The Long and Short
BRF finds other ways to keep deleveraging
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
BRF, the global food company headquartered in Brazil, announced in the last week a hold on the sale of its pet food division, opting instead to explore a potential joint venture with Archer Daniels Midland (ADM). The shift comes in the wake of bids of approximately R$1.7 billion for the division, short of the company’s target price of around R$2 billion. BRF intended the sale of its pet food division to drive debt reduction. But a recent capital injection and a reduction in cost pressures within its core business have eased debt pressures. By the end of 2023, BRF should be one of the least leveraged players in the protein space
BRF also recently disclosed the early results of its tender process for the purchase of its 2026 notes and 2030 notes. As of September 19, 2023, the “Early Tender Date,” investors tendered $250.52 million, equivalent to 50.18% of the 2026 Notes, and $132.31 million, approximately 22.49% of the 2030 Notes. The total exceeded the targeted maximum amount of $200 million, prompting BRF to accept a pro-rated amount of the 2026 issue while declining to accept any of the 2030 notes. This decision was made in accordance with a waterfall priority mechanism that primarily focused on the 2026 notes.
With improved chicken prices improving and a decrease in input costs, constituting approximately 50% of operating expenses, BRF expects better profit margins in the second half of the year. This should follow the report for the second quarter of 2023, which showed sequential improvement. The company’s margin protection initiatives, combined with more favorable global operating conditions, resulted in a total EBITDA margin of 8.2%, a notable increase compared to 4.6% in the first quarter this year and 6.9% in the same period last year. During this quarter, BRF reported adjusted EBITDA of R$1 billion, contributing to improved cash generation. However, despite capex and interest expenses totaling R$1.6 billion, working capital cash generation fell short, resulting in a consolidated cash burn of approximately R$1.7 billion for the first half of 2023. This led to a reported net leverage increase of around 0.4 times EBITDA for the quarter, ending June at 3.75 times, compared to 3.35 times in the first quarter this year and 2.98 times in the second quarter of 2022. Incorporating the R$5.4 billion equity injection, pro-forma net leverage drops significantly to 2.42 times. Additionally, the potential for incremental tax credit-driven liquidity in the coming quarters may further enhance BRF’s credit position relative to its peers.
In light of the tender results, BRF’s liquidity remains robust on the balance sheet, with the R$3 billion committed revolver providing flexibility, alongside approximately R$12.8 billion in cash. Although the credit line matures in two segments over the next year, it is likely to be extended in due course. In the U.S. bond market, BRF’s relative performance had been trailing in recent years, resulting in prices trading over 100 bp wider than the MRFGBZ 2031 bond issue. However, this trend has reversed, partly due to BRF’s plans to improve its financial metrics and its association with Marfrig, which has exposure to the U.S. beef market. Currently, BRF is trading at approximately 35 bp through the MRFGBZ bonds in the belly, reflecting expectations of its outperformance in the coming year. Moreover, in the long bond market (BRF 2050s), the convergence with the JBS 2052 bond issue is driven by the U.S. beef cycle. Given the anticipated challenges for JBS, this spread differential should narrow further, making BRF an attractive investment option with a 22-point pick in the bonds, despite differences in investor bases.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.