Jalles Machado - LATAM Stocks Investment Analysis #21

Jalles Machado is a vertically integrated sugarcane producer with a diversified product portfolio and exports to over 20 countries.

Oct 06, 2023

Dear LATAM Stocks Readers,

This edition will cover Jalles Machado, a vertically integrated Brazilian sugarcane producer.

Sugar has received a lot of attention from investors recently. The price of sugar has increased significantly over the past 3 years and is currently hovering around its highest price in over a decade.

I think it’s reasonable to say sugar prices are at an inflection point. Given the current attention and price action in sugar, I wanted to cover a sugar company.

I don’t have an opinion, bullish or bearish, on the price of sugar. I’ll leave that up to you. My goal with this analysis is to put the Brazilian sugar industry on your radar by highlighting a pretty standard Brazilian producer.

Jalles Machado harvests over 87,000 hectares of sugarcane. They have 3 plants which have large installed milling and ethanol production capacity.

Their current financials are decent but not great. The current valuation is mixed, reasonable by some metrics, expensive by others. Your view of sugar prices is probably going to determine your view of Jalles Machado stock as an investment.

But again, my goal here is to draw your attention to the Brazilian industry as much as it is to highlight Jalles stock as a potential investment.

Brazil is the largest producer and exporter of sugar in the world. They also have a robust domestic ethanol market. I think it’s a market worth studying and Jalles Machado is a great case study to look at the industry

The majority of Brazil’s sugar industry is private, including the country’s largest producer and exporter, Copersucar. Interested investors can also look at São Martinho (Ticker: SMTO3) and Raizen (Ticker: RAIZ4) which are also Brazilian sugar stocks.

I hope you find this analysis useful. As always, let me know what you think in the comments below!

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Common Stock: Jalles Machado (Ticker: JALL3)

Industry: Agriculture

Current Market Price: R$ 8.70

Market Capitalization: R$ 2.77 Billion

*All values in this article are expressed in Brazilian Reais (BRL) unless otherwise noted.

**A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.

Summary of the Company

Jalles Machado is a vertically integrated sugarcane producer. They plant, harvest, and mill sugarcane. They have a diversified portfolio of products derived from the production of sugarcane.

Product Portfolio

Table Sugar – The company’s crystal and organic sugar products are a core product line, accounting for 36% of revenue. Their Itaja sugar brand is one of the leading brands in Brazil with exports to over 20 countries.
Ethanol – The company produces both anhydrous and hydrated ethanol. There is a robust domestic market for ethanol in Brazil. Ethanol accounts for around 55% of revenue.
Energy Generation – The company generates electricity which it sells to the grid. Electricity generation accounts for 4% of revenue.
Cleaning Products – The company has a line of cleaning products derived from sugar such as alcohol sanitizers. This product line accounts for 3% of revenue

The company’s 3 major plants are Jalles Machado, Otavio Lage, and Santa Vitoria. They have the following combined installed capacity:

Milling – 41,500 tons per day.
Ethanol – 800 cubic meters of anhydrous and 3,000 cubic meters of hydrated per day.
Sugar – 41,000 sacks per day.
Energy – 190 Megawatt hours.
Harvesting – 87,800 Hectares

Jalles Machado was founded in 1980 and had their IPO on the Brazilian stock market in 2021. The company is headquartered in the state of Goiás, one of Brazil’s major agriculture states.

Mergers, Acquisitions & Joint Ventures

In October 2022 Jalles Machado acquired the Santa Vitoria plant in the state of Minas Gerais for R$ 722 million. This modern facility increases the company’s installed capacity across all business lines with the exception of table sugar. It also diversifies their production geographically.
In September 2023 Jalles Machado announced an investment of R$ 30 million to create the first biogas facility in the state of Goiás. The facility will be operated in partnership with the French company Albioma. Jalles has partnered with Albioma in the past. This biogas facility is expected to produce enough energy to support 30,000 people per year.

The Brazilian Sugar Industry.

Brazil is the largest sugar producer in the world. They produced 36 million tons of sugar in 2021/2022. It is also the largest sugar exporter in the world.

