BRF_-_BRASIL_FOODS_SA(BRFS.N)：DOMESTIC_MARKET_WOES_TO_COMPLICATE_THINGS_IN_2H12_(MAINTAIN_HOLD)-2012-08-16.ppt

24,20,16,12,stock data,869.5,deutsche bank markets research,rating hold global emerging markets brazil,company brf - brasil foods sa,date 14 august 2012 forecast change,food,price at 13 aug 2012 (usd) target price,14.53 15.00,reuters brfs.n,bloomberg brfs us,exchange ticker nys brfs,52-week range,21.46 - 13.70,domestic market woes to complicate things in 2h12 (maintain hold) short-term earnings risk still skewed to the downside; stay on the sidelines we updated our brf model to reflect disappointing 2q12 results and the most recent sharp increase in feed costs in brazil; which combined with a challenging economic outlook and added marketing expenses related to new product launches (meant to fill the gap left by the recent asset divestiture/ brand suspension), should put additional pressure on margins in 2h12 and beyond. the net impact of these changes was a 17% downward revision to our,jose yordan research analyst (+1) 212 250-5528 rebeca sanchez sarmiento research associate (+1) 212 250-2009 key changes,12-month price target (from $18/ads to $15/ads, or r$29/ local share). considering the limited upside implied in our new target, and our view that,target price,18.00 to 15.00 ,-16.7%,earnings risk remains skewed to the downside, we maintain a hold rating. 2q12 results fell short of already-bearish expectations for about two months, brfs management had been warning of flat margins on a sequential basis (when the normal progression is for 2q margins to rise versus 1q); therefore, last nights announcement of a qoq ebitda margin decline of 40bps (or 10bps as the company defines it) and a yoy decline of,price/price relative,340bps should be characterized as a miss by the street (eps also fell short of our estimates) and lead to further downgrades to consensus expectations.,8 8/10,2/11,8/11,2/12,revision reflects 2q12, higher costs/leverage, lower domestic volumes, new fx our present revision reflects the 2q12 shortfall as well as higher costs (mostly feed, but also marketing, labor and financial expenses), all of which should have a negative impact that should only be partially offset by a weaker brl. in our view, brfs remains overvalued and vulnerable in the short term,brf - brasil foods s bovespa (rebased) performance (%) absolute bovespa,1m 4.6 8.8,3m -16.3 -0.5,12m -21.7 10.6,brf is currently trading at 11.3x 12-month estimated ebitda, well above our target multiple of 8.2x (see page 3 for derivation); thus, we expect the stock to,fall moderately in the short term and recover some time in 1h13. downside risks are: stalling global demand, a stronger brl, higher trade barriers and/or feed costs and disease (avian flu, h1n1, bse). upside risks include strength in domestic/ global demand, a weaker brl and lower trade barriers/feed costs. forecasts and ratios,market cap (usdm) shares outstanding (m) adr ratio free float (%) volume (13 aug 2012),12,633.5 1.0 100 2,276,300,year end dec 31 revenue (brlm) ebitda (brlm) ebitda margin (%) ebit (brlm) net income (brlm) eps (brl) % change p/e (x) ev/ebitda (x) dps (brl) dividend yield (%),2011a 25,706 2,702 10.5 1,823 1,367 1.57 0.0% 19.7 11.9 0.58 1.9,2012e 28,254 2,530 9.0 1,633 1,323 1.52 -20.5% 19.4 12.9 0.51 1.7,2013e 30,668 3,085 10.1 2,177 1,878 2.16 -19.4% 13.6 10.8 0.53 1.8,2014e 33,515 4,299 12.8 3,288 2,445 2.81 -5.6% 10.5 7.7 0.76 2.6,bovespa