Towards Financial Freedom
Indofood Agri Resources - Venturing into sugar in Brazil BUY
- Maintain BUY on Indofood Agri Resources (IndoAgri) with an unchanged fair value of S$1.63/share based on a 20% holding company discount to RNAV.
- On Monday, Indofood Agri Resources (IFAR) announced a proposal to acquire a 50% equity interest in CMAA Group (Companhia Mineira de Acucar e Alcool Participacoes). The balance 50% of CMAA Group is held by JF Citrus, which is one of the largest growers of orange in Brazil.
- CMAA Group is involved in the cultivation and processing of sugar cane for the production of ethanol and refined sugar. Presently, CMAA Group operates a sugar mill with a crushing capacity of three million tonnes/year. The capacity of the mill can be expanded to 3.8mil tonnes/year.
- We believe the proposed acquisition is positive in the long term as it would give IndoAgri exposure to the sugar and ethanol industry in Brazil. IndoAgri is also buying into a sugar company at the trough of raw sugar prices.
- In the short term, CMAA Group is not expected to be earnings-enhancing. CMAA Group is envisaged to increase IndoAgri's earnings by 5% to 10% from FY14F/FY15F onwards. We understand that CMAA Group is breaking-even presently.
- Although the current price of raw sugar at 18.38 US cents/pound is just above the cost of sugar production of 18 US cents/pound in Brazil, we understand that sugar companies in the country can always switch to producing more ethanol. We gather that the Brazilian government would be mandating the use of E25 versus E20 presently, in vehicles in April 2013.
- The location of CMAA Group's sugar mill in Vale do Tijuco is advantageous as the state government has mandated that there would be only one sugar mill within a 30km radius as opposed to other states, which may have a few sugar mills close together. Hence, CMAA Group has limited competition and would not be fighting with other sugar mills to buy sugar cane from third party farmers.
- Based on the enterprise value of R$730mil, IndoAgri is buying CMAA Group at an estimated replacement cost of US$122/tonne. We understand that recent M&As in Brazil have valued the replacement cost of a sugar mill at US$110/tonne-US$130/tonne.
Source: AmeSecurities
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