|Shares Out. (in M):||0||P/E|
|Market Cap (in M):||584||P/FCF|
|Net Debt (in M):||0||EBIT||0||0|
We are recommending going long Brasil Agro (AGRO3), which we
believe to be one of the cheapest and most unique investment opportunities in
the agriculture space providing between ~35% upside (project NPV of fully
deployed IPO cash proceeds) and ~70% (30% premium for less conservative project
assumptions and Brasil Agro’s ability to deploy additional capital). The
company’s core business is the acquisition, development and resale of
agriculture land in
We believe that shares of Brasil Agro are worth between 35% (~13.50 reais) and 70% (~17 reais) more than its current share price of 10 reais. On the low side, we arrive at a valuation of ~13.50 reais based on the following sum of the parts:
1. Cash balance: R552mln
2. NPV of committed land projects: R170mln [Project details below]
3. NPV of future land projects from IPO capital: R125mln
4. NPV of cash received from warrants: R101mln
Total EV: R948mln
Post-exercise shares outstanding: 70.1mln
Value per share: ~R13.50
For the remaining excess capital, we assume that the
remaining ~R290mln in cash will yield an NPV of ~R125mln when deployed in one
year’s time with a project IRR of ~30% with otherwise similar assumptions to
the firm’s existing projects.
Our upside target is an approximation to account for more efficient capital deployment, especially the utilization of 6-7% economic development bond borrowings. Additionally, it allows for value creation through the deployment of cash received from warrants being exercised. To understand the return potential on future capital deployment, we encourage investors to acquaint themselves with Cresud’s history.
Perhaps one of Brasil Agro’s greatest assets is it management team and investor base.
Cresud, senior management and larger shareholders have commented both privately and publicly that they are interested in increasing their stakes in Brasil Agro through open market transactions. They will also increase or maintain their relative position size if the company raises further equity once capital is fully deployed
Brasil Agro’s business economics are primarily driven by two factors:
Example of land valuations in
Cattle Land ~ $800 to $1000 per hectare
Soy Land ~$2000-$2500 per hectare ( R3500-4400 per ha)
Sugarcane Land ~ $5000 per hectare (R8900 per ha)
We discuss the management team and financial backers within the management section. Brasil Agro has an exclusive relationship with Brenco, a Brazilian ethanol producer, which allows Brasil Agro to purchase and develop land in advance of Brenco’s future sugar cane mill announcements. We discuss an example project in “Other topics to discuss.”
By buying large underdeveloped tracks of land and investing capital for soil correction, irrigation and new seed selection the company should be able to realize significant returns on invested capital. For example, they currently are transforming unproductive cerrado into cleared cattle farmland, cattle farmland into soy crop and soy crop into sugarcane plantations. Each step of this process creates significant price appreciation as the crops move up the value chain. Brasil Agro is currently involved in each step of this process and is able to enter at various points of the value curve
While the primary focus of the company is to acquire and redevelop assets the business will involve a significant amount of farming operation. By the beginning of 2009 the company intends to run ~18,000 acres of soy, growing to over 30,000 hectares prior to sales on existing projects. While it is hard to forecast operating earnings for this business due mainly to fluctuating crop prices we feel a 35% EBITDA margin to be appropriate (normally range between 25 and 45%). While we believe there is value created in day-to-day operations we view this business as an ancillary means to an end. The company will not be spending capex on farm equipment, as it wants to minimize operational capex. Instead it will lease the machinery and in many cases outsource labor.
· Soft commodity prices collapse
· Land prices increase slower than expected or decline
· The company is unable to find viable acquisition to meet investment targets
· Competition intensifies and returns on future projects fall
|Subject||some questions about Brasil Ag|
|Entry||01/01/2008 09:19 PM|
|Thanks, xanadu, I love off-the-beaten path stock ideas, and this looks like a very interesting investment. It's hard for me to find information on the company given the language barrier and limited analyst coverage, so I hope you don't mind if I ask some questions that are a little more detailed than what I normally would ask:|
Economics: It sounds from you description that, for the most part, Brasil Agro:
(1) Buys cerrado land,
(2) Turns it into cattle land which the company actively ranches, while it:
(3) Further converts the land into soy farmland, which Brasil Agro farms until it either sells the land or
(4) Further converts the land into sugar cane farmland, which the company farms until it sells the land.
Is this correct? Is the progression always the same, or can they skip some steps (e.g., go directly from cerrado to soy production)? How long does it take, and what does it cost, to convert cerrado into cattle land, soy farmland, and sugar cane farmland? At each stage, how much value can Brasil Agro add by operating the properties? What was the state of development at Engenho and Sao Pedro when Brasil Agro bought these properties?
Capital Structure: Is there significant debt in the company's capital structure right now? Do they own their land outright, or are some lands leased?
