Increased Planting And Cost Reductions Will Improve Future Crop Production

Key Takeaways

• Expansion in planted area and strategic land acquisitions are poised to drive revenue growth through increased production and crop yields.
  
• Cost reductions in crop input and effective hedging strategies suggest improved net margins and stabilized or enhanced earnings.
  
• Volatility in soybean and cotton markets, coupled with weather risks and leverage concerns, could strain SLC Agrícola's revenue, profitability, and financial stability.

Catalysts

Produces and sells agricultural products in Brazil and internationally.

• The planned 11% increase in total planted area for the '24-'25 season, with notable expansions in soybeans (18.2%) and corn (25.9%), could drive future revenue growth through higher production volumes.
  
• The company's strategic joint ventures and land acquisitions expanding over 60,000 hectares, including leveraging double cropping potential, indicate potential for increased crop yields and revenue.
  
• Cost reductions for inputs for the '24-'25 crop year, with a 5.2% decrease in costs per hectare, could improve net margins by decreasing operational expenses.
  
• Hedging strategies for commodities like soybean and cotton at favorable prices, coupled with potential benefits from the exchange rate fluctuations, are likely to stabilize or enhance future earnings.
  
• The acquisition of SLC LandCo for increased asset flexibility and operational expansion suggests a forward-looking approach to augmenting revenue and improving strategic asset management.

SLC Agrícola Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SLC Agrícola's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 17.4% in 3 years time.
• Analysts expect earnings to reach R$1.5 billion (and earnings per share of R$3.56) by about January 2028, up from R$401.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.7 billion in earnings, and the most bearish expecting R$887.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 19.3x today. This future PE is greater than the current PE for the BR Food industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.25%, as per the Simply Wall St company report.

SLC Agrícola Future Earnings Per Share Growth

Risks

• The volatility in soybean prices due to global supply increases could put pressure on SLC Agrícola's revenue and margins if prices fall further.
  
• Cotton market risks include a conservative industry outlook with reduced market liquidity amid geopolitical tensions and economic uncertainty, which could lead to volatility in revenue as demand might remain unstable.
  
• Challenges with cotton stocks and logistic bottlenecks may lead to decreased efficiency and could impact the net margins or lead to increased storage costs, affecting profitability.
  
• Decreased yields due to unpredictable weather conditions, such as heat waves and irregular rainfall, represent a risk to crop output and could negatively impact gross profits.
  
• Concerns over increased leverage, especially if it surpasses 2x, could strain cash flow and future investments, affecting financial stability and potentially leading to higher interest expenses.

Valuation

• The analysts have a consensus price target of R$23.01 for SLC Agrícola 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$26.0, and the most bearish reporting a price target of just R$19.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$8.5 billion, earnings will come to R$1.5 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 17.2%.
• Given the current share price of R$17.66, the analyst's price target of R$23.01 is 23.2% 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.