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Imperial1964 (96.65)

Opinions on TNE and Brazilian Real (currency)

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April 02, 2009 – Comments (7) | RELATED TICKERS: TNE

Seeking opinions on the merger with Brazil Telecom and the direction of the Brazilian Real.  TNE took on a lot of debt, 22% of which is in US Dollars and Japanese Yen.

From their 10-K:

"On December 31, 2008, the company had consolidated gross debt of R$20,542 million, of which R$4,484 million in foreign currency (21.8% of the total). It must be noted that all debt installments in foreign currencies that will fall due through 2010 are entirely protected from exchange rates fluctuations through hedge contracts (swaps) and through a portion of cash that is kept in dollars."

They levered up for the merger, partly with US$ and JPY.  Thier debt payments are hedged through 2010 through currency swaps, but over half of their foreign debt payments are after 2010.


(R$ million)                             2009   2010   2011   2012   2013   2014  onwards
Total  Gross Debt amortization  4,047  5,993  3,427  1,562  2,290  3,223  20,542
Foreign Currency Amortization   1,287    647     554     340     621  1,035    4,484  
Local Currency Amortization      2,760  5,346  2,874  1,223  1,669  2,188  16,058 

Debt:Equity ratio is currently 1.74, which is very high for my tastes.  Fluctuations in the exchange rate could have a material impact on their outstanding debt levels and payments as well as their earnings because the effects of currency movements on assets and liabilities get recorded as income (or loss).  Add to that the currency effects of owning stock in a foreign company (I live in the US) and it has the potential for sharp losses or sharp gains.

I'm considering selling TNE and buying a Brazilian ETF or something I don't have to watch so closely.  But with a yield of >10% and P/E of 5 it's difficult for a value investor to push the sell button.

What do you think of the merger or the outlook for the Brazilian Real?  Am I crazy to want to sell it?  Or am I doing prudent risk management as the company has put itself in a riskier position than it was in when I bought it?

7 Comments – Post Your Own

#1) On April 02, 2009 at 2:49 PM, dudemonkey (91.66) wrote:

I don't know much about valuing a telecom so I'm going to sidestep that issue, but I will say that I am selling dollars and buying Reais.  The bulk of my investment dollars are going into solid Brazilian companies, as I expect Brazil's economy to recover before most other major economies do.  Their government is well-capitalized and is running a budget surplus, so the fundamentals of the Brazilian Real are much more attractive to me than the US dollar.

If I'm not correct, the worst-case scenario is that I'm sitting on top of a pile of Brazilian money so I'd just go to Rio for a month and party.

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#2) On April 02, 2009 at 2:50 PM, anchak (99.76) wrote:

Imperial..... Most Brazilian utilities have this problem - they are too much debt-loaded and their yield ( high payout ratio) is primarily driven by the obligation to pay the exchequer.

However I think the Real is a good bet.

Craig ( Stockspreadsheet),Tasty and I had some discussions on this very topic on the stinkyfeet board. ELP was a good pitch from there ( I had countered with this very one ie TNE)

Difficult choice....

 

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#3) On April 02, 2009 at 3:08 PM, Schmacko (96.90) wrote:

The real took a nose dive against the dollar in july 08 with the commodity bust.  I think as commodities (especially oil and metals) strengthen again the real appreciating vs. the dollar will be a no brainer in the medium to long term.  I make no claims as to having any idea how it will move vs. the yen.

A lot will depend on your entry price and investing time frame.  If your cost basis is near $10 like your caps profile I don't think anyone could blame you if you decided to lock in the roughly 50% gain you have so far.  On the flip side if you think the rally has legs I could see TNE moving back up to $18 or so shortly. 

I've been a long term holder of TNE since well before the merger and it's one of the companies I always seriously consider adding to on pull backs.  I like Brazil's future long term and I think Oi will be fine in the long run.

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#4) On April 02, 2009 at 3:09 PM, MattH42004 (99.91) wrote:

Out of all the BRIC countries Brazil is my favorite, and it's by a fairly wide margin. They are commodity rich, self-sustaining, and have become more open to business. You need to watch out for the occasional SA nationalism to rise up from time to time though. Personally, after the fall commodity washout last year I started buying RIO with an average price of about 9.90 as our right now. Thats probably my favorite Brazil play, although ERJ and PBR are nice too. 

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#5) On April 02, 2009 at 3:50 PM, nottheSEC (72.43) wrote:

I own VIV and unfortunately GOL shares so I am vested in Brazil Anywho I am no expert but from a strictly TNE perspective I think its fairly valued compared to other telecoms.I think VIV is over priced with multiple of 28 or so. I also believe Schmacko (97.73) has a  valid point that it could have " legs" to 18 on the improving Brazilian economy and the real. Lets see MF 4/5, MSN no rating, and the fine folk at Zacks said the following about the Latin american markets.

CHICAGO, Feb 26, 2009 -- ...Zacks Equity Research analyst Claudio Freitas discusses the Latin American markets. Highlighted stocks include: Vivo (NYSE: VIV), Oi Participacoes (NYSE: TNE), AmBev (NYSE: ABV), Grupo Ultra (NYSE: UGP) and Telesp (NYSE: TSP).

After 5 months of consecutive declines, in January Brazil produced a total of 186,100 vehicles, almost 100% more than in December 2008. Total vehicle sales in January reached 194,500 vehicles, 1.5% more than in December 2008. Some days ago, it was announced that car sales in Brazil increase 15.56% in the first half of February 2009 if compared to the first half of January 2009, reaching a total of 109.258 units (just cars, not including buses or trucks). If we compare to the same period 2008 it also increased by 7.4%.

It was also announced some days ago that in January 2009, total subscribers in the Brazilian wireless market grew by 0.86% from December 2008. Despite the crisis, January 2009 was the second best month in terms of subscribers' growth in 10 years, in absolute terms!

It seems that companies focused in local Latin American markets will go through the crisis without much pain; thus, there are some good opportunities out there:

In such a business environment, we would recommend some Brazilian domestic focused companies like the telecom companies Vivo (NYSE: VIV) and Oi Participacoes (NYSE: TNE), consumption products producer like AmBev (NYSE: ABV), fuel retailers like Grupo Ultra (NYSE: UGP) and high-dividend utilities like Telesp (NYSE: TSP).

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#6) On April 02, 2009 at 4:00 PM, nottheSEC (72.43) wrote:

 nottheSEC (62.00) wrote....so I am vested in Brazil.  "Vested in Brazil" sorry if the sounded funny. Lmao! like me and Lulo talk all the time.

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#7) On April 02, 2009 at 4:19 PM, Imperial1964 (96.65) wrote:

I sold TNE today into a 7% rally in the shares, selling just a nickel off the daily high.  With that much debt and 10% of it exposed to currency fluctuations it no longer fits my risk tolerance.  Also, I've learned how much more difficult to properly track investments in emerging markets than in developed foreign economies like in Europe.

I am also very bullish on Brazil and have been for a few years.  They're in better shape than any other BRIC country.  They aren't dependant on outsiders for much of anything other than capital.  I am a little afraid of outflows of foreign capital during this crisis.

I plan to buy a Brazil ETF or something with the proceeds, but I think I will probably wait until this rally ends.

Thanks for the comments!

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