Fixed Income Analysis /

BRF: Reiterate Sell on mixed Q1 results, valuation and the need for improvements

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    13 May 2019
    Published by

    We reiterate our Sell recommendation on the BRF family of bonds. We see the bonds trading tight to levels that we consider fair and also tight relative to BRF’s main Brazilian protein (and foods) peers. In addition, the company has continued to report weak quarterly results and will have to demonstrate, in our view, substantial operational and financial improvements to justify the bonds’ current prices.

    Sales in Q1 19 were US$1.954bn, slightly higher than the (revised in light of new accounting laws) US$1.867bn of Q1 18; However, higher costs hit the company’s operating profit, which was US$41.96mn in Q1 19, down from US$69.05mn a year ago.

    EBITDA also showed a slight improvement, reaching US$192.0mn in Q1 19, compared with US$179.8mn a year ago; Similarly, adjusted EBITDA compared well with the previous year, reaching US$198.6mn in Q1 19 compared with US$181.9mn a year ago.

    However, on the balance sheet side, cash fell to US$1.146bn (plus US$150.24mn in financial investments). This figure compares poorly with cash of US$1.256bn and financial investments of US$130.86mn at end-18, and cash of US$1.816bn and financial investments of US$68.91mn at end- Q1 18.

    On a positive note, total debt decreased slightly in Q1 19, reaching US$5.51bn, compared with US$5.72bn in 2018. This resulted in a slightly better debt/adjusted EBITDA ratio of 8.2x in Q1 19, from 8.7x in 2018 and 9.5x in Q1 18. However, our view is that the metric remains too high to be sustainable, and that, to lower it, BRF will have to make substantial operational and financial improvements.

    To this point, management stated during its conference call of 10 May that there is a plan for such improvements, but that it could be two or three years before they are fully reflected in the results.

    In summary, we believe that the trading levels and yields of the BRF family of bonds do not reflect the challenges that lie ahead for the company, in terms of increasing volumes and prices, maintaining market share, increasing EBITDA and lowering debt. Compared with its main Brazilian protein (and foods) peers, we continue to regard BRF as expensive and, therefore, reiterate our Sell recommendation (on both fundamentals and relative value).