Sao Martinho sees aid to cane mills from weak real

Sao Martinho underlined the extent to which cane crushing groups are favouring production of sugar rather than ethanol as it revealed a jump in earnings, supported by a ramp up in volumes and a weaker Brazilian real.

The sugar group, based in Brazil's important Centre South district, revealed that it had slashed to 47% the proportion of cane going to make sugar in the April-to-June quarter, from 56% the year before, with the balance being turned into ethanol.

The switch meant that, while Sao Martinho lifted its cane crushing volumes by 90% in the quarter, sugar output rose by a more moderate 67%.

Volumes of ethanol showed far faster growth, particularly of the anhydrous type which is mixed into gasoline, and whose output has been encouraged by a lift to 25%, from 20%, in Brazil's mandated blend rate.

Production of anhydrous ethanol rose 161% to 132,000 cubic metres. Sales soared 159% to R$162.5m by value, and 145% to 123,300 cubic metres by volume.

Currency impact

The focus on anhydrous ethanol reflected in part a knock-on effect from a weak Brazilian real, in boosting the competitiveness of the country's exports.

"This type of ethanol offers more resilient pricing in the domestic market as well as opportunities for exports, especially in light of the depreciation in the Brazilian real against the US dollar in the period" Sao Martinho said.

The real during the quarter hit its weakest rate against the US dollar in four years, and has continued to soften since.

In sugar too, the weaker real played a role in ensuring a 57% rise to R$229.1m in revenues, from an 89% rise in sales volumes.

"Despite the drop in sugar prices, the depreciation in the Brazilian real served to mitigate the decline in prices in local currency," the group said.

Sao Martinho has limited its own exposure to weak sugar prices by fixing ahead 91% of its sugar volumes, outside an agreement with Consecana, at an average price of 20.27 cents a pound.

Market reaction

The comments came as the group unveiled a jump in earnings to R$34.7m for the quarter, the first of its financial year, from $2.38m a year before.

Revenues rose 76% to R$407.3m.

The results were termed "strong" by ItauBBA, but the bank restated a "market perform" rating on Sao Martinho shares, saying they were trading "close to historical levels" as valued by enterprise value per tonne of cane.

"At this point, we don't see any fundamental reason that would justify trading multiples above their historical levels," the group said.

Bradesco restated an "outperform" rating on the stock, on which it has a target price of R$36.4.

Sao Martinho shares added 1.2% to R$24.99 in morning deals in Sao Paulo.

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