Just the Numbers for Cosan

Last month Brazil’s sugar and ethanol producer Cosan Ltd. (CZZ:  NYSE) released financial results for the quarter ending March 2020.  The company is under new leadership following the retirement of long-time chief executive officer Marcos Lutz.  Cosan is now under the direction of Luis Henrique Guimarães, who had previously been running Raizen, a joint venture between Cosan and Royal Dutch Shell.  Guimarães probably had no idea he had signed up for the job just as nature was about to hand businesses worldwide the challenge of a century.  Within just weeks Cosan would be grappling with a virus pandemic accompanied by government mandated business shutdown, quarantined employees and a collapse in oil prices.  Financial results from the March quarter provide investors with the first chance to see how the coronavirus pandemic is impacting the company.

Sugar Cane Harvest

Cosan reported R$4.9 billion in total sales in the March 2020 quarter, 4.3% higher than the same period in the prior year.  Distribution and marketing of fuels at Riazen Combustiveis and the ethanol and sugar products made by Raisen Energia were the largest contributors to the top line.  Beginning in the month of March 2020, as business shutdown orders idled all but essential services, demand for transport fuel fell off dramatically.  Fuel distribution revenue was not fully made up by increases in gas sales to residential customers staying home under those same stay-at-home policies.  Sharply lower prices for fuels also impacted revenue as well as inventory values.  While the sugar cane crop had closed out successfully, on a slightly different season the soybean crop faced operational issues.

It was at the operating profit level that the ravages of shutdown and quarantine could be observed in Cosan’s first quarter.  True enough Raizen Energia experienced the usual strong seasonal quarter at the end of the sugar cane crop, reporting a 67% increase in cash earnings to R$1.5 billion.  With demand for transport gas compromised by the shutdown, ethanol sales were down 12% year-over-year.  Overall Raizen Combustiveis captured a cash earnings profit of 2.9% of net sales in the quarter.  This compares to an 11.0% cash earnings profit margin for this segment in the full year 2019. 

By contrast Raizen Energia is well hedged with the sugar market as an alternative channel for its sugar cane crop.  With improved selling prices, sugar sales in the quarter were up 35% year-over-year.  The segment scored a cash earnings profit of 21.4% in the quarter compared to 5.0% in the full year 2019.

In the March 2020 quarter Cosan generated R$2.9 billion in operating cash flow.  After R$1.4 billion in capital expenditures, free cash flow was R$1.5 billion.  However, with the uncertainties of the coronavirus pandemic swirling around his team, in March 2020 Guimarães went to the bank for R$7.0 billion in added credit lines.  Cosan ended the quarter with R$36.2 billion in gross debt compared to R$35.8 billion at the end of December 2019.  Shareholders’ equity totaled R$16 billion at the end of March 2020, representing a 2.26 debt-to-equity ratio.  Cosan may be in a position to tolerate higher leverage levels given that cash resources compose 10% of the company’s total assets.

Guimarães may not have anticipated the health catastrophe that has descended upon the entire world, but thus far dogged execution and a mix of products seem to have mitigated the worst of the pandemic economics.  Nonetheless, the one analyst who publishes an earnings estimate for Cosan has trimmed expectation for the full year 2020 to US$4.16 compared to US$7.44 posted up prior to the pandemic. 

CZZ is trading at 10.7 times trailing earnings and 3.8 times the consensus estimate.  If that forward earnings multiple is not enticing enough note a forward dividend yield of 0.7%.  The shares have recovered from the late March route experienced by nearly all U.S.-listed stocks.  The shares may even now be a bit overbought given that Brazil has not yet got the coronavirus under control in Cosan’s home turf.  What is more, one of Cosan’s most important customers,  the U.S., appears to be headed backward and is far from clear of the pandemic conditions.  Guimarães may need that credit line cushion yet.       

 

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.