We recently maintained a Neutral recommendation on Brazilian sugar and ethanol producer, Cosan Limited (CZZ).
Cosan’s long-term growth prospects appear bright with strategic acquisitions, growing sugar and ethanol demand, energy co-generation and transportation businesses acting as the major growth driving catalysts. Cosan’s dividend payments and share buyback activities are an added advantage for the company.
Formation of Raizen, a joint venture between Cosan and Shell, has proved to be a boon for the company enabling better access to the ethanol consumer market and increased competitiveness in biofuels and fuel distribution businesses. The joint venture is expected to be one of the largest ethanol producers in the world with 2.2 billion litres of annual production capacity.
Besides, Cosan’s association with Camil will bring recognised brands in sugar, rice and canned fish under one roof. Also, the acquisition of stakes in Comgas will strengthen Cosan’s presence in energy business while the additions of Esso Petroleum Company and Comma will solidify the company’s presence in the European lubricant and specialties markets. Share acquisition in América Latina Logística (ALL) will provide Cosan access to the former’s transportation services.
For fiscal year 2013, management anticipates that consolidated net revenue would be in the range of R$26.0-R$29.0 billion; EBITDA in the range of R$2.2-R$2.5 billion and capital expenditure in the range of R$2.1-R$2.4 billion.
Despite the solid long-term growth prospects, Cosan’s near-term performance has forced us to remain on the sidelines. Cosan posted disappointing fiscal first quarter 2013 results with a net loss of R$24 million as compared with earnings of R$986 million in the year-ago quarter. Revenue increased 18%, which was more than offset by a 23% jump in cost of sales.
The current Zacks Consensus Estimate for the fiscal second quarter of 2013 is 25 cents. Estimates for fiscal 2013 and 2014 are 71 cents and $1.48, reflecting annual growth of (72.8%) and 108.5%, respectively.
Cosan currently has a Zacks #3 Rank, translating into a short-term (1-3 months) Hold rating while its nearest competitor Archer Daniels Midland Company (ADM) bears a Zacks #5 Rank, indicating a Strong Sell rating.
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