BRF SA Should Show Sales Growth During The Pandemic

May 03, 2020 3:32 PM ETBRF S.A. (BRFS)2 Comments

1.12K Followers

Summary

My current estimates have BRF SA's 2020 Net Revenue growing by at least 10% year over year.
The company's decision to hire more people prove that they are working to keep up with demands.
BRF SA is a company worth analyzing for long-term investors.

Brazilian Food Processor, BRF SA, is showing signs that its 2020 results will not be negatively affected by the pandemic. Even though the company is not marketing its success to the masses, it is showing small discreet messages that lead me to believe that they will be successful in 2020. In my opinion, the company is doing the right thing by not marketing itself during such hard times as I think it would cause lousy press.

I will discuss the four factors that I believe are signs that BRF SA will have above average sales this fiscal year. After reviewing the signs, I will use them as guidance for my valuation that I hope to complete by next week. Just a quick apology, several sources are in Portuguese, and I could not find an English equivalent version.

Hiring Workers During The Pandemic

During the beginning of the worst pandemic that we have ever seen, C level executives around the world held emergency meetings to come up with a strategy to keep their company as a going concern. Not at BRF SA, they drank some whiskey and decided to hire 2,000 more people to help them burn cash even faster. SARCASM! On April 1st, a NYSE:BRFS representative stated that the company had hired more people to keep up with production demands. The representative also said that they would not be laying off anyone in April or May. Unless you think that the C level executives are as irresponsible as I said sarcastically earlier than you should assume that they are ramping up production to meet demands. This increase in demand by more than they had the capabilities to meet demonstrates that it is more than produce on average, aka above-average sales.

Net Debt to EBITDA Ratio

March 3rd, BRF SA informed the market that it was updating its estimates of its net financial leverage, which is measured by taking the net debt and dividing it by Adjusted EBITDA for the LTM. Their new estimate, after taking into consideration the effects of the coronavirus, is between 2.35x to 2.75x. If we assume that their net debt remains the same, that gives them an estimated adjusted EBITDA of R$ 4,825 million to R$ 5,646 million for 2020, I know that the range is quite broad. Still, the range at least gives us a direction, and that direction is that the company believes that profitability will be around the same levels as last year.

Sales In Brazil

The Brazilian supermarkets posted inflation-adjusted growth in sales for January and February at 5.11% and 15.88%, respectively (compares months against last year's same months). The effects of the pandemic should only show up in late March according to my estimates of when governors began implementing Stay-At-Home orders. According to this report in Portuguese, March data shows to be promising for supermarkets. This should give at least a 5 to 10% increase in BRFS Brazil unit's 1Q20 sales. As of 2019, larger retailers accounted for almost 42% of BRFS Brazil unit's sales.

It is usual for grocery stores, that are not considered supermarkets due to their smaller size, to grow their sales at around the same percentage or a little less than their supermarket competitors here in Brazil. Smaller retailers make up 47% of the Brazilian unit's sales, which adds up to around 89%. These two distribution channels should grow by about 5 to 10% this year.

Foodservice is only responsible for 11% of the Brazilian unit's sales. I could not find foodservice sales data, but I do know that it will be lower because of the stay-at-home order but not as low as in the United States. The reason I have this opinion is that restaurants can still serve patrons at their locations and via off-premise dining but under very restrictive conditions. In the US, restaurant sales were limited to only off-premise sales. At the same time, many companies shut down their on-location dining facilities, which will cause a good size decrease in sales to foodservice establishments.

As for April, May, and June, there are fewer data sources available, as expected. I do know that the supermarkets sold a little less on Easter day than the year prior. I also know that BRFS shut down a plant in Brazil due to a water supply issue.

Exports Continue With Favorable Exchange Rate

BRF SA continues to export around the world as a part of its international strategy. The company, in February, had two plants that were suspended by Saudi Arabia. One of the plants that were ban did not even export to Saudi Arabia, but the other Plant exported around 6,000 tons of poultry.

Around the same time that Saudi Arabia banned two of BRF SA's plants, China approved a plant giving BRFS 14 approved plants that can export to China. In the first and second quarters, I have BRF SA exporting around the same volume but with higher sales due to favorable exchange rates for exporters.

Conclusion

My current estimates have BRF SA's 2020 Net Revenue growing by at least 10% year over year. In my opinion, the company's Adjusted EBITDA margin will be in the range of 12% to 14.5%. At this time, I do have a target price on BRFS and, therefore, will not give an opinion other than this is a company worth studying.

This company has risks that need to be analyzed prior to investing in it. Former Members of BRF SA were involved in political corruption found from Operation Weak Flesh and Operation Trickery. The company also suffered many years of negative income due to fines and banned exports by countries who questioned their food quality. The company deleveraged itself by selling off non-essential assets to improve its liquidity ratio to prevent debt default.

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This article was written by

James Cherry

1.12K Followers

I am the Head of Content Strategy at Sproutfi, a fintech located in Brazil that is democratizing investing in Latin America. I have over 13 years of experience in the Food Industry, ranging from plant engineer to Corporate Development and FP&A.You, the reader, will notice that most of my articles were written about investment ideas I was researching for my investments.My alma mater is the University of Arkansas, where I graduated with a BA and an MSc in Operations Management. I served in the United States Army for six years and was deployed several times, including in Iraq. After completing my military obligation, I moved to Brazil to begin my career in Finance. I received an MBA in International Business from FIA/FEA at the University of Sao Paulo. I have passed the Level 1 and Level 2 CFA Exams. My hobbies are: playing the guitar and drums, longboarding, mountain biking, scuba diving, reading non-fiction books, and giving financial advice to low-income households.Any article in Seeking Alpha reflects my opinion and not the opinion of Sproutfi.

Analyst’s Disclosure: I/we 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.

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