exchange rate (brl/usd,59,123 2.03,source: deutsche bank estimates, company data _ deutsche bank securities inc. all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,0,0,0,0,0,4,14 august 2012 food brf - brasil foods sa,model updated:14 august 2012,fiscal year end 31-dec,2009,2010,2011,2012e,2013e,2014e,running the numbers,financial summary,latin america brazil food brf - brasil foods sa,db eps (brl) reported eps (brl) dps (brl) bvps (brl) valuation metrics price/sales (x),0.27 0.40 0.37 22.25 0.5,0.92 0.92 0.18 15.65 0.9,1.57 1.57 0.58 16.16 1.0,1.52 1.52 0.51 16.84 0.9,2.16 2.16 0.53 17.58 0.8,2.81 2.81 0.76 17.58 0.8,reuters: brfs.n hold price (13 aug 12) target price 52 week range market cap (m),bloomberg: brfs us usd 14.53 usd 15.00 usd 13.70 - 21.46 eurm 10,228,p/e (db) (x) p/e (reported) (x) p/bv (x) fcf yield (%) dividend yield (%) ev/sales ev/ebitda ev/ebit,72.3 48.5 1.0 0.7 1.9 0.8 16.3 105.4,26.3 26.3 1.8 7.3 0.7 1.1 10.8 16.9,19.7 19.7 2.3 0.2 1.9 1.3 11.9 17.7,19.4 19.4 1.8 nm 1.7 1.2 12.9 20.0,13.6 13.6 1.7 1.0 1.8 1.1 10.8 15.3,10.5 10.5 1.7 4.7 2.6 1.0 7.7 10.1,usdm 12,633,income statement (brlm),company profile brf - brasil foods sa is one of the largest latin american food companies and one of the worlds largest meat processors, exporting to over 110 countries. the company resulted from the merger of sadia and perdigao. its product mix has over 3,000 items (skus), including poultry and pork meats (both in natural and processed products), as well as beef, margarine and dairy products. brasil foods owns several industrial units throughout brazil (including meat plants, soybean crushing plants and dairy-processed,sales ebitda ebit pre-tax profit net income cash flow (brlm) cash flow from operations net capex free cash flow,20,937 992 153 741 234 767 -693 74,22,681 2,321 1,480 1,001 804 2,244 -698 1,546,25,706 2,702 1,823 1,522 1,367 1,183 -1,125 57,28,254 2,530 1,633 1,576 1,323 1,029 -1,860 -830,30,668 3,085 2,177 2,357 1,878 2,019 -1,762 257,33,515 4,299 3,288 3,172 2,445 2,973 -1,758 1,215,and dessert product units).,equity raised/(bought back),5,290,price performance 24 20 16 12,dividends paid net inc/(dec) in borrowings other investing/financing cash flows net cash flow change in working capital balance sheet (brlm) cash and cash equivalents,-116 -4,859 -285 104 655 4,244,-153 -1,853 -441 -901 59 3,343,-502 392 -551 -604 -630 2,740,-440 1,391 -466 -345 -870 2,394,-1,203 -519 -188 -1,653 -443 741,-657 -565 8 0 -418 741,8 aug 10,feb 11,aug 11,feb 12,property, plant & equipment goodwill,8,874 0,9,067 0,9,798 0,10,890 0,11,991 0,11,991 0,brf - brasil foods sa margin trends 16 12 8,bovespa (rebased),other assets total assets debt other liabilities total liabilities total shareholders equity net debt,15,266 28,384 9,056 6,332 15,388 12,996 4,812,15,342 27,752 7,203 6,912 14,115 13,637 3,860,17,446 29,983 8,054 7,820 15,874 14,110 5,314,18,838 32,123 9,416 8,019 17,434 14,689 7,021,19,686 32,418 8,492 8,593 17,085 15,334 7,751,19,686 32,418 8,492 8,593 17,085 15,334 7,751,key company metrics,0,09,10,11,12e,13e,14e,sales growth (%) db eps growth (%),-5.4 na,8.3 243.6,13.3 70.5,9.9 -3.2,8.5 41.9,9.3 30.2,ebitda margin growth & profitability 15 10 5 0,ebit margin,20 15 10,payout ratio (%) ebitda margin (%) ebit margin (%) roe (%) net debt/equity (%) net interest cover (x),92.5 4.7 0.7 2.7 37.0 0.1,19.1 10.2 6.5 6.0 28.3 4.7,36.7 10.5 7.1 9.9 37.7 7.4,33.2 9.0 5.8 9.2 47.8 5.1,24.7 10.1 7.1 