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JBS shares surge as boss sees end to debt-fuelled buying spree

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Shares in JBS surged, as the chief executive promised an end to the company's debt-fuelled expansion, and teased share and debt buybacks to come.

The Brazilian beef company claimed the position of the world's biggest meat producer through a series of overseas acquisitions, leaving it with hefty debts on its books.

Chief executive Wesley Batista told investors that the company's strategy for 2015 was "very clear".

"It's going to be organic growth and why organic growth? Very simple, we don't see where we can invest," Mr Batista said.

Opportunities inside the company

Mr Batista said that investments within JBS were delivering better returns than any acquisitions he could see.

"So, we see the clear the best return for our shareholders is investing inside of our company," he said, suggesting that share and debt buybacks could be on the cards.

Mr Batista also struck an upbeat note for the company's US beef business, which reported disappointing earnings in a set of company reports released overnight.

Hedging costs mount

JBS reported a loss for the three months to December 31, due primarily to the cost of its currency hedging operations.

JBS has pursued a strategy of hedging its dollar-denominated debts, to prevent depreciation of the real from swelling its already-hefty liabilities.

The strategy has borne fruit in the past, as the plummeting Brazilian currency has boosted real-denominated returns from its overseas operations, while hedging counteracts

But the real held fairly steady against the dollar in the last three months of the year, staying above the all-time lows plumbed in September, leaving JBS forking over for the cost of unexercised currency options.

Disappointing earnings, sales

JBS took a R$1.34bn hit from its currency hedging operation, pushing the company into a net loss of 271.5m , compared with a net income of 618.8m the same time last year.

The results came in below analyst expectations, which called for a net profit of 135.6m reis.

Sales were also a little behind expectations, although at R$47.2bn, they were the highest JBS has ever reported.

'Better days' for beef

And after a couple of big acquisitions, of Cargill's pork unit and Moy park, the company's leverage increased, as the debt to earnings before interest, taxation, depreciation and amortization (Ebitda) ration hit 3.2, from 1.9 last year.

Earnings for JBS Brazilian beef segment, and its US pork business, showed wider margins and earnings, but the results from US beef and poultry businesses were disappointing, as the strong dollar strains exports.

Speaking to investors, Mr Batista ascribed the falling earnings to "the continuing retention of cows and heifer's in the US, which is rebuilding the herd, which is a very positive signal for the business on medium and long-term basis, but which represents sacrifice in the short term in order to build up the pipeline of capital supply".

Mr Batista said he had "no doubt that the industry is going to see better margin and better days," expecting results to improve in the second half of 2016.

Moves priced in

"The stock seems to have more than priced-in the much anticipated softer operational figures," BTG Pactual said.

"We also believe that negative US beef results in the reported period should carry little effect into 2016, as we see the US beef industry posting a nice rebound in cattle availability," BTG said.

JBS shares in Sao Paolo were up 7.1% in afternoon deal, at R$12.13.

By William Clarke

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