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Cosan Rated Neutral yet Again

CZZ ADM

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We maintained our Neutral recommendation on Cosan Limited (CZZ - Analyst Report), Brazil’s leading sugar and ethanol producer yet again. This is the second consecutive Neutral recommendation reiteration for the company, after it was downgraded from an Outperform recommendation in June, 2012.

Despite net earnings of US$0.48 per ADR more than doubling the year-ago earnings of US$0.22 per ADR, it’s the fall in sugar and ethanol sales that has raised our concerns for the stock. Sugar sales plummeted 12% as weaker sales volumes more than offset price increases while ethanol sales got impacted by weaker volumes and prices in the domestic market.

Moreover, increase in the cost of sales can prove to be disastrous for the company, as in the second quarter 2013 it soared 20 basis points year over year to 89.0% of total revenue. It also registered a 3.6% year-over-year increase.

All these near-term concerns have forced us to remain on the sidelines for Cosan. Despite these, the company’s long-term growth prospects cannot be overlooked. Strategic acquisitions, energy co-generation and transportation businesses are likely to be the major growth driving catalysts. Cosan’s dividend payments and share buyback activities are also  added advantages for the company.

Also, formation of Raizen, a joint venture between Cosan and Shell, has proved to be a boon for the company enabling better access to the ethanol consumer market and increased competitiveness in biofuels and fuel distribution businesses. Looking ahead, the joint venture may turn out to be one of the largest ethanol producers in the world with 2.2 billion litres of annual production capacity.

Moreover, Cosan’s association with Camil will bring recognised brands in sugar, rice and canned fish under one roof. Also, the acquisition of stakes in Comgas will strengthen Cosan’s presence in energy business while the additions of Esso Petroleum Company and Comma will solidify the company’s presence in the European lubricant and specialties markets. Share acquisition in América Latina Logística (ALL) will provide Cosan access to the former’s transportation services.

Cosan currently has a Zacks #2 Rank, translating into a short-term (1-3 months) Buy rating while its nearest competitor Archer Daniels Midland Company (ADM - Analyst Report) bears a Zacks #3 Rank, indicating a Hold rating.
 

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