BRFBRASILFOODSSA(BRFS.N)：DOMESTICMARKETWOESTOCOMPLICATETHINGSIN2H12(MAINTAINHOLD)0816

1、24201612stock data869.5deutsche bankmarkets researchratingholdglobal emerging marketsbrazilcompanybrf - brasil foodssadate14 august 2012forecast changefoodprice at 13 aug 2012 (usd)target price14.5315.00reutersbrfs.nbloombergbrfs usexchange tickernysbrfs52-week range21.46 - 13.70domestic market woes

2、 to complicatethings in 2h12 (maintain hold)short-term earnings risk still skewed to the downside; stay on the sidelineswe updated our brf model to reflect disappointing 2q12 results and the mostrecent sharp increase in feed costs in brazil; which combined with achallenging economic outlook and adde

3、d marketing expenses related to newproduct launches (meant to fill the gap left by the recent asset divestiture/brand suspension), should put additional pressure on margins in 2h12 andbeyond. the net impact of these changes was a 17% downward revision to ourjose yordanresearch analyst(+1) 212 250-re

4、beca sanchez sarmientoresearch associate(+1) 212 250-key changes12-month price target (from $18/ads to $15/ads, or r$29/ local share).considering the limited upside implied in our new target, and our view thattarget price18.00 to 15.00 -16.7%earnings risk remains skewed to the downside, we maintain

5、a hold rating.2q12 results fell short of already-bearish expectationsfor about two months, brfs management had been warning of flat marginson a sequential basis (when the normal progression is for 2q margins to riseversus 1q); therefore, last nights announcement of a qoq ebitda margindecline of 40bp

6、s (or 10bps as the company defines it) and a yoy decline ofprice/price relative340bps should be characterized as a miss by the street (eps also fell short ofour estimates) and lead to further downgrades to consensus expectations.88/102/118/112/12revision reflects 2q12, higher costs/leverage, lower d

7、omestic volumes, new fxour present revision reflects the 2q12 shortfall as well as higher costs (mostlyfeed, but also marketing, labor and financial expenses), all of which shouldhave a negative impact that should only be partially offset by a weaker brl.in our view, brfs remains overvalued and vuln

8、erable in the short termbrf - brasil foods sbovespa (rebased)performance (%)absolutebovespa1m4.68.83m-16.3-0.512m-21.710.6brf is currently trading at 11.3x 12-month estimated ebitda, well above ourtarget multiple of 8.2x (see page 3 for derivation); thus, we expect the stock tofall moderately in the

9、 short term and recover some time in 1h13. downsiderisks are: stalling global demand, a stronger brl, higher trade barriers and/orfeed costs and disease (avian flu, h1n1, bse). upside risks include strength indomestic/ global demand, a weaker brl and lower trade barriers/feed costs.forecasts and rat

10、iosmarket cap (usdm)shares outstanding (m)adr ratiofree float (%)volume (13 aug 2012)12,633.51.01002,276,300year end dec 31revenue (brlm)ebitda (brlm)ebitda margin (%)ebit (brlm)net income (brlm)eps (brl)% changep/e (x)ev/ebitda (x)dps (brl)dividend yield (%)2011a25,7062,70210.51,8231,3671.570.0%19.

11、711.90.581.92012e28,2542,5309.01,6331,3231.52-20.5%19.412.90.511.72013e30,6683,08510.12,1771,8782.16-19.4%13.610.80.531.82014e33,5154,29912.83,2882,4452.81-5.6%62.6bovespaexchange rate (brl/usd59,1232.03source: deutsche bank estimates, company data_deutsche bank securities inc.all prices a

12、re those current at the end of the previous trading session unless otherwise indicated. prices are sourcedfrom local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subjectcompanies. deutsche bank does and seeks to do business with companies covered in its

13、research reports. thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.investors should consider this report as only a single factor in making their investment decision. disclosures andanalyst certifications are located in appe

