Acquisition Of Marfrig's Assets Will Increase Production Capacity By 35%

Key Takeaways

• Increased production capacity and geographic diversification enhance revenue stability and growth amid rising global protein demand.
  
• Initiatives in clean energy and disciplined financial management potentially improve net margins and support strategic growth investments.
  
• Integration uncertainties and regulatory oversight, combined with external economic factors, pose risks to Minerva's profitability and operational stability in volatile markets.

Catalysts

Produces and sells fresh beef, livestock, and by-products in South America and internationally.

• The acquisition and integration of Marfrig's South American assets are anticipated to significantly enhance Minerva's production capacity, increasing daily slaughter capacity by 35%, which should boost future revenue.
  
• Geographic diversification and increased access to international markets, including China and the U.S., are expected to provide Minerva with opportunities to capitalize on rising global protein demand, enhancing revenue stability and growth.
  
• Minerva's initiatives to self-produce electricity from clean sources aim to improve operational efficiencies and cost management, potentially enhancing net margins.
  
• Minerva’s strategy of geographic and capacity diversification provides opportunities to mitigate risk and capitalize on arbitrage opportunities, likely supporting higher future earnings.
  
• The company’s strong cash generation and disciplined financial management enhance its capacity to strategically invest in growth opportunities, benefiting future earnings and shareholder returns.

Minerva Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Minerva's revenue will grow by 21.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.0% today to 1.7% in 3 years time.
• Analysts expect earnings to reach R$892.2 million (and earnings per share of R$0.9) by about February 2028, up from R$1.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$207 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, down from 2024.7x today. This future PE is lower than the current PE for the BR Food industry at 10.0x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.12%, as per the Simply Wall St company report.

Minerva Future Earnings Per Share Growth

Risks

• The integration of new assets involves uncertainty, with potential inefficiencies requiring 4-5 quarters to reach Minerva's standards, which could affect profitability in the short term. Impact: Operating margins, net income.
  
• Increased cattle prices in Brazil and fluctuating working capital demands could strain financial resources and negatively influence margins if not effectively managed. Impact: Net margins, operating costs.
  
• The geopolitical and macroeconomic volatility in regions like Argentina could disrupt operations and financial performance, especially if favorable conditions or reforms fail to materialize. Impact: Revenue stability, operating margins.
  
• Regulatory oversight, such as antitrust agency reviews in Uruguay, could delay the realization of synergies and benefits from newly acquired assets, potentially affecting planned growth. Impact: Revenue growth, cost efficiency.
  
• External economic factors, including the volatility of exchange rates and dependency on FX hedging, could lead to financial exposure and increased costs if hedging strategies are insufficient. Impact: Net earnings, financial stability.

Valuation

• The analysts have a consensus price target of R$7.446 for Minerva based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$11.0, and the most bearish reporting a price target of just R$5.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$53.3 billion, earnings will come to R$892.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 26.1%.
  
• Given the current share price of R$4.56, the analyst price target of R$7.45 is 38.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.