Last Wednesday night’s announcement (24) marks another chapter in the IRB (IRBR3) Reinsurance saga as it searches for its recovery. And in confirmation of market speculation in the past few weeks and studies confirmed by the company itself, it was reported that it would conduct another capital increase, this time amounting to 1.2 billion Brazilian riyals, to reformulate the regulatory indicators set by the supervisory authority. For Private Insurance (SOSIP).
As shown in the second quarter results, the IRB recorded insufficient equity adjusted equity with respect to the minimum required capital of R$614 million. There was also no classification to cover technical provisions and regulatory liquidity of R$730 million.
Stocks reacted, at first, positive, as the move was already widely expected – speculation about the operation has gained steam since the company released its results, on August 15, 2022, with a loss of R$373, R$3 million. At 2:07 p.m. (Brazilian time), the shares were up 4.48% at R$ 2.10, reaching an all-time high of 7.46% on the day, at R$ 2.16. However, the expectation is that Follow It may have a high deductible and weaken shareholders, while analysts estimate that it may not be the solution to the company’s problems.
The company launched an initial offer with limited efforts, initially, of 597 million shares, based on the closing price of assets the previous day, of R$ 2.01. However, the amount can be increased by up to 200%, approximately 1.2 billion shares, thus providing the possibility of a significant asset discount. The stock price of the operation will be determined on September 1.
“The signal is that they expect a relatively high discount to be able to raise that money, which makes sense because the company continues to burn money. Even with the most favorable and robust financial result [do segundo trimestre]The run is still very poor, says Carlos Daltoso, head of equities at Eleven Financial.
The company highlighted in an earnings conference call that the second quarter was “significantly affected” by the historic drought that affected the South, resulting in a loss rate that was the main reason for the loss in the quarter, above 100%. “The effect was caused not by the old contracts, but by the new rural ones, which resulted in a yellow light in our assessment of the quality of their origin,” Daltoso highlights.
BTG Pactual analysts highlighted in a report that if the IRB ends up issuing the maximum number of shares allowed, reaching R$1.2 billion, “we will talk about a R$0.66 share price.”
They said they still loved the IRB brand, team and contracts, but considered that BB Seguridade (BBSE3), one of its key clients, was reducing its exposure, adding to the challenge for the company to continue increasing premiums to improve future results.
Genial Investimentos added that “it is possible that the required discount will be high, which could further weaken the minority (shareholders).” For Safra, the process could cause significant dilution for shareholders not participating in the offer, which could range from 32% to 59%.
However, they are of the opinion that demand may not be too low, as some investors may use supply to cover short positions.
This is one of the bets on the radar for the success of the company’s stock offering, at a time when the company has seen a huge rent hike on its shares since speculation about a new one. Follow I got the radar.
Last Wednesday, IRB shares were very close to the leased position limit, of 25% of free float (shares outstanding in the market), with great demand from investors for “short(Take short positions, bet on the fall) the paper.
An investor can bet on a drop in the price of the asset by renting the paper from someone who bought it and then sold it. However, it will be necessary to buy it back so that it can be returned to the original owner in the future. In this process, the “short” person waits for the price of the asset to fall so that it can be repurchased at a lower value in the future.
Interest in this process in the IRB rose sharply. Thus, in about a month, the rate charged for lending shares of the reinsurer rose from 20% to 45%.
After the market closed yesterday, B3 announced that it rose from 25% to 30% from free float Maximum Leasing Stock with Maximum Options with Company Shares reduced from 35% to 30%. B3 said in the statement that it had taken the action to meet the increasing demand for operations in a particular market. According to the exchange, if the new limit is reached, it will interrupt the registration of new contracts and decide to close operations so that the initial limit is respected again.
With the exponential rise in the cost of rent and with the ability of supply to reach low prices, the “shorts” (sold) could cover their position through acquisitions in the market. Follow.
In this sense, Daltozo, of Eleven, highlights that the point that drew attention in this press release in relation to the previous offering, in 2020, was that the respective shareholders Bradesco (BBDC4) and Itaú (ITUB4) did not explicitly indicate this time that they would follow Capital increase in the amount related to their respective holdings by 15.8% and 11.5%.
However, doing an evaluation, they will likely follow up on their participation and will make a resource contribution again. In any case, shareholders must subscribe within the limits of their positions, resulting in a contribution of less than R$400 million. Thus, more resources will be required for the success of the operation, which can come from contributors with short positions.
It is worth noting that since December last year, more Brazilian and multi-market equity funds have been “sold” than “purchased” in IRB shares, according to information from the Economica website. The most recent data is from April of this year, when managers have up to 90 days to notify the Securities and Exchange Commission (CVM) of the composition of their portfolios.
In the twelve months to April, the balance between “long” (shares bought) and “short” (shares leased) positions was positive at R$139.6 million in May 2021, but gradually decreased through November. In December 2021, “Sold” began to dominate and the balance was negative by R$ 27.3 million. The number increased month by month, reaching 169 million riyals in April.
Last week, the director of Squadra — who was responsible for exposing the IRB accounting fraud in February 2020, which culminated in a stock exchange drop of more than 90% since then and several changes in management — was highlighted in a letter, continuing First half of 2022 in office shorts In the company. However, in a much smaller volume due to the sharp decline in market value.
In the still heavily affected operating scenario (which suffered a strong setback with the drought in the last quarter) and with continued capital increases, the view of market analysts remains quite skeptical about the company, with continued recommendations for cautious investors in IRBR3.
“One of the questions is whether these R$1.2 billion will really solve the company’s problem, since the operation has not yet shown signs of improvement, the loss ratio remains high by the company’s own standards, with an overall rate above 100%. The operating result is still incomplete and causes in losses, even with the most favorable trend for the financial result due to the rise of Selic”, assesses Daltozo. Eleven currently has an IRB recommendation under review.
BTG Pactual also highlights being careful with the origin. “It is true that we expected the IRB to be in a much more comfortable position now and note that our ability to predict outcomes has been very low thus far,” the institution’s analysis team noted.
The Genial team highlighted that it is difficult to know the future of the Immigration and Refugee Board (IRB), which could open the doors to write off or change control. “Amidst a turbulent and uncertain environment, we reiterate the recommendation to sell”; The home’s target price for the assets is BRL 2.10 (up 4.5% until the previous day’s close).
Safra cut the target price for the stock after announcing the follow-up from R$ 3.10 to R$ 2.40 (a rise of 19.40%), while maintaining a neutral recommendation, indicating that they do not rule out another price adjustment. Target depending on the outcome of the stock offering.
It estimates that “in our view, stocks may continue to be under pressure in the short term, reflecting their negative earnings momentum, with additional pressures arising from the capital appreciation.”
The day before, Citi had already lowered its target price for IRBR3 shares from R$2.40 to R$1.60 (down 20.40% compared to Wednesday’s close), reiterating the sell recommendation, while noting that the impact of the contracts under review should continue for some. time, which is detrimental to the home’s long-term view of the reinsurer’s profitability.
According to a compilation by Refinitiv, of the seven homes the newspaper covers, four are recommended for sale and three for maintenance, with an average target price of R$2.96 (still a huge upside potential of 47% compared to the previous day’s close). The future of the IRB remains uncertain.
(With information from Reuters)
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