BRF SA Muddling Through And Still Weighed Down By Debt And Capex

The last five months or so have been challenging ones for BRF SA (NYSE:BRFS). Brazilian consumers are under pressure from high inflation, and although input costs have been better of late for this large poultry and packaged food producer, margin leverage is still sub-optimal. What's more, as the company continues to invest into transformative capex, liquidity has come under pressure, leading to a higher net debt position.

It's harder to find strong arguments for a bullish stance on BRF today. While the situation in Brazil seems to be stabilizing, there's still quite a bit of uncertainty in key foreign markets. What's more, rivals like JBS (OTCQX:JBSAY) have more flexibility when it comes to pricing and assortment. Maybe the best bullish argument at this point is that expectations have come down for this stock and the shares don't look all that expensive; if the company can execute on its multiyear turnaround strategy, there is greater upside potential, but execution has been pressured here of late.

 

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BRF SA Muddling Through And Still Weighed Down By Debt And Capex

BRF SA - A Little Light, But A Lot Of Tunnel

 

In my recent update on BRF SA (BRFS), I noted that the near-term outlook for this large Brazilian poultry and packaged food producer was not great, as the company was getting squeezed by high costs and limited consumer purchasing power. Fourth quarter results amply demonstrated those pressures, though the halal and direct export operations showed better strength.

While the fourth quarter results and management commentary don’t change my outlook all that much, another development is more significant – that of large shareholder Marfrig (OTCPK:MRRTY) apparently looking to leverage its ownership stake and take a much more direct role in the company. Whether this will lead to a merger down the road remains to be seen, but at this point I don’t see much downside risk to more involvement from Marfrig.

 

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BRF SA - A Little Light, But A Lot Of Tunnel

BRF SA - The Long Wait For Self-Improvement Goes On

 

Writing about BRF (BRFS) in May of 2021, I said that the shares of this Brazilian poultry and processed food producer were a borderline call over the near-term due to margin pressure, but that the long-term potential of its self-help program kept me at an overall “Buy”. Since then, those margin pressures have intensified even more than I expected, and the ADRs have lost almost 30% of their value.

The long-term value and potential are still there, but it’s going to take literally years for the improvements to manifest. That’s a long time to wait, and a lot can go wrong in the meantime – including the current set-up of flattish prices with still-high costs. Still, I like what the company has already accomplished in the pet food space and its ongoing plans for more localization in key markets like Turkey/Mideast and Asia.

With a fair value range of around $4.50 to $5.25 for the ADRs, very patient investors willing to accept weaker near-term results may yet see enough reward down the line to make the holding period worthwhile.

 

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BRF SA - The Long Wait For Self-Improvement Goes On

BRF SA Goes Back To The Future With A Bold 10-Year Growth Plan

Everything old is new again, and so it would seem with BRF (BRFS). Management laid out bold growth targets for the next 10 years at its December 8 investor day, but the underlying concepts (expanded processed/packaged food offerings, international expansion) harken back to the goals and ambitions of prior management teams... goals that proved impossible for the company to reach then.

That BRF has tried this before and come up short does not invalidate this plan. BRF has a better management team today and my takeaway from the presentations is that this new effort will be driven more by internal innovation than M&A than in the past, and I think that’s an important differentiation. I also believe that the global market can support the growth that BRF is looking to achieve, but the goals are ambitious. The further you go out in time, the fewer the number of estimates, but BRF’s 2023/2024 revenue target is about a third higher than analysts previously expected, and I expect some “show me” skepticism.

When I last wrote about BRF, I was bullish on the long-term potential of the business but more cautious in the near term given weaker spreads and margins. The shares have since risen about 20%, but my basic thesis is the same – I do see a path to a higher share price over time, possibly a much higher share price, but the near term does offer risk as poultry spreads remain pressured.

 

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BRF SA Goes Back To The Future With A Bold 10-Year Growth Plan

Recent Outperformance Not Helping BRF All That Much

Brazil’s BRF SA (BRFS) has strung together some good quarters, but it hasn’t done the stock much good – the shares are down more than 55% from the time of my last article, underperforming U.S. protein producers like Pilgrim’s Pride (PPC) and Tyson (TSN), as well as fellow Brazilian producers like JBS (OTCQX:JBSAY) and Marfrig (OTCPK:MRRTY). While there are some macro concerns in play, including signs of increased poultry production in exporting countries, I believe BRF’s issues in its halal business and doubts about its long-term strategy in Brazil are also having an impact.

