BrasilAgro Earnings Review: Exercising Caution After Persistent Challenges (NYSE:LND)

In my latest quarterly review of BrasilAgro (NYSE:LND), the company disclosed its financial results for the second quarter of fiscal year 2024, covering the 2023/2024 harvest.

The reported results were disappointing, with a net loss of R$5.82 million. Although still negative, this figure represented a 54.8% improvement compared to the loss of R$12.88 million in the same period of the previous cycle. Despite this improvement, the company continued to feel the impact of declining commodity prices and rising agricultural costs. Throughout the year, there has been a depreciation of approximately 10% in the company’s share price.

In my initial article on BrasilAgro, I took an optimistic stance on the Brazilian company due to its business model comprising owned and leased land, providing resilience during periods of weak seasonality. Furthermore, from a valuation perspective, the company appeared undervalued, trading well below its net asset value (“NAV”).

However, while BrasilAgro managed to mitigate specific impacts through farm sales in the last quarter, history did not repeat itself in FY24Q2. Faced with a prolonged unfavorable scenario characterized by declining agricultural commodity prices and diminishing land productivity, the company’s real estate segment is expected to suffer.

In response to these challenges, I anticipate that the company may adopt a more aggressive stance by buying more land, potentially through a follow-up offering or increased leverage. This shift is driven by the anticipation of difficulties encountered by smaller agricultural producers amid lower commodity prices, which could introduce short to medium-term volatility in the company’s share price.

Consequently, I foresee the distribution of dividends being potentially compromised for this year. In a more optimistic scenario, the company may deliver a yield close to 5%, but I believe this would render the dividend investment thesis unattractive in the short term.

BrasilAgro’s FY24 Q2 Earnings Results

The Brazilian agricultural products and services company reported weak results for the second quarter of the 2023/2024 crop year. Regarding figures, BrasilAgro reported net revenue of R$151.9 million in the quarter, down 18% compared to the same period in 2023. Moreover, there were fewer farm sales within its real estate arm, with revenues dropping 83% annually.

Additionally, there was a sharp compression in the EBITDA margin, which decreased by 17 percentage points quarter-over-quarter and by 8.6 percentage points year-over-year.

The company’s performance was adversely affected by several unfavorable conditions. These included reduced productivity in some regions, particularly in the Brazilian state of Mato Grosso. Additionally, there was a significant and continuous drop in the prices of soy and corn commodities.

The company’s operational results exhibited significant seasonality, typical of Brazilian agribusiness. However, insights about the remainder of the harvest year can still be gleaned.

One aspect addressed was the challenging scenario for agribusiness, with expected impacts from weather conditions, particularly those caused by El Niño. BrasilAgro has undertaken initiatives to mitigate these impacts even before planting, such as altering the crop mix and reducing corn areas, which could lessen the effects of El Niño on the company’s results.

Furthermore, the reduction of fuel taxes at the end of 2022 and the beginning of 2023 negatively impacted the ethanol price curve, consequently hurting margins in the sugarcane segment.

Despite the company’s cost of goods sold remaining in line with the same period last year, BrasilAgro reported a net loss of R$5.8 million for the quarter, compared to a net loss of R$12.9 million in the corresponding period last year.

Nevertheless, the downward trend in agricultural commodities (soybeans and corn) will continue to impact the company significantly throughout 2024. Farm prices have also declined, although there may still be opportunities for further land sales.

It is unclear whether agricultural land will reach the high prices seen in previous years in the agricultural real estate market. However, there remains potential for the company to make new property sales, particularly in the Brazilian state of Bahia and in Paraguay.

If BrasilAgro manages to sell around R$200 million of land in the 2023/2024 harvest, this could contribute to a dividend yield of 5% for 2024. It is worth noting that good land purchase opportunities are expected to emerge in the coming quarters as prices continue to decline. This trend may also pressure the company’s dividend distribution but aligns with the move towards a more asset-light business model adopted by companies in the sector.

Reasons for Current Caution

My bullish thesis on BrasilAgro has only paused in the short to medium term rather than indicating pessimism in the long term.

