Debt investors are the biggest winners in Brazil’s beef boom
WHEN IT comes to Brazilian meat companies, shareholders’ losses are bondholders’ gains. Take Minerva SA. Investors who bought the shares following the initial public offering in 2007 have lost 68 percent in dollar terms – more than double the decline in Brazil’s benchmark stock index.
The company’s overseas bonds, however, have returned 198 percent over the past 10 years, double the average for emerging-market corporate bonds.
Much like larger rivals Marfrig Global Foods SA and JBS SA, the meatpacker took on heavy debt loads to expand over the past decade, but the resulting increase in sales has mostly gone to creditors. Minerva spends almost 80 percent of its adjusted earnings to service its debt – a record among global peers – leaving little left for shareholders’ pockets.
“That was part of the magic from the perspective of the bondholder,” said Ian McCall, who helps manage $190 million (R2.48 billion) of emerging-market assets at First Geneva Capital Partners. “You were receiving the lion’s share of the ebitda (earnings before interest, tax, depreciation and amortisation) these companies generated.”
JBS, Marfrig and Minerva were all listed on the Sao Paulo exchange in 2007 amid a commodity boom and a government push for consolidation. While JBS soon became the world’s largest producer after spending $20bn in deals, Minerva and Marfrig also showed impressive growth.
The three companies dominate the national beef market and account for a combined three quarters of exports. Brazil is the world’s largest beef supplier.
But still, financing is expensive in a country where the benchmark interest rate topped 14 percent last year, which makes it more difficult for a typically low-margin business such as meatpacking to get rid of a debt glut. That helps to explain why Marfrig spends almost the same amount as Tyson Foods to service a debt load that is less than a quarter the size. Tyson bonds have returned 132 percent over the past decade, while the shares jumped fivefold.
Both Minerva and Marfrig announced expansion plans recently, seeking to benefit from rising demand for beef and higher cattle supplies in South America. They’re also seeking to gain market share from JBS, which was forced to downsize operations after being plunged into crisis earlier this year amid a corruption scandal and the jailing of its owners.
Marfrig and JBS declined to comment. Minerva didn’t respond to questions.
Slaughtering capacity
Minerva has increased its slaughtering capacity by 50 percent after spending $300m to buy JBS assets in Argentina, Paraguay and Uruguay. Marfrig has reopened five beef plants in Brazil, almost doubling its domestic capacity.
The strategy led JPMorgan Chase & Co to cut its recommendation on both stocks, citing higher leverage and low margins. The net debt amassed by Minerva and Marfrig rose above four times ebitda in the third quarter, after a drop in 2016.
The companies have pledged to cut leverage throughout 2018.
Minerva has completed its expansion strategy and once debt is at comfortable levels the company intends to pay shareholders more dividends instead of making significant acquisitions, its chief financial officer Edison Ticle told investors at a November 28 meeting in Sao Paulo.
Marfrig says its net debt can go as low as 2.5 times ebitda by next year – a planned listing of its Keystone unit in the US should help. Its larger rival JBS has already reduced net debt to 3.42 times ebitda after selling assets as part of refinancing agreement with banks, and it has pledged to keep deleveraging amid strong cash generation in its US businesses.
“The scenario is considerably improving for beef producers in Brazil,” said Raul Grego Lemos, an analyst at Eleven Financial Research. Investors who have been avoiding the meat sector in Brazil after recent scandals should gradually start looking at the fundamentals as the dust settles, he said, adding that “a more positive view will eventually be expressed in the shares”. – Bloomberg