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

• CDS markets are grossly overstating credit risk with a CDS of 606bps relative to an iCDS of 232bps, while bond markets are materially overstating credit risk with a bond YTW of 6.587% relative to an Intrinsic YTW of 4.167%. Furthermore, Moody’s is overstating AVP’s fundamental credit risk with their Ba3 credit rating, four 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 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 Q1 2017 earnings call (5/4) highlights that management is confident that they are seeing positive revenue growth in Brazil, driven by higher average orders, and in the capabilities of their revamped digital platform. Additionally, they are confident that they are on track with their 3-year transformation plan, and they are confident about their Beauty for a Purpose initiative. Moreover, they are confident they are building their capabilities on all three price tiers
• AVP is currently trading at a 1.8x UAFRS-based P/B, which is near historical lows. Even at these levels, the market is pricing in expectations for Adjusted ROA to recover from 5% in 2016 to 13%, accompanied by 1% Adjusted Asset shrinkage. Given such lofty expectations, that appear to be pricing in the best-case scenario for operational improvement, equity upside is likely limited, and risks appear weighted to the downside