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Marfrig shares rally, despite it paying heavy price for debt

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Shares in Brazilian beef giant Marfrig Global Foods rose thanks to rising returns from its overseas business.

Markets shrugged-off an unexpectedly large net loss, due to disappointing financial expenses for the debt-laden group.

Marfrig reported a "still challenging scenario" for the rest of 2016.

Cautious outlook

Marfrig took a cautious outlook for 2016, pointing out lower prospects for growth thanks to "the slowdown in the Chinese economy, the recession in Russia and the downward revision in expectations for commodity exports".

But the company pointed out that "lower crude oil prices are expected to boost consumption, especially in developed markets"

"In the case of China, GDP growth is forecasted at 6.8%, reflecting the shift in government policy from exports towards internal consumption, a change that could leverage growth in the consumption of fresh beef and processed food products," Marfrig said.

Financials weigh

In the last three months of 2015, Marfrig reported adjusted earnings before interest, taxation, depreciation and amortisation (ebitda) of 527m real, up 19%, and just shy of analyst forecasts of 528m real.

But the company's troubled financial situation weighed on net profits.

Broker BTG Pactual said the size of the financial loss was "much larger than expected".

Marfrig is heavily indebted, after years of rapid expansion, leaving hefty interest and exchange rate liabilities.

The situation is improving, but base on the latest results, not as quickly as is hoped.

Currency effects

Marfig reported financial losses of 439m reis in the last three months of 2015, down from 1.24bn in the previous quarter, and 690m in the same period of 2014.

Currency effects, as the real fell against the dollar, increasing the cost of servicing dollar-denominated debt, cost the company 43m reis in the three-month period.

Still, BTG Pactual said the net leverage, of 3.4 times ebitda was "comfortable, maintaining a buy rating on the company.

Profits fall short

In the end disappointing financials left Marfrig with a net loss of 194m reis.

This is up from a net loss of 285m reis in the same period last year, but came in short of analyst expectations, which, ranged from a net loss of 80m to profits of 107m reis.

Still, for Marfig's overseas interest, the weaker currency was a boost.

Marfrigs sales were up 19%, to 5.2bn reis.

The growth was powered by higher returns from the international Keystone business, as well as exports from the Brazilian business.

80 percent of Marfrig's revenue is linked to currencies other than the real, the company said.

Capacity reduction

Marfrig Beef, Marfrig's Brazilian business, is pursuing a strategy of lower slaughter rates, cutting capacity in response to "lower cattle supply".

Cattle prices in Brazil are very high, thanks to the weak domestic currency and export demand.

Marfig took 30% of its capacity offline over the whole of 2015.

"Marfrig Beef's strategy continues to be capturing operating efficiency gains and strengthening its operational focus while pursuing higher profitability and cash generation at the expense of volumes," Marfrig said.

Over the whole of 2015, slaughter volumes at Marfrig Beef Brazil fell 12.9% year-on-year, or by 330,000 head.

Marfrig shares rose 1.7% in morning deals in Sao Paulo, to 6.06 reis.


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