Bunge: Investment Thesis
The key test I'm looking at in reviewing investment opportunities at present is the ability of corporations to survive through this COVID-19 pandemic and recover to former levels of earnings. The next test is, will the dividend likely be maintained and will a return of the share price to Feb. 21, 2020, levels provide superior returns? For Bunge (NYSE:BG) I believe, as explained further below, the company will trade through this period and come out intact on the other side. Bunge has regularly paid yearly increasing common stock dividends per share since end of 2001, including through the period of the GFC. Significant capital gains and high dividend yields are possible from an investment in Bunge shares, bought at current price level and held through end of Q2 2021. By mid 2021, or thereabouts, I anticipate survivor stocks will have returned to their February 2020 highs, the reasons for which are explained further below.
Potential returns from share price gains and dividend receipts -
Table 1.1 below shows the detailed calculations for a potential total return of ~59% from investing in Bunge common stock shares at May 6 share price and holding through end of Q2-2021.
Table 1.1 Bunge Common Stock Projected Total Returns - May 6, 2020
Table 1.2 Bunge Common Stock Projected Total Returns - Apr 29, 2020
Tables 1.1 and 1.2 are generated from Dividend Growth Income+ Club's extensive database of dividend paying stocks, including all of the Dividend Aristocrats. The only difference in input data between the two tables is share buy price and analysts' consensus EPS estimates. Buying at the April 29 closing share price would have given a potential return of 28.3%. Patiently waiting for the lower share price at May 6 results in more than doubling of total potential return to ~59%. The database I have developed for screening for stocks with potential high returns is updated on a daily basis. Identifying stocks offering high returns is only the first step which is followed by further investigation. Bunge has a highly attractive indicated return of 59% at the current share price, and the results of further investigation suggest the stock is quite suitable for investment at present, despite the loss reported for first quarter.
18 years of unbroken dividend growth is expected to continue -
Bunge has gone eight quarters without a quarterly dividend increase. However, if the dividend is raised by just $0.01 per quarter in the September or December quarter 2020, Bunge will maintain its unbroken record of dividend increases each fiscal year since 2002. I'm projecting a minimum increase of $0.01 in the quarterly dividend rate in 2020 on the basis Bunge has the capacity to do this, and will do everything possible to maintain its dividend growth record.
Bunge: The Detailed Investment Case
The nature of Bunge's business involves constant struggles with uncertainty - fluctuating exchange rates and commodity prices, and events such as swine fever. Bunge is better positioned than most to deal with operational and financial challenges associated with COVID-19. Bunge is constantly dealing with the logistics and financing requirements associated with disruptions to supply chains and sharp swings in demand for the low-margin, high-volume commodities it stockpiles, processes and deals in. For Bunge, COVID-19 is really just another day at the office, just more of the same, and Bunge is well prepared for more of the same. In the following sections I review,
- Bunge's five reportable segments
- Bunge: Segment and consolidated income summaries - Actual and projected
- Bunge: Balance sheet strength - actual and projected
- Bunge: liquidity
- Bunge: Important long-term risk considerations
Bunge's Five Reportable Segments
Excerpted from Bunge 2019 10-K:
Bunge has five reportable segments - Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer, ...
1. The Agribusiness segment is characterized by both inputs and outputs being agricultural commodities and thus high volume and low margin.
2. The Edible Oil Products segment involves the processing, production and marketing of products derived from vegetable oils.
3. The Milling Products segment involves the processing, production and marketing of products derived primarily from wheat and corn.
4. In December 2019, the company contributed its Brazilian sugar and bioenergy operations forming the majority of the Sugar and Bioenergy segment into a joint venture with the Brazilian biofuels business of BP p.l.c, the Sugar and Bioenergy segment primarily involved sugarcane growing and milling in Brazil, as well as sugarcane-based ethanol production and corn-based ethanol investments and related activities.
5. Following the classification of the Brazilian fertilizer distribution and North American fertilizer businesses as discontinued operations, the activities of the Fertilizer segment include its port operations in Brazil and Argentina and its blending and retail operations in Argentina.
