CREMER S.A. CREM3 BZ
December 23, 2008 - 5:10pm EST by
louisc738
2008 2009
Price: 9.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 298 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

Crem3 has 50% of its market cap in cash, so it has the resources to be a leader in consolidating the distribution of disposable healthcare products sector. Crem3 offers a way to participate on the growing healthcare sector in Brazil at an attractive price (EV/Ebitda 3.3x 2009) along with one of the shrewdest investors group in the country. Cremer’s largest shareholder is Tarpon Investment Group (ticker: TARP11 BZ), which recently Trev62 has written about. All figures in Brazilian Reals.

BACKGROUND

 Cremer S.A. began as a manufacturer of surgical textiles and adhesives for the healthcare sector. Later on, it diversified into adhesives and plastics for the footwear and automotive industries. After being acquired and divested by private equity investors, the company is being transformed in a leading distributor of disposable healthcare products. Through its Call Center and the internet B2B website, the company serves hospitals, pharmacies, dentists, supermarkets and veterinary clinics throughout the country with the help of 11 distribution centers of its own scattered among the most attractive regions in Brazil. Acting as a third party distribution is a way to leveraging its installed distribution infrastructure via (1) an increase the number of suppliers, (2) an increase in number of products,  (3) increase client base and cross-selling efforts, and (4) the last front of our growth strategy is to explore the under-penetrated segments. One of this is the distribution of higher value-added disposable healthcare goods. Another is the online sales of dental products.

 The healthcare distribution business in Brazil is fragmented, where most of the companies have a local/regional reach, are undercapitalized, and family owned without scale. The company has a market share of 5% (it is the largest in the segment) and growing organically and by acquisitions. The sector is ripe for consolidation.

 The sector in Brazil is the largest in South America, which represents expenditures of US$ 40 billion, and Argentina is the 2nd with US$ 25 billion. The Healthcare expenditures are growing around 14% since 2002.

The company has a large customer base which is growing around 13% CAGR in the last 3 years. In the 1Q08 Cremer has 33,477 customers and two years ago had 26,355 customers. Cremer is attending only 30% of the Brazilian hospitals and 19% of all Brazilian drugstores, so there is plenty of room for growth. In order to accelerate growth they are making small acquisitions of niche players and regional distributors in order increase their reach and product diversity.

Recently CREM3 acquired Hemocat and Biamed, which are regional distributors of disposable products in the segments of interventional cardiology, neurosurgery, neuroradiology and endovascular surgery, which are complementary to the Company’s products. In 2007, the companies Hemocat and Biamed had joint revenues of approximately R$13 million and a joint EBITDA of R$1.9 million. The price paid was 4.5x EV/EBITDA to be ascertained in the fiscal years of 2009 e 2010.

Cremer had net sales of R$ 245 million in the 9 months of 2008, which means an increase of 19% Y-o-Y. Revenues from their manufacturing division represent 69% of the total, last year was 73%. The distribution of third party products is increasing its share. However, the distribution business has lower margins than manufacturing. The company had Net Earnings of R$ 33.7 million (9 months -2008) and last year it was the same level. However, most of the gains (interest income) came from the huge cash balance, that pre-tax is R$ 31,8 million (9 months-2008) and last year it was R$ 6,6 million.

Crem3 disbursed R$15,432 in the period from October 1 to October 29, 2008 to repurchase 1,997,500 common shares. The average acquisition cost was R$7.73 with minimum price of R$6.85 and maximum price of R$10.08.

The IPO share price was R$ 17.50, and it happened on April/2007.

Financial / Valuation

Nr. of Shares                                     33,678,495

(-) Buyback on October                  (1,997,500)

Adj. Nr. of Shares                              31,680,995

Share Price                                      R$   9,40

Market Cap (million)                         R$ 297.8

                                               R$ million

Marketable Securities+Cash           R$ 176.1

(-) Loans ST+LT                                R$ (10.2)

(-) Tax Installments                            R$   (7.8)

Net Cash (Set 30, 2008)                  R$ 158,1

(-) Buyback Disbursement               R$ (15.4)

Adjusted Net Cash                            R$ 142.7

Enterprise Value                             R$ 155,1

Recently the company released its new guidance for 2008 results, so they expect  an EBITDA of R$42mn to R$44mn, The reasons for the revision were the already expected impacts of (1) workers’ strike in 4Q, (2) flood in Blumenau, (3) slowdown in plastics and adhesives and (4) a slow development of the retail channel. This means that the company is trading at 3.7x Ebitda 2008. Assuming a 10% growth in the EBITDA for 2009, the company will be trading at 3.3x Ebitda 2009.

