Fixed Income Analysis /

BRF: Upgrade to Hold on strong Q2 results, operational and financial improvements

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    28 August 2019
    Published by

    We upgrade our recommendation to Hold from Sell on the BRF, S.A. (BRFSBZ) family of bonds, based on the company’s strong Q2 19 results, and overall operational and financial improvements. The company’s bonds look fairly priced – continued improvements will substantially limit any downside, but  given that they are among the most expensive credit in Brazil’s animal protein and foods sector, there is also very limited upside.  

    BRF saw a turnaround in Q2 with substantial improvements in deleveraging, increase in margins, overall growth and profitability. Increases in volumes and prices resulted in strong revenue generation that, coupled with strict cost controls, allowed the company to record a meaningful increase in EBITDA.

    Net operating revenues in Q2 19 were US$2.13bn, compared with US$1.80bn a year ago. Adjusted EBITDA was US$394.5mn, compared with US$90.8mn in Q2 18. The increase was mainly due to a combination of higher volumes sold in the company’s export markets – coupled with increases in average prices across its markets – and a one-time positive accounting effect. The latter came from a favourable ruling on the exclusion of ICMS from the PIS/COFINS calculation basis that added cBRL690mn to the EBITDA line, albeit partially offset by a one-time accounting charge of cBRL360mn from the negative impact of ICMS payments on staple basket products.

    For the last twelve months (LTM) to end-Q2 19, net operating revenues came in at US$8.81bn versus US$8.39bn at end-18 and US$10.48bn in 2017, highlighting the fact that the company still has room to grow to reach the 2017 sales level. Adjusted EBITDA in LTM to end-Q2 19 was US$966.7mn (versus US$646.3mn at end-18 and US$894.9mn in 2017), which shows the company’s efforts to reduce costs and improve margins.

    On the balance sheet, BRF reported cash and equivalents of cUS$1.51bn, versus US$1.39bn at end-18 and US$1.59bn a year ago. Gross total debt was US$5.43bn from US$5.78bn in 2018 and US$5.99bn a year ago. As a result, leverage came down in Q2 19 to 5.6x, from 8.9x in 2018 and 9.3x in Q2 18, mainly as a result of the much-improved adjusted EBITDA.

    We upgrade our recommendation on the BRF bonds to Hold. This is based on our view that continued improvements will substantially limit any downside, but since upside is limited as well at current levels – given that the bonds are the lowest-yielding in the sector – the BRF bonds are fairly priced.