Adecoagro S.A. $AGRO rose 7.3% on September 30, 2022, after Itau BBA initiated coverage on the stock with an Outperform rating.
Adecoagro S.A. operates as an agricultural company in South America, with operations in Argentina, Brazil and Uruguay. The Company is engaged in farming crops and other agricultural products, cattle and dairy operations, sugar, ethanol and energy production and land transformation. Adecoagro S.A. is based in Luxembourg.
Itau BBA rates Adecoagro as Outperform, 30% upside target
On September 30, 2022, Itau BBA analyst Daniel Sasson started coverage of Adecoagro with an Outperform rating and $10 price target, nearly 30% above the current price. At current valuation levels, investors are buying Adecoagro’s sugar and ethanol business at a cheap price and getting its farming division for free, Sasson tells investors. The analyst says the $10 price target does not account for Adecoagro’s aggressive plans of increasing organic sugar revenues, nor to expand its biogas production. He likes the company’s 11% free cash flow yield for 2023.
Adecoagro reported EBITDA 16.7% higher year-over-year
On August 11, 2022, Adecoagro S.A. (NYSE: AGRO, Bloomberg: AGRO US, Reuters: AGRO.K), a leading sustainable production company in South America, announced its results for the second quarter ended June 30, 2022.
Main highlights for the period:
- Net sales presented a year-over-year increase of 33.3% in 2Q22 and 27.6% in 6M22 on strong prices and a solid commercial strategy.
- Adjusted net income reached $44.0 million in 2Q22 and $58.7 million in 6M22, presenting an outperformance compared to the same period of last year.
- Financial & Operational Highlights:
Sugar, Ethanol & Energy business
- Adjusted EBITDA in our Sugar, Ethanol & Energy business reached $104.4 million in 2Q22 and $161.6 million in 6M22, marking a year-over-year increase of 41.8% and 22.7%, respectively. In 6M22, i) our flexibility to divert 80% of TRS to ethanol production positively impacted financial results, the product offering the highest marginal contribution; (ii) our commercial decision to clear out our ethanol tanks in April when prices peaked, marking a record sale of 125 thousand m3 at an average price of 26.4 cts/lb sugar equivalent (6.7 cts/lb higher than the average price for sugar); (iii) our capacity to export ethanol, which provides an outlet when domestic prices are pressured, and allowed us to capture a price premium of 60-80 USD/m3; (iv) our hedging strategy, which enabled us to secure sugar at 19.5 cts/lb; and (v) a gain in the mark-to-market of our unharvested cane because of higher expected yields and prices. In addition, year-to-date, we sold $7.1 million worth of carbon credits (average gross price of 21 USD/CBio). These positive effects were partially offset by an increase in costs mostly driven by fertilizers, fuels and lubricants, coupled with a reduction in crushing volume. EBITDA per ton crushed amounted to 31.6 USD/Tn in 2Q22 and 45.3 USD/Tn in 6M22, 49.2% and 90.9% higher compared to the same period of last year, respectively.
- In past releases, we shared our view on the potential implications of 2021’s frost, in 2022’s operational performance. We stated that:
- Sugarcane availability would be limited by 2021 year-end and beginning of 2022, and would lead to a period of interharvest;
- Productivity indicators would be below average during the first semester of 2022 but would return to normal levels towards the second semester, as there would no longer be sugarcane affected;
- Crushing volume would be in line with 2021 but concentrated in the second semester.
- In line with our expectations, we entered an inter-harvest period from December 2021 to mid-March 2022 to allow our sugarcane to continue to recover from the impact of the frost. In terms of productivity, it impacted yields during 6M22 but presented a gradual recovery, from a year-over-year reduction of 40.9% in 1Q22 to 24.5% in 2Q22. Last, we have sped up our crushing pace to make up for the slow start of the year. Indeed, in July 2022, we marked a new monthly record of 1.5 million tons crushed in our cluster. We designed our operational forecast for the year with these events in mind and, seeing as our view has so far materialized, our forecast remains unchanged.
Farming & Land Transformation businesses
- Adjusted EBITDA in the Farming and Land Transformation business amounted to $20.0 million in 2Q22, marking a 38.4% or $12.5 million reduction compared to the same period of last year. A lower contribution from our Crops and Rice businesses explained the decline.
- Focusing on our year-to-date results, which offer better insight than a standalone quarter, Adjusted EBITDA was $55.6 million, 37.3% lower than the previous year. Lower Adjusted EBITDA generation was driven by our Rice and Crops businesses, which fully offset the improved performance in our dairy business. Higher costs and a mixed performance of yields and prices mainly impacted results. The global inflationary environment, which led to an overall increase in costs of agricultural inputs in U.S. dollars, including fertilizer, agrochemicals and diesel, as well as higher logistic costs pressured margins, among others. In terms of yields, rice presented a 13% reduction (0.9 Tn/Ha) compared to the previous campaign because of La Niña weather effect, while peanut and corn second crop also performed below last year’s average (4% and 11% lower, respectively). Regarding prices, while soybean, corn and wheat experienced a year-over-year increase, peanut, and rice were 11% and 12% lower, respectively. In addition, rice prices at the time of harvest were 9% lower year-over-year, which, together with the impact on yields, further contributed to a reduction in the mark-to-market of the biological asset.
