Sao Martinho Poised to Lead Sugarmakers Profit: Corporate Brazil

Sao Martinho SA, owner of the world’s largest cane-processing plant, is forecast to post the biggest profit gain among major sugar makers this year as it boosts productivity to process a bumper crop.

Earnings will more than double to 1.88 reais a share in 2013, the best increase among the top five producers by market value worldwide, according to the median of analyst estimates compiled by Bloomberg. Cosan SA Industria & Comercio’s earnings are set to rise 78 percent, the second-biggest increase.

The planned takeover of the Usina Santa Cruz mill this year will help Sao Martinho, the industry’s most cost-efficient maker, to reduce costs and bolster profit, Giovana Araujo, an analyst at Itau Unibanco Holding SA said. Brazil’s Center South, the world’s largest producing region, is expected by industry leader Cosan to reap a record 580 million metric tons of cane and make 36 million tons of the sweetener from the harvest that starts in April.

“They will gain control over a state-of-the art facility that is next door to Sao Martinho’s main mill and should help dilute costs,” Araujo, who rates the stock the equivalent of buy, said in a telephone interview from Sao Paulo. “It’s a sweet deal because it’s almost a non-cash deal.”

Pradopolis-based Sao Martinho, Brazil’s biggest sugar and ethanol maker by market value after Cosan, rose 0.5 percent to 28.93 reais at 4:44 p.m. in Sao Paulo. Shares have soared 68 percent in the past 12 months, while Cosan rose 57 percent and Tereos Internacional SA gained 15 percent. The shares trade at 27.2 times estimated 2013 earnings, compared with 11.9 for Cosan and 13.3 for Tereos, according to data compiled by Bloomberg.

Sugar is forecast to rise to 20.6 cents per pound at the end of this year, from 18.9 cents yesterday, trading in forward contracts show.

‘Smart Move’

The cost to produce sweetener and ethanol from sugar cane represented 47 percent of sales at Sao Martinho in the six months ended Sept. 30, the best ratio among Brazil’s major producers. That compares with 79 percent for Cosan’s sugar unit and 84 percent for Tereos, both based in Sao Paulo.

“They are the benchmark in terms of industrial efficiency,” Henrique Koch, an analyst at Banco do Brasil SA, said in a telephone interview Jan. 7. “They are adding capacity and at the same time securing cheap cane supplies. It’s a smart move.”

An official at Sao Martinho, who declined to be named because of internal policy, had no comment.

Sao Martinho plans to expand crushing capacity by a third to 19.5 million tons in two years after it takes control of the Santa Cruz mill, investor relations manager Felipe Vicchiato said last month. Under the plan, Sao Martinho will boost its stake in the mill to 87.5 percent from 32.2 percent and pay with the 18 percent it owns in farmland company Agropecuaria Boa Vista SA. Separately, Sao Martinho is investing $120 million to add processing at existing plants.

Weather Risk

Last month, the company bought farmland for 199.6 million reais from Amsterdam-based Louis Dreyfus Holding BV. Brazilian sugar-cane prices almost doubled in four years amid bad weather that reduced crops, according to the Consecana pricing system that is used to pay growers. Sugar fell 16 percent in 2012.

The biggest risk for Sao Martinho’s profitability would be harvesting delays in the event of excess rain or damage to crops if there’s a dry spell, said William Alves, an analyst at XP Investimentos who covers the stock.

“I like the company, but in the end when you talk about cane, weather conditions play a key role,” Alves said in a Jan. 10 telephone interview from Rio de Janeiro. “Who knows what will happen if the weather doesn’t help?”

Sugar Prices

Increasing demand for ethanol, which South American millers make from sugar cane, will support prices for the sweetener even as Brazil reaps a record crop, Itau’s Araujo said. The price of sugar will likely fall to an average of 19 cents a pound in New York in the crop year that starts April 1, from about 20 cents in the current crop year.

Raw sugar for March delivery dropped 1.4 percent to 18.9 cents a pound on ICE Futures U.S. in New York yesterday.

Sugar accounts for about 67 percent of Sao Martinho’s sales. Brazil produces about 45 percent of global sugar exports and is the biggest ethanol producer after the U.S., where the biofuel is made from corn.

“A record cane crop in Brazil is not necessarily bad news for sugar, as prices are expected to remain at profitable levels,” Araujo said. “The scenario is good for most mills, and the most efficient, like Sao Martinho, are poised to gain the most.”

Before it's here, it's on the Bloomberg Terminal.