14、ndix 1. mica(p) 072/04/2012.00000414 august 2012foodbrf - brasil foods samodel updated:14 august 2012fiscal year end 31-dec2009201020112012e2013e2014erunning the numbersfinancial summarylatin americabrazilfoodbrf - brasil foods sadb eps (brl)reported eps (brl)dps (brl)bvps (brl)valuation metricspric

15、e/sales (x)0.270.400.3720.920.1815.650.91.571.570.5816.161.01.521.520.5116.860.5317.580.82.812.810.7617.580.8reuters: brfs.nholdprice (13 aug 12)target price52 week rangemarket cap (m)bloomberg: brfs ususd 14.53usd 15.00usd 13.70 - 21.46eurm 10,228p/e (db) (x)p/e (reported) (x)

16、p/bv (x)fcf yield (%)dividend yield (%)ev/salesev/ebitdaev/ebit72.348.51.016.3105.426.316.919.71.91.311.917.719.419.41.8nm20.013.615.310.52.61.07.710.1usdm 12,633income statement (brlm)company profilebrf - brasil foods sa

17、 is one of the largest latin americanfood companies and one of the worlds largest meatprocessors, exporting to over 110 countries. the companyresulted from the merger of sadia and perdigao. itsproduct mix has over 3,000 items (skus), including poultryand pork meats (both in natural and processed pro

18、ducts),as well as beef, margarine and dairy products. brasil foodsowns several industrial units throughout brazil (includingmeat plants, soybean crushing plants and dairy-processedsalesebitdaebitpre-tax profitnet incomecash flow (brlm)cash flow from operationsnet capexfree cash flow20,93799215374123

19、4767-6937422,6812,3211,4801,0018042,244-6981,54625,7062,7021,8231,5221,3671,183-1,1255728,2542,5301,6331,5761,3231,029-1,860-83030,6683,0852,1772,3571,8782,019-1,76225733,5154,2993,2883,1722,4452,973-1,7581,215and dessert product units).equity raised/(bought back)5,290price performance24201612divide

20、nds paidnet inc/(dec) in borrowingsother investing/financing cash flowsnet cash flowchange in working capitalbalance sheet (brlm)cash and cash equivalents-116-4,859-2851046554,244-153-1,853-441-901593,343-502392-551-604-6302,740-4401,391-466-345-8702,394-1,203-519-188-1,653-443741-657-56580-4187418a

21、ug 10feb 11aug 11feb 12property, plant & equipmentgoodwill8,87409,06709,798010,890011,991011,9910brf - brasil foods samargin trends16128bovespa (rebased)other assetstotal assetsdebtother liabilitiestotal liabilitiestotal shareholders equitynet debt15,26628,3849,0566,33215,38812,9964,81215,34227,7527

22、,2036,91214,11513,6373,86017,44629,9838,0547,82015,87414,1105,31418,83832,1239,4168,01917,43414,6897,02119,68632,4188,4928,59317,08515,3347,75119,68632,4188,4928,59317,08515,3347,751key company metrics009101112e13e14esales growth (%)db eps growth (%)-5.4na8.3243.613.370.59.9-3.28.541.99.330.2ebitda

23、margingrowth & profitability151050ebit margin201510payout ratio (%)ebitda margin (%)ebit margin (%)roe (%)net debt/equity (%)net interest cover (x)2.737.06.56.028.34.736.737.77.433.29.05.124.750.54.326.912.89.816.050.57.0-55dupont analysis-100ebit

24、margin (%)09101112e13e14ex asset turnover (x)0.91.01.0 x financial cost ratio (x)-solvency605040302010sales growth (lhs)roe (rhs)8642x tax and other effects (x)= roa (post tax) (%)x financial leverage (x)= roe (%)annual growth (%)x nta/share (avg) (x)= re

25、ported epsannual growth (%)-2.7na15.00.40na6.0126.515.30.922.19.963.415.91.5770.11.0-6.616.51.52-2.212.662.116.027.417.62.8130.200source: company data, deutsche bank estimates09101112e13e14enet debt/equity (lhs)jose yordan+1 212 250