12.6 50.5 4.3,26.9 12.8 9.8 16.0 50.5 7.0,-5,5,dupont analysis,-10,0,ebit margin (%),0.7,6.5,7.1,5.8,7.1,9.8,09,10,11,12e,13e,14e,x asset turnover (x),0.8,0.8,0.9,0.9,1.0,1.0,x financial cost ratio (x),-9.2,0.8,0.9,0.8,0.8,0.9,solvency 60 50 40 30 20 10,sales growth (lhs),roe (rhs),8 6 4 2,x tax and other effects (x) = roa (post tax) (%) x financial leverage (x) = roe (%) annual growth (%) x nta/share (avg) (x) = reported eps annual growth (%),-0.2 0.9 3.0 2.7 na 15.0 0.40 na,0.7 2.9 2.1 6.0 126.5 15.3 0.92 130.8,0.9 4.7 2.1 9.9 63.4 15.9 1.57 70.1,1.0 4.3 2.2 9.2 -6.6 16.5 1.52 -3.1,1.1 5.8 2.2 12.6 36.2 17.2 2.16 41.9,0.9 7.5 2.1 16.0 27.4 17.6 2.81 30.2,0,0,source: company data, deutsche bank estimates,09,10,11,12e,13e,14e,net debt/equity (lhs) jose yordan +1 212 250-5528 page 2,net interest cover (rhs) ,deutsche bank securities inc.,14 august 2012 food brf - brasil foods sa investment thesis outlook we rate brasil foods (formed in 2009 from the merger of sadia and perdigo, and now one of the worlds largest animal protein companies) hold. the companys export business has recovered somewhat from a weak brl (although revenue growth remains below normalized rates), but the uncertainty in the domestic market introduced by the recent asset swap with marfrig (and the multi-year suspension of some of brfs brands in accordance with the july 2011 antitrust ruling), combined with a significant deterioration in the raw material cost outlook, should continue to put pressure on margins in the short to medium term. we continue to like the companys long-term fundamentals, but in our view the stocks risk-reward profile is not yet attractive. valuation our price target assumes a justified multiple of 8.2x applied to our estimated ebitda for the 12-month period starting a year from now to derive our target. we derive this target multiple by first defining a justified multiple assuming no discounts, using a two-stage model that takes into account the companys expected free cash flow growth (9.6% in the first 10 years, and 3.2% in perpetuity), tax rate (of 23.3%), roic (10.2% average in stage one and 13.6% in perpetuity) and wacc (8.9%). by applying these metrics we arrive at a justified multiple of 9.1x estimated ebitda for brfs. we then apply a 10% discount to this multiple (to reach 8.2x) to account for the relatively high risks associated with commodity food companies like brasil foods. risks downside risks include stalling global demand, a strong brl, the erection of additional trade barriers by countries that currently trade with brazil, and any significant increase in feed costs. animal protein companies are also exposed to the risk of disease (avian flu, h1n1, bse), which can cause confidence crises among consumers and significantly curtail demand or lead to costly product recalls). company-specific risks include increased competition from local or global players and potential liabilities from ongoing litigation. upside risks include a stronger-than-expected recovery in global demand, a weak brl (which would lead to higher margins than we currently project, everything else equal) and lower trade barriers and feed costs.,deutsche bank securities inc.,page 3,14 august 2012 food brf - brasil foods sa 2q12 earnings review,brasil foods reported 2q12 results last night that were moderately below our expectations (and are summarized in figure 1 below). although net sales of r$6,842 million was 1.3% above our forecast (due to stronger than anticipated volumes on the export side), unadjusted ebitda of r$515 was 5.3% lower than our already-bearish estimates (with margins missing by 52 basis points) as a result of 1) weaker-than- expected domestic sales (especially the foodservice segment that suffered from a weak economic environment) and 2) higher-than-expected feed costs (both corn and soybean meal) and sg&a expenses stemming from the asset swap/ brand suspension (more specifically, the 168 product launches as part of a strategy to replace the revenues lost in the swap transaction and related brand suspension). while some of the additional costs that led to the shortfall should prove to be temporary, we are particularly concerned about the outlook for feed costs over the next 12 months. figure 1: brasil foods1q12 earnings summary,ebitda and eps fell short of already-low expectations,2q12a,2q12e,2q12 a/e (%),2q11a,yoy (%),operating data,total sales volume (000 tons) domestic market volumes export market volumes dairy volumes foodservice volumes avg. price/ton (r$) domestic market avg price/ton (r$) export market avg price/ton (r$) dairy avg price/ton (r$) foodservice avg price/ton (r$) total net sales domestic market sales export market sales dairy sales foodservice sales,1,621 644 641 281 55 4,221.5 4,609 4,399 2,498 6,418 6,843 2,968 2,820 702 353,1,558 665 573 257 63 4,338 4,536 4,697 2,570 6,195 6,758 3,016 2,693 660 389,4.1% -3.1% 11.8% 9.5% -12.5% -2.7% 1.6% -6.3% -2.8% 3.6% 1.3% -1.6% 4.7% 6.4% -9.3%,1,548 640 574 273 61 4,065 4,338 4,444 2,355 5,295 6,293 2,776 2,551 643 323,4.7% 0.6% 11.7% 2.9% -9.8% 3.8% 6.3% -1.0% 6.1% 21.2% 8.7% 6.9% 10.5% 9.2% 9.3%,profit & loss (r$ million),total net revenue gross profit gross margin (%) operating profit (ebit) ebit margin (%) unadj. ebitda ebitda margin (%) net income net margin (%) eps (r$/share),6,842 1,489 21.8% 275 4.0% 515 7.5% 6 0.1% 0.01,6,758 1,487 22.0% 311 4.6% 544 8.1% 55 0.8% 0.06,1.3% 0.2% (24)bp -11.4% (57)bp -5.3% (52)bp -88.4% (72)bp -88.5%,6,294 1,561 24.8% 463 7.4% 688 10.9% 498 7.9% 0.57,8.7% -4.6% (303)bp -40.5% (333)bp -25.2% (341)bp -98.7% (782)bp -98.7%,balance sheet (r$ million),cash & equivalents short term debt long term debt net debt,2,748 3,411 6,212 6,875,1,854 3,777 4,979 6,903,48.3% -9.7% 24.8% -0.4%,3,834 2,589 4,950 3,704,-28.3% 31.8% 25.5% 85.6%,profit & loss (us$ million),net revenue gross profit gross margin (%) operating profit (ebit) ebit margin (%) ebitda ebitda margin (%) net income net margin (%) eps (us$/ads),3,405 741 21.8% 147 4.3% 266 7.8% 6 0.2% $0.01,3,363 740 22.0% 155 4.6% 271 8.1% 27 0.8% $0.03,1.3% 0.2% (24)bp -5.2% (29)bp -1.8% (24)bp -79.6% (65)bp -79.7%,4,026 998 24.8% 296 7.4% 440 10.9% 319 7.9% $0.37,-15.4% -25.8% (303)bp -50.5% (305)bp -39.6% (313)bp -98.2% (775)bp -98.2%,source: deutsche bank estimates and company reports,page 4,deutsche bank securities inc.,jan-10,jan-05,jun-05,jun-10,jul-02,jul-07,feb-07,feb-12,jul-12,dec-02,dec-07,aug-09,aug-04,sep-06,may-03,may-08,nov-05,sep-11,oct-03,oct-08,mar-09,mar-04,apr-06,nov-10,apr-11,jan-05,jun-05,jan-10,jun-10,jul-02,jul-07,aug-04,sep-06,dec-02,feb-07,aug-09,sep-11,dec-07,may-03,nov-05,may-08,nov-10,feb-12,oct-03,oct-08,apr-06,mar-04,mar-09,apr-11,jul-12,14 august 2012 food brf - brasil foods sa estimate revision reflects challenging cost environment below in figure 2, we summarize the present estimate changes for brasil foods. while we essentially left our top-line