financial statements of TOTVS.

Also the different multiples and current share price.

FINANCIAL ANALYSIS

VALUATION OF BRAZILIAN TOTVS

VALUATION OF BRAZILIAN TOTVS

Although sales have suffered over the past year, largely due to the global economic situation, and especially the difficulties experienced in Latin America, sales are expected to recover and even exceed those recorded in 2017 in the coming years.

This is due to the growing need for companies to optimise and improve their processes in all areas.

In terms of margins, EBITDA and EBIT, the company has managed to maintain the levels of previous years.

It maintains good data, growing at a good pace and showing no weakening in the need to incur new expenditures or investments to maintain the growth it is and is expected to experience.

Net profit has been sharply reduced in the last year.

However, it is again expected to recover its previous levels in the coming years, in turn boosting ROE to levels close to those obtained in 2016.

The balance sheet is largely unchanged, apart from a slight reduction largely due to the decline in sales over the last year.

Apart from this factor, the company's capital structure appears adequate.

There is no cause for concern, having even reduced the liability values.

MULTIPLES AND QUOTATION

VALUATION OF BRAZILIAN TOTVS

The company's multiples reflect a valuation above that of its peers, with premiums well above historical levels.

Moreover, given TOTVS' expected growth estimates, these multiples should rise and increase in value relative to the industry.

This would increase the company's valuation.

VALUATION OF BRAZILIAN TOTVS

TOTVS' share price reflects a strong share price appreciation especially over the last year.

This shows that, despite the poor financial results, the company's future prospects look solid and will allow it to maintain its position as an industry leader.

However, doubts arise as to whether the company's current multiples, as well as the sharp increase in the share price, do not indicate a company that is overvalued beyond its true value.

We will have to wait and see if the future prospects are confirmed and can justify the valuation that the Brazilian company currently seems to have.

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