However, my current caution stems from the company’s potentially more aggressive approach to land investments, which could involve executing a follow-on offering or increasing leverage considering the company’s R$196 million cash balance and R$1.04 billion net debt.

BrasilAgro anticipates challenges for smaller-scale agricultural producers due to lower commodity prices. With greater access to capital markets, the company could increase the issuance of agribusiness-specific securities, particularly given recent restrictions on specific securities by the Central Bank of Brazil. This move should attract investors seeking to raise funds at more favorable rates for real agribusiness projects.

As BrasilAgro aims to intensify land acquisitions, it’s crucial to view these actions in the context of more favorable conditions for its real estate business. While this segment is significant during periods of weak seasonality, profitable land sales depend on buying at attractive prices and capitalizing on favorable land valuations.

Furthermore, pressure on small producers, coupled with challenges in family business succession, could lead to favorable lease deals, aligning with the sector’s trend towards a more asset-light business model, mainly observed in companies like SLC Agricola (OTCPK:SLCJY) and to a lesser extent, BrasilAgro.

This dynamic could lead to increased leverage or a potential follow-on offering, even amid tighter market conditions due to commodity price impacts on stock performance. While this wouldn’t necessarily harm the company’s fundamentals, it might introduce short to medium-term volatility in its share price due to potential dilution and increased leverage in a high-interest-rate environment.

Despite these considerations, I maintain an optimistic long-term outlook on BrasilAgro. However, short to medium-term volatility could result from these strategic shifts.

As previously discussed, BrasilAgro’s strategy revolves around effectively timing real estate transactions and ensuring profitable agricultural production. However, agricultural operations entail challenges such as weather fluctuations and market volatility, impacting liquidity and the availability of favorable buying and selling opportunities.

The challenging scenario, characterized by declining agricultural commodity prices and land productivity, will likely affect farmland sale prices, potentially impacting the company’s real estate segment. Nevertheless, this could present acquisition opportunities at attractive prices.

BrasilAgro’s combination of controlled debt, diversified operations, and strong cash generation typically results in dividend distributions. Historically, the company has paid dividends frequently, with distributions occurring mainly in November, averaging around 66% over the last six years, with a dividend yield of approximately 8.7%.

However, given uncertainties in the operating and real estate segments, dividend payouts may be impacted, potentially reducing the yield for this year. Thus, I prefer a conservative stance on BrasilAgro’s shares, turning my bullish position to neutral.

Valuation Still Attractive, but Dividends at Risk

BrasilAgro reports a Net Asset Value (“NAV”) of R$3.8 billion, indicating the value of its agricultural properties at approximately R$37.5 per share, or around $7.5 per share in U.S. dollars.

However, it’s essential to acknowledge that NAV may not fully reflect a company’s market value, as it excludes factors like intangibles, growth potential, and economic conditions. BrasilAgro’s market capitalization of $472 million remains significantly below its asset value. Thus, the company appears undervalued based on this metric.

Regarding dividends, the current challenging situation may impact the company’s ability to maintain its recent average payout. As per its dividend policy, BrasilAgro distributes a minimum of 25% to its shareholders. If the company maintains a 40% payout, a base case scenario would yield an annual dividend of $0.24 per share, assuming a net profit of $59 million in 2024, as estimated by Koyfin based on S&P Global Intelligence.

In this scenario, a dividend yield of 5% is feasible. However, I consider this unattractive compared to a 6% return on investment (ROI), which I deem a good yield for an income stock. This translates to a target price of $3.96, offering no margin of safety for the stock at the current share price.

The Bottom Line

In summary, the recent quarter has posed challenges for BrasilAgro, though not alarming given the sector’s typical seasonality. While the long-term investment thesis remains compelling, particularly in valuation, I anticipate a potential shift in the real estate segment’s strategy. This could involve the company making land acquisitions this year, possibly through leveraging or raising additional capital. Such actions may introduce added risk, short-term share price volatility, and negatively impact dividend distribution.

Therefore, I am adopting a neutral stance on BrasilAgro in the short to medium term, considering the complexities of execution amidst the current seasonality of its strategy, which, in theory, should be straightforward.