Brazilian meat giants reap market gains from Chinese demand

Brazilian meat giants reap market gains from Chinese demand

By Luzi Henrique Mendes | São Paulo – Valor International

The African swine fever epidemic in China is still driving shares of Brazilian meat processors. Since there are no signs the outbreak is under control, with Chinese herds still shrinking, investors are doubling down bets on Brazil’s top meatpackers: JBS, BRF, Marfrig and Minerva. The rally of 2019 is unheard of and will be challenging to replicate.

JBS shares rose to a new record in September, with the company controlled by the Batista family ranking third in market capitalization of private-sector groups on B3, surpassing Vivo. Marfrig also had an extremely positive month, having won Chinese authorization to export from two other plants, which helped push its shares to a nearly 32% rise. The company also relied on – somewhat exaggerated – optimism driven by the launch of its vegetarian burger, said Eleven Financial equities analyst Carlos Eduardo Daltozo.

The market euphoria pushed meat processors to the top of Ibovespa valuations. JBS is leading the pack for the year, having risen 183%. Investors reaped a 101% rise from Marfrig shares in the year to September, the fourth biggest rally on B3. BRF ranked seventh with a nearly 75% rise.

Minerva is not part of Ibovespa but also had some gains thanks to China-led optimism – the country also cleared two of its plants for export in September. Its shares have risen 96% so far this year.

The rally added R$77 billion to the four companies’ market capitalization. They are now worth R$131 billion altogether.

JBS generated the lion’s share of the gains. The market capitalization of the company, which owns brands Fibroi and Seara in Brazil, rose by R$57 billion since January to nearly R$90 billion on Monday. The rally should generate a significant return for the Brazilian Development Bank (BNDES) once it decides to shed its 21.3% stake. The bank’s stake would be worth R$19 billion, up R$12.3 billion from December.

“Chinese herd data are still showing deterioration. It doesn’t appear we have reached the bottom,” Bradesco BBI analyst Leandro Fontanesi says. The latest data from China’s Ministry of Agriculture and Rural Affairs show the country’s swineherd down 38.7% year-on-year in August. The herd was 32.2% lower in July.

10/1/2019 Brazilian meat giants reap market gains from Chinese demand | Valor International

The size of the supply shock in China, which consumes 50% of the world’s pork output, forced updates to seemingly unanimous forecasts for how much the herd would shrink. “We were working with 30%, and official numbers have already surpassed that level,” another analyst says.

With such a surprising supply drop, a higher-than-expected rise of international global prices is shaping up and fueling investor optimism about Brazilian meat processors. Preliminary data from the Economy Ministry’s Secretariat of Foreign Trade indicate a 30% rise in the average price of Brazilian pork exports in September from the same period of 2018. Beef and poultry saw 7.5% and 7% increases, respectively.

In addition to the Chinese effect – any news about the country’s swineherd triggers another rally –, meat processors have the exchange rate on their side. With the dollar settling between R$4.10 and R$4.20, international operations and exports are growing more profitable. JBS and BRF are the primary beneficiaries since both have significant operations in the US – foreign-currency sales represent over 70% of revenues for JBS and 50% for BRF.

Companies producing beef in the US are also benefiting from an August fire halting a cattle abattoir of Tyson Foods. The plant handled 5% of the American beef output, and its absence gave a margin boost for an already buoyant beef industry. This outlook should continue for the next few months until the plant is rebuilt.

Brazilian meat processors are expected to continue enjoying the China-led rally. Mr. Fontanesi says BRF has the highest upside potential. Bradesco BBI is setting a price target of R$50, which represents a 30% rise from today’s prices on B3.

But some are starting to see BRF and Marfrig as overvalued. One analyst who declined to be named says the current scenario is exceptional and is inflating the operating results from the owner of Sadia and Perdigão brands. Once the performance is normalized – and the positive effects of the scarcity cycle disappear – the enterprise value-to-EBITDA ratio of BRF is excessive at over 11 times, he says.

In the case of Marfrig, the analyst believes that many investors are not taking into consideration mandatory dividends to minority shareholders of its US unit, National Beef. As this is the business with strongest cash flow, positive results are diluted within the controlling shareholder – that is, to Marfrig shareholders on B3.