Investing In Mato Grosso Ethanol Industry Will Diversify Future Revenue Streams

Key Takeaways

• Expanding geographically and investing in new facilities offers significant revenue growth and diversification opportunities.
  
• Strong cash generation and low debt enable strategic investments that bolster future earnings and maintain competitiveness.
  
• High debt from investments and reliance on volatile agribusiness conditions, macroeconomics, and crop yields could challenge revenue, cash flow, and earnings.

Catalysts

Operates in the agribusiness sector in Brazil.

• The expansion of operations into new geographic areas, such as Mato Grosso and the Araguaia Valley, signals a significant potential for revenue growth as the company taps into larger and more diversified agricultural markets.
  
• Investment in new facilities, such as the corn ethanol industry in Mato Grosso, represents an opportunity to increase revenue streams and improve earnings through diversification and tapping into growing demand for renewable energy sources.
  
• The ongoing development and training of personnel in new crops like canola and sorghum indicates potential for increased revenue and improved net margins by offering a broader range of products and capitalizing on emerging market opportunities.
  
• The strategic use of logistics and infrastructure investments, including a new river port partnership, can enhance efficiencies and improve net margins by reducing costs and optimizing supply chain operations.
  
• With strong cash generation and a low net debt, the company's financial strategy allows for continued investment in growth initiatives, supporting future earnings potential and maintaining a competitive edge in a challenging economic environment.

Três Tentos Agroindustrial S/A Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Três Tentos Agroindustrial S/A's revenue will grow by 22.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.9% today to 4.9% in 3 years time.
• Analysts expect earnings to reach R$1.1 billion (and earnings per share of R$2.28) by about March 2028, up from R$758.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, up from 9.5x 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 remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

Três Tentos Agroindustrial S/A Future Earnings Per Share Growth

Risks

• The company acknowledges the risks and uncertainties associated with forward-looking statements and how general economic conditions, agribusiness conditions, and operational factors might negatively affect future performance, potentially impacting revenue and net margins.
  
• The high level of debt forecasted due to significant investments, such as the R$1.16 billion for the new ethanol industry, may affect financial flexibility and could impact net earnings if returns on these investments do not meet expectations.
  
• Despite the growth in operating revenue and net operating revenue across segments, challenges like the sensitivity to Brazil's macroeconomic environment and interest rates could impact cash flow and financing costs, ultimately affecting net earnings.
  
• Although Tres Tentos is expanding regionally and operationally, execution risks associated with new markets and expansions, such as the move to Mato Grosso and Araguaia Valley, pose potential challenges that could affect net margins if mismanaged.
  
• The agribusiness sector's dependency on crop yields, which are subject to climatic variability and other factors, poses a risk to revenue streams, especially given the recent experience of a significant crop failure in Rio Grande do Sul.

Valuation

• The analysts have a consensus price target of R$19.6 for Três Tentos Agroindustrial S/A 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$17.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$23.4 billion, earnings will come to R$1.1 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 16.9%.
• Given the current share price of R$14.54, the analyst price target of R$19.6 is 25.8% 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.