Cosan Management Executing Through Trying Times And A Big Buyback Supports The U.S. Shares

Cosan Limited (CZZ) shares have continued to perform since my last update, rising almost 20% as the underlying companies continue to execute well in a challenging environment in Brazil and as management shows it’s willing to aggressively buy back shares when there’s a significant gap between Cosan Ltd. and the underlying value of Cosan SA (CSAN3.SA) and Rumo SA (RAIL3.SA).

I don’t see much reason for near-term optimism on the sugar or ethanol markets, and African swine fever is likely to continue pressuring Chinese demand for soy, but Cosan SA should still generate respectable free cash flow through this downturn due to its Comgas gas utility operations, and management has clearly shown they will support Cosan Ltd. through buybacks. The upside in Cosan Ltd. doesn’t look so exciting now, but I continue to believe this is a well-run conglomerate leveraged to economic growth in Brazil, and it would definitely be a name to reconsider at a lower level.

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Cosan Management Executing Through Trying Times And A Big Buyback Supports The U.S. Shares

Ongoing Improvements In Rail Sweeten Cosan's Story

I liked Cosan Ltd. (CZZ) roughly a year ago, and between significant ongoing improvements in the rail business and a buyback at the holding company level, the shares have risen about 80% since then – outperforming the local performance of both Cosan SA (CSAN3) and Rumo (RAIL3), to say nothing of peers and rivals like Adecoagro (AGRO) and Sao Martinho.

Cosan has taken a “hunker down” approach to the current weak environment in sugar, while continuing to grow the retail fueling business and focusing considerable attention on the rail assets. The valuation discount for Cosan Ltd. has shrunk noticeably, and with that management may feel freer to invest its cash flow into growth (instead of buybacks), something management has made clear would be their preference. Although I still think Cosan is a very well-run company and a great collection of assets, I don’t see the same striking discount to fair value as before.

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Ongoing Improvements In Rail Sweeten Cosan's Story

Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Although I had some concerns back in April about Adecoagro’s (AGRO) exposure to volatile commodity markets, particularly the oversupplied global sugar market, the shares have done better than I’d expected since then, with a 10% rise that not only beats Sao Martinho, but trounces Cosan Ltd. (CZZ). I believe Adecoagro has helped up better in part because of its low-cost sugar/ethanol operations, as well as its greater capacity to shift production toward ethanol at a time when sugar prices are so weak.

Looking ahead, the ongoing trade disputes between the U.S. and China should continue to help crop prices in Brazil and Argentina, while Adecoagro is also able to take advantage of weaker local currencies and a pretty solid hedging position. Moreover, I think the share price doesn’t reflect the progress the company has made over the years in improving its operations, nor the potential leverage to a larger dairy business. The commodity exposure increases the risk of this stock, but I do think the valuation remains relatively attractive.

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Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Sugar Prices Have Soured The Cosan Story

There's a lot more to Cosan Ltd. (CZZ) than sugar, but plunging global sugar prices are dominating the story at this Brazilian conglomerate and likely to continue to do so for the time being. Although the company is executing well in its fuel distribution, ethanol, gas, lubricant, and rail operations, sugar is a significant source of earnings, and there is only so much management can do to offset a global supply glut.

Even factoring in the weak sugar price outlook, Cosan Ltd. shares look significantly undervalued. Unfortunately, near-term sugar prices have long had a disproportionate influence on how Cosan Ltd. shares trade, and I'm not willing to just assume that's going to stop. Higher oil prices are supporting the ethanol business and the Rumo rail operations are performing much better, but it's going to take a more constructive market sentiment toward Brazil in general and sugar for these shares to get out of the doghouse.

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Sugar Prices Have Soured The Cosan Story

Cosan Undervalued On Strong Underlying Execution

Cosan (CZZ) isn’t, and never will be, the easiest stock to own. In addition to a complicated ownership structure, the company is heavily exposed to commodity market prices that it cannot really influence and the volatility of the Brazilian real. Even so, I believe Cosan management continues to do a good job of managing the business and controlling what it can; the company’s sugar/ethanol and fuel operations are run quite efficiently, and management has already shepherded a meaningful improvement in the Rumo rail operations. In addition, management has signaled that at the holding company level (the CZZ shares), they are ready and willing to start returning more cash to shareholders, preferably through buybacks.

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Cosan Undervalued On Strong Underlying Execution

Painfully Complex, Cosan Remains An Undervalued Play On Brazil

As I have written before, U.S. investors are not exactly spoiled for choice when it comes to Brazilian investments. Cosan Ltd. (NYSE:CZZ) has a lot to offer, including exposure to multiple major long-term opportunities within Brazil's economy, but the holding company structure is complicated and this is a difficult company to track and model. Still, with a holding company discount rate in excess of 30%, relatively healthy underlying fundamentals for the sugar, ethanol, and retail fuel businesses, and good long-term prospects in the rail business, this is worth a look.

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Painfully Complex, Cosan Remains An Undervalued Play On Brazil

Weak Yields And Sentiment Weigh Heavily On SLC Agricola

While Cosan Ltd. (NYSE:CZZ) and Cresud (NASDAQ:CRESY) have shot up since the latter part of January, SLC Agricola (OTCPK:SLCJY) has performed more like Adecoagro (NYSE:AGRO) in going nowhere fast. Investors are no longer mad about buying up hard asset plays like farmland, and SLC Agricola has also seen historically bad weather whack its crop yields. Add in the fact that these ADRs weren't particularly liquid even in the best of times and you have a pretty uninspiring set-up for the shares.

Value remains a point of frustration with me. I can tell you that an independent appraisal values the company about 25% more than the market does even if you just look at land values and debt (and give no value to other company-owned assets or any potential appreciation through development). Likewise, a discounted cash flow analysis - typically a pretty ungenerous valuation approach for farming companies - suggests undervaluation of around a third.

