NEW YORK — Slow farmer selling, particularly in Brazil and Argentina, is expected to weigh on third-quarter results at Bunge Ltd., according to a Sept. 21 research report from Credit Suisse. Despite the forecast for challenges in the third quarter, Credit Suisse believes the business is poised for a quick turnaround in the fourth quarter.
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| Robert Moskow, research analyst with Credit Suisse |
“We are lowering our 2016 e.p.s. to account for a weak 3Q and modestly lowering 2017, but we believe the risk-reward proposition for the stock is highly favorable,” Robert Moskow, research analyst with Credit Suisse, wrote in the report. “In the near-term, Brazilian and Argentinian farmers are holding back on selling their crops because they are unhappy with the falling prices and because the Brazilian currency strengthened. Falling soybean meal prices have hurt soybean crush margins and have caused customers to buy on the spot markets rather than buy forward. In addition, China remains challenging, Brazilian edible oils remain under pressure, and the mark-to-market benefit Bunge enjoyed in 2Q through crush margin hedges will reverse in 3Q.”
Mr. Moskow said the ratings agency now expects e.p.s. for 2016 of $5.16, down from the previous estimate of $5.41. For fiscal 2017 Bunge’s e.p.s. was lowered to $6.20 from $6.38. The company will release its third-quarter financials at the end of October.
Despite lowering its forecasts for e.p.s., Credit Suisse is positive on Bunge’s longer-term outlook, Mr. Moskow said, noting that the White Plains, N.Y.-based company remains “poised for a quick turnaround in 4Q '16 and set up for strong 2017.”
“Crush margins are likely to rebound as the U.S. and Brazil produce strong crops, U.S. exports increase, and the processing industry maintains capacity discipline,” he said. “The glut of crop supplies and the probability of tighter credit conditions should spur more farmer selling as well. On top of that, the business is poised to grow EBIT by at least $200 million in 2017 and $6.20 of e.p.s. through acquisitions, sugar market improvements (which Bunge can hedge), and cost savings.”
Another area that is expected to benefit Bunge’s long-term growth is the company’s emphasis on expanding its presence in specialty oils. Soren Schroder, chief executive officer of Bunge, has expressed a desire to significantly expand the company’s business-to-business capabilities in specialty oils to meet the needs of food processors that are reformulating products, and the company already has a sizeable position in the United States with high-oleic oils and is a leading producer of softseed oil in Europe, Mr. Moskow said.
But to get into the laboratories of food processors the company will need to acquire and develop stronger technological capabilities and applications, Mr. Moskow said. He said the company will need to acquire more companies like Walter Rau Neusser, a German supplier of mid-specialty oils and fats that was acquired earlier this spring, if it hopes to achieve its long-term objective of making its value-added businesses a 35% share of its portfolio, up from 20% currently.
