What is the expected impact of the potential sale of Avon International on the company's cash flow and balance sheet?

Fundamental outlook

The announced “probable” divestiture of Avon International is a classic cash‑generation move for Natura (NTCO). By stripping out the non‑core Avon assets, the company will free up the working‑capital drag that has historically tied up inventory and receivables in the lower‑margin Avon franchise. In the next 12 months the sale is expected to produce a one‑off cash inflow of roughly BRL 1‑1.5 bn (based on recent comparable transactions in the beauty‑sector) and will eliminate the need to fund Avon’s ongoing operating deficits. Post‑sale, Natura’s balance sheet will be leaner: a higher cash‑and‑equivalents ratio, a reduced net‑debt burden and a stronger current‑ratio, while the equity base will be modestly trimmed by the removal of Avon‑related goodwill. The net‑income boost from the “greater visibility into Latin America’s results” should translate into a more predictable earnings trajectory and a higher free‑cash‑flow conversion rate, reinforcing the dividend‑coverage ratio and giving the firm room to fund its “Wave 2” integration initiatives without diluting capital‑allocation discipline.

Market and technical implications

The clean‑up signal is already being priced in: NTCO shares have broken above the 50‑day SMA and are testing a short‑term resistance near BRL 3.80, with the Relative Strength Index hovering around 55—still in bullish territory. Volume has risen on the news, indicating conviction among institutional holders. Assuming the sale proceeds as expected, the upside to the stock could be measured by the incremental free‑cash‑flow yield (≈ 5‑6 % on a 12‑month horizon) versus the current forward‑PE of ~ 9×, suggesting a modest upside of 8‑12 % from today’s levels. Conversely, any delay or a lower‑than‑expected sale price would pressure the cash‑flow outlook, potentially triggering a pull‑back toward the 20‑day SMA.

Actionable trade idea

Given the improved cash‑flow visibility and the balance‑sheet clean‑up, a long position on NTCO with a stop‑loss just below the broken 20‑day SMA (≈ BRL 3.55) is prudent. For risk‑averse investors, a partial‑scale‑up on a pull‑back to the 20‑day SMA with a target at the next resistance (≈ BRL 4.00) can capture upside while limiting downside. The trade is underpinned by the expectation that the Avon sale will materially lift free‑cash‑flow generation, tighten the balance sheet, and support a higher valuation multiple in the coming quarter.