The Long and Short

BRF finds other ways to keep deleveraging

| September 29, 2023

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.

Declan Hanlon
declan.hanlon@santander.us
1 (212) 973-7658

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