26、-5528page 2net interest cover (rhs)deutsche bank securities inc.14 august 2012foodbrf - brasil foods sainvestment thesisoutlookwe rate brasil foods (formed in 2009 from the merger of sadia and perdigo, and nowone of the worlds largest animal protein companies) hold. the companys exportbusiness has r

27、ecovered somewhat from a weak brl (although revenue growth remainsbelow normalized rates), but the uncertainty in the domestic market introduced by therecent asset swap with marfrig (and the multi-year suspension of some of brfs brandsin accordance with the july 2011 antitrust ruling), combined with

28、 a significantdeterioration in the raw material cost outlook, should continue to put pressure onmargins in the short to medium term. we continue to like the companys long-termfundamentals, but in our view the stocks risk-reward profile is not yet attractive.valuationour price target assumes a justif

29、ied multiple of 8.2x applied to our estimated ebitda forthe 12-month period starting a year from now to derive our target. we derive this targetmultiple by first defining a justified multiple assuming no discounts, using a two-stagemodel that takes into account the companys expected free cash flow g

30、rowth (9.6% inthe first 10 years, and 3.2% in perpetuity), tax rate (of 23.3%), roic (10.2% average instage one and 13.6% in perpetuity) and wacc (8.9%). by applying these metrics wearrive at a justified multiple of 9.1x estimated ebitda for brfs. we then apply a 10%discount to this multiple (to rea

31、ch 8.2x) to account for the relatively high risksassociated with commodity food companies like brasil foods.risksdownside risks include stalling global demand, a strong brl, the erection of additionaltrade barriers by countries that currently trade with brazil, and any significant increasein feed co

32、sts. animal protein companies are also exposed to the risk of disease (avianflu, h1n1, bse), which can cause confidence crises among consumers and significantlycurtail demand or lead to costly product recalls). company-specific risks includeincreased competition from local or global players and pote

33、ntial liabilities from ongoinglitigation. upside risks include a stronger-than-expected recovery in global demand, aweak brl (which would lead to higher margins than we currently project, everythingelse equal) and lower trade barriers and feed costs.deutsche bank securities inc.page 314 august 2012f

34、oodbrf - brasil foods sa2q12 earnings reviewbrasil foods reported 2q12 results last night that were moderately below ourexpectations (and are summarized in figure 1 below). although net sales of r$6,842million was 1.3% above our forecast (due to stronger than anticipated volumes on theexport side),

35、unadjusted ebitda of r$515 was 5.3% lower than our already-bearishestimates (with margins missing by 52 basis points) as a result of 1) weaker-than-expected domestic sales (especially the foodservice segment that suffered from a weakeconomic environment) and 2) higher-than-expected feed costs (both

36、corn and soybeanmeal) and sg&a expenses stemming from the asset swap/ brand suspension (morespecifically, the 168 product launches as part of a strategy to replace the revenues lostin the swap transaction and related brand suspension). while some of the additionalcosts that led to the shortfall shou

37、ld prove to be temporary, we are particularlyconcerned about the outlook for feed costs over the next 12 months.figure 1: brasil foods1q12 earnings summaryebitda and eps fell short ofalready-low expectations2q12a2q12e2q12 a/e (%)2q11ayoy (%)operating datatotal sales volume (000 tons)domestic market

38、volumesexport market volumesdairy volumesfoodservice volumesavg. price/ton (r$)domestic market avg price/ton (r$)export market avg price/ton (r$)dairy avg price/ton (r$)foodservice avg price/ton (r$)total net salesdomestic market salesexport market salesdairy salesfoodservice sales1,621644641281554,

39、221.54,6094,3992,4986,4186,8432,9682,8207023531,558665573257634,3384,5364,6972,5706,1956,7583,0162,6936603894.1%-3.1%11.8%9.5%-12.5%-2.7%1.6%-6.3%-2.8%3.6%1.3%-1.6%4.7%6.4%-9.3%1,548640574273614,0654,3384,4442,3555,2956,2932,7762,5516433234.7%0.6%11.7%2.9%-9.8%3.8%6.3%-1.0%6.1%21.2%8.7%6.9%10.5%9.2%

