- BRF’s recent acquisition of overseas companies will enhance its vertical integration and improve profit margin in the following quarters.
- Three top shareholders continued to add shares in the recent months.
- The latest shift towards the Middle East and African markets will diversify its revenue stream.
- Its stock has a strong support level at $13 and just broke above the resistance level of $15, which shows significant upside potential in the following a couple of months.
BRF S.A. (NYSE:BRFS) is the largest poultry exporter in the world and the largest food processor in Brazil, with a market cap of $12B. Brazil’s economy experience great recession last year, which caused a consumer spending contraction and Brazil’s currency Real depreciated by more than 30% vs the US Dollar. BRF generates more than half its revenue from the domestic market, meaning the Real’s decline impacted its earnings severely. BRFS slumped 40% in the late of last year, but an improving investment climate in Brazil makes this stock a compelling opportunity moving forward.
Investment Climate in Brazil
Contrary to the public view on the great recession in Brazil that was widely reported last year, the capital net inflow of investment in Brazil for the latest quarter has turned positively. It indicates Brazil’s economic recovery is well underway. (See Figure 2)
Source: trading economics
Global Diversification Strategy
BRF S.A. is making every effort to diversify its portfolio globally as soon as possible.
In 2015, the company spent $496 million to buy assets in Thailand, Argentina and the UK. BRFS expected to grow annual revenue overseas by $600 million.
In June 2016, The European Union and six countries in Southern Africa signed a free trade agreement. According to the latest SEC filing in July, BRF S.A. appointed new directors for African and Middle East subsidiaries. Now it separates Africa’s division from the Middle East’s division and has focused more on the African market. Meanwhile, the company also established a new subsidiary targeting the global Muslim market.
Increase of Institutional Ownership
The recent changes on top owners are also positive. Although the largest shareholder Singapore government group reduced some stakes, T. Rowe Price, BlackRock and Renaissance have added more shares, which lead to a net increase of institutional ownership in the recent quarter.
BRF has P/E 16.8, P/B 3.1 and P/Cash Flow of 16.5 with Debt-to-Equity ratio of 1.02. Its current valuation is significantly lower than the consumer staple industry with strong positive cash flows. So far the stock trend line has formed a solid trough with strong support level around $13. The SMA 20 crossed above SMA 50, just broke above resistance level $15. The trend line has strong upside potential. (See Figure 1)
Considering profit margin improvement and global diversified strategies BRF S.A. has adopted to enhance its vertical integration and distribution capability, its earnings are expected to be significantly higher this quarter (will announce on July 28).
According to the latest news of Financial Times, BRF S.A. is projected to outperform the market in the following quarters. (See Figure 4 and Figure 5)
Using limit order around $15 to initial buy position would be a good approach to start investing in BRFS.
Let us know what you think about investing in Brazil’s comeback, comment below.