BRF shares do look undervalued, but the Covid-19 outbreak has created new challenges for a company that was only just starting to show real progress on its restructuring efforts. Management needs to sort out the issues in the halal business, but the political nature of those issues will make that challenging, and the long-term FCF margin outlook is still uncertain. While I do think today’s price undervalues the long-term opportunity, I can’t make a compelling argument that every investor really needs to bother with a quasi-commodity company operating largely in emerging markets.

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Recent Outperformance Not Helping BRF All That Much

Swine Fever And Self-Improvement Leading To Real Progress At BRF

The African swine fever (or ASF) epidemic that has devastated herds in China (as well as Vietnam and other Asian nations) has spiked global prices, creating a temporary windfall opportunity for exporters like BRF S.A. (BRFS) and JBS (OTCQX:JBSAY). At the same time, though, BRF has been making steady progress in its turnaround efforts and has been able to use the ASF windfall to accelerate its leverage reduction targets.

I thought BRF shares looked a little overheated in late August, but with the stock down about 15% since then, I'm more bullish on these shares. BRF still has a lot left on its "to do" list, but new management has built up some meaningful credibility, and it's easier to see the path towards a much stronger, more competitive BRF.

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Swine Fever And Self-Improvement Leading To Real Progress At BRF

Sick Chinese Pigs Driving Healthier Profits For BRF

I have been generally bullish on the turnaround plan underway at BRF SA (BRFS), as management is bringing a great deal more operating discipline to a company that has never had much of it. Add that enhanced discipline and a greater focus on bottom line profits to a business with strong domestic market share and an underrated Middle Eastern business, and that’s why I’ve been consistent in saying that a successful turnaround could drive a meaningfully higher share price for BRF down the road.

Along the way, though, the company has picked up an unexpected tailwind from a serious outbreak of African Swine Fever (or ASF) in China. This outbreak has led to a dramatic increase in food imports into China, boosting global prices, while BRF has also started seeing lower input costs.

The ASF outbreak won’t last forever, but it is effectively “free money” for BRF and will both accelerate the turnaround process and give management more flexibility in its strategy. The improved near-term outlook supports a fair value near the double-digits, but I believe the ASF outbreak will have to get worse to support a substantially higher near-term price, though the longer-term fair value of a successful turnaround is still higher than today’s price.

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Sick Chinese Pigs Driving Healthier Profits For BRF

BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

As I’ve written extensively in the past, BRF SA (BRFS) management has a lot on its plate trying to turn around this large Brazil-based poultry and processed food company. After years of ill-advised (or at least unfocused) M&A and scattershot business plans carried out by prior management teams, BRF found itself saddled with debt and an inefficient operating structure, leading to the entry of Pedro Parente and a completely new management team.

While there had been some signs of progress with the turnaround plan, and the outbreak of African Swine Fever in China has been a net positive for Brazilian protein companies, management is now considering a sharp change in strategy by entering into merger negotiations with Marfrig (OTCPK:MRRTY).

On balance, I’m not sure the advantages of a merger with Marfrig outweigh the challenges, but it does at least kick the can down the road in terms of showing results from the turnaround. Moreover, there aren’t going to be too many opportunities like this for BRF. While I continue to believe that BRF could be worth substantially more than its current share price down the road, I’m not sold on the idea that adding more complexity is the best way to build value.

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BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

Slow Progress At BRF SA, But ASF Is Providing A Boost

BRF SA’s (BRFS) turnaround process is going to take years to complete, but management has made some progress already. Helping matters, a potentially severe outbreak of African Swine Fever (or ASF) in China has boosted protein stocks (BRF included) in anticipation of higher protein imports from that country and less demand for grain in Brazil.

The impact of the ASF outbreak is unlikely to provide a permanent boost to BRF, but it should boost revenue, profits, and cash flow at a time when the company could really use the boost. The shares look more fully-valued on a near-term basis, but I maintain my longer-term outlook that a successful turnaround could drive a meaningfully higher price for more patient investors.

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Slow Progress At BRF SA, But ASF Is Providing A Boost

BRF's Third Quarter Had A Few Positives

Brazil’s BRF SA (BRFS) is only just starting its turnaround process, so investors shouldn’t expect quick fixes or huge improvements in financial results right away. Likewise, I wouldn’t get too concerned about near-term challenges like a currency-driven jump in the debt ratio. Importantly, the two key profit centers (Brazil and the halal business) both had some positive news and results should improve in the coming quarters.

