Brasil Bolsa Balcao (B3SA3 BZ)

Financial infrastructure monopoly trading at 13x P/E with a 7% distribution yield...

This is the first single stock deep dive following on the back of my macro piece on Brazil and why it is the most asymmetric market in the world today. I also highlighted why the capital markets sector is the best risk/reward set-up within Brazil given the high probability rate normalization and what it means for equity flows. If you have not read the macro piece, do read it before this one! This is what I seek to do with all my investments - identifying a confluence in the macro and micro for high probability set-ups.

Introduction

Brasil Bolsa Balcao (otherwise known as B3) is Brazil’s stock exchange. This is a high-quality financial infrastructure monopoly situated in a 6-year bear market where investors do not see a reason to allocate to Brazil. The drastic relative valuation gap between B3 (13.5x fwd P/E) and other global exchanges (avg. 24x fwd p/e) despite demonstrating better capital discipline suggest that the market struggles to value assets at cyclical lows. Simply put, this is a very rare instance of a monopoly with low reinvestment needs possessing share cannibal characteristics (100% capital return via buybacks/dividends), whilst trading at 13.5x P/E on cyclically depressed earnings.

Business Overview

Brasil Bolsa Balcao was formed following the merger of the Sau Paulo Stock Exchange & the Commodities and Futures Exchange in 2008, after which they further vertically integrated through the acquisition of Cetip in 2017. Cetip is LATAM’s largest securities clearinghouse and crucially also a monopoly in Brazil’s securities registration business as the sole depository for all types of securities.