Rising Costs May Compress Meat Exporter's Future Margins

Key Takeaways

• Expanding into new markets entails geopolitical risks and market challenges that might hinder revenue growth.
  
• Increased investment in capacity and added value products could compress net margins without a corresponding rise in consumer demand.
  
• Successful market diversification and value-added product sales have strengthened margins and export revenues, supporting stable growth amidst potential challenges.

Catalysts

BRF S.A. raises, produces, and slaughters poultry and pork for processing, production, and sale of fresh meat, processed products, pasta, margarine, pet food, and other products.

• The company is investing in added value products, particularly in processed goods, which could lead to higher costs that might compress net margins if consumer demand does not match these expansions, impacting future earnings.
  
• BRF plans to increase investment spend, focusing on expanding production capacity, which could increase operational expenses and affect net margins if revenue growth does not offset these new costs.
  
• The company intends to continue expanding into new markets, such as Turkey and the Middle East, with strategic investments in chicken production in Saudi Arabia, which could expose it to geopolitical and market risks that might adversely affect revenue growth.
  
• There is an increased competitive landscape in the processed goods market, especially in Brazil, which may pressure BRF to maintain price levels, impacting potential revenue growth and operating margins.
  
• The anticipation of stable corn and soy prices is crucial for cost management; however, if these prices rise unexpectedly due to global demand or adverse weather conditions, it could impact feed costs and reduce net margins.

BRF Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BRF's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.6% today to 2.6% in 3 years time.
• Analysts expect earnings to reach R$1.8 billion (and earnings per share of R$1.35) by about December 2027, down from R$3.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$3.0 billion in earnings, and the most bearish expecting R$1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2027 earnings, up from 14.2x today. This future PE is greater than the current PE for the US Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 7.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.64%, as per the Simply Wall St company report.

BRF Future Earnings Per Share Growth

Risks

• BRF has demonstrated significant operational progress, achieving a historical high EBITDA margin of 19.1% and a substantial increase in profitability, which could sustain earnings growth.
  
• The company's revenue increased by 12% year-over-year, indicating strong demand and effective commercial execution that could continue to support revenue growth.
  
• BRF has been successful in diversifying its international markets and increasing sales of value-added products, which could help maintain healthy margins and stable export revenues.
  
• The company's strong cash flow performance and low leverage (0.7x EBITDA) provide financial stability and capacity for continued investment in growth, potentially enhancing net margins and future earnings.
  
• Investments in brands and new product launches, along with market share gains in various product categories, could continue to drive revenue and offset potential market challenges.

Valuation

• The analysts have a consensus price target of R$27.35 for BRF 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$32.0, and the most bearish reporting a price target of just R$22.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be R$67.4 billion, earnings will come to R$1.8 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 16.6%.
• Given the current share price of R$28.38, the analyst's price target of R$27.35 is 3.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.