Thursday, June 24, 2010

Cosan Downgraded To Neutral

We recently downgraded our rating for Cosan Limited (CZZ: 9.86 -0.03 -0.30%)from Outperform to Neutral due to a host of factors, including the cyclicality of the industry served, sensitivity to changes in supply and demand, the competitive nature of the business and customer concentration risks.
Fourth Quarter and Fiscal Year 2010 Highlights
Cosan Limited reported encouraging results for the fourth quarter and fiscal 2010. Net sales for fiscal 2010 grew at a staggering 145% year over year with net income in the positive territory, compared with a loss in the comparable period a year ago.
Reported net income in the fourth quarter was R$309 million (US$170.7 million) versus a net loss of R$40 million (US$17.2 million) in the fourth quarter of 2009. For fiscal 2010, net earnings were a positive R$986.5 million (US$524.7 million) versus a negative R$474 million (US$235.8 million) in fiscal 2009, largely fueled by higher sales volume and prices, exchange rate variation and benefits from the tax recovery program.
Considering the top line, net sales (excluding eliminations) in the fourth quarter grew 87% year over year to R$4,394.1 million (US$2,427.7 million) and in fiscal year 2010 grew 145% year over year to R$15,336.1 million (US$8,157.5 million), driven primarily by the merger of NovAmérica, higher sugar prices and the start-up of the co-generation projects. Of the 2010 gross sales, CAA contributed 34%, Rumo 1% and CCL 65%. 
For fiscal year 2011, management anticipates revenues in the range of R$16.5–R$18.5 billion (US$9.1–US$10.2 billion), EBITDA in the range of R$2.0–R$2.4 billion (US$1.1–US$1.3 billion), and capital expenditure in the range of R$1.9–R$2.3 billion (US$1.0–US$1.3 billion). Crushed cane volumes are expected to range within 58–62 million tons, sugar volume sold within 4.7–5.1 million tons, and ethanol volume sold in the range of 2.0–2.2 million liters.
Downgraded to Neutral
We believe that Cosan has been growing through acquisitions and other expansion strategies. The company is well positioned to deliver good results yet again for fiscal year 2011 with an expected increase in sugar and ethanol production, driven by favorable weather conditions (higher level of rains) and higher yield of sucrose in cane.
Also, Cosan’s joint venture with Shell, a leading energy and petrochemical player, is expected to create better access to the ethanol consumer market, increased competitiveness in biofuels and fuel distribution businesses, better scope for development of second generation technology, improved debt ratios through more capital and increase in cash profile, and better growth prospects.
However, the company is highly exposed to the volatility in domestic and international supply and demand. Ethanol pricing is largely affected by changes in supply and demand for gasoline, while highly regulated market and speculation risks influence sugar prices.  Also, customer concentration risks and sensitivity to currency fluctuations impact the company’s financial results in adverse conditions.
Cosan’s prime competitors include Archer Daniels Midland Company (ADM: 26.545 -0.445 -1.65%) and Copersucar - Cooperativa de Produtores. We have downgraded Cosan Limited’s recommendation from Outperform to Neutral.

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