Brazil’s Via Varejo; Admission of Fraud Does Not Undermine Confidence of Investors

RIO DE JANEIRO, BRAZIL – Rising sharply in recent months, having doubled in market value since May and up 140 percent in 2019, Via Varejo’s (VVAR3) share price crashed at the end of the trading session on Thursday, December 12th.

The securities, which until 5:54 PM Thursday were up 8.14 percent, tumbled and closed down 3.10 percent, shortly after the company disclosed relevant facts confirming indications of accounting fraud that should have a significant impact on earnings for the fourth quarter of 2019.

On Friday, November 13th, the securities had a highly volatile session, with a drop of nine percent, closing only slightly lower, at only 0.99 percent.

At the time, the company had announced that the first stage of investigations into the alleged accounting irregularities had not confirmed the allegations (a situation that was amended with the last company statement).

Among the potential irregularities, the company mentions manipulation of the labor law obligations, incorrect accounting for assets and liabilities, and “failures of internal controls” that may have led to accounting errors going unnoticed.

As last Thursday’s announcement was released at the end of the trading session, it was expected that the company’s shares would continue to react negatively in Friday’s trading session, since the impact on its results is considerable.

According to Pedro Fagundes, XP Investments analyst, the amount of negative cash effect on Via Varejo is approximately R$900 million, to be disbursed between three and four years – or approximately six percent (at present value) of the company’s market value.

However, the shares of the owner of Casas Bahia, Ponto Frio and Extra.com brands traded higher throughout the session, rising up to eight percent.

Although the news is clearly negative, analysts point out that the facts investigated refer to the company’s past management and that there is now a clear improvement in corporate governance.

In addition, despite the very considerable amount of impact on its financial statements, the company’s cash flow will possibly not be as affected.

According to XP, the amount of R$900 million does not consider the gains of R$600 million related to tax credits currently being assessed (most of which have already become final), as well as any benefits arising from tax recuperation (estimated at around R$270 million).

Source: Infomoney