April 10, 2018

AVP Valens Credit Analysis – Operational sustainability and healthy liquidity levels indicate that credit markets and ratings agencies are overstating credit risk

  • Credit markets are grossly overstating credit risk with a CDS of 696bps and a cash bond YTW of 9.125%, relative to an Intrinsic CDS of 350bps and an Intrinsic YTW of 6.105%. Additionally, Moody’s is materially overstating AVP’s fundamental credit risk, with their B1 credit rating five notches lower than Valens’ IG4 (Baa2) rating
  • Incentives Dictate Behavior™ analysis highlights that management’s compensation framework focuses them on all three value drivers, which should lead to Uniform ROA expansion and higher cash flows available for servicing obligations. Moreover, management members have low change-in-control compensation, limiting event risk for creditors
  • Earnings Call Forensics™ of the firm’s Q4 2017 earnings call (2/15) highlights that management is confident that they are taking a fresh look at their business with a sense of urgency, and in their direct selling strategy through the 70,000 Shakti ladies in India. Additionally, they are confident that they are reviewing all of their cost base to identify additional opportunities to mitigate future cost pressure, and that they have defined what good service means at Avon, allowing them to develop a clear framework and KPIs
  • AVP is currently trading near historical lows relative to UAFRS-based (Uniform) Earnings, with a 16.8x Uniform P/E (V/E’). At these levels, the market is pricing in expectations for Uniform ROA to decline from 13% in 2017 to 10% in 2022, accompanied by immaterial Uniform Asset growth going forward. Given that valuations are likely being compressed by the market’s inaccurate perception of the firm’s credit risk, AVP could see material credit-driven equity upside if credit spreads tighten, even without fundamental improvement

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