Page 11 - bne_Magazine_September_2017

bne September 2017 Companies & Markets I 11
“Russia has always been a good investment for agriculture and food,” Maxim Basov, CEO of Rosagro told bne IntelliNews in an exclusive interview. “There is a large market for food with relatively high prices, as a lot of the food has been imported. And the country has all the basics – wheat, barley, corn, sunflower – that can be produced at a low cost, processed and sold retail at high prices to the local market.”
Rosagro had excellent years in 2015 and 2016 with profits soaring as it has been one of the big winners from Russia’s 2014 ban on the import of EU agricultural (and later Turkish) agricultural goods in response to EU sanctions over Crimea. But this year has been harder.
The company just reported first second-quarter results that saw revenues down 8% y/y to RUB19.1bn ($316.8mn), with most of the damage being done by a harsh 23% fall in its sug- ar business, where both prices and sales were down thanks to a sugaroversupply on the market.
“Further rerating is in our view subject to improving returns within the sugar business and the launch of greenfield pork breeding capacities from 2018,” VTB Capital (VTBC) said in a note.
Currently, sugar is the most profitable business and makes up about half the company’s revenues and an even bigger share of its profits. Sugar is the only market in Russia that is still protected under WTO rules with an import duty of $140-$230 per tonne, says Basov.
Russia imports half a million tonnes of sugarcane a year from a total domestic sugar consumption of 5.5mn tonnes a year and Rosagro controls about 15% of the market, which makes it the second largest player in the sugar business, producing some 600,000 tonnes of sugar beet and 200,000 tonnes of cane sugar a year.
The devaluation of the ruble initially boosted this business,
as sugar prices are linked to the global price and so became more profitable as the ruble tumbled. The company had already modernised its sugar beet processing plants before the ruble crashed at the end of 2014, and it further increased profits by a number of branded sugar products sold directly to supermarkets from the cheap “Russian Sugar” through to pre-
mium brands such as “Mon Café” and “Brown” that dominate their various niches.
The rest of the business is doing well as Rosagro uses the
same strategy of going up the value chain to improve profits. While sugar was down, meat sales were up. To the plus, Rosa- gro’s meat business, lead by pork production, is growing and this is one of the most dynamic segments of the agricultural sector.
In the second quarter, Rosagro’s meat revenue was up by 25%, driven by both prices and sales volumes. Pork prices were strong during the quarter and grew 16% y/y and 9% q/q to RUB102/ kg ($1.70/kg), seeing a recovery in consumption after the end
“May was plagued by storms that turned fields across the regions into quagmires”
of Lent. At the same time, the product mix is shifting towards more value-added products: livestock sales volumes were down 23% y/y, while carcass and cuts up were up between 7-63%.
Things are also not going so well in oils and fats, with over all revenues down 11% y/y as prices were up, leading to a fall in sales. Mayonnaise is a central ingredient on any Russian table, but the upshot is even more than with sugar, the competition in the mayonnaise business is extremely intense and Rosneft has seen heavy falls in the production and sales of its brands of mayonnaise. Analysts worry that the company is fighting a losing war on this front.
The company is doing well, but given the fast growth of the last few years it is no longer flying. For example, it had a very ambi- tious plan to build three 100-football-field sized greenhouses in Siberia and the Russian Far East, but these have been iced after the cash-strapped government withdrew its offer of subsidies, without which the project is not economic viable.
However, the investors still like the stock, which is up 13% over the last month and now trades on 2017F EV/Ebitda of 6x, reports VTBC, which has a Buy rating on the name and a 21% upside.
Rosagro oil & fat production tonnes
Mayonnaise
Margarine
Oil
Oilseeds meal
Rosagro
14,8 17,9
9,4 7,5
55,4 43,9
70,76 48,1
19,5 21,4 14,6
7,3 12,4 9,9
32,7 46,7 53,8
11,5 44,4 61,5
14,9 -20%
6,6 -12%
57,2 8%
67,8 21%
Oil & Rosagro Fats Produc- tion tonnes
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
Change y/y
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