Completion Of Corn Processing And Rising Ethanol Demand Will Boost Future Earnings

Key Takeaways

• Increased corn processing and improved ethanol production efficiency are expected to significantly boost revenue and earnings.
  
• Strategic hedging and enhanced sugarcane yields position the company to protect and potentially grow revenue amidst market shifts.
  
• Fire-related disruptions and high-interest rates could pressure margins and revenue, while regulatory dependence threatens demand and pricing stability.

Catalysts

Engages in the production and sale of sugar, ethanol, and other sugarcane byproducts in Brazil.

• The completion of commissioning and transition to full-capacity operation for corn processing, with a year-on-year increase of 21% in processed corn, is expected to significantly boost revenues and earnings through increased ethanol production.
  
• Adjustments made to mitigate the impact of past fires, such as increased fertilization and crop protection, indicate improved sugarcane yields in the next crop year, potentially enhancing revenue and margins.
  
• An expected rise in ethanol demand driven by competitive changes in fuel taxation (ICMS and PIS/COFINS) and the introduction of E30 fuel is likely to positively impact revenue and net margins.
  
• Expansion through increased production of corn-based ethanol, which has a higher margin than sugarcane ethanol, along with improving conversion efficiency of corn to ethanol, is anticipated to enhance earnings.
  
• Hedging strategies that secure favorable sugar prices for future exports (50% hedged) position the company to protect revenue streams amidst market volatility.

São Martinho Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming São Martinho's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.8% today to 13.9% in 3 years time.
• Analysts expect earnings to reach R$1.2 billion (and earnings per share of R$3.23) by about March 2028, up from R$1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$1.6 billion in earnings, and the most bearish expecting R$551.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 6.9x today. This future PE is greater than the current PE for the BR Food industry at 8.8x.
• Analysts expect the number of shares outstanding to decline by 4.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.87%, as per the Simply Wall St company report.

São Martinho Future Earnings Per Share Growth

Risks

• The fires in August led to a significant decrease in sugar production capacity and increased ethanol production costs, which could result in lower revenue and profit margins for the current and upcoming crop cycles.
  
• The estimated R$350 million cash flow impact from fire-related operational disruptions poses a risk to net income and overall financial stability in the short term.
  
• Capital expenditure plans and costs associated with future projects might be influenced negatively by the current high-interest rate environment, potentially impacting future revenue streams and net margins.
  
• The volatility in sugar and corn prices introduces uncertainty in production planning and hedging, which could affect revenue stability and earnings reliability.
  
• Dependence on regulations, such as changes in ethanol taxation and import-export policies (e.g., those affecting sugar production), may lead to fluctuating demand and pricing, thus impacting net margins and revenue predictability.

Valuation

• The analysts have a consensus price target of R$33.383 for São Martinho 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$40.0, and the most bearish reporting a price target of just R$28.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$8.4 billion, earnings will come to R$1.2 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 17.9%.
• Given the current share price of R$22.6, the analyst price target of R$33.38 is 32.3% 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.