JBS (JBSS3) and Marfrig (MRFG3) have price target cut by Bradesco BBI, cautious about margin squeeze in the US

In a report, signed by analysts Leandro Fontanesi and Victor Romano, Bradesco BBI highlighted its concern with the compression of the beef margin in the United States, which has been one of the main drivers of the shares of JBS (JBSS3) and Marfrig (MRFG3) .

With the decrease in margins in the US (below the 5-year average), JBS shares fell by 18.65% and Marfrig had a decline of 40.80% in the year, a performance inferior to the Ibovespa, which had a devaluation of 7.89 % in the same period.

According to the report, this is due to livestock costs rising as the natural cycle and the impact of drought reduce the availability of animals for slaughter and fewer Covid-19 related disruptions contribute to the normalization of beef prices compared to previous years, where the industry has had temporary shutdowns.

As a result, the bank’s research team reduced its EBITDA margin projection (earnings before interest, taxes, depreciation and amortization, EBITDA, on net revenue) for US beef in 2023 to 7% for JBS against a consensus of 8%, and for Marfrig to 8% vs. 9% consensus because: 1) risk of recession for beef consumption, while cheaper proteins like chicken may do better and 2) USDA (United States Department of Agriculture) predicts that cattle costs could increase another 9.4% in 2023 as animal availability declines further.

As a result of these changes, BBI reduced JBS’s target price by 5%, from R$36 to R$34 (13% potential compared to Friday’s closing), and of Marfrig by 20%, from R$22 to BRL 18 (still an upside of 46% compared to Friday’s closing), maintaining a neutral recommendation.

For analysts, JBS’ strategy of carrying out share buybacks and paying higher dividends in recent years was well received by investors. However, they reduced estimates to reflect their more conservative stance on US beef margins, despite better results for other segments such as chicken, resulting in 2023 consolidated Ebitda being 15% below consensus.

BBI notes that the US beef segment accounts for 50-60% of JBS’s Ebitda and is historically the main driver of the action. Additionally, given challenging market conditions, we are less clear on the timing of its US operations listing, a long-awaited positive trigger for equities.

The shares trade at an expected 2023 EV/Ebitda multiple of 4.7 times (5 times for 2024), which is broadly in line with the historical average, which analysts think is fair due to risk/reward (previous target price was BRL 36.00).

Marfrig has performed well in recent years, benefiting from a positive cycle for American beef, which has allowed the company to pay dividends and, more recently, allocate capital to the processed foods company BRF (BRFS3). However, Marfrig’s 2023 Ebitda is 16% below consensus as BBI is more cautious about US beef margins, a segment that accounts for 80-90% of its total Ebitda.

Marfrig will start consolidating BRF (now holds 33%) as of 2Q22, and analysts project that the consolidated net debt/Ebitda multiple will fall to 2.5 times in 2023, from 2.8 times in 2022, as they project a robust growth in BRF’s Ebitda despite compressed margins for Marfrig’s US beef segment.

Thus, BBI believes that consolidated leverage will likely be below the covenant of 4.5 times net debt over Ebitda. The stock is trading at a 2023 EV/Ebitda of 4.5x (ex-BRF).

Purchase opportunity? XP Strategist Reveals 6 Cheap Stocks to Buy Today. Watch here.