Bunge: Segment and Consolidated Income Summaries
Table 2.1 - FY 2019 Segment and Consolidated Income Summaries
Table 2.2 - FY 2020 Segment and Consolidated Income Estimates, Worst-Case Scenario
Table 2.3 - FY 2020 Segment and Consolidated Income Estimates, Aligns To Analysts' Consensus Estimates Of 2020 Non-GAAP EPS
Table 2.1 is provided as a base for projecting 2020 income for Bunge. Table 2.2 is provided as a "worst-case" net income scenario as part of stress testing the balance sheet, discussed further below. Table 2.3 is provided as a guide based on Bunge 2020 full-year segment outlook (Feb. 11, 2020) and analysts' non-GAAP EPS consensus estimate of $3.17 EPS sourced from Seeking Alpha Premium. Table 2.3 also is used to understand potential stresses on Bunge's balance sheet and liquidity. Notes on the assumptions are contained at the foot of Tables 2.2 and 2.3. Additional detail is provided as part of the discussion below on balance sheet strength and liquidity.
Bunge: Balance Sheet Strength
Table 3.1 - Bunge Shareholder Equity And Projected Changes In Equity
Table 3.1 shows total shareholders' equity at end of 2019 and a projection of total shareholders' equity at end of 2020, based on changes due to net income projections per Tables 2.2 and 2.3, less dividends paid, and an allowance for comprehensive income losses.
Bunge - Dividends on common shares
As per Table 1.1 above, I have allowed for a quarterly dividend increase of $0.01 per share from Q3-2020. This results in slightly higher total dividend payments of $286 million in 2020 versus $283 million for 2019.
Bunge - Comprehensive income losses
An allowance is made for comprehensive income loss of $1.2 billion for both worst and consensus cases. This is for potential currency translation losses in respect of working capital balances held in foreign currency. Exposure arises due primarily to decline in the value of the Brazilian real. It's estimated ~$800 million in currency translation losses were recorded in comprehensive income in Q1-2020, so the $1.2 billion will allow for further declines in the Brazilian real.
Bunge - Net debt as a percentage of net debt + equity
Net debt as a percentage of net debt + equity increases from 43.7% to 57.7% under the worst case, and to 46.5% under the consensus case.
Bunge - Book value per share
For the consensus case, estimated book value per common share of $30.54 is not far below the share price of $34.20 at close on May 6. This is after allowance for the $1.2 billion reduction in book value due to currency translation losses, which reduces book value by $8.45 per share. For the worst case, assumption of total write off of the sugar and ethanol joint venture equity together with lower earnings assumptions, results in a lower estimated book value per share of $22.08.
Bunge - Changes in total equity
Under the worst-case scenario, shareholders' equity reduces by $2.208 billion. Under the analysts' consensus EPS case, shareholders' equity decreases by $1.009 billion, including the $1.2 billion allowed for foreign currency translation adjustments.
Total equity equates to total net assets (liabilities), the estimated changes in the components of which are analyzed in Table 3.2 below.
Table 3.2 - Bunge Total Net Assets (Liabilities)
Ascertaining projected net cash (debt) without a formal cash flow projection
Borrowings and cash balances are impacted by changes in shareholders' equity as detailed in Table 3.1, and by changes in all asset and liability balances other than cash and borrowings. By projecting changes in all other asset and liability balances in Table 3.2 it's possible to determine projections of cash and borrowings without a formal cash flow projection. Details of and comments on projected changes to the various asset and liability balances appear below.
Projected Working Capital Surplus
In Table 3.2, projected currency translation effect on working capital is reflected as a single line adjustment, rather than estimating the effect on individual working capital items. The other side of this adjustment is recorded in comprehensive income loss and results in a reduction in equity. There's no cash impact. In the balance of working capital projections for 2020, I have assumed Bunge will manage working capital assets such as inventories and receivables and working capital liabilities such as trade accounts payable, so there will be little change in net working capital surplus between end of 2019 and end of 2020. Under both the worst case and the consensus case, I have projected working capital surplus balance to reduce only slightly from $4.611 billion at end of 2019 to $4.543 billion at end of 2020 (excluding foreign currency translation effect). However, it should be noted any increase in the net working capital surplus, such as from higher inventory levels, will reflect as a reduction in cash or as an increase in borrowings. Any reduction in the net working capital surplus, such as from increase in trade payables, will reflect as an increase in cash or reduction in borrowings. Factors that will tend to keep working capital balances stable, as projected, include: Increased inventory spend will be likely offset by increased trade payables, and increased sales reducing inventory can lead to increased receivables.
