Boost yields? The right diet focuses on the proteins of Brazilian cattle. A recent report by the investment firm Neuberger Berman highlights the strengths of a sector that has archived an excellent year with strong growth in revenues, higher Ebitda margins, stable or improving leverage ratios, better cash flows and liquidity needed to meet deadlines and capital requirements. For the analyst Violeta Ramos Romero, who analyzes the debt of emerging markets, the prospects for 2015 remain interesting thanks to an industry with many strengths compared to its competitors, the decline of the Brazilian real and the probable increase of demand from China.
CARIOCA CATTLE THAT STRENGTH
Indeed, Brazil is considered the main exporter of beef in the world with just over 20% of global exports, followed by Australia (17%) and the United States (13%). The latter in particular are the first producer of beef due to the size of its herds of cattle and the high productivity supported by the extensive use of growth hormone on animals but not the first exporter because domestic consumption is high. Brazil has thelargest cattle herd on the market, with 208,3 million head of cattle compared to 104,3 million in China, 88,3 million in the USA and 28,5 million in Australia.
Furthermore, there is a fundamental difference with its competitors: it has much more potential to exploit its resources and increase future exports if the industry maintains current levels of investment and efficiency. This is because the rate at which cattle are slaughtered, i.e. ithe “usage rate” is far below compared to the other 3 countries.
Brazilian cattle farmers also enjoy some important advantages over their competitors. One of them is that their herds are fed on grass. “Cattle farmers in other countries – explains Romero – tend to feed their livestock with wheat, which is more expensive and subject to the volatility of raw material prices. Furthermore, grass-feeding avoids the risk of spreading mad cow disease, which can be transmitted to livestock through the recycling of beef carcasses in livestock feed, a common practice in some markets. Other competitive advantages include the South American country's mild climate and large grazing areas, which add considerable potential for productive growth".
Nor should we forget the economic trends that facilitate exports such as the recent currency decline with the Real falling significantly against the dollar since the beginning of 2013. “The main players – explains Ramones – have been able to increase their dollar revenue with higher exports due to distribution in developed markets. Today, more than 40% of their income is in foreign currency. Wage costs, which were already low, are mainly in local currency which adds another competitive advantage.”
THE PUSH OF CHINESE CONSUMPTION
As a result, the report notes, Brazilian beef exporters have grown steadily, a trend that analysts expect will continue thanks to higher productivity, lower costs, and advertising and marketing campaigns as well as growth in exports to new Villages. Significant help could come from China, which is determined to lift the ban on Brazilian meat products from January 2015, which could trigger a surge in demand. Beijing has substantial demand for beef but has low slaughter capacity as the growth rate of domestic consumption has outpaced the growth rate of its herds.
The good performance of the sector has helped a lot the debt profile of the industry, as well as the increased diversification both geographically and by business. “Companies have modified their exposure to risk by selling different types of meat (cattle, pork and poultry) – explains Ramones – and products (fresh and packaged meat) and with increased segmentation (offering different brands to different demographic / economic groups)” .
The meat (or protein) industry includes companies with a wide range of ratings, from B to BBB-. Overall ratings from rating agencies had a positive impact as issuers posted steady improvements in fundamentals. “These firms,” Ramones notes, “typically have high-coupon assets, which provide potential for optimizing liabilities over market cycles. This can be beneficial to the credit profiles of companies as well as bondholders. These transactions can reduce interest costs while investors can receive buyback premiums to redeem their securities.
For Neuberger Berman analysts it is THEREFORE a sector with positive prospects, which will be driven by the continued demand for meat products worldwide together with the improvement in the quality of the debt of specific companies.
However, there is no shortage of risk factors: the segment, warns the report, remains volatile on many fronts and analysts at Neuberger Berman believe that investors must carefully evaluate the underlying fundamentals and risks associated with issuers. They also need to consider that various industry-related economic factors (infectious outbreaks, economic slowdowns, currency movements, import bans, weather-related issues, etc.) can have a significant impact on industry demand and performance.
