Bullish on Cosan

Recently, Cosan SA Ltd. (CZZ - Analyst Report), a leading producer of sugar and ethanol in the world, reported results for the fourth quarter and fiscal year ended March 31, 2009. The company has shifted the fiscal year period to March 31 from April 30. As such, fiscal year 2009 comprised only 11 months compared to 12 months in fiscal year 2008 and fourth quarter of 2009 includes 2 months versus 3 months in the fourth quarter of 2008.

The company posted net revenue of R$2,349.8 million (US$1,008.5 million), an increase of 179% year over year and R$6,270.1 million (US$3,119.5 million), an increase of 129%, during fourth quarter and fiscal 2009, respectively. EBITDA during the quarter and full year reached R$165.9 million (US$ 71.2 million) and R$718.0 million (US$357.2 million), representing an increase of 232.5% and 292.6%, respectively.

However, Cosan reported a net loss of R$40.2 million (US$17.3 million) in the fourth quarter and R$473.8 million (US$235.7 million) for fiscal 2009. After adjusting for the effects of foreign-exchange losses and goodwill amortization, as well as post tax benefits, net income would have been R$34.5 million (US$17.2 million) at the end of March 31, 2009.

At the end of March 31, net debt reached R$3,035.6 million (US$582.7 million) from just R$621.7 million at the end of April 30, 2008. The company obtained loans of R$1,888 million (US$974.2 million) to refinance debt and fund expansion plans in fiscal year 2010. It borrowed R$1.1 billion from Banco Bradesco (BBD - Snapshot Report) to refinance promissory notes issued to acquire Exxon Mobil's (XOM - Analyst Report) fuel distribution assets in Brazil and R$788 million from Brazil's national development bank BNDES.

Cosan plans to open a new sugar and ethanol mill at Jatai in the Goias state for a total investment of R$639 million and establish a new power generation project at its Gasa mill in Sao Paulo for a total value of R$149 million.

Persistent declines in crude oil prices have reduced the demand for ethanol, raising its inventories. As such, ethanol prices have fallen in 2009 from its 2008 high. However, the sugar market is promising and prices are expected to rise by 20% by the end of 2009 due to the lower production in India, the world’s largest producer of sugar. Thus, the company is expected to report net profit in the fiscal year 2010. Hence, we are bullish on Cosan.

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