projections unchanged, we sharply lowered our margin assumptions for 2012 and 2013, and to a lesser extent for 2014. figure 2: brf brasil foods summary of estimate changes,brf - brasil foods sa,2012e old,2012e new % chg.,2013e old,2013e new % chg.,2014e old,2014e new % chg.,revenue ebit ebitda,28,064 2,209 3,106,28,254 1,633 2,530,1% -26% -19%,30,849 2,980 3,875,30,668 2,177 3,085,-1% -27% -20%,34,015 3,731 4,730,33,515 3,288 4,299,-1% -12% -9%,ebitda mg,11.1%,9.0% -212 b.p.,12.6%,10.1% -250 b.p.,13.9%,12.8% -108 b.p.,net interest taxes net profit eps (excl gw amort) capital expenditures net cash/(debt) revenue, us$ ebit, us$ ebitda, us$ adj ebitda, us$ net interest, us$ taxes, us$ net profit, us$ epads us$ capex, us$ net cash/(debt) us$,-273 303 1,665 1.91 -1,886 -6,293 15,227.1 1,198.4 1,685.5 451.3 -148.0 164.3 903.1 1.04 -1,023.1 -3,312.3,-320 239 1,323 1.52 -1,860 -7,021 14,597.1 843.5 1,306.9 438.9 -165.5 123.4 683.8 0.79 -960.7 -3,600.7,17% -21% -20% -20% -1% 12% -4% -30% -22% -3% 12% -25% -24% -24% -6% 9%,-418 610 2,329 2.68 -1,796 -6,501 16,452.8 1,589.3 2,066.7 531.7 -222.9 325.4 1,242.3 1.43 -957.8 -3,514.0,-512 465 1,878 2.16 -1,762 -7,751 15,931.2 1,131.1 1,602.8 517.6 -266.0 241.5 975.6 1.12 -915.2 -4,079.3,23% nm -19% -19% -2% 19% -3% -29% -22% -3% 19% 0% -21% -21% -4% 16%,-378 756 2,591 2.98 -1,758 -6,501 18,141.2 1,990.1 2,522.6 531.7 -201.8 403.4 1,381.6 1.59 -937.8 -3,514.0,-467 713 2,445 2.81 -1,758 -7,751 17,410.3 1,708.0 2,233.5 517.6 -242.5 370.4 1,270.1 1.46 -913.4 -4,079.3,23% nm -6% -6% 0% 19% -4% -14% -11% -3% 20% 0% -8% -8% -3% 16%,ads price target (12-month),18.00,15.00,-17%,fx assumption (eop),1.90,1.95,-3%,1.85,1.90,-3%,1.95,1.95,0%,source: deutsche bank estimates,as deteriorating drought conditions in the us and russia wreak havoc on the global agricultural complex, grain prices have been soaring in recent weeks. despite a strong safrinha (brazils second crop), corn in brazil rallied 30% since the end of june, while soybean meal (which has been rising all year following a disappointing south american harvest) is now trading at all-time highs, more than doubling in price since year to date.,higher grain and sg&a costs should keep margins under pressure for the rest of 2012,figure 3: brazil corn (r$/60 kg sack) 35 30 25 20,figure 4: brazil soybean meal (r$/ton) 1600 1400 1200 1000,800 15 600,10 5 0 source: bloomberg finance lp deutsche bank securities inc.,400 200 0 source: bloomberg finance lp,page 5,jan,feb,jun,aug,may,sep,jul,nov,dec,mar,apr,oct,sept,nov,feb,jan,apr,jun,jul,may,oct,dec,aug,mar,14 august 2012 food brf - brasil foods sa as a result, we calculate that on a spot basis, feed costs (which are approximately 2/3 corn and 1/3 soybean meal) for brazils pork and poultry producers are up 38% since the start of this year (see figure 5 below). figure 5: estimated dressed equivalent feed costs (r$/kg) r$ 1.60 r$ 1.50 r$ 1.40 r$ 1.30 r$ 1.20 r$ 1.10 r$ 1.00 r$ 0.90 r$ 0.80,jan,feb,mar,apr,may,jun,jul,aug,sep,oct,nov,dec,2008,2009,2010,2011,2012,source: deutsche bank estimates and bloomberg finance lp as feed is one the largest cost components for brasil foods (composing 25-30% of cogs on a consolidated basis), the current rally in grain prices should put downward pressure on gross margins at least through the end of this year and into the first half of 2013 (especially if the upcoming brazilian soybean harvest manages to disappoint). as a result, we now forecast full-yea