Cosan Catching Up With Ultrapar After Gas Plan

Cosan Catching Up With Ultrapar After Gas Plan
Sugarcane is unloaded at the Cosan SA Industria e Comercio facility in Piracicaba, Brazil. Photographer: JC Franca/Bloomberg

Cosan SA Industria & Comercio, the sugar producer expanding into gas distribution, says a $1.8 billion acquisition is boosting its value closer to that of its biggest Brazilian peer.

The purchase of Cia. de Gas de Sao Paulo, Brazil’s largest natural-gas distributor, will boost earnings and help narrow the gap between the valuations of Cosan and Ultrapar Participacoes SA, said Chief Financial Officer Marcelo Martins. Sao Paulo-based Cosan, the co-owner of the world’s largest sugar-cane processor, trades at a 40 percent discount to Ultrapar, based on estimated 2013 price-to-earnings ratio, according to a Banco Itau BBA SA research report this month.

“Investors are underestimating the potential gains from the acquisition of Comgas,” Martins told reporters at the opening of a Cosan terminal yesterday in Itirapina, Brazil. “The multiples relative to Ultrapar will narrow.”

Cosan, whose 40 percent rally this year is more than 10 times the gain for Brazil’s benchmark Bovespa index, is diversifying into fuel distribution and logistics to create an integrated energy company. Sugar and ethanol, Cosan’s core business until 2008, will account for 22 percent of earnings before interest, taxes, depreciation and appreciation in 2013, according to Itau BBA estimates.

Cosan trades at about 12 times its estimated 2013 earnings, while Sao Paulo-based Ultrapar, whose shares gained 30 percent this year before today, has a ratio of 20, according to Itau BBA. Cosan has a market value of 15.4 billion reais ($7.6 billion), compared with Ultrapar’s 22.6 billion reais.

Cosan fell 1.8 percent to 37.13 reais in Sao Paulo today as Ultrapar gained 1.4 percent to 42.15 reais. The Bovespa index fell 1.7 percent.

‘Building a Reputation’

An official at Ultrapar, who can’t be identified because of company policy, declined to comment.

Ultrapar’s growth opportunities are more limited than Cosan’s and Ultrapar is fairly priced, said Andre Facury, an analyst with Perfin Investimentos, which manages 1.7 billion reais in Sao Paulo, including Cosan. Cosan will also benefit once it consolidates its two classes of stock into one, he said.

“When they resolve this corporate governance issue, the perception that foreign investors have of the company will change,” Facury said in a telephone interview.


While investors normally see Cosan and Ultrapar as peers, the companies are very different in nature and can’t be compared with each other, said Auro Rozenbaum, an analyst at Banco Bradesco SA who covers Brazilian energy companies.

Ultrapar is a holding company with businesses in chemicals production, fuel distribution and liquid storage in port terminals. The company reported second-quarter earnings before interest, taxes, depreciation and amortization of 579 million reais, of which 375 million reais came from Ipiranga, its service station division.

“Investors pay a premium for Ultrapar because the company has shown resilience even during the worst economic crisis -- it’s a defensive stock,” Rozenbaum said in a telephone interview from Sao Paulo. “Cosan, on the other hand, is building a reputation. They are doing a good job, but it is still a story that is being written.”

Exxon Purchase

Of the 16 analysts who rate Cosan, 11 say buy. Ultrapar has three buy ratings, five holds and 2 sell recommendations.

Profit at Cosan, which used to swing with sugar and ethanol prices, has become more stable since it expanded into fuel distribution by buying Exxon Mobil Corp.’s Brazilian unit in 2008, Martins said. 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 country’s third-largest fuel distributor after Petroleo Brasileiro SA and Ultrapar.

The fuel-distribution’s unit’s ebitda more than doubled from a year earlier to 367.4 million reais 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.

“Cosan’s good performance year to date reflects, to some extent, market recognition of the similarities between its story and Ultrapar’s,” Itau BBA analysts led by Paula Kovarsky said in an Oct. 11 report. “The company has more to capture on a relative basis.”

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