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Marfrig to sell units in Argentina, US sale amid drive to cut debt

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Marfrig Global Foods, fresh from the $1.5bn sale of its Moy Park chicken group, unveiled plans for further disposals amid a revamp of its balance sheet, aimed at cutting gross debt by $1.2bn by the end of next year.

The Brazil-based group revealed it "currently negotiating" the sale of its Argentine assets, and of its Marfood beef jerky business in the US.

A disposal of the operations - which have a book value of R$293m, equivalent to about 7% of Marfrig's stock market value – reflected a "commitment to focus more" on food services, and in particular on the Keystone business, which sells meat products to Asian and US restaurant chains, the company said.

The group also underlined a "capital structure improvement process" aimed at cutting gross debt by up to $1.2bn by the end of 2016.

The company reported gross debt of R$15.05bn as of the end of September, equivalent to $3.9bn at today's exchange rate, although Marfrig has since repurchased $406m of its senior notes.

Currency hit

The revamp of Marfrig's balance sheet comes at a tricky time for Brazilian operators with dollar-denominated debt, with the depreciation of the real, while a boost to the value in local terms of foreign earnings, raising the burden of borrowings taken out in the greenback.

Indeed, the group revealed a R$538m dent in its results for the July-to-September quarter thanks to a 28% drop in the real against the dollar.

The hit, combined with a R$706m expense thanks to marking derivatives to market value, limited the group to earnings of R$185.9m for the quarter - despite a R$1bn capital gain from the sale of Moy Park to Brazilian rival JBS and an improved operating performance.

Operating profits gained 40% to R$312.4m, on revenues up 30% at R$4.94bn.

Volume decline

The gain in operating performance reflected improvements at both its major operating divisions, Keystone and Marfrig Beef.

Besides help from the weaker real, in inflating the value of dollar takings, a 129% surge to R$120.6m in earnings before interest, tax, depreciation and amortisation (ebitda) at Keystone was down to factors including lower US animal costs, which have improved packer margins, and rising Asian sales.

In Marfrig beef, a rise of 8.1% to R$245.8m in ebitda was helped by a decision to cut slaughter capacity in Brazil by 29% to "adjust to the current scenario of lower cattle availability", with five plants mothballed.

Marfrig Beef volumes in the quarter, at 216,800 tonnes, were down 28% year on year.

'Nice re-rating story'

The results were well received by analysts at BTG Pactual, who restated a "buy" rating on Marfrig shares, with a price target of R$10.00, saying that the stock had a "nice re-rating story".

The bank said: "When upgrading the stock a few months ago, we claimed that Marfrig had solved its debt problems after selling Moy Park, and that could drive management focus on operations, where we saw major room for improvements.

"Results seem to confirm that view."

Factor Carretora - maintaining an "overweight" rating on the shares, with a R$8.30 price target – also highlighted the disposal plans unveiled on Friday.

"The company continues with its strategy of cash generation," the broker said.

"We believe the capital structure improvement and Marfrif Beef rationalisation is not fairly priced" by investors.

The shares stood 0.9% higher at R$6.42 in morning deals in Sao Paulo.


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