Peers (Cardinal, McKesson, AmerisourceBergen) are trading at higher multiples around 5.5x EV/Ebitda, however they don’t have the same prospects as CREM3.

Cremer

Dez/2006

Dez/2007

Set/2007

Set/2008

Net Revenues

243

277

206

245

COGS

181

208

153

188

(-) Discounts on Purchases

-14

-20

-14

-18

Adjusted COGS

166

188

139

170

Gross Profit

76

89

67

75

(-) Sales Expenses

32

38

28

35

(-) G & A Expenses

28

29

20

23

Operating Income

17

22

18

18

(+) Depreciation

7

4

3

3

(+) Goodwill Amortization

18

18

12

12

EBITDA

42

44

34

33

EBITDA Margin

17%

16%

16%

13%

Capex

(5)

(8)

(11)

(5)

Working Capital

(21)

(11)

(11)

(25)

Free Cash Flow

17

25

12

3

Obs.: BRGAAP requires that discounts obtained by prepayment of goods purchased for resale to be included in the Financial Income line. However the company for disclosure purpose includes it as reduction of the COGS.

The Catalyst: An Undetected Control Group

Cremer's Main Shareholders

Qty (000)

Outstanding

File Date

Poland FIA

3290

9.8%

27-Nov-08

Guepardo Investimentos

1892

5.6%

6-Nov-08

Tarpon Group

3798

11.3%

3-Nov-08

CS Hedging-Griffo CV

5254

15.6%

31-Oct-08

   

           

  

a) Shares in Friendly Hands

14234

42.3%

Findlay Park L.A. Fund

1670

4.9%

11-Jan-08

Rio Bravo Investimentos

    1430

            4.2%

company

AIM Investments

1700

5.0%

19-Oct-07

b) Potential Friendly Hands

4800

14.1%

a+b) Total Shares could be Friendly

19034

56.4%

Note: Free-float of 94%.

Below, I explain why exist a group of related asset managers that are the major shareholder group in this company. However, there is no factual evidence that they have a formal agreement among them, if so they are obliged by CVM rules to disclose it. The key person is Mr. Luiz Alves Paes de Barros, who is a mentor for the Magalhães cousins.

- Luiz Alves Paes de Barros – portfolio manager / owner of Poland FIA (a mutual fund with only 3 investors and a NAV of around US$ 300 million); and head of Investment committee of Delos Asset Management;

- Octavio Ferreira de Magalhães – CIO - Guepardo Investimentos;

- Sergio Lisa Figueiredo –  Senior Analyst of Guepardo Investmentos / Member of the Board – Cremer;

- Rafael Ferreira de Magalhães – Managing Director of Delos Asset Management, and a former portfolio manager/analyst at Tarpon Investment Group;

- José Carlos Reis de Magalhães – CEO/CIO –Tarpon Investment Group, he is nephew of Mr. Luiz Alves Paes de Barros, who manages Poland FIA. Tarpon (ticker: TARP11 BZ) was written up by trev62 on December 3rd-2008. Mr. Alexandre Borges represents Tarpon in the Board of Directors.

 - Luis Stuhlberger (CIO) from Hedging Griffo, helped to launch the Tarpon Investment Group., and a long time ago Mr. Luiz Alves Paes de Barros was a partner at Hedging-Griffo. Besides that, Hedging-Griffo distributes Tarpon and Guepardo funds.

 I didn’t find any evidence that Delos Asset Management has a stake in Cremer, however they manage investment clubs – Clube Delos de Ações - which has no obligation to disclose to CVM (the local SEC) the names of invested companies.

According info from company, another asset management company is represented in the Board of Directors – Rio Bravo Investimentos Ltda., which has 4,2% of the capital . The Board member is Mr. Mario Flack, who was the former CEO of Accenture Brasil and manages the RB Fundamental Equity Fund.

I would like to emphasize that this group have a value and long-term orientation for their investments.

Based on above, I am sure that the main group of hands-on asset managers will take care that Cremer executes successfully its growth strategy.

RISK

 The main risk is the execution risk of the planned strategy. However, I believe that it is mitigated by the presence of these experienced and long term investors.

Catalyst

1)Company can make very accretive acquisitions considering the credit crunch that affect more the small companies in the sector.
2)The informal controlling shareholder group may assure that the growth/consolidation plans will have a good execution. They have already two seats at the company’s board.
3)Operational and financial performance of the company will help to close the gap between price and value.
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    Description

    Crem3 has 50% of its market cap in cash, so it has the resources to be a leader in consolidating the distribution of disposable healthcare products sector. Crem3 offers a way to participate on the growing healthcare sector in Brazil at an attractive price (EV/Ebitda 3.3x 2009) along with one of the shrewdest investors group in the country. Cremer’s largest shareholder is Tarpon Investment Group (ticker: TARP11 BZ), which recently Trev62 has written about. All figures in Brazilian Reals.

