IRS - IRSA Seems To Be Heading For Growth

Summary

• The full name of IRSA is IRSA Inversiones y Representaciones Sociedad Anónima (IRS), an Argentine company that operates diversified real estate businesses in Argentina.
• The stock has been in a strong uptrend since the beginning of the year, a sign that the market may have started to be positive about the future of IRSA.
• The company's earnings have improved significantly while recovering from the impact of Argentina's economic slowdown and the COVID-19 pandemic crisis.
• If the economy in Argentina gradually solves its problems, it will provide such a better context that it would be much easier for IRSA to continue growing its profits and improving its financial position.
• The outlook for IRSA is bright, but that doesn't mean it takes to be optimistic to see it. The stock price is ready for higher trading. As a further incentive for a Buy rating, the stock may trade below its intrinsic value.

IRSA Inversiones y Representaciones Sociedad Anónima Is Performing Well Since Early of 2023

IRSA Inversiones y Representaciones Sociedad Anónima ( IRS ), an Argentina company that operates diversified real estate businesses in Argentina, has seen its share price rise nearly 40% this year, outperforming all its peers except DigitalBridge Group, Inc. ( DBRG ), below chart shows.

IRSA is benefiting from a significant improvement in the profitability of its real estate business, which should gain momentum from better economic conditions in Argentina and a recovery in consumer confidence. Therefore, based on this rosy outlook, shares are poised to continue trading higher. With this in mind, investors should consider increasing their exposure to Argentina's business through IRSA shares, and if they do so now, they could benefit from a valuation that still looks cheap despite the year-to-date rally. Not only because of the promising prospects, but the cheap valuation also results from some comparisons between the current market valuation and estimates of the possible intrinsic value of the stock.

IRSA Inversiones y Representaciones Sociedad Anónima in the Real Estate Services industry

Headquartered in Buenos Aires, Argentina, IRSA Inversiones y Representaciones Sociedad Anónima is an acquirer and developer of commercial real estate, which is leased primarily to shopping centers, offices, and hotels. This is the most important source of income for the company.

A smaller portion of the corporate portfolio sees IRSA take over luxury hotels it currently manages under the Intercontinental, Libertador and Llao Llao names.

The company is also engaged in the development and sale of residential real estate and the acquisition of undeveloped land reserves for future development or sale.

How IRSA Inversiones y Representaciones Sociedad Anónima Performs

The Net Income

IRSA's net income for the first quarter of fiscal 2023 [Q1 FY 2023] was Argentine peso [ARS] 1,297 million, a positive turn from the net loss of 1,855 million ARS in the same quarter of fiscal 2022.

In US dollars, net income for the first quarter of fiscal 2023 was a net profit of $8.8 million compared to a net loss of $18.8 million for the first quarter of fiscal 2022.

On a trailing 12-month basis [TTM], which provides a better idea of the ongoing trend in the company's bottom line than a quarter-on-quarter comparison, the chart below shows that IRSA's net income continues to improve after reversing from the net loss in the third quarter of fiscal 2022.

It seems that the dark period for Argentina's economy, which plunged into a dramatic drop in activities in 2021 due to the combined effect of the previous stagnation with the pandemic crisis due to the COVID-19 virus, has been left behind.

As evidence of this, the chart below shows that TTM net income improved significantly from a net loss of ARS 28,055 million (?$252.7 million) in March 2022 to a net profit of ARS 34,892 million (?$278.6 million) in June 2022 and to a net profit of ARS 38,044 million (?$258.3 million) in September 2022.

The Rental adjusted EBITDA

Rental EBITDA [adjusted] was ARS 5,796 million (?$39.4 million) for the first quarter of fiscal 2023, up nearly 47% year over year.

Earnings were driven by strong year-over-year revenue growth of 22% generated by tenants of IRSA properties through shopping center operations. In favor of the importance of the performance, the company highlights the aspect that the corresponding period in 2020 was not affected by the pandemic.

The occupancy rate of all properties in IRSA's portfolio was 93.7% in Q1 FY 2023, up from 89.6% in Q1 FY 2022 and 92.8% in Q1 FY 2021, but still slightly below 94.3% in Q1 FY 2020.

The shopping center segment accounted for 79%, the office segment for 9.6% and the hotel segment for 11.4% of total rent-adjusted EBITDA.

The Hotel Segment

Although its contribution to the company's overall profit is marginal compared to rental income, it must be noted that the hotel segment is performing very well, particularly driven by the management of resorts under the Llao Llao brand.

This trend has resulted in the hotel segment's EBITDA growing nearly 360% year over year, reaching approximately ARS 283 million (? $1.93 million).

The Total EBITDA

The chart below from Seeking Alpha illustrates the trend in total EBITDA on a TTM basis, clearly highlighting the sequential improvement over the last 5 quarters.

Due to a difficult economic environment both internationally and overseas, IRSA's TTM total EBITDA fell into the red in June 2021, but from that level the item recovered very well, reaching ARS 17,051 million (?$115.7 million) as of September 30, 2022.

TTM total EBITDA, which includes the sale in Q1 FY 2023 of another floor of an office tower called "200 Della Paolera", surpassed the level of 2 years ago and is well on track to recover to pre-pandemic levels.