I continue to believe that fair value for BRF shares today is in the $6’s, but with upside into the double-digits in a couple of years if and when the company executes on its turnaround strategy. Success is far from guaranteed, though, and investors need to aware not only of the company-specific execution risks, but also the commodity and currency risks that impact this business.

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BRF's Third Quarter Had A Few Positives

BRF Lays Out A Good Restructuring Plan, But No Quick Fixes

Investors, as a group, aren’t often the most logical creatures, so maybe there will be some disappointment at the restructuring plan that BRF SA (BRFS) management laid out on October 8 during its Brazil-based Investor Day (with a New York-based day to follow on October 10). Management didn’t offer up any quick fixes or any reason to think that the business will suddenly turn on a dime. What they did offer, though, was a very sound and credible strategy for building a stronger-for-longer company with substantial upside in both its home market of Brazil and its large foreign markets.

Valuation remains tied to the eventual long-term outcomes of this restructuring plan. If and when the restructuring activities start showing the expected benefits in 2019/2020 and beyond, I fully expect the multiple to expand again. Likewise, through that process the company will put some ugly near-term annual FCF results in its rear view mirror. While the current share price looks basically fair for what BRF is today, a more bullish outlook on that restructuring plan supports worthwhile upside for long-term investors.

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BRF Lays Out A Good Restructuring Plan, But No Quick Fixes

After Restructuring Optimism, Weak Second Quarter Results Bring BRF SA Back Down

Investors in troubled Brazilian food producer BRF SA (BRFS) got a brief respite from a year of terrible performance when the market responded favorably to the hiring of Pedro Parente as CEO and the subsequent broad restructuring initiatives he announced late in June. That honeymoon was short-lived, though, as challenging production costs, a trucker strike in Brazil, lack of market access in Europe, and tougher conditions in Asia all combined to produce a rather weak set of second quarter results.

To some extent, the quarterly results over the next year aren’t critically important – the bigger concerns are reducing leverage and making progress on restructuring efforts aimed at making BRF a leaner, more competitive global protein player in the years to come. Still, the results do underline some of the ongoing operating challenges and the basic reality that this is not going to be a smooth or easy process. While today’s price is arguably fair relative to the likely near-term performance, a successful turnaround should drive a substantially higher fair value in the coming years, but there’s really no visibility (let alone certainty) as to when that will start to materialize.

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After Restructuring Optimism, Weak Second Quarter Results Bring BRF SA Back Down

BRF's Initial Restructuring Moves Focused On Slimming Down

Considering how Pedro Parente, the new CEO of BRF SA (BRFS) approached the turnaround of Petrobras (PBR), the initial moves outlined late on Friday June 29 shouldn't be a major surprise to investors. Whether a series of initial asset disposals and restructuring efforts will achieve the monetary target won't be known for a while, it does seem like a cogent approach to getting this struggling Brazilian food company back on track.

The equity call remains more or less the same as it was before - you either believe that Parente will lead a meaningful turnaround here (though it may take a couple of years) or you believe this company is too far gone to be fixed and eventual bankruptcy is the ultimate destination. At this point I believe Parente deserves the benefit of the doubt, and that BRF's strong domestic share in Brazil's processed meat market is worth something, but the stock's slide wasn't interrupted in any meaningful way by the hiring of Parente, and there remains a lot of work to do.

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BRF's Initial Restructuring Moves Focused On Slimming Down

BRF SA Finally Catches A Break

"Once is happenstance. Twice is coincidence. Three times is enemy action." - Ian Fleming

Between rising costs, weakening positions in once-key markets, a scandal that has closed off the EU market, and a general sense of operational disarray, BRF SA (BRFS) has continued to struggle and has lost about half of its market value since the start of the year. At long last, though, investors finally have some good news to celebrate - the company's Chairman and former CEO of Petrobras (PBR) has been named as the new CEO.

To be clear, Mr. Parente has a lot of work ahead of him, and BRF's turnaround is not going to happen overnight. Nevertheless, I see more than a few casual similarities between Petrobras and BRF at the time Mr. Parente became CEO - both companies had unacceptable levels of inefficiency and high costs, both had serious regulatory/conduct issues, both had unfocused operations, both had issues with pricing and focus, and both had troublingly high debt. While Parente's success at Petrobras is no guarantee of a successful turnaround at BRF, I believe this was the best move available to the company and could, perhaps, represent the first few at-bats in what is likely to be a nine-inning turnaround cycle.

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BRF SA Finally Catches A Break