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Marfrig shares soar on 'hefty' price gained for Moy Park

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Shares in Marfrig Global Foods surged 15% as investors reacted to the sale by the debt-laden protein group of its European poultry business, Moy Park, for $1.5bn, a price deemed "hefty" by one broker.

Shares in Brazil-based Marfrig hit R$5.54 in early deals in Sao Paulo before easing back in lunchtime deals to stand at R$5.25, a gain of 8.7%.

At their intraday high, the shares were up 14.7% on the day, and 46% from a low reached three weeks ago, before news of corporate action on Moy Park filtered into markets, although many had assumed Marfrig may have been poised to deliver on ambitions to float the UK-based poultry business.

Instead, Marfrig revealed on Sunday it had sold Moy Park to Brazilian rival JBS, shares in which stood 1.6% higher at R$16.72 in Sao Paulo.

'Reducing leverage'

Banco Paulista said that Marfrig shares "should react well" to the sale, given that Moy Park was sold, on its estimates, at a multiple of 8.7 times earnings before interest, tax, depreciation and amortisation (ebitda), on the bank's estimates.

That is a premium to the 6.6 times at which shares in Marfrig as a whole have been trading.

"The sale represents another step by Marfrig towards reducing leverage," which has been a significant worry towards the group's investors.

BTG Pactual estimated Marfrig's gearing, as measured by the ratio of net debt to ebitda, at 4.3 times after the deal, "still high, but much better than the 6.2 times reported last quarter", the bank said.

'Selling lunch to buy dinner'

Indeed, BTG Pactual raised by R$1.00, to R$6.00, its target price for Marfrig shares, although it kept a "neutral" rating, saying that the protein group "needs to prove the long-term sustainability and execution of its business model".

The sale of Moy Park will leave Marfrig "with its historically cash-consuming beef business and Keystone, which has yet to live up to its full potential".

While the group's decision to stick with these operations and sell Moy Park, which the bank termed a "selling lunch to buy dinner" strategy, should "provide some short-term stock momentum, it ultimately still doesn't justify a long-term investment".

'Highly levered'

Bradesco termed the Moy Park deal "positive" for Marfrig, in cutting debt, besides reducing to an estimated 6.0 times ebitda, from 6.8 times ebitda, the multiple at which the shares were trading, so making the stock appear cheaper.

"The rationale of the disposal is quite clear, as it comes at a time when Marfrig is highly levered," Bradesco analyst Gabriel Vaz de Lima said.

"The deal should reduce Marfrig's year-end leverage from 5.5 times ebitda to 4.0 times."

'Challenging asset'

For JBS, which had paid a "high multiple" for Moy Park, equivalent to about 9.0 times this year's ebitda on Bradesco estimates, the deal was "neutral".

"Although we see Moy Park as an expensive acquisition, the impact is quite small, representing additions of 4.5% to JBS's net revenues and 3.6% to ebitda," while lifting the group's leverage to 2.90 times ebitda, from 2.65 times.

Bradesco termed Moy Park a "challenging asset", with its ebitda margins, at 7-8% of revenues, "low for a chicken company", a reflection of the competitiveness of the UK grocery sector.

BTG Pactual retained a "buy" rating on JBS shares, with a price target of R$21.00, saying that while the purchase price was "hefty at first glance", Moy Park was a "solid company with consistent operating margins".

JBS has "consistently delivered on past acquisitions", such as that of US-based poultry group Pilgrim's Pride, the bank noted.


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