Brazilian meat producers set to rebound after year of embargoes and rising costs By Investing.com
By Jessica Bahia Melo
Investing.com – While 2021 has been a year of serial hardship for companies in the Brazilian meat sector, 2022 looks more promising. The resumption of imports of beef by China, beef and pork by Russia, and the continued high demand for these products globally are encouraging factors for the major players in the sector globally and in Brazil. The boycott of Brazilian brands by European chains due to deforestation will however remain a negative factor if it persists.
The four listed meat producers on the had very distinct performances in 2021, as did meat prices. posted strong appreciation in 2021. A year ago they were listed at $ 112, while on Wednesday, December 22, they were above $ 135. A different situation was that of, which saw a significant increase in the middle of the year, to $ 122, and fell to around $ 82.
With this in mind, while companies like Marfrig (SA 🙂 (OTC 🙂 and JBS (SA 🙂 (SA 🙂 – whose consumer market is mainly located in the United States – have experienced a year of high margins that analysts consider as unsustainable, Minerva (SA 🙂 (OTC 🙂 suffered from restrictions in China, and BRF (SA 🙂 (NYSE 🙂 from falling income and unemployment in Brazil, because the latter is more concentrated than the other in the domestic market mentioned meat producers.
These contrasts are reflected in the performance of their stocks for the year. Mafrig rose 52% and JBS rose 66%, while BRF ended the year up just 2.2% and Minerva ended up just 4.1%. (Performance based on Brazilian lists)
Improve business prospects
The year ended with some promising news on the trade front. In November, Russia announced zero import tariffs on beef and pork and import quotas for several countries, including Brazil. In the first quarter of 2022, the Russian government is expected to conduct inspections to qualify new Brazilian factories for export.
In December, China lifted the embargo on Brazilian beef. The restrictions began after cases of mad cow disease occurred in the states of Minas Gerais and Mato Grosso in September. Brazilian beef exports registered consecutive declines in the following months, as its biggest buyer decided to suspend shipments. Hyberville Neto, market consultant at Scot Consultoria and columnist for Investing.com Brasil, believes the lifting of the embargo is linked to China’s need for meat due to the Chinese New Year, celebrated in February.
Global outlook for the meat sector in 2022
In a report on the global outlook for the meat industry, Bank of America (BofA) noted that companies were able to maintain their margins due to strong demand in the United States and Mexico. For 2022, BofA does not expect a significant drop in raw material costs, leading to cost pressure and limiting margin expansion. The withdrawal of stimulus measures in the United States may also affect the market, but yields are expected to remain above historical levels.
For the Brazilian cattle cycle, the bank expects a faster turnover of cattle inventories, increasing availability and reducing costs. For chicken, lower grain prices tend to benefit the industry. Inflation should also be a boon – with consumers facing higher costs, they tend to turn to chicken, which is cheaper than beef.
Nationally, improved weather conditions are expected to benefit corn and soybean crops, reducing cost pressure. Hyberville Neto believes that even if China resumes some of its pork production, there is still room to increase Brazilian shipments – and the same goes for other proteins as well.
“Expectations for meat production next year are not high in China. While they have rebounded in pork production over the past two years, it is expected to decline in 2022.” , he adds.
The expert agrees that the trend is towards an increase in the supply of livestock in the country, with less retention of females in the herd. “We expect supply to increase, but not in such a large way as to cause the market to drop.”
A Review of the Big Four Meat Producers
Marfrig, which operates primarily in the U.S. beef market with factories based there, has benefited from the injection of U.S. government funds into the economy, achieving margins above their historical average – a situation analysts say ‘expect to normalize.
In the third quarter, it recorded adjusted EBITDA of R $ 4.7 billion, up 115.6 percent year-on-year, and net profit of R $ 1.7 billion, up R $ 148. , 7%.
XP has a buy recommendation for the stock, with a target price of R $ 34.80. Leonardo Alencar, an agro, beverage and food analyst at XP (NASDAQ 🙂 Investimentos, believes that the supply and demand put in place in the United States is helping the company.
