Equity Research Sonae SGPS SA: Structural Approach to Soane's Probability of Default

The present document consists of an Equity Research report on Sonae SGPS, S.A. (SON). This report was used for the local Portuguese CFA Institute Research Challenge and obtained a 2nd place. Please note that this report contains solely public information until the 14/01/2021. In addition to the standard format chosen, this report has an additional chapter in which it employs a structural approach to Sonae’s Probability of Default. Three different approaches, using different parameters and assumptions are tested on Sonae to arrive at a range of Probability of Default for the conglomerate. SON is a Portuguese conglomerate, comprised of eight business units (BU) that range from food and non-food retail to commercial real estate and telecommunications. To value the conglomerate this report uses a Sum-of-the-Parts approach, where a discounted cash flow analysis was developed for most of the business units, thoroughly reflecting its different value drivers. The valuation yielded a buy recommendation with a price target of 1.25€/sh for 2021YE, with an upside potential of 75% from the January 15th 2021 closing price of 0.71€, with a medium to low risk. To support the base case of the report, other methods were also used, such as Relative Valuation.