The Balance Sheet

As of September 30, 2022, the balance sheet reported total current assets of ARS 35,016 million (?$238.3 million), of which 9.6% was cash and equivalents, 33.3% was accounts receivable, and 58.8% was investments in debt and equity securities.

Non-Current Assets were valued ARS 395,828 million (? $2.69 billion), while total Liabilities were valued ARS 223,459 million (? $1.52 billion).

Total debt was about ARS 71.62 billion (?$487.3 million), of which 44.5% had to be paid within the year, while the remaining 55.5% is long-term debt.

Due to outstanding debt, the company saw its income statement burdened with interest expenses of approximately ARS 6,895 million (?$46.8 million) over the past 12 months through Q1 FY 2023, which was fully offset by operating income of ARS 16,381 million ( ? $111.2 million).

Shareholders' equity for the first quarter of fiscal 2023 was ARS 207,385 million (? $1.41 billion), up 0.17% from Q4 FY 2022.

The annual unlevered free cash flow, which is the company's cash on hand prior to paying financial obligations, hovers at approximately ARS 27 billion (? $184.3 million).

IRSA Returns Cash to Shareholders

In the first quarter of fiscal 2023, the company completed the share buyback program initiated in the previous fiscal year. Under the plan, the company repurchased 1.16% of its common stock and spent approximately ARS 995 million (? $6.8 million).

On December 5, 2022, IRSA paid its shareholders a semi-annual cash dividend of approximately $0.187 per American Depositary Receipt [ADR]. The payment leads to a forward dividend yield of 5.39% as of this writing.

The Stock Valuation

ADRs of IRSA traded at $7 per unit for a market cap of $1.06 billion as of this writing.

From a technical perspective, the stock doesn't seem to be trading low as the current level is significantly above the 200-, 100- and 50-day simple moving average lines, the chart above illustrates. Furthermore, the price per ADR is currently just a whisper away from the upper bound of the 52-week range of $3.16 to $7.07.

However, the following financial indicators suggest that the stock isn't more expensive than most of its peers. IRSA has a Price / Sales [TTM] of 4.50x versus the sector median of 5.06x, while the Price / Book [TTM] is 0.81x versus the sector median of 1.56x and the Price / Cash Flow [TTM] is 11.15x versus the sector median of 13.30x.

IRSA's Graham number, which measures the stock's fundamental value as the metrics accounts for earnings per share and book value per share, was $35.29 for the first quarter of fiscal 2023, making IRSA appear undervalued compared to the current stock price of $7.

The IRSA appears undervalued by the stock market even when another model for determining the stock's intrinsic value is considered. This is the earnings-based discounted cash flow model, which gives an intrinsic value of $41.06 for an 83.09% safety margin from the current share price level.

To determine intrinsic value as the present value of future earnings, the analysts discounted IRSA's future earnings, which Wall Street projects will grow at a 13% growth rate annually over the next 5 years.

If earnings are the stock's driver and assuming Wall Street is right, then rising earnings may need to match the stock prices above current levels, suggesting no overvaluation and the potential for a good return going forward.

This mindset implies growing profitability for IRSA, which is more likely than not, based on the following factors.

A less severe than originally expected recession in developed countries (as economists now estimate) will support foreign demand for leisure services offered in a beautiful country like Argentina. In addition to the extraction of raw materials, tourism has always been one of the most important sources of national income in Argentina.

"Argentina is one of South America's most popular tourist destinations", says travellersworldwide.com.

IRSA's portfolio, which focuses on hotels and related services, should benefit from the positive trend.

Economic Situation in Argentina

The upcoming conditions in the Argentina economy will be critical for IRSA's shopping center and other real estate properties portfolio.

The next cycle will determine people's propensity to visit shopping malls and companies' willingness to invest in expanding operations. Argentina's economy is struggling due to initial stagnation and the restrictions against the spread of the COVID-19 infection, but the cycle is finally turning to recovery as the following indicators suggest.

These are the continued growth of Argentina's GDP ( 5.9% yoy in the third quarter of 2022 versus a market forecast of 5.8%) and the continued improvement in consumer confidence . Also, the Argentina central bank's disinflation plan is being carried out to protect people's savings and make the exchange rate more stable.

In addition, the policies of economic liberalization that President Alberto Fernandez's government has launched since taking office in November 2019, including the lifting of protectionist measures that weighed on exports, the lifting of controls on capital movements, and the liberalization of the exchange rate, should help the country overcome the crisis. This is because predecessor President Mauricio Macri's austerity measures were not enough to grow the economy, lift people's poverty, and prevent social tensions.

Finally, in March 2022, Argentina's parliament approved a $45 billion debt restructuring deal (? 12% of total debt in 2022) with the International Monetary Fund, giving the country's balance sheet some financial breathing space.

Conclusion

IRSA Inversiones y Representaciones Sociedad Anónima ( IRS ), has performed well since the beginning of the year, a sign that the market may have begun to positively weigh the future of this stock.

There is a good chance that the positive trend in IRSA's business will continue to strengthen, which should propel the stock price to higher levels.

Investors should likely be interested in increasing the number of IRSA's ADRs in their portfolio by taking advantage of a market valuation that currently does not appear overvalued, despite the good recovery since early 2023.

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