Itaú BBA classifies Marfrig in the Outperform category, with a target price of R $ 26. Gustavo Troyano, food and beverage analyst at Itaú BBA, agrees that the year has been exceptionally positive and also expects above-average results next year, but with lower margins. “An average margin for the sector is around 4% to 7%, and this year there are companies with margins above 20%, which is very strong,” he explains. They are still expected to be in double digits, however.
More diversified in protein and operating market, the company recorded adjusted EBITDA of BRL 13.9 billion in 3Q2021 (+ 74.2% year-on-year). The net profit of 7.6 billion reais represents a growth of 142.1% compared to the same quarter of last year. It also has a large exposure in the United States, but exports to Europe and Australia, among other countries. It works with beef, pork, and now even fish. “This diversification offers more security to the company. We expected a stronger recovery in the United States, but now that inflation is weighing more heavily there, it is already starting to become more uncertain, which could make the less attractive stocks, ”said Fabiano Vaz, analyst at Nord Research.
However, JBS is among BofA’s top picks in the meat business, as it believes that even with lower margins in the North American market, further acquisitions should boost results next year. The target price is R $ 70.
XP has a buy recommendation for the stock, with a price target of R $ 51.80.
Itau BBA rates JBS as outperforming, with a target price of R $ 47. The bullish cycle of the US beef market and the diversification of the company are factors that benefit the thesis.
Another diverse producer, BRF is one of the world’s largest food companies, owning brands such as Sadia, Perdigão and Qualy. The company is more transformation-oriented and has more exposure to the Brazilian economy, although it also exports to several countries, especially the Middle East. The company was hit by high prices for grain, needed for poultry and pork production, squeezing their margins. BRF recorded a net loss of R $ 271 million in the third quarter of 2021, compared to a net profit of R $ 219 million in 3Q20. However, revenue grew 24.6% year on year, reaching 12.3 million reais. Itaú BBA classifies BRF as Market Perform, with a target price of R $ 24.
XP has a neutral recommendation for the action, with a target price of R $ 30.40. Leonardo Alencar points out that even with the rise in meat prices, the company has not been able to regain margins throughout the year.
“She exported more to Asia, but couldn’t arbitrate very well. It was very focused on the domestic market, which performed poorly and, with the pressure of production costs, experienced a weaker year, ”he explains. . However, the pressure on costs is expected to ease in 2022, according to the analyst.
There are also intrigues concerning Marfrig and BRF. In December, BRF announced a planned secondary offering of 325 million new shares. The estimate is that BRF will raise around R $ 6.6 billion with the operation, which would allow it to expand its business and make strategic investments, in addition to improving the debt structure, reducing the cost. total and reduce debt. The measure will be voted on at a general meeting of shareholders on January 17.
Brazilian analysts see the transaction as an opportunity for Marfrig to take control of BRF. Currently, Marfrig owns 33.2% of the shares of BRF and, according to the articles of association of BRF, the shareholder who obtains control of 33.3% of the shares will have to launch a public tender offer of all the remaining shares with a premium. 40% compared to the average share price. the previous 30 or 120 days, whichever is greater. This could correspond to a price 65% higher than the market value of BRF.
However, in the event of a capital increase, the statutory rule limiting shareholder control of BRF would no longer be valid. Despite an aggressive history of acquisitions, analysts do not have a clear vision of how Marfrig’s lead over BRF will play out. It’s a story to watch in 2022.
Minerva is one of South America’s leaders in the production and sale of fresh meat and meat by-products, but it also exports live cattle. In the third quarter of this year, the company reported 24% year-on-year growth in net profit, reaching 72.4 million reais. EBITDA in 3Q21 was a record, reaching BRL 648.1 million, an increase of 17% compared to 3Q20.
Itaú BBA classifies Minerva in the Outperform category, with a target price of R $ 17. According to the Itaú analyst, the company is the biggest beneficiary of the lifting of the embargo by the Chinese government, because it is the company that holds the largest market share in this market.
Nord Research has a buy recommendation for the stock, but does not have a price target. “Marfrig is a big company and has a super interesting exposure in the US, but it’s a more competitive market there, with higher costs. Minerva has the advantage of being exposed to China, a new market that continues to grow. The middle class In recent years, incomes have increased and people are improving their diets. Minerva is taking advantage of this and it is still a huge market, ”explains Fabiano Vaz.
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