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Minerva emerges as key winner, so far, of JBS turmoil

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Minerva appears to be emerging as the main winner, so far, of the fallout of the troubles at beef giant JBS – although other Brazilian meatpackers too stand to benefit from raised market share, besides a drop in cattle prices close to a three-year low.

Shares in all Brazil's meatpackers – bar JBS, the world's sector leader - have recovered from lows reached in March after the announcement by authorities of "Operation Weak Flesh" into corruption among food safety inspectors, allowing unfit meat onto the market.

Shares in JBS remain some 28% below levels ahead of the announcement, depressed by the outcome of separate corruption allegations, which saw the group last week agree a R$10.3bn fine as part of a plea bargain deal with Brazil's Federal Prosecutor's Office, and change its chairman.

However, stock in Minerva - which traces its history back to the 1950s, and the entry of the Vilela de Queiroz family into raising and transporting cattle – has proved particularly strong, and is now up 20% from levels ahead of the Weak Flesh announcement.

The gains have been accelerated by Minerva's announcement on Tuesday of the $300m purchase of beef assets in Argentina, Paraguay and Uruguay from JBS, which sold them in a bid to "reduce its financial leverage", in the face of the record fine.

'Challenging new market'

The acquisition, termed "unexpected" by BTG Pactual, raised come concerns for investors over Minerva's immediate prospects, with Bradesco BBI terming the deal "challenging in the short term", given the extra borrowings it will mean, lifting the group's net debt to the equivalent of 4.1 times earnings before interest, taxation, depreciation and amortisation (ebitda).

Bradesco BBI analyst Gabriel Lima also advised investors to "keep in mind that Argentina is a challenging, new market" for Minerva.

BB Investimentos cautioned too that the group faced "some margin pressure" from the acquired businesses, given their lower profitability, with margins pegged at "close to 5%" compared with 9.2% at Minerva.

'Checks all boxes'

However, BB Investimentos analyst Luciana Carvalho added that the deal "should improve Minerva's geographic diversification and increase its competitive advantage", boosting profitability prospects long-term.

Array

Minerva: -0.2%

Marfrig: -2.6%

Brasil Foods: -12.3%

JBS: -34%

Share price performance for 2017 as of close on June 8

BTG Pactual, restating a "buy" rating on Minerva stock with a R$16.00 price target, said that the "announcement checks all boxes Minerva has been pursuing for years", in terms of spreading the group's Latin America footprint, including entry into Argentina.

"For a company that has for long stood out for its capacity to properly arbitrage between local cattle and global beef prices, the transaction surely takes it to a whole new next level."

Brazil cattle price tumbles

However, observers have flagged benefits for other groups too from the turmoil at JBS, with the group viewed as likely to dispose of further assets, and potentially at attractive prices.

Minerva paid the equivalent of 6 times ebitda for the JBS assets, in line with its own valuation, but with the acquisitions multiple falling to about 4 times ebitda once synergy benefits, such as cutting out duplicated costs, are factored in.

Furthermore, JBS is seen too as potentially retreating to less capital intensive areas, in an effort to support its finances, creating opportunities for competitors.

"Players in the sector could also benefit from the gap JBS has left by freezing some of its operations in terms of market share," Ms Carvalho said, as BB Investimentos cut its forecast for JBS's ebitda this year by 25%.

And all meatpackers may end up benefited from the drop in Brazilian cattle prices since the Weak Flesh investigation was revealed, with values this week falling below $130, after a 4.6% tumble in May – the second-worst monthly performance in six years.

"It is important to notice that international [beef] prices have already increased, which shows that we might expect some profitability improvement in the sector."

Farmer stand-off

JBS's woes could also create opportunities for smaller players , according to Pericles Salazar, president of Brazilian meatpackers' association Abrafrigo, flagging in particular potential presented by a shake-up in Mato Grosso, the country's top cattle-ranching state, with a herd of nearly 30m head.

According to Mr Salazar JBS is to axe nine sites in the state, closures he believes create scope for expansion by small and medium sized operators to purchase and process cattle.

"Part of JBS's problems in Mato Gross is their inability to source enough cattle for their operations," said South America ag expert Dr Michael Cordonnier.

"Ranchers in the state are very reluctant to sell cattle to JBS fearing they would not get paid in the customary 30 or 60 days."

By Mike Verdin

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