We recently reiterated our Neutral recommendation on Cosan Limited (CZZ), a leading sugar and ethanol producer in Brazil.
Cosan’s long-term growth prospects appear quite compelling especially as sugar and ethanol demand is increasing steadily. In addition to this core business, exposure into energy, food, logistics, infrastructure and farmland development and management businesses appear added advantages for the company.
Moreover, Cosan has been expanding its business portfolio through acquisitions and long-term contracts or agreements. The company’s association with Camil, and its stake acquisitions in Comma, América Latina Logística (ALL), and the recent 10% stake acquisition in the capital stock of STP (Serviços e Tecnologia de Pagamentos S.A.) would undoubtedly result in increased competitiveness in their respective businesses.
Effective the quarter ended Jun 30, 2013, Cosan made a couple of strategic changes. Firstly, the company started reporting its financial results on a calendar year basis with an exceptional nine months operating period for 2013. Secondly, Cosan adopted IFRS 11 to recognize Raízen under the equity pick-up method.
For 2013, management guided net revenue in R$35.0-R$38.0 billion range and EBITDA in the range of R$3.95-R$4.35 billion. Capital spending to be used for the improvement of capacity and services has been fixed in the range of R$2.95-R$3.2 billion.
Despite these positives, the near-term risks surrounding the stock have forced us to maintain a neutral stance on Cosan. Adverse weather conditions, rising competition, higher cost of sales and operating expenses as well as rising long-term debt are detrimental to the company’s performance.
Other Stocks to Consider
Cosan currently has a market capitalization of $3.6 billion. Other players that are worth a mention in the industry are The Andersons, Inc. (ANDE), with a Zacks Rank #1 (Strong Buy) while Monsanto Company (MON) and Gruma S.A.B. de CV (GMK), each come with a Zacks Rank #2 (Strong Buy).
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