LND - BrasilAgro: A Great Farming Stock Pick

2023-08-17 12:18:45 ET

Summary

• BrasilAgro operates in agriculture and real estate, generating revenue from agricultural production, land sales, and leasing.
• Despite price fluctuations and rising costs, the company balances operations and real estate to sustain dividends and counter EBITDA declines.
• Positioned below net asset value, BrasilAgro offers potential for long-term growth, making it an appealing choice for those interested in Brazil's thriving agribusiness sector.

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas ( LND ) operates in the agricultural sector, primarily emphasizing agricultural activities. The company also acquires, develops, exploits, and sells rural properties, further extending its operations.

Presently operating at full capacity, this marks a departure from its previous state, characterized by extensive land ownership but limited cultivation. With a more balanced portfolio that generates operational revenue from both owned and leased land, particularly due to its real estate division, BrasilAgro maintains a competitive edge compared to other agribusiness entities.

While the company is currently navigating a challenging period, marked by the anticipation of a notable impact due to squeezed margins attributed to rising costs and the fluctuating pricing trends of corn and soybeans, the ongoing land sales have played a pivotal role in alleviating the decline in EBITDA associated with its operations.

Moreover, the company's stock trades significantly below its net asset value. In my view, this positions it for a potential upside in the long term, potentially coupled with an expansion of dividend distribution.

Challenging scenario for agricultural commodities

In 2023, when comparing BrasilAgro operations figures to previous years, the prevailing reality is characterized by elevated costs associated with fertilizers and high chemical prices.

BrasilAgro's operational portfolio encompasses a range of crops, including soybeans, corn, and sugarcane. About 40% of the consolidated EBITDA is derived from sugarcane, another 40% from soybean sales, and the remaining 20% is distributed, with corn playing a significant role. The falling performance of commodities did not contribute to BrasilAgro's 2022/2023 harvest planning .

Furthermore, BrasilAgro found its harvest to be less advanced in sales volume, opting to await a more opportune moment for contract closures to capture slightly elevated prices for bags of soybeans, aiming to replicate the situation from the preceding 2021/22 harvest.

This delay inadvertently compounded an additional challenge, resulting in heightened logistical pressure on physical sales and directly impacting the premium, a pivotal component within the price structure. This component exhibited a distinct behavior from that observed over the past five years.

Consequently, grappling with adverse price dynamics, BrasilAgro began confronting a profitability predicament, as reflected in its financial statement. The consolidated EBITDA, which amounted to R$750 million, with R$500 million stemming from the commodities operation during the 2021/23 harvest, was anticipated to contract for the 2022/23 harvest.

The company forecasted a potential 50% decline in EBITDA for this operation if prices remained relatively stagnant. However, mounting costs exerted pressure on the profit margin, resulting in a compression of the margin by half in comparison to the preceding harvest.

BrasilAgro embarked on the harvest season with the prospect of an EBITDA below the previous year's.

Assorted business initiatives

In addition to its agricultural activities, BrasilAgro focuses on enhancing land value and implementing transformative strategies within its real estate endeavors. Apart from its core areas, the company has expanded its presence into peripheral regions where strategic, operational leverage is employed to reduce volatility and ensure consistent outcomes.

BrasilAgro's management emphasizes the synergy between agricultural operations and real estate endeavors, aiming to create a distinctive impact on the company's financial outcomes.

A comparison between net revenue and EBITDA margins underscores a pronounced pattern of heightened margins, primarily influenced by more robust EBITDA performance during years characterized by substantial agricultural sales.

The returns from a farm sale at BrasilAgro are notably higher than those generated solely from regular operations. As of the end of June this year, an example of this was seen when BrasilAgro sold Fazenda Jatobá for R$121.9 million. This property was initially acquired in 2007 for R$70.4 million to develop for grain and pasture activities. The sale price translates to 298 bags of soybeans per productive hectare, equivalent to R$38,069 for each hectare of fertile land.

This sale is advantageous, especially given the regional circumstances and the current trajectory of agricultural commodities, which are experiencing a downturn.

In addition to projecting an EBITDA of R$250 million from commodities operations, a decrease of 50% compared to the previous year due to escalating costs and the impact of current harvest price dynamics, BrasilAgro aims to offset this decline by adopting a more assertive approach in land sales. This strategy seeks to mitigate the overall consolidated result's volatility. With two farm sales accomplished in June, the company anticipates reaching R$350 million in the 2022/23 period (compared to R$250 million in 2021/22).

Dividends should fall, staying at an average

BrasilAgro, established in 2005 and listed on the NYSE since 2012, is a relatively young company. Throughout its existence, its activities have distributed dividends exceeding R$1 billion.

This achievement holds significance for a company that began realizing profits in the past decade. Since then, the company has emerged as an enticing income stock alternative, driven by its consistent dividend distributions stemming from the sale of its farms and commodities operations.

Over the past decade, BrasilAgro has maintained an average yield of 7.3% for dividends, with the peak occurring in 2022 at over 18%, coinciding with elevated commodity prices. The company currently boasts a yield of 12.6%, which stands 74% above its historical average.

As the company adeptly offsets challenging harvest periods by generating more substantial revenue from its real estate ventures, there is no anticipated impact on dividend disbursements this year. The existing composition of the production area, encompassing both owned and leased land, provides increased flexibility in portfolio management and mitigates volatility in the operational cash flow.

Operational volatility, tied to the cycles of commodities, has impacted the company for several years. Farm sales have consistently acted as a counterbalance throughout history, arresting declines and sustaining the average dividend yield at 7%. This year's trajectory is expected to follow the same pattern.

Good exposure to Brazilian agribusiness

As of this instance, the company's market capitalization is $460.86 million. At the close of June this year, BrasilAgro's net asset value ((NAV)) stood at R$4 billion. The exchange rate of 1 BRL to 0.20 USD translates to an asset value of approximately $800 million.

Furthermore, the company is traded with an EV/EBITDA ratio of 3.49x, aligning with the annual average but surpassing the lower levels observed in 2021.

Nonetheless, despite the substantial challenges inherent in the thesis, primarily concerning fluctuations in commodity prices, fertilizer costs, and the influence of climate-related crop factors, BrasilAgro maintains a well-rounded business model encompassing both owned and leased land. This structure is poised to sustain dividend payments over the coming years.

Consequently, besides recognizing BrasilAgro as an exceptional avenue to tap into Brazil's flourishing agribusiness sector, I perceive promising long-term growth potential mainly attributable to its valuation below net asset value and its trading position under market value.

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