Ultrapar Run Overdone

Recently, Ultrapar Participações S.A. (UGP - Analyst Report) announced good operating results for the second quarter of 2009. Net revenue reached R$9,622 million ($4,604 million), from R$6,411 million in the year-ago quarter.

The operating performance of Ipiranga, which accounts for almost 80% of the company’s total sales, was positive considering the difficult economic environment in the beginning of the year. Sales by volume (excluding Texaco) were essentially flat at 3,055,000 cubic meters. Ultragaz’ sales totaled 401,000 tons, down 3% from the same period a year ago. Oxiteno sales volumes reached 160,000 tons, compared to 146,000 tons last year. Ultracargo’s effective storage increased 67% year over year.

Quarterly EBITDA was R$320.6 million ($153 million) compared with R$226 million a year ago. EBITDA margin was 3.3%, down from 3.6% in the same period of 2008.

The company’s net debt rose to $1.12 billion from $248 million as a result of the Texaco disbursement in the beginning of the year.

The integration of Texaco into Ultrapar’s network is on track. At the end of the second quarter, 651 Texaco service stations were already converted into Ipiranga. With the assimilation of Texaco’s information system into Ipiranga earlier this month, the company’s fuel distribution business was finally integrated. This was a significant step towards implementation of the operational and administrative synergies plan.

Consolidated net income amounted to R$93.3 million ($44.6 million), down from R$109.7 million in the year-ago period due to lower operating margins and higher financial expenses.

Lower interest rates in Brazil should help the company through a difficult 2009. However, the stock’s current valuation has already priced in all positives and appreciated considerably in the last few months. It is up 65% since last December. Thus, despite the company’s growth potential, the stock is not trading at reasonable levels anymore.

We continue to believe that Ultrapar will be able to emerge from this crisis without major problems. The company is very focused on its local markets and is not too exposed to the international economic cycle. Moreover, stabilization of the currency market in Brazil and resilience of the fuel retail business is good news for the near future.