Cash Flow: Can you present your conservative-assumptions cash flow model thru 2012. I'd like to get a handle on conversion costs (capex or operating), profits/losses from farming operations, sales prices (either in dollars or reals), sg&a for each year, and financings (equity or debt, including economic development bonds) to see what happens when we change the assumptions. Also, I'd like to be sure that the numbers you quote for rates of return, cost of capital, etc. are all in reals, not dollars (the forwards imply approximately 6% annual inflation of the real vs the dollar right now).
Current land prices: Are there any published sources for current land purchase prices for the relevant land categories in Brazil?
Barriers to Entry: The returns on the purchase of land that you're forecasting seem very attractive. What's to keep others from entering the conversion business, driving up the purchase price for additional land?
Bottlenecks: What limits the scale of the company's efforts? Are there envirnomental regulations that limit the conversion of cerrado into ranchland or farmland?
Relative Valuation: Are there any Brazilian comps we should be looking at? What are the current prices for unproductive land, cattle land, soy land, and sugar cane land, in Argentina right now? Are there any regulatory, tax, or other differences that would make Argentinian farmland more valuable than Brazilian?
Catalysts: Is it fair to say that the primary near-term catalyst will be the sales of the Engenho and Sao Pedro properties? If so, do you think the market doesn't appreciate their current values?
|Entry||01/02/2008 11:41 AM|
Thank you for the questions
1. That is the general premise of the company’s business. They typically move one or two steps up the value chain. For example they may buy cerrado and move to soy or buy soy land and move to sugarcane. The company certainly enters at different points of the process and maintains flexibility as it is able to operate the production of crops in each stage of development. This gives them control of the timing of asset sales and allows them to evaluate whether further land improvement is warranted or the company can maximize value by selling the asset
2. In terms of the timeframe it varies by project
• For cerrado to cattle the company typically needs to clear the land - less than a year
• For cattle to soy the company must remove the grassland and plant soy or other grains- typically two years for a full harvest
• For soy to sugarcane the company will slowly rotate crop over a three year period as cane must be grown in sections
When speaking to the company they mention, as a general rule of thumb, the improvement cost will be approximately 50% of the acquisition price. As you can see by the general land prices we displayed above the move up the value chain usually implies a 100% price increase. Therefore the company is able to capture the differential.
3. Operation of the property is simply a byproduct of their business model. While it will create a decent amount of cash flow the true nature of the business is the development and resale of these properties.
4. Engenho and Sao Pedro were actually two cases in which management was able to take advantage of short term opportunities. For Engenho the company was able to buy the property from a distressed farmer but had already been running the property for sugarcane. Sao Pedro was soy land bought near an existing sugar mill
5. As of the last quarter the company had 476 million R in cash and cash equivalents with no debt. As they begin to develop their larger land banks they intend to access the Economic Development Bonds in order to help optimize the capital structure. Note that in our valuation we assume the company completely finances its land acquisitions with equity capital. As they begin to add “cheap debt” to the balance sheet our valuations should rise
6. The company owns all of the land outright and does not intend to lease land as its primary focus is not agricultural operation
7. Land prices in Brazil are not published as far as we know. Our numbers have come from talking to the company, speaking to sell side analyst and speaking to consultants in Brazil
Cash Flow: Unfortunately we cannot publish our exact cash flow estimates as it is against firm policy. However it is important to note that besides the smaller sugarcane asset sales we assumed that the land sales occur in five years from the purchase date. If the turn is quicker than that the IRR and NPV of the projects will improve and provide further upside.
Barriers to Entry
Over time other competitors may enter this business however it is a very unique business model and one that takes extensive experience to get right. That is why the management and shareholders involved are so crucial to the company’s success. Furthermore, agreements like the one signed with Brenco should help bolster the company’s competitive advantage and provide easier avenues for capital deployment
*We also draw a bit of comfort from the fact that Cresud has operated in Argentina for many, many years with relatively no competition
There is limited to no restriction on cerrado land conversion as far as we know. By some estimates there are more than 90 million HA of undeveloped (non rainforest) cerrado which could potentially be converted in Brazil.
The best comps are Cresud and SLC Agricola.
The price differential should only be relevant for grain land in Argentina (as cattle lands lack the Brazilian rain fall advantage and Argentina can not grow sugarcane)
Soy land Argentina is 5000-6000 USD per Ha
*We have no view on Argentina regulatory differences
Short term Catalyst
1. The sales Engenho and Sao Pedro
2. Management is able to fully deploy its capital by mid summer
3. Greater sell side coverage
We believe the market is clearly not valuing these assets appropriately as the stock is trading at a discount to mark to market book value. As the company begins to sell off these assets well above purchase price book value will begin to rise