BRF Makes Progress In Brazil, Finds Challenges Abroad

Summary

• BRF had a mixed fourth quarter, with improved results in Brazil offset by challenges in the International business largely beyond management's control.
• I was impressed with the growth in value-added products in both Brazil and International, and continuing to grow (and gain share) with higher-value packaged/processed foods is a growth cornerstone.
• China remains a good market for more commoditized protein exports, but the Mideast/Halal operations remain pressured by the pandemic and politics.
• Mid-to-high single-digit revenue and FCF growth can support a fair value for the ADRs above $5; it will take time for the Street to trust this name again, but the rewards look worthwhile.

If BRF (NYSE:BRFS) can ever get all of its businesses moving in the right direction at the same time, the impact on profit and free cash flow growth will be powerful, but this is what I’d call a “Spartan if”, as the performance of the international operations is still heavily influenced by commodity market moves and government policies. For the here and now, though, management is executing well in Brazil, and particularly on its plan to boost growth and margins through value-added product development.

I was lukewarm on BRF shares back in December, largely because of commodity market risks, and the shares are down about 10% since then, outperforming the iShares MSCI Brazil ETF (EWZ), but underperforming JBS (JBSAY). While I still see risks on the commodity side, and it’s tough to time any meaningful improvement in the Mideast operations, I think the valuation is interesting enough relative to the risk to get more positive.

Mixed Results, With Brazil Stronger And International Weaker

Continuing a recent trend, BRF’s fourth quarter results were marked by good and improving performance in Brazil and ongoing challenges in the International business, particularly in the company’s important Mideast/Halal operations.

Revenue rose more than 23% this quarter to R$11.47B, beating expectations by 5% to 9% (different third-party sources reported different “consensus” estimates). Overall volume increased by a little more than 2%, with processed food volume up a little less than 8%, and realized prices rose 21%, boosted in part by forex.

Gross profit fell 30bp to 25.2%, as the company was hit a little less hard by commodity cost inflation than I feared and better offset it with stronger value-added sales in Brazil. Adjusted EBITDA rose 13% to R$1.5B, coming in a little weaker than I expected, and in the middle of wide “consensus” bracket (BRF either missed by 3% or beat by 4% depending upon

Analyst’s Disclosure:I am/we are long BRFS. 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.