We recently upgraded our recommendation on Cosan Limited (CZZ), a leading sugar and ethanol producers in Brazil, from Underperform to Neutral.
Why the Upgrade?
Long-term growth prospects appear quite compelling for Cosan. The company’s core sugar and ethanol businesses are prospering well as demand is growing rapidly. In addition to this, exposure into energy, food, logistics, infrastructure and farmland development and management businesses are bearing fruits as well.
For 2014, Cosan provided an impressive guidance anticipating higher revenues and earnings before interest, taxes, depreciation and amortization (:EBITDA) compared with that for 2012. The guidance is based on the expectation that the business segments will perform well, going ahead. The mid-point of the crushed sugarcane volume guidance represents a 7.6% increase over the 2012 volume.
Cosan has spent roughly R$2.2 billion in fiscal 2013 to improve its capacity and services. During the year, the company completed rebranding of its Esso stations to the Shell brand. For 2014, further investments of roughly R$3.1–R$3.35 billion has been planned.
Additionally, the formation of new business units (Radar and Comgas), the company’s association with Camil, and its stake acquisitions in Comma and América Latina Logística (ALL), would undoubtedly result in increased competitiveness in their respective businesses.
In view of the developments mentioned above, we upgraded Cosan. However, the near-term risks surrounding the stock restricted the upgrade to a Neutral recommendation only. Adverse weather conditions, rising competition, higher cost of sales and services as well as rising long-term debt are detrimental to the company’s performance.
In the fourth-quarter fiscal 2013 results, Cosan recorded a 49.6% year- over-year increase in cost of sales and services while its operating expenses (selling, general and administrative expenses) grew by 49.6%. The company’s long-term debt, though down a meager 3.6% on a sequential basis, was as high as $9.7 billion.
Other Stocks to Consider
Cosan currently has a market capitalization of $4.2 billion. Other players that are worth a mention in the industry are Monsanto Company (MON), Hillshire Brands Company (HSH) and The Andersons, Inc. (ANDE).
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