Global Energy Transition Will Expand 2G Ethanol Markets

Key Takeaways

• Operational efficiencies, strategic cost reductions, and asset sales position Raízen for rapid margin expansion and improved profitability beyond current market expectations.
  
• Leadership in 2G ethanol and ESG alignment could secure premium contracts and funding, strengthening Raízen's competitive moat and supporting outsized revenue growth.
  
• Heavy financial pressure, volatile crop yields, execution risks, shifting fuel demand, and stricter regulations threaten Raízen's margins, growth prospects, and core business stability.

Catalysts

Operates as an integrated energy company in Brazil, Argentina, Paraguay, rest of Latin America, North America, Asia, Europe, and internationally.

• While analyst consensus expects moderate EBITDA growth from operational efficiency, this view underestimates the magnitude and speed of margin expansion-recent leadership changes, aggressive cost reduction, back-office streamlining, and asset sales could drive a step-change in net margins far beyond expectations within two years.
  
• Analyst consensus anticipates incremental growth from the commissioning of new E2G plants, but structurally tight global renewable mandates and Raízen's leading position in 2G ethanol could unlock premium pricing and multi-year international off-take contracts, delivering outsized revenue gains and a strategic competitive moat well ahead of current market assumptions.
  
• The global acceleration of capital toward ESG-focused companies positions Raízen to tap significantly lower-cost funding, while unlocking partnerships with premium global buyers-directly lowering interest expenses, funding further expansion, and structurally enhancing return on equity.
  
• Raízen's expansive, integrated Shell-branded distribution network and new premium product launches (such as V-power and lubricants) can increasingly capture market share as anti-informality regulation takes hold in Brazil and Argentina-driving higher retail volumes, sustained pricing power, and substantial uplift to consolidated revenues and stable gross margins.
  
• Sector consolidation and the company's unique, integrated value chain enable Raízen to outperform smaller fragmented peers, potentially leading to accretive M&A opportunities that amplify scale advantages and drive significant cumulative annual EBITDA growth over the next five years.

Raízen Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Raízen compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Raízen's revenue will decrease by 1.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -1.7% today to 1.2% in 3 years time.
• The bullish analysts expect earnings to reach R$3.0 billion (and earnings per share of R$0.29) by about July 2028, up from R$-4.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, up from -3.5x today. This future PE is greater than the current PE for the BR Specialty Retail industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.07%, as per the Simply Wall St company report.

Raízen Future Earnings Per Share Growth

Risks

• Raízen's high leverage and persistent negative free cash flow-driven by heavy CapEx, elevated interest expenses, and ongoing asset sales-create substantial financial pressure, which threatens both net margins and the company's ability to grow earnings in the medium to long term.
  
• Exposure to increasingly volatile weather conditions such as droughts and wildfires in Brazil heightens the risk of recurring crop failures and volatile yields, further undermining both revenue stability and margin predictability for the core sugar, ethanol, and bioenergy segments.
  
• The company's long-term investment focus on second-generation ethanol and capital-intensive bioenergy comes with significant execution and demand risks; if global demand for biofuels underdelivers or regulatory environments shift, returns on invested capital could be squeezed, impairing future earnings growth.
  
• Accelerating electric vehicle adoption and the global transition away from liquid fuels threaten to diminish fuel distribution volumes and erode the core profit contribution of Raízen's retail network, pressuring both revenue and future top-line growth.
  
• Increasing regulatory stringency-particularly around carbon emissions compliance, sustainability standards, and anti-informality enforcement in Brazil-could lead to rising operating costs, compressed net margins, and growing operational complexity, especially as Raízen faces mounting competition from both traditional energy majors and agile renewable startups.

Valuation

• The assumed bullish price target for Raízen is R$4.5, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Raízen's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$4.5, and the most bearish reporting a price target of just R$1.9.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be R$246.5 billion, earnings will come to R$3.0 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 21.1%.
• Given the current share price of R$1.46, the bullish analyst price target of R$4.5 is 67.6% 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.