Morgan Stanley raises Petrobras ADR price and reiterates neutral rating

Morgan Stanley raised the price target for Petrobras ADRs, from US$ 11.50 to US$ 12.50, according to a report sent on Thursday night (5) to clients, in which they revised projections, while reiterating the recommendation “ equalweight” for the oil company’s securities.

“We think it’s just a matter of time before Petrobras changes its dividend policy,” said analyst Bruno Montanari.

“Distributions linked to cash flows were robust but likely ran their course. Earnings-based distribution scenarios imply a yield closer to global peers and, by themselves, would not justify exposure to the stock,” he added.

He assesses that the dividend policy is among the easiest changes to be implemented by a new team in charge of the state-owned company.

With a new CEO and potentially new executive directors being appointed by the new government of President Luiz Inácio Lula da Silva, the analyst expects that one of the first actions will be a reduction in dividend distributions.

“Unlike the pricing policy, which requires changing the bylaws, and the capital level, which requires a robust approval process and has a longer term, dividends are simply a recommendation from the executive management team and approved by the board of directors. management,” he argued.

He expects the distributions to come close to the minimum legal requirements.

“Based on our discussions with investors, we believe the consensus expectation is for a 30% to 35% payout rate. At this point, we have set our payout rate assumption at 32.5% from 2023 until there is more visibility into future policy,” he said.

In this context, it estimates dividends of around US$ 6.6 billion in 2023, which they see as a marked change compared to the US$ 42 billion in dividends declared in the last 12 months until the third quarter of last year — US$ 23 billion when excluding extraordinary payments.

He stated that the previous estimate was US$ 16 billion, assuming a 60% cash flow rate (FCF).

Citing the binary nature of the Q4 2022 dividend, it assumes zero distribution for the final quarter, with any announcement to that effect being a positive trigger for equities.

In the report, the analyst also claims to see the action at a fair price, but does not rule out a fall in a more interventionist scenario.

“We expect continued volatility as the new government takes office and begins to share its vision and strategy for state-owned enterprises,” he said.

“While recent comments and interviews from the government’s energy transition team suggest moderation in the intervention narrative, we believe dividend, capex and fuel prices are at risk of changing, potentially for the worse, which keeps us on the sidelines for now. .”

In explaining the change in price target, he said that given the current volatility and uncertainty about future strategy, he temporarily changed the sum-of-the-parts valuation methodology to just EV/Ebitda.

This Friday, Petrobras shares traded on the São Paulo stock exchange showed mixed performance, with preferred shares yielding 0.34%, to R$ 23.8, while common shares rose 0.11%, to R$ 27.11. In the week, they are heading to close with a decline of around 3% each.