40、9.3%profit & loss (r$ million)total net revenuegross profitgross margin (%)operating profit (ebit)ebit margin (%)unadj. ebitdaebitda margin (%)net incomenet margin (%)eps (r$/share)6,8421,48921.8%2754.0%5157.5%60.1%0.016,7581,48722.0%3114.6%5448.1%550.8%0.061.3%0.2%(24)bp-11.4%(57)bp-5.3%(52)bp-88.4

41、%(72)bp-88.5%6,2941,56124.8%4637.4%68810.9%4987.9%0.578.7%-4.6%(303)bp-40.5%(333)bp-25.2%(341)bp-98.7%(782)bp-98.7%balance sheet (r$ million)cash & equivalentsshort term debtlong term debtnet debt2,7483,4116,2126,8751,8543,7774,9796,90348.3%-9.7%24.8%-0.4%3,8342,5894,9503,704-28.3%31.8%25.5%85.6%pro

42、fit & loss (us$ million)net revenuegross profitgross margin (%)operating profit (ebit)ebit margin (%)ebitdaebitda margin (%)net incomenet margin (%)eps (us$/ads)3,40574121.8%1474.3%2667.8%60.2%$0.013,36374022.0%1554.6%2718.1%270.8%$0.031.3%0.2%(24)bp-5.2%(29)bp-1.8%(24)bp-79.6%(65)bp-79.7%4,02699824

43、.8%2967.4%44010.9%3197.9%$0.37-15.4%-25.8%(303)bp-50.5%(305)bp-39.6%(313)bp-98.2%(775)bp-98.2%source: deutsche bank estimates and company reportspage 4deutsche bank securities inc.jan-10jan-05jun-05jun-10jul-02jul-07feb-07feb-12jul-12dec-02dec-07aug-09aug-04sep-06may-03may-08nov-05sep-11oct-03oct-08

44、mar-09mar-04apr-06nov-10apr-11jan-05jun-05jan-10jun-10jul-02jul-07aug-04sep-06dec-02feb-07aug-09sep-11dec-07may-03nov-05may-08nov-10feb-12oct-03oct-08apr-06mar-04mar-09apr-11jul-1214 august 2012foodbrf - brasil foods saestimate revision reflectschallenging cost environmentbelow in figure 2, we summa

45、rize the present estimate changes for brasil foods. whilewe essentially left our top-line projections unchanged, we sharply lowered our marginassumptions for 2012 and 2013, and to a lesser extent for 2014.figure 2: brf brasil foods summary of estimate changesbrf - brasil foods sa2012e old2012e new %

46、 chg.2013e old2013e new % chg.2014e old2014e new % chg.revenueebitebitda28,0642,2093,10628,2541,6332,5301%-26%-19%30,8492,9803,87530,6682,1773,085-1%-27%-20%34,0153,7314,73033,5153,2884,299-1%-12%-9%ebitda mg11.1%9.0% -212 b.p.12.6%10.1% -250 b.p.13.9%12.8% -108 b.p.net interesttaxesnet profiteps (e

47、xcl gw amort)capital expendituresnet cash/(debt)revenue, us$ebit, us$ebitda, us$adj ebitda, us$net interest, us$taxes, us$net profit, us$epads us$capex, us$net cash/(debt) us$-2733031,6651.91-1,886-6,29315,227.11,198.41,685.5451.3-148.0164.3903.11.04-1,023.1-3,312.3-3202391,3231.52-1,860-7,02114,597

48、.1843.51,306.9438.9-165.5123.4683.80.79-960.7-3,600.717%-21%-20%-20%-1%12%-4%-30%-22%-3%12%-25%-24%-24%-6%9%-4186102,3292.68-1,796-6,50116,452.81,589.32,066.7531.7-222.9325.41,242.31.43-957.8-3,514.0-5124651,8782.16-1,762-7,75115,931.21,131.11,602.8517.6-266.0241.5975.61.12-915.2-4,079.323%nm-19%-19