Net Income & Adjusted Net Income
- Net Income amounted to $18.1 million during 2Q22, marking a $2.4 million increase compared to the same period of last year. This was mostly explained by higher year-over-year EBITDA generation, coupled with income tax gains of $10.5 million versus expenses of $44.6 million in 2Q21, partially offset by the effect of foreign exchange on our dollar-denominated monetary assets and liabilities (nominal depreciation of the Brazilian Real of 10.6% compared to an appreciation of 12.2% during 2Q21; nominal depreciation of the Argentine Peso of 4.0% compared to 12.8% during 2Q22). Net income for the first six months of the year reached $83.3 million, $48.3 million or 137.9% higher compared to the previous year. This was driven by the above mentioned impact on taxes coupled with the effect of inflation accounting (higher exposure of our negative net monetary position to an inflation rate of 36.2% in 6M22 compared to 25.3% in 6M21).
- Adjusted Net Income reached $44.0 million during 2Q22 and $58.7 million during the first semester, $57.8 million and $18.0 million higher than the previous year, respectively. We believe Adjusted Net Income is a more appropriate metric to reflect the Company’s performance.
Shareholder Distribution Policy Update
- During the first seven months of the year, we repurchased 2.7 million shares at an average price of $7.96 per share, totaling $21.3 million. Going forward, we expect to continue repurchasing shares, in line with our commitment to generate long-term value for our shareholders.
- On May 17th, we made our first cash dividend payment of $17.5 million (approximately $0.1571 per share). The second installment shall be payable in or about November 2022 in an equal cash amount, resulting in an annual cash dividend of $35 million.
- Share repurchases and dividend distribution are part of the company’s distribution policy, which comprises a minimum distribution of 40% of the Adjusted Free Cash Flow from Operations (NCFO) generated during the previous year. In 2021, we generated $152.1 million of NCFO.
2021 Sustainability Report
- On July 25th, we released our first Integrated Report, together with our audited 2021 Sustainability report. We prepared our reports following the Integrated Reporting Framework, GRI and SASB standards, and showing our contribution to the United Nations’ 2030 Agenda.
- Highlights include (i) over 650 thousand tons of carbon (CO2e) sequestered in 2021; (ii) over 90% of energy consumed is self-generated and renewable – plus energy exports to the local grid are enough to power a city of 1.1 million people; (iii) over 6,600 new jobs created since origin; (iv) 45% reduction in accident frequency rate 2021 vs. 2019; (v) creation of the ESG Committee to continue integrating ESG into the company’s overall strategy and bring these topics to the forefront of our agenda.
Regulatory Scenario in Brazil
- The Brazilian government approved in June a package of measures (PLP 18) to reduce the tax burden on fuels until year-end. As gasoline has a heavier burden of PIS/COFINS and CIDE (federal taxes) and ICMS (state value added tax) compared to hydrous ethanol – its substitute at the pump – it became more attractive on relative terms. To restore ethanol’s attractiveness, the Congress voted two amendments (PEC 15 & 16) in July. They guarantee that (i) for the next 20 years, the ICMS tax differential previously enjoyed by hydrous ethanol will be preserved; and (ii) a BRL 3.8 billion compensation fund will be distributed among states based on consumption. Specific details on how they will be applied are yet to be defined.
- We are in a solid position to face this scenario:
- During April we sold all of our ethanol inventories and year-to-date production, achieving a record sale of 125 thousand m3 at an average price of 26.4 cts/lb sugar equivalent.
- Our two mills in Mato Grosso do Sul can produce anhydrous ethanol. This product experienced an increase in demand, because of the 27% mandatory blend in gasoline, and now commands a 17%-18% price premium to hydrous ethanol. We have an installed capacity to produce an ethanol mix of up to 70% anhydrous ethanol (1,700 m3/day).
- We are one of the few players in Brazil certified to export anhydrous ethanol and who can reach the level of purity required in Europe. This competitive advantage enables us to capture a price premium over domestic prices. So far, we have exported 20% of our production to Europe, at a premium of 300-400 BRL/m3 (approximately 60-80 USD/m3).
- Our ethanol storage capacity amounts to 267 thousand m3, enough to carry-over our production until year-end when supply is limited and prices increase. This flexibility reduces our exposure to spot prices.
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📉 Adecoagro S.A. $AGRO Chart Technical Analysis
$AGRO stock is in a technical downtrend. Long-term indicators support a continuation of the downtrend. The stock has been in a downtrend channel since April 2022. It has formed a higher low as of October 2, 2022, and may morph into a Symmetrical Triangle pattern, but we need more data to know.