Cosan Shifting to Gas Raises Stock Forecasts: Corporate Brazil

Cosan Shifting to Gas Raises Stock Forecasts: Corporate Brazil
Profit at the fuel-distribution unit has climbed since Cosan SA Industria & Comercio started branching out from sugar-cane crushing with its 2008 purchase of Exxon Mobil Corp.’s Brazilian unit. Photographer: Nelson Almeida/AFP via Getty Images

Cosan SA Industria & Comercio, co-owner of the world’s biggest sugar-cane processor, is forecast by analysts to extend a rally after expanding its fuel-distribution network to cushion earnings from food-price swings.

Analysts have raised Cosan’s 12-month share-price estimate by an average 8.8 percent since mid-February, the most among biofuel companies rated by at least three analysts and with annual revenue above $50 million, data compiled by Bloomberg show. The average price estimate for U.S. ethanol producer Green Plains Renewable Energy Inc. was cut by 51 percent in the period, more than any other company, the data show.

Cosan, whose 43 percent gain in the past year before today is four times the increase for Brazil’s benchmark Bovespa index, is shifting away from sugar and ethanol in favor of distribution as harvesting delays contributed to its first loss in three years last quarter. The company in May agreed to buy control of Cia. de Gas de Sao Paulo, Brazil’s biggest natural-gas distributor, and is bidding for part of railway operator ALL America Latina Logistica SA.

“They are the most extreme example of diversification among sugar-cane processors,” Pedro Herrera, an analyst at HSBC Holdings Plc. who rates the stock the equivalent of buy, said in a telephone interview from New York. “Before the diversification process unfolded, shares oscillated with sugar prices. Now they have more stable earnings and it makes it easier for investors to perceive value in the company.”

Target Price

Sao Paulo-based Cosan rose 0.3 percent to 31.59 reais at 12:22 p.m. in Sao Paulo. The stock is expected to rise to 36.92 reais, according to the median 12-month target price of nine analysts. Of a total of 13 analysts with a rating on the stock, nine recommend buying, three say hold and one has a sell rating.

Profit at the fuel-distribution unit has climbed since Cosan started branching out from sugar-cane crushing with its 2008 purchase of Exxon Mobil Corp.’s Brazilian unit. In 2010, Cosan agreed to combine some assets including service stations and sugar and ethanol mills with Royal Dutch Shell Plc’s Brazilian unit to create the world’s biggest cane processor.

The distribution unit’s earnings before interest, taxes, depreciation and amortization more than doubled from a year earlier to 367.4 million reais ($182 million) in the fiscal first quarter ended June 30, while the sugar-cane crushing business posted a drop in Ebitda of 21 percent to 323.5 million reais. Raw sugar prices have declined 26 percent in the past year as global output is expected to exceed demand for a third straight year, Morgan Stanley said in an Aug. 3 e-mailed report.

‘Diversification’ Benefits

“The fiscal first quarter was a good example of the benefits of diversification,” Cosan’s Investor Relations Manager Guilherme Machado said in an Aug. 9 telephone interview from Sao Paulo. “Strong results in the fuel distribution unit offset the underperformance of the sugar and ethanol business. Diversification is generating value for our shareholders.”

Cosan traded at 43.7 times reported earnings, the most expensive level among major biofuel producers after Leipzig-based Verbio AG, according to data compiled by Bloomberg.

Cosan agreed in May to pay $1.8 billion for a controlling stake in the fuel distributor known as Comgas. The company also agreed to pay $100 million for Exxon’s Comma Oil and Chemicals in March and $522.8 million for a stake in ALL in February.

Exxon, Shell

“They have managed to do a very good job by buying Exxon distribution assets and later by merging them with Shell’s,” Auro Rozenbaum, an analyst with Banco Bradesco SA, said by phone from Sao Paulo. “The benefits of ALL are clear, as Cosan is already in the logistics business.”

While Cosan’s strategy will make the company less vulnerable to swings in sugar and ethanol prices, there’s concern the company’s recent acquisitions may not provide “significant” cost-cutting gains for its main business, said Henrique Koch, an analyst with Banco do Brasil SA.

“There is always the risk, although minimum from my point of view, that the company goes over the top with the diversification process,” Koch, who rates the stock the equivalent to buy, said in a telephone interview from Sao Paulo.

After buying eight companies in the past four years, Cosan has no immediate plans for further acquisitions, Chief Executive Officer Marcos Lutz said in an Aug. 9 conference call with journalists.

“Our portfolio is complete now,” Lutz said. “Now we will focus on profitability and synergy gains.”

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