Ripley Corp SA (RIPLEY), Chile’s third- largest department-store chain, is rebounding as investors seize on record-low valuations and concern fades that a credit fraud at rival Empresas La Polar SA (LAPOLAR) will erode the industry’s profits.
Ripley has surged 27 percent from a one-year low in October, the biggest rally among Chilean retailers in that period.
The stock plunged 38 percent in the four months after La Polar said it hid $1 billion of customer loan delinquencies, a cover-up that has led to the trial of four former executives and prompted the government to seek tighter lending rules.
With shares trading at 16.4 times trailing earnings, Ripley’s valuation is 16 percent below that of companies in the benchmark IPSA index.
That’s less than the record 19 percent discount on Sept. 30.
The rebound shows that concern the government’s move to lower maximum interest rates banks and department stores charge consumers in response to La Polar’s case would reduce Ripley’s profit is easing, said Carles Gaju, a fund manager at Bice Inversiones Adm. General de Fondos SA.
“The market has paid too much attention to potential changes to the maximum rate,” said Gaju, who manages the Bice Chile Activo mutual fund, the third-best performing Chilean equity mutual fund, with a 17 percent decline in the last 12 months, according to data compiled by Bloomberg.
“The effect of lower rates will be less than what the market was thinking. The announcements scared retail investors and that created opportunities.”
Polar Tumbles
Financial services account for 11 percent of Ripley’s total revenue, according to data posted on the website of Chile’s securities regulator.
This compares with 7 percent at SACI Falabella (FALAB) and 3.5 percent for Cencosud SA (CENCOSUD), the country’s two biggest retailers by market value and sales, respectively, according to data compiled by Bloomberg. Falabella trades at 22 times profit, while Cencosud fetches 24.
La Polar shares tumbled 90 percent after directors said on June 9 that the company had been secretly restructuring terms of clients past due loans as a way to cap provisions and boost profits.
The retailer has since filed for bankruptcy protection and received approval from creditors to restructure debt to continue its operations in Chile and Colombia.
Former Chief Executive Pablo Alcalde, one of the four standing trial, says he was unaware of the fraudulent lending and accounting practices.
Ripley, which also has operations in Peru, fell as much as 41 percent in the last 12 months before paring losses to 24 percent. Since hitting a one-year low on Oct. 4, Ripley has risen 27 percent, outperforming Falabella’s 8.6 percent gain and Cencosud’s 17 percent.
Ripley fell 1.6 percent to 495 pesos at 2:54 p.m. in Santiago today after rising as much as 1.2 percent.
Rate Ceiling
Since the La Polar fraud case, the government submitted a bill to lower the ceiling on consumer loan rates and announced the creation of a consumer protection agency specifically tailored for the financial services industry.
Chilean law allows banks and credit-card operators to charge a maximum 51.4 percent a year for peso loans of up to 90 days worth less than 200 unidades de fomento, the local inflation-adjusted accounting unit, or roughly $8,700, according to data on the banking regulator website.
The finance ministry’s bill submitted in September would set a ceiling of 1.35 times the average market interest rate on such loans, from 1.5 times, or the average plus 12 percentage points, whichever is lower.
The maximum annual rate may fall to below 40 percent, officials have said.
Security Stake
Fondo Mutuo Security Acciones (SEACCCII), the best performing Chilean equity mutual fund in the fourth quarter with a 12 percent gain, managed by a unit of Grupo Security SA, increased its investment in Ripley to 5 million shares in December from 87 shares in October, according to data on the securities regulator’s website.
Cristian Ureta, the fund’s manager, didn’t respond to phone calls and e-mails seeking comment.
Ripley doesn’t say how much the 11 percent in revenue it derives from financial services contributes to earnings before interest, tax, depreciation and amortization, or Ebitda, Veronica Perez, an analyst at the brokerage unit of Banco de Credito & Inversiones, or BCI, said in an interview.
By comparison, for Cencosud, which has stores in five Latin American countries, banking and credit-card operations accounted for 3.5 percent of 2010 sales and 22 percent of profit, according to data compiled by Bloomberg.
Financial services accounted for 6.2 percent of Falabella’s 2010 sales, the data show. Falabella doesn’t provide a breakdown for net income.
Most Affected
Empresas Hites SA (HITES), another department-store chain, would be most affected by the new rate limits, according to a BCI study published Sept. 22, as the new ceiling could push the average rate it charges to about 31 percent per year from 39 percent.
Ripley may see a fall in the average rate to 26 percent from 32 percent, according to BCI. Hites shares fell 53 percent in 2011.
Ripley declined to comment for this article, according to an external public relations representative.
Slower consumption growth may also hurt Ripley this year, BCI said in the note. Chile’s economy is expected to grow between 3.75 percent and 4.75 percent this year, after expanding about 6.2 percent last year, according to the most recent estimates from the central bank.
Ripley lags larger peers in efficiency indicators, posting return on common equity of 8.52 times at the end of the third quarter compared with 17.9 for Falabella and 10.7 for Cencosud.
“Ripley’s quality of earnings is quite different than Cencosud and Falabella,” said Eric Conrads, who manages $1.2 billion in Latin American stocks at ING Groep NV in New York. “It’s also much more affected by the sensitivity to the Chilean economy.”
‘A Bet’
For Bice’s Gaju, lower profitability and performance indicators at Ripley mean the company has room to improve.
He added Ripley shares even after the company reported on Nov. 25 third-quarter earnings that missed analysts’ estimates.
The Chile Activo Fund held 2.2 million Ripley stocks as of December, according to data on the website of Chile’s securities regulator, up from 1.8 million in August and 1.3 million in May.
