We value ALPA4 at R$9.00, based on a Discounted Cash Flow to Equity model, as we believe that it better captures the company’s long-term growth potential. We use a cost of equity (Ke) of 15.6%, which is the result of a 4.2% risk-free rate in dollars, 2.8% country risk, 5.5% equity risk premium, 1.2 beta, and a 2.0% inflation differential between Brazil and the US. Nominal growth (g) is set at 4.2%.

We rate ALPA as High Risk for two main reasons: 1) Brazil operations are still hampered by write-offs of raw materials and finished products; 2) Strong volatility of International operations with limited visibility on long-term profitability.


Risks to our Neutral thesis and to the shares achieving our target price include: 1) fluctuations of raw material costs (Havaianas rubber is highly dependent on butadiene and styrene); 2) changes in tax regime (the company has several government grants related to its production facilities that are deductible from its taxable basis); 3) commercial/diplomatic relationship between Brazil and ALPA’s key markets (Europe, US, China); and 4) natural macro swings.

If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our target price. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.