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Marfrig follows Wilmar in unveiling plans for divisional IPO

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Shares in Marfrig Global Foods, having soared on anticipation a listing of its Keystone Foods division, wavered as the flotation was unveiled – in the second announcement in hours by an ag major over IPO plans.

Shares in Marfrig Global Foods initially fell in trading on Friday, before recovering ground to stand at R$7.69 in afternoon deals, a gain of 0.9% on the day.

The modest performance followed the Brazilian meatpackers' announcement that it had "confidentially" registered its Pennsylvania-based Keystone Foods division for stockmarket flotation in the US – expectations of which are widely viewed as having spurred a surge in Marfrig shares.

"We believe investors' hopes that such an IPO could be underway have fuelled much of the 40% stock price rally in the last 30 days," said Thiago Duarte at Brazilian broker BTG Pactual.

Marfrig has the "has the potential to unlock substantial value for Marfrig if it can float Keystone at a valuation close to global food service companies".

Marfrig stockmarket maths

Such thinking has been spurred by the acquisition last month by Tyson Foods of AdvancePierre, a rival to Keystone, at a multiple pegged by Bradesco at 14 times earnings before interest, tax, depreciation and amortisation (ebitda).

That is well above the multiple that the market attributes to Marfig shares, even after their rally, with the group proscribed a discount thanks largely to concerns over its debt levels.

Assuming Keystone Foods could be floated even at a multiple of 10 times ebitda, the impact on pulling up Marfrig's overall valuation creates further scope for share prices rises, said Bradesco, lifting its target price for the stock by R$2 to R$10, with an "outperform" recommendation.

However, BTG Pactual stuck with a "neutral" rating, and a R$9.00 share price target, terming "weak" results for the January-to-March quarter that Marfrig also unveiled.

'Confidence was shaken'

The Keystone division , a major supplier to McDonalds, achieved an "excellent" start to the year, with underlying ebitda adding 10% to $62m (R$196m), on revenues up 7% at $667m, led by growth in Asia Pacific markets such as Australia, Malaysia and Thailand.

However, underlying ebitda in Brazilian beef fell by 38% to R$222m, on revenues down 17% at R$2.0bn, thanks to setbacks including the knock-on effects of the Operation Weak Flesh police investigation into corruption among food health officials.

"In addition to the seasonally weaker demand, the Weak Flesh Operation, triggered in the second week of March, adversely affected the operations of animal protein companies, poultry, beef, pork and processed foods," said Marfrig, which was itself not targeted by the probe .

"Consumer confidence was shaken and some important export destinations, such as Chile and China, temporarily suspended imports from Brazil," the group said, talking of "highly challenging" conditions in the domestic market.

Marfrig's group losses more than doubled, to R$237.9m, on revenues down 15.7% at R$4.16bn.

Wilmar reheats China flotation plans

The IPO announcement for Keystone Foods - in which Marfrig said it "currently intends to sell a portion of its holdings", which many investors took to signal the sale of a minority stake – represented the second flotation announcement in hours from an ag industry major.

Wilmar International, the Singapore-based agricultural trading giant, on Wednesday said that it was "carrying out an internal restructuring of its China operations with the possibility of a separate listing".

The proposed flotation was "still at evaluation stage", said the group, which in 2009 shelved plans for a listing of its Chinese unit in Hong Kong, which at the time created talk of a $3bn valuation for the division, which is one of China's biggest oilseeds crushers.

Shares in Wilmar, which also announced a 51% jump to $361.6m in earnings for the January-to-March quarter, closed up 9.6% at Sing$3.76 on Friday.

By Mike Verdin

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