In addition to sugar for human consumption, Brazil has a robust domestic ethanol market. This ethanol market is driven in large part by the largest “flex fuel” car fleet in the world. Flex fuel engines are able to run on both gasoline or ethanol power. There are around 40 million flex fuel cars in Brazil. It is common for Brazilians to fill up their tank with ethanol or a mixture of gasoline and ethanol.

The current price of Sugar is around $0.26 USD cents per pound. Price has increased significantly over the past 3 years and is currently right around its highest price since 2011.

The Financials

Revenue and Cost Analysis

R$ 1.7 billion in revenue in 2023, up from R$ 1.45 billion in 2022.
Gross profit of R$ 547 million in 2023, representing a gross margin of 32% in 2023, down from 52% in 2022.
EBIT of R$ 969 million in 2023, up from R$ 735 million in 2022. This increase is due mostly to a large increase in “other income”, which is a one-time gain on a bargain purchase that is a recorded as income for accounting purposes, but is not a cash inflow. Normalized EBIT without this accounting gain was R$ 298.3 million in 2023.
Profitable. Net income of R$ 692 million in 2023, representing a profit margin of 40%. Again, “other income” was a big part of this. Normalized net income, excluding the gain on bargain purchase was R$ 22 million in 2023. Profit margin in 2022 was 26.7%.
A few interesting notes on the company’s operations and margins:
Around 70% of all the company’s production costs are related to the field.
Any additional product/ revenue stream the company can create, such as energy, is highly accretive to the company’s earnings:
“Energy sales improve cash flow stability and predictability and are strategic for the Company, since practically all revenue from energy sales is converted into EBITDA, thanks to marginal operating costs and expenses.”
This also implies that the company’s efficiency in field operations are highly impactful on the company’s margins. Management continually highlights its recent investments in irrigations systems:
“Since around 70% of production costs are related to the field, throughout its history, the Company has constantly sought to reduce field costs through increasingly efficient management. In recent years, Jalles Machado has made significant investments in irrigation, as well as investments to reduce the average age of the sugarcane field, which is fully owned by the Company, thus mitigating supply risk and increasing field quality control. Harvesting and planting are fully mechanized, increasing productivity and reducing farming costs.
Irrigation is one of Jalles Machado’s main agriculture differentials. In the last few years, investments were focused on rescue irrigation, which protects against adverse weather conditions, and full and/or supplement irrigation, which increases sugarcane yield and the average life of the plant, diluting the cost of planting over a longer period.”

Balance Sheet Analysis

The company’s short term liquidity position is fine with a current ratio of 2.5

Jalles has a leveraged balance sheet, with a debt to equity ratio of 2.2.

Debt Analysis

Jalles has R$ 2.1 billion in total debt outstanding, R$ 230.7 million current of which is current.

Valuation Metrics

Price to Book – 1.3x
Price to Sales – 1.6x
Price to EBIT (excluding “other income”) – 9.3x
Price to Net Income (excluding “other income”) – 126x

Share Dynamics and Capital Structure

As of the fiscal year end March 31, 2023 Jalles Machado has 294.7 million common shares outstanding and no preferred shares.

The company’s largest shareholder is Vera Cruz Agropecuária, which owns 36%. Gissara Agropecuária owns 10%.

32% of the company’s shares float.

The remaining shares are owned by dozens of individuals from the founding families, most of whom own less than 1%.

Dividends

In July of 2023 Jalles Machado paid total dividends of R$ 0.44 cents per share based on the previous fiscal year’s results.

At the current price this implies a dividend yield of 5.1%

Technical Analysis Notes

The company’s stock price has basically gone nowhere since their IPO in 2021.

Price is currently above the 50 week moving average as well as the 50 and 200 daily moving average.

Summary and Conclusions

Positives

Diversified product portfolio. Market leader in table sugar with significant exports.
Price is currently at the IPO price over 2 years later. The company’s operation have grown significantly since then.

Negatives

Leveraged with a lot of long term debt. Financing expenses are a significant drag on earnings.

Conclusion

Jalles Machado is a typical Brazilian sugar company. Their financials are healthy enough and you can make an argument the current valuation is reasonable based on some metrics, such as price to book. If you want exposure to the sugar market, Jalles Machado stock is a workable investment vehicle.

Regardless, studying Jalles Machado provides insights into the sugar market and is a company worth adding to your watchlist.

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