“Buying Falabella is to play it safe,” he said. “Ripley is a bet, but it’s a bet that may double its Ebitda by 2016.”
bloomberg.com
Ripley has surged 27 percent from a one-year low in October, the biggest rally among Chilean retailers in that period.
The stock plunged 38 percent in the four months after La Polar said it hid $1 billion of customer loan delinquencies, a cover-up that has led to the trial of four former executives and prompted the government to seek tighter lending rules.
With shares trading at 16.4 times trailing earnings, Ripley’s valuation is 16 percent below that of companies in the benchmark IPSA index.
That’s less than the record 19 percent discount on Sept. 30.
The rebound shows that concern the government’s move to lower maximum interest rates banks and department stores charge consumers in response to La Polar’s case would reduce Ripley’s profit is easing, said Carles Gaju, a fund manager at Bice Inversiones Adm. General de Fondos SA.
“The market has paid too much attention to potential changes to the maximum rate,” said Gaju, who manages the Bice Chile Activo mutual fund, the third-best performing Chilean equity mutual fund, with a 17 percent decline in the last 12 months, according to data compiled by Bloomberg.
“The effect of lower rates will be less than what the market was thinking. The announcements scared retail investors and that created opportunities.”
Polar Tumbles
Financial services account for 11 percent of Ripley’s total revenue, according to data posted on the website of Chile’s securities regulator.
This compares with 7 percent at SACI Falabella (FALAB) and 3.5 percent for Cencosud SA (CENCOSUD), the country’s two biggest retailers by market value and sales, respectively, according to data compiled by Bloomberg. Falabella trades at 22 times profit, while Cencosud fetches 24.
La Polar shares tumbled 90 percent after directors said on June 9 that the company had been secretly restructuring terms of clients past due loans as a way to cap provisions and boost profits.
The retailer has since filed for bankruptcy protection and received approval from creditors to restructure debt to continue its operations in Chile and Colombia.
Former Chief Executive Pablo Alcalde, one of the four standing trial, says he was unaware of the fraudulent lending and accounting practices.
Ripley, which also has operations in Peru, fell as much as 41 percent in the last 12 months before paring losses to 24 percent. Since hitting a one-year low on Oct. 4, Ripley has risen 27 percent, outperforming Falabella’s 8.6 percent gain and Cencosud’s 17 percent.
Ripley fell 1.6 percent to 495 pesos at 2:54 p.m. in Santiago today after rising as much as 1.2 percent.
Rate Ceiling
Since the La Polar fraud case, the government submitted a bill to lower the ceiling on consumer loan rates and announced the creation of a consumer protection agency specifically tailored for the financial services industry.
Chilean law allows banks and credit-card operators to charge a maximum 51.4 percent a year for peso loans of up to 90 days worth less than 200 unidades de fomento, the local inflation-adjusted accounting unit, or roughly $8,700, according to data on the banking regulator website.
The finance ministry’s bill submitted in September would set a ceiling of 1.35 times the average market interest rate on such loans, from 1.5 times, or the average plus 12 percentage points, whichever is lower.
The maximum annual rate may fall to below 40 percent, officials have said.
Security Stake
Fondo Mutuo Security Acciones (SEACCCII), the best performing Chilean equity mutual fund in the fourth quarter with a 12 percent gain, managed by a unit of Grupo Security SA, increased its investment in Ripley to 5 million shares in December from 87 shares in October, according to data on the securities regulator’s website.
Cristian Ureta, the fund’s manager, didn’t respond to phone calls and e-mails seeking comment.
Ripley doesn’t say how much the 11 percent in revenue it derives from financial services contributes to earnings before interest, tax, depreciation and amortization, or Ebitda, Veronica Perez, an analyst at the brokerage unit of Banco de Credito & Inversiones, or BCI, said in an interview.
By comparison, for Cencosud, which has stores in five Latin American countries, banking and credit-card operations accounted for 3.5 percent of 2010 sales and 22 percent of profit, according to data compiled by Bloomberg.
Financial services accounted for 6.2 percent of Falabella’s 2010 sales, the data show. Falabella doesn’t provide a breakdown for net income.
Most Affected
Empresas Hites SA (HITES), another department-store chain, would be most affected by the new rate limits, according to a BCI study published Sept. 22, as the new ceiling could push the average rate it charges to about 31 percent per year from 39 percent.
Ripley may see a fall in the average rate to 26 percent from 32 percent, according to BCI. Hites shares fell 53 percent in 2011.
Ripley declined to comment for this article, according to an external public relations representative.
Slower consumption growth may also hurt Ripley this year, BCI said in the note. Chile’s economy is expected to grow between 3.75 percent and 4.75 percent this year, after expanding about 6.2 percent last year, according to the most recent estimates from the central bank.
Ripley lags larger peers in efficiency indicators, posting return on common equity of 8.52 times at the end of the third quarter compared with 17.9 for Falabella and 10.7 for Cencosud.
“Ripley’s quality of earnings is quite different than Cencosud and Falabella,” said Eric Conrads, who manages $1.2 billion in Latin American stocks at ING Groep NV in New York. “It’s also much more affected by the sensitivity to the Chilean economy.”
‘A Bet’
For Bice’s Gaju, lower profitability and performance indicators at Ripley mean the company has room to improve.
He added Ripley shares even after the company reported on Nov. 25 third-quarter earnings that missed analysts’ estimates.
The Chile Activo Fund held 2.2 million Ripley stocks as of December, according to data on the website of Chile’s securities regulator, up from 1.8 million in August and 1.3 million in May.
“Buying Falabella is to play it safe,” he said. “Ripley is a bet, but it’s a bet that may double its Ebitda by 2016.”
bloomberg.com
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