Net Property Plant and Equipment
Per Bunge 2020 full-year segment outlook (linked above), expected capex is:
In the range of $400 to $450 million; and depreciation & amortization of ~$465 million.
I have taken a conservative approach, allowing for capex of $450 million and depreciation & amortization of $465 million, to arrive a net $15 million reduction in Net Property Plant & equipment in 2020 for both worst and consensus cases.
Other Intangible Assets
Assume $36 million reduction for both cases, based on historical amortization.
Investments In Affiliates
For the worst case only it's assumed the present disruption to sugar and ethanol markets (and corn markets) due to the combined effects of COVID-19 and oil producers on demand and supply will continue for an extended period. It's further assumed this will lead to 100% impairment of Bunge's 50% interest in the assets of the BP Bunge Bioenergia joint venture, the value of which, net of loans, at Dec. 31, 2019, was $357 million. It's understood if the assets of the joint venture should become worthless, Bunge will not be required to repay any amount of a $700 million loan secured over the assets of the joint venture on a non-recourse basis, per this disclosure in Bunge's 2019 10-K filing,
In November 2019, the $700 million, 5-year revolving credit facility, maturing on May 1, 2023 was converted into a term loan and then subsequently transferred to the recently formed joint venture, BP Bunge Bioenergia, on a non-recourse basis.
Net cash (debt)
As mentioned above, rather than developing a cash flow projection, I'm using estimates of changes in shareholders' equity as detailed in Table 3.1, and estimates in Table 3.2 of changes in all asset and liability balances other than cash and borrowings, to determine projected change in net cash (debt). Table 3.2 shows the projected change for worst case is a $1.612 billion increase in net debt, which I have assumed increases short-term unsecured debt by $1.612 billion. For the consensus case, the calculated change in net (debt) is $770 million. For both the worst case and consensus case I'm assuming loan of $507 million due December 2020 is repaid out of proceeds from a new long-term loan of similar amount. Table 3.2 shows both for the worst case and consensus case Bunge is required to increase borrowings. Bunge has ample undrawn loan facilities for this purpose as discussed in detail below.
Loan/EBITDA ratio -
On the fourth quarter 2019 earnings call, Bunge CEO Greg Heckman spoke to the following slide:
Source: Bunge Q4-2020 earnings call slides
Per Table 2.1 above, Bunge's Loan/EBITDA ratio at end of 2019 was 3.0. The significance of the above slide is, in a tight financial situation, or even in a liquidation scenario, Bunge could reduce its total long-term debt by over 80% by selling off its readily marketable inventory. In that context, the number of years of EBITDA required to pay off outstanding loans has far less relevance for Bunge than for most businesses. For example, in my recent article, "General Electric: Shareholders Can Breathe A Sigh Of Relief," I detailed how it took over a year of uncertainty before GE (GE) eventually received the cash from its biopharma sale in an effort to reduce its Loan/EBITDA ratio to a more acceptable level.
Ample Undrawn Committed Credit Facilities To Finance Inventories -
As per the slide above, at end of 2019, $3.9 billion (83%) of Bunge's long-term debt of $4.7 billion can be attributed to the financing of readily-marketable inventories. These inventories, and their financing, are integral to and unavoidable in the operation of Bunge's business. The slide above shows there are periods, such as Q2-2018, when far higher levels of borrowings are required to finance higher levels of these readily marketable inventories. The availability of undrawn committed credit facilities of $4.3 billion is shown in this slide from the fourth quarter 2019 earnings call.
Of course, the loan/EBITDA ratio will fluctuate with levels of inventory financed, making this statistic of less relevance in judging ability to repay borrowings over time.
