Multiplus Gains as Smiles Misses on Drop in Brazil’s Real

The Brazilian real’s 9 percent slide in three months is bolstering revenue at Multiplus SA, the nation’s largest loyalty-points program. The company’s biggest rival, Smiles SA, is mostly losing out on the gains.

About 80 percent of Multiplus sales come from dollar-denominated credit-card purchases, while the points it awards to customers are tied to the real, Chief Executive Officer Eduardo Gouveia said. That means as the real weakens, Multiplus grants fewer points for each dollar spent.

“We’re in a very favorable situation,” he said in an interview at Bloomberg’s Sao Paulo office. “Revenue has already begun to improve a bit now, but margins will improve soon.”

Gouveia said he’s optimistic the weaker real will help Multiplus report 2013 profit and sales that beat market estimates. The Sao Paulo-based company is betting that will halt a 40 percent stock-price plunge this year after parent airline Tam SA proposed selling new shares in the unit. The sale was later canceled.

The plan by Latam Airlines Group SA, which acquired Tam in 2012, “did not go over well with the market,” Carlos Eduardo Picchi Daltozo, an analyst at BB Investimentos, said by telephone from Sao Paulo. “It reinforced the image that Latam doesn’t appreciate the Multiplus business, that they want to appropriate the money in detriment to the minority shareholders.”

Smiles Waits

Smiles, which sold shares in an initial public offering in April, won’t see the results of the stronger dollar immediately, Chief Financial Officer Flavio Vargas said. The Sao Paulo-based company sold 400 million reais ($179.6 million) of tickets at a fixed exchange rate of 2 reais a dollar before Brazil’s currency fell to as low as 2.27 last week.

“We’ll probably see a more significant impact as of the third and fourth quarters,” Vargas said in an interview at Bloomberg’s Sao Paulo office.

Loyalty programs get cash from point sales and earn interest on the money for several months before awards are redeemed by customers. Multiplus and Smiles expect to benefit as investors search for defensive bets amid a plunging currency, the benchmark Ibovespa index’s June 11 entry into a bear market and rising interest rates.

The central bank last week increased the benchmark interest rate by 50 basis points for the second straight time to 8.5 percent. The rate should reach 9 percent by year-end, according to a Bloomberg survey of 22 economists.

Slowing Economy

Gross domestic product expanded 1.9 percent in the first quarter from a year earlier, missing analysts’ estimates for 2.3 percent growth as household spending fell to its lowest level since 2011. GDP growth slowed to 0.55 percent in the first quarter from the previous three-month period.

Multiplus is “a defensive company especially because of the distribution of dividends and because it requires little investment,” Felipe Silveira, an analyst at Coinvalores, said by telephone from Sao Paulo. “Even marketing and publicity ends up being done by its partners, so you basically have 100 percent of results being distributed to shareholders.”

Smiles probably will pay an “elevated dividend,” CFO Vargas said, which will be discussed at an April 2014 board meeting.

Ratings Cut

Analysts cut their ratings on Multiplus after the follow-on offering was announced and later canceled, and after Itau Unibanco Holding SA, one of its biggest credit-card partners, in February changed rules requiring customers to spend more to accumulate points. Of the 14 analysts that follow Multiplus, four say buy while 10 say hold, including Silveira. That compares with nine buy ratings for Smiles and one sell.

“It’s a question of ramp-up -- Smiles has more potential to ramp up than Multiplus, which is cruising along,” CEO Gouveia said. “We have already lived through this.”

Smiles gained 7.2 percent through yesterday since April 29, when it made its debut in Sao Paulo trading following its IPO, compared with declines of 13 percent each for Multiplus and the Ibovespa. Multiplus was little changed at 28.86 reais at 11:36 a.m. in Sao Paulo, while Smiles fell 0.8 percent to 24.46 reais.

Each of the companies is spending about 20 million reais this year on marketing, and both have room to gain customers, Gouveia and Vargas said. Only about 5 percent of Brazil’s population of 191 million is enrolled in Smiles or Multiplus, while the estimated penetration rate for loyalty programs in the U.S. is 40 percent.

“All of our drivers of growth are amplified -- the airline segment has historically grown two to three times GDP and looking ahead it should continue to grow more than GDP,” Vargas said. “Credit cards, too, grew five times GDP in the past, maybe they will grow 3 times now. But it’s still the case that Brazil’s growing in banking overall -- people are using more credit cards.”