If Russia Invades Ukraine, Watch Out For These 3 Companies

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Includes: ADM, BG, MDLZ
by: David Ristau

Summary

The conflict threatens ADM's export and processing facilities in Ukraine.

BG's plans for expansion in the Black Sea region could be suspended.

MDLZ could see chocolate, gum and biscuit constraints in its production facilities.

The focus of the world continues to be on the conflict in Ukraine. Following the civil war that resulted in the ousting of former president Yanukovych, Russia now threatens to exert control over the Ukrainian-controlled Crimean peninsula. So far, the Eastern European turmoil has not had a major impact on US markets.

Nevertheless, we have identified several publicly listed companies that have enough exposure to the region to experience disruptions in both top and bottom line growth. These companies sell goods in the region and have production facilities that, if offline, could limit output indefinitely.

Archer Daniels Midland Co. (NYSE:ADM)

The first such company is Archer Daniels. The company derives revenue from 3 sources: oilseeds processing, corn processing and agricultural services. Below is a breakdown of revenue for the latest fiscal year, 2013.

Segment

Revenue FY 2013 (in $ millions)

Oilseeds Processing

34,883

Corn Processing

13,139

Agricultural Services

41,480

Financial

302

Total

89,804

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The segment most affected by the conflict is oilseeds processing. ADM owns an 80% stake in Alfred C. Toepfer International, a German commodity trading firm. Toepfer owns several export facilities, with a location in the port of Odessa, Ukraine, with a 210K tonnes capacity. Additionally, ADM owns an oilseeds processing plant for crushing and origination within the territory. Below is further breakdown of the oilseeds processing revenue segment:

Oilseeds Processing

Revenue FY 2013 (in $ millions)

Crushing and Origination

20,522

Refining, Packaging, Biodiesel, and Other

10,375

Cocoa and Other

3,281

Asia

705

Total Oilseeds Processing

34,883

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Crushing and origination accounts for 59% of total oilseeds processing revenue. Any disruptions to the processing capabilities of ADM will constrain supply and limit revenue from this segment. Ukraine is one of the top grain producers and exporters in the world. We have already seen concerns coming from different parts of the world, dealing with cost of various goods. In Great Britain, there are worries about rising cost of bread. Depending on the length and gravity of the conflict, ADM can experience ripples in both its topline and bottom line.

Bunge (NYSE:BG)

The next company is Bunge Ltd. Similar to ADM, this company also engages in the processing, storing and trading of commodities. Here is a breakdown of company revenue:

Segment

Net Sales (in $ millions)

Volume (thousands metric tons)

Agribusiness

45,507

137,405

Sugar and Bioenergy

4,215

10,316

Edible Oil Products

9,165

6,972

Milling Products

2,012

4,034

Fertilizer

448

958

Total

61,347

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The agribusiness, which accounts for 75% of revenue, is vulnerable to Ukraine, where BG has production and storing facilities. Much of the business in the region is done through 9 different subsidiaries. Currently, BG controls an export terminal located in the port of Nikolayev, Ukraine, which was acquired in 2011 for $100 million. The port is mostly used for exporting grain. In the latest annual report, the company announced plans to expand the facility and introduce a new multi-oilseed processing facility. The current production involves processing oil and transforming it in bottled edible oils sold under popular regional brands Oleina, Rozumnitza and Golden Drop.

The tension in Ukraine is not only a factor to current production and distribution activities, but to the future plans of BG within the region. In the latest Q4 earnings call, company CEO Soren Schroeder identified Ukraine as key to solidifying BG's position in the region. Escalations in the conflict would put any expansion around the Black Sea on hold.

Mondelez International (NASDAQ:MDLZ)

Mondelez is a different business than ADM and BG, with exposure to other types of commodities. The company is still undergoing changes from the recent split from Kraft Foods. In February, Kraft Foods Ukraine officially changed its name to Mondelez Ukraina. With a 20-year presence in the region, Mondelez Ukraina is a leading coffee, chocolate, biscuits, snacks and gum producer. It currently owns 4 production facilities surrounding the capital, Kiev, and Sumy region.

Mondelez management identifies Russia and Ukraine as the regions with strongest growth prospects for the gum category. In addition to gum, MDLZ also owns a chocolate factory, which was launched in 2011. In the recent annual report, the company identified Ukraine and Russia as the main drivers of lower net pricing for coffee and chocolate for European sales.

Segment

Revenue ($ millions)

Latin America

5,382

Asia Pacific

4,952

EEMEA

3,915

Europe

14,059

North America

6,991

Total

35,299

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Revenue from the Ukrainian market is included in the EEMA (Eastern Europe, Middle East and Africa) category. Within the EEMEA segment, chocolate, gum and biscuits account for over 60% of total segment revenue, the rest represented by beverages and groceries. We can conclude that limiting production in the Ukrainian facilities could pose a problem on future sales.

Conclusion

According to latest news, the conflict does not seem to have an end any time soon. Russia remains dead set on turning the Crimean peninsula into Russian territory. Pro-Russian forces are looking to take control of the peninsula, defying the Ukrainian government and military. ADM, BG and MDLZ are some examples of global companies stuck in the middle of this tug-of-war. All three can face production shortages and decreasing demand. While the losses for these companies are more or less speculative at this point, if the conflict intensifies, losses could quickly materialize.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by Adrian Moraru, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.