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Morningstar | Activists Add Four Board Seats as Bunge Lowers Guidance; We Trim FVE to $74; Shares Undervalued

Bunge reported solid third-quarter results as segment EBIT tripled year on year to $535 million, due primarily to a higher soy crush spread. However, in its