|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||584||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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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
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