    BACKGROUND

     Cremer S.A. began as a manufacturer of surgical textiles and adhesives for the healthcare sector. Later on, it diversified into adhesives and plastics for the footwear and automotive industries. After being acquired and divested by private equity investors, the company is being transformed in a leading distributor of disposable healthcare products. Through its Call Center and the internet B2B website, the company serves hospitals, pharmacies, dentists, supermarkets and veterinary clinics throughout the country with the help of 11 distribution centers of its own scattered among the most attractive regions in Brazil. Acting as a third party distribution is a way to leveraging its installed distribution infrastructure via (1) an increase the number of suppliers, (2) an increase in number of products,  (3) increase client base and cross-selling efforts, and (4) the last front of our growth strategy is to explore the under-penetrated segments. One of this is the distribution of higher value-added disposable healthcare goods. Another is the online sales of dental products.

     The healthcare distribution business in Brazil is fragmented, where most of the companies have a local/regional reach, are undercapitalized, and family owned without scale. The company has a market share of 5% (it is the largest in the segment) and growing organically and by acquisitions. The sector is ripe for consolidation.

     The sector in Brazil is the largest in South America, which represents expenditures of US$ 40 billion, and Argentina is the 2nd with US$ 25 billion. The Healthcare expenditures are growing around 14% since 2002.

    The company has a large customer base which is growing around 13% CAGR in the last 3 years. In the 1Q08 Cremer has 33,477 customers and two years ago had 26,355 customers. Cremer is attending only 30% of the Brazilian hospitals and 19% of all Brazilian drugstores, so there is plenty of room for growth. In order to accelerate growth they are making small acquisitions of niche players and regional distributors in order increase their reach and product diversity.

    Recently CREM3 acquired Hemocat and Biamed, which are regional distributors of disposable products in the segments of interventional cardiology, neurosurgery, neuroradiology and endovascular surgery, which are complementary to the Company’s products. In 2007, the companies Hemocat and Biamed had joint revenues of approximately R$13 million and a joint EBITDA of R$1.9 million. The price paid was 4.5x EV/EBITDA to be ascertained in the fiscal years of 2009 e 2010.

    Cremer had net sales of R$ 245 million in the 9 months of 2008, which means an increase of 19% Y-o-Y. Revenues from their manufacturing division represent 69% of the total, last year was 73%. The distribution of third party products is increasing its share. However, the distribution business has lower margins than manufacturing. The company had Net Earnings of R$ 33.7 million (9 months -2008) and last year it was the same level. However, most of the gains (interest income) came from the huge cash balance, that pre-tax is R$ 31,8 million (9 months-2008) and last year it was R$ 6,6 million.

    Crem3 disbursed R$15,432 in the period from October 1 to October 29, 2008 to repurchase 1,997,500 common shares. The average acquisition cost was R$7.73 with minimum price of R$6.85 and maximum price of R$10.08.

    The IPO share price was R$ 17.50, and it happened on April/2007.

    Financial / Valuation

    Nr. of Shares                                     33,678,495

    (-) Buyback on October                  (1,997,500)

    Adj. Nr. of Shares                              31,680,995

    Share Price                                      R$   9,40

    Market Cap (million)                         R$ 297.8

                                                   R$ million

    Marketable Securities+Cash           R$ 176.1

    (-) Loans ST+LT                                R$ (10.2)

    (-) Tax Installments                            R$   (7.8)

    Net Cash (Set 30, 2008)                  R$ 158,1

    (-) Buyback Disbursement               R$ (15.4)

    Adjusted Net Cash                            R$ 142.7

    Enterprise Value                             R$ 155,1

    Recently the company released its new guidance for 2008 results, so they expect  an EBITDA of R$42mn to R$44mn, The reasons for the revision were the already expected impacts of (1) workers’ strike in 4Q, (2) flood in Blumenau, (3) slowdown in plastics and adhesives and (4) a slow development of the retail channel. This means that the company is trading at 3.7x Ebitda 2008. Assuming a 10% growth in the EBITDA for 2009, the company will be trading at 3.3x Ebitda 2009.

    Peers (Cardinal, McKesson, AmerisourceBergen) are trading at higher multiples around 5.5x EV/Ebitda, however they don’t have the same prospects as CREM3.