It's tempting to think that this year's bad weather won't repeat again next year and that SLC Agricola's proven ability to generate above-average yields and develop its land will be better valued by the market in the future, but the illiquidity of the shares and uncontrollability of the business are both significant factors to consider.

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Weak Yields And Sentiment Weigh Heavily On SLC Agricola

Cosan Buoyed By Better Operating Results And Optimism On Brazil

If you really hate your brain and want to punish it, dig deep into Cosan Ltd (NYSE:CZZ). While this Brazilian-American conglomerate has a lot of positives going for it, including a strong position in ethanol and sugar production, fuel distribution, and rail in Brazil, it also has a complex holding company structure, a lot of debt, and a lot of moving parts to factor into any sort of valuation analysis.

My last update on Cosan took place right around the period of peak pessimism on Brazil, with both the stock market and currency around five-year lows. Since then, not only has Cosan seen stronger markets for ethanol and sugar, but more optimism about a recovery in Brazil and a stronger currency. The shares have soared more than 100% since my last update and yet I still think there could be upside left.

Adjusting for the company's capex plans, the recapitalization of Rumo, and the exchange rate, my fair value rises to around $11, suggesting meaningful upside is still possible. Keep in mind, though, that what the currency markets give they can also take back and Cosan is a high-beta play on Brazil, not to mention a complicated company in its own right.

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Cosan Buoyed By Better Operating Results And Optimism On Brazil

Adecoagro's Valuation Looks A Little Too Sour

When I last wrote about Adecoagro (NYSE:AGRO), I thought the company was in place to benefit from an improved political and economic situation in Argentina and its low-cost position in ethanol in Brazil, but I thought the valuation was less than compelling, and particularly next to Cosan (NYSE:CZZ) and SLC Agricola (OTCPK:SLCJY). Since that last article, Adecoagro shares have basically been flat while Cosan has soared, SLC Agricola has gone up a bit (around 16%), and another Argentine farming/farmland play, Cresud (NASDAQ:CRESY), has been quite strong.

At this point, I'm more bullish on Adecoagro again. While low global grain prices are a concern, prices have been quite healthy in the sugar and ethanol business. What's more, the company continues to periodically sell farmland well in excess of appraised value, and the economic reforms underway in Argentina make further appreciation a credible driver. With a fair value around $13.50 to $14.50, Adecoagro isn't shockingly cheap, but I think it is worth the elevated level of risk that goes with an emerging market commodity play.

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Adecoagro's Valuation Looks A Little Too Sour

Seeking Alpha: Cosan Ltd Looks Like Value The Hard Way

The shares of Cosan Ltd. (NYSE:CZZ) are hardly unique in being Brazilian shares that have done poorly over the past year, as Brazil's ongoing economic struggles and currency weakness have badly hurt many stocks. Cosan has a host of its own challenges, though, as investors wrestle with the prospects for Cosan SA's (CSAN3.SA) Raizen joint venture to improve profits and cash flow in the sugar and ethanol operators, as well Rumo's (RUMO3.SA) very weak share price and its prospects for raising much-needed capital on acceptable terms.

The positive spin on Cosan Ltd. is that it gives investors a one-stop exposure to one of the largest sugar and ethanol producers in the world, as well as a leading operator of gas stations in Brazil, a large natural gas distribution business, and a growing rail and port operator. The negative spin is that those sugar and ethanol operations have never generated great returns on capital and that the logistics operations need very large amounts of capital in the coming years. There's also a negative argument for complexity here - this is a tough business to model and the holding company structure creates risks and inefficiencies.

When it's all said and done, I believe that Cosan Ltd. is undervalued, but this is a good example of a stock where investors may find the return prospects significantly overshadowed by the risk and complexity. These shares can definitely outperform on a Brazilian economic recovery, but there are significant commodity, macroeconomic, and operational risks to consider.

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Cosan Ltd Looks Like Value The Hard Way

Seeking Alpha: Cosan Is Complex, But Built To Win

The last year has been a bad one for Cosan Ltd (NYSE:CZZ). Despite strong positions in sugar, ethanol, fuel distribution, and logistics, a struggling Brazilian economy, a weaker Brazilian currency, lumpy results, and ongoing uncertainty over the complexity of the corporate structure has taken a toll on the shares. Down more than 40% over the past year (and since my last article on the company), Cosan seems unfairly maligned and overly discounted, but this will likely never be a stock suitable for investors who can't handle risk and volatility.

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Cosan Is Complex, But Built To Win

Seeking Alpha: Cosan's Value Is Worth The Hassle

I would imagine that those investors tending towards the OCD side of the spectrum who look into Cosan Ltd. (CZZ) will eventually have wisps of smoke coming out of their ears. Not only does Cosan Ltd. have a convoluted ownership structure (Cosan Ltd. technically owns about 62% of Cosan SA (CSAN3), and Chairman Ometto owns more than 40% of Cosan Ltd.), but the basic business of Cosan is confusing as well with its mix of JVs and wholly-owned operations.

What I believe is a lot simpler to understand is the value proposition. Although Cosan Ltd. routinely trades at a discount of 15% to 20% of the implied value of its Cosan SA position, Cosan Ltd. is the one that most U.S. investors can own and Cosan Ltd. shares themselves appear to be about 30% undervalued. Cosan is vulnerable to Brazil's opaque regulatory policies in multiple ways and Cosan Ltd. is vulnerable to currency moves, but I believe there is significant value in a company that is Brazil's largest sugar and ethanol producer and a significant player in fuel distribution (gas stations), natural gas distribution, and commodity logistics.

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Cosan's Value Is Worth The Hassle