Long-term debt obligations -
Per Bunge's 2019 10-K filing, long-term debt obligations at end of 2019 totaled $3.7 billion per detail below:
Apart from repayment of the $507 million due 2020, and provided for in the balance sheet projections per Table 3.2, there are no further repayment obligations until 2022, when a relatively small repayment of $398 million is required. Bunge should have no difficulty in financing even the worst-case scenario of additional $1.6 billion debt as ample undrawn loan facilities are already in place.
Bunge: Important Long-Term Risk Considerations
- Country Risk: Expropriation Of assets
- Product market demand risk
- Liquidation risk
Country Risk: Expropriation Of Assets -
Bunge owns property in a range of geographical locations.
Data source: Bunge 2019 10-K filing
Excluding North America and Europe, the largest individual country risk for Bunge is Brazil where it has 17.3% of its long-lived assets. Of those assets, 5.8% are in the Bunge BP joint venture for which I have allowed 100% write off in the worst-case balance sheet projection per table 3.2. The highest country risk is possibly Argentina, where 3.1% of the assets are located. A total of 26.5% of assets are located in the Rest of world category, and although there are questions over country risk, the risk is spread over a number of countries. A significant proportion of the assets located in Asia-Pacific will be in Australia which poses nil country risk. There may be some country risk in Eastern European countries included in the Europe category. Overall, I would expect risk of expropriation of Bunge assets is quite low and dollar value of assets lost not material. That's not to downplay the loss of operating capability and product supply that would accompany such country action.
Product market demand risk -
From Bunge 2019 10-K filing-
Demand for our purchased and processed Agribusiness products is affected by many factors, including global and regional economic conditions, changes in per capita income, the financial condition of customers and customer access to credit, worldwide consumption of food products, particularly pork and poultry, population growth rates, relative prices of substitute agricultural products, outbreaks of disease associated with livestock and poultry, and demand for renewable fuels produced from agricultural commodities and commodity products.
"Beyond Breakfast Sausage™ is made from a blend of pea and rice proteins. It is made without GMOs, soy, gluten or artificially produced ingredients."
I do not see increased growing of pea and rice, to produce meat look-alikes, reducing the growing, trading and processing of soybeans. If there's a shift away from feeding soy to livestock, the more likely scenario is a significant increase in human soy consumption, rather than a change in soy plantings (see here). In fact, a case is made in this PubMed article for a part only replacement of meat protein with soy protein for overall improved health outcomes. The products where I would have concerns are sugar and ethanol which are produced by the Bunge BP joint venture in Brazil. The current oversupply and low prices for oil naturally impacts adversely on the economics of ethanol production. While sugar cane is considered to be a more economical crop to soy for producing ethanol, the sugar produced is today considered by many nutritionists to be a poison, and also responsible for widespread obesity. If ethanol production becomes uneconomic, soy has different and better markets for its alternative products. It should be noted I have allowed for 100% impairment of Bunge's investment in the Brazilian sugar/ethanol joint venture in my worst-case financial analysis above.
Bunge: Summary and Conclusions
My view of the direction the share market will take post the coronavirus crisis has not changed. Interest rates will likely continue at lower levels than in the recent past. In this climate, investors will continue to seek higher yields and multiples will return to pre-coronavirus levels and higher.
On this basis, there is an opportunity for significant total return in the region of 60%, buying Bunge shares and holding for a year or so until the share price returns to around February 2020 levels. The company appears well placed to manage through this COVID-19 pandemic and come out the other side, remaining in good shape. As with all shares at present, there's a possibility of a flight to safety that could put downward pressure on all common stock shares. There's also the possibility of further downgrades in analysts' consensus EPS estimates for Bunge that could impact on share price levels. For those who think the stock market will not go lower from here, the reaction of the market to Bunge's Q1-2020 earnings release, taking ~10% off an already depressed share price, should be a salutary lesson. As Bunge CEO explained the mark to market adjustments contributing to the Q1-2020 loss will likely be reversed in the period ahead. There are many companies who have experienced lockdowns who will be reporting significant losses for second quarter and that will almost certainly drag the market down. A stepped entry into any share purchase at present might be advisable.