49、%-2%19%-3%-29%-22%-3%19%0%-21%-21%-4%16%-3787562,5912.98-1,758-6,50118,141.21,990.12,522.6531.7-201.8403.41,381.61.59-937.8-3,514.0-4677132,4452.81-1,758-7,75117,410.31,708.02,233.5517.6-242.5370.41,270.11.46-913.4-4,079.323%nm-6%-6%0%19%-4%-14%-11%-3%20%0%-8%-8%-3%16%ads price target (12-month)18.0

50、015.00-17%fx assumption (eop)1.901.95-3%1.851.90-3%1.951.950%source: deutsche bank estimatesas deteriorating drought conditions in the us and russia wreak havoc on the globalagricultural complex, grain prices have been soaring in recent weeks. despite a strongsafrinha (brazils second crop), corn in

51、brazil rallied 30% since the end of june, whilesoybean meal (which has been rising all year following a disappointing south americanharvest) is now trading at all-time highs, more than doubling in price since year to date.higher grain and sg&a costsshould keep margins underpressure for the rest of 2

52、012figure 3: brazil corn (r$/60 kg sack)35302520figure 4: brazil soybean meal (r$/ton)1600140012001000800156001050source: bloomberg finance lpdeutsche bank securities inc.4002000source: bloomberg finance lppage 5jan febjunaugmaysepjulnovdecmaraproctseptnovfebjanaprjunjulmayoctdecaugmar14 august 2012

53、foodbrf - brasil foods saas a result, we calculate that on a spot basis, feed costs (which are approximately 2/3corn and 1/3 soybean meal) for brazils pork and poultry producers are up 38% since thestart of this year (see figure 5 below).figure 5: estimated dressed equivalent feed costs (r$/kg)r$ 1.

54、60r$ 1.50r$ 1.40r$ 1.30r$ 1.20r$ 1.10r$ 1.00r$ 0.90r$ 0.80janfebmaraprmayjunjulaugsepoctnovdec20082009201020112012source: deutsche bank estimates and bloomberg finance lpas feed is one the largest cost components for brasil foods (composing 25-30% ofcogs on a consolidated basis), the current rally i

55、n grain prices should put downwardpressure on gross margins at least through the end of this year and into the first half of2013 (especially if the upcoming brazilian soybean harvest manages to disappoint). as aresult, we now forecast full-year gross margin contraction of 267bps this year and havere

56、duced our expectations for next to only 50bps of margin accretion.meanwhile, the pricing scenario for brazilian poultry producers (figures 5-6) has beenequally volatile, with domestic wholesale chicken prices swinging from a year-on-yeardecline in 1q12 to a 2q12 recovery following several months of

57、coordinated industry-wide production cuts. on the other hand, brazilian poultry export prices continue tolanguish in light of tough comparisons and soft export demand (as key markets likejapan and the middle east are still trying to wind down excess inventory levels).figure 6: brazilian wholesale ch

58、icken prices (r$/kg)r$ 3.25r$ 3.00r$ 2.75r$ 2.50r$ 2.25r$ 2.00r$ 1.75figure 7: brazilian chicken export prices (r$/ton)$2,200$2,000$1,800$1,600$1,400$1,200$1,0002008201120092012201020082011200920122010source: iea (instituto de economia agrcola)source: secex/mdicwhile we expect retail prices to conti

59、nue trending upward for some time (as producerspass on increased feed costs), we have revised down our expectations for volumes aswe anticipate consumers will trade up to beef as the relative value of poultry and porkproducts (versus the more inexpensive beef cuts) narrows (see figure 8 below).page

60、6deutsche bank securities inc.1)14 august 2012foodbrf - brasil foods safigure 8: wholesale chicken spread chicken vs. “inexpensive cuts” of beef (r$/kg)0.520012002200320042005200620072008200920102011relative pricelt avg+1 st dev-1 st devsource: iea (instituto de economia a