    Cremer

    Dez/2006

    Dez/2007

    Set/2007

    Set/2008

    Net Revenues

    243

    277

    206

    245

    COGS

    181

    208

    153

    188

    (-) Discounts on Purchases

    -14

    -20

    -14

    -18

    Adjusted COGS

    166

    188

    139

    170

    Gross Profit

    76

    89

    67

    75

    (-) Sales Expenses

    32

    38

    28

    35

    (-) G & A Expenses

    28

    29

    20

    23

    Operating Income

    17

    22

    18

    18

    (+) Depreciation

    7

    4

    3

    3

    (+) Goodwill Amortization

    18

    18

    12

    12

    EBITDA

    42

    44

    34

    33

    EBITDA Margin

    17%

    16%

    16%

    13%

    Capex

    (5)

    (8)

    (11)

    (5)

    Working Capital

    (21)

    (11)

    (11)

    (25)

    Free Cash Flow

    17

    25

    12

    3

    Obs.: BRGAAP requires that discounts obtained by prepayment of goods purchased for resale to be included in the Financial Income line. However the company for disclosure purpose includes it as reduction of the COGS.

    The Catalyst: An Undetected Control Group

    Cremer's Main Shareholders

    Qty (000)

    Outstanding

    File Date

    Poland FIA

    3290

    9.8%

    27-Nov-08

    Guepardo Investimentos

    1892

    5.6%

    6-Nov-08

    Tarpon Group

    3798

    11.3%

    3-Nov-08

    CS Hedging-Griffo CV

    5254

    15.6%

    31-Oct-08

       

               

      

    a) Shares in Friendly Hands

    14234

    42.3%

    Findlay Park L.A. Fund

    1670

    4.9%

    11-Jan-08

    Rio Bravo Investimentos

        1430

                4.2%

    company

    AIM Investments

    1700

    5.0%

    19-Oct-07

    b) Potential Friendly Hands

    4800

    14.1%

    a+b) Total Shares could be Friendly

    19034

    56.4%

    Note: Free-float of 94%.

    Below, I explain why exist a group of related asset managers that are the major shareholder group in this company. However, there is no factual evidence that they have a formal agreement among them, if so they are obliged by CVM rules to disclose it. The key person is Mr. Luiz Alves Paes de Barros, who is a mentor for the Magalhães cousins.

    - Luiz Alves Paes de Barros – portfolio manager / owner of Poland FIA (a mutual fund with only 3 investors and a NAV of around US$ 300 million); and head of Investment committee of Delos Asset Management;

    - Octavio Ferreira de Magalhães – CIO - Guepardo Investimentos;

    - Sergio Lisa Figueiredo –  Senior Analyst of Guepardo Investmentos / Member of the Board – Cremer;

    - Rafael Ferreira de Magalhães – Managing Director of Delos Asset Management, and a former portfolio manager/analyst at Tarpon Investment Group;

    - José Carlos Reis de Magalhães – CEO/CIO –Tarpon Investment Group, he is nephew of Mr. Luiz Alves Paes de Barros, who manages Poland FIA. Tarpon (ticker: TARP11 BZ) was written up by trev62 on December 3rd-2008. Mr. Alexandre Borges represents Tarpon in the Board of Directors.

     - Luis Stuhlberger (CIO) from Hedging Griffo, helped to launch the Tarpon Investment Group., and a long time ago Mr. Luiz Alves Paes de Barros was a partner at Hedging-Griffo. Besides that, Hedging-Griffo distributes Tarpon and Guepardo funds.

     I didn’t find any evidence that Delos Asset Management has a stake in Cremer, however they manage investment clubs – Clube Delos de Ações - which has no obligation to disclose to CVM (the local SEC) the names of invested companies.

    According info from company, another asset management company is represented in the Board of Directors – Rio Bravo Investimentos Ltda., which has 4,2% of the capital . The Board member is Mr. Mario Flack, who was the former CEO of Accenture Brasil and manages the RB Fundamental Equity Fund.

    I would like to emphasize that this group have a value and long-term orientation for their investments.

    Based on above, I am sure that the main group of hands-on asset managers will take care that Cremer executes successfully its growth strategy.

    RISK

     The main risk is the execution risk of the planned strategy. However, I believe that it is mitigated by the presence of these experienced and long term investors.

    Catalyst

    1)Company can make very accretive acquisitions considering the credit crunch that affect more the small companies in the sector.
    2)The informal controlling shareholder group may assure that the growth/consolidation plans will have a good execution. They have already two seats at the company’s board.
    3)Operational and financial performance of the company will help to close the gap between price and value.

    Messages


    SubjectControl group
    Entry12/25/2008 09:40 PM
    Memberom730
    Who controlled the company before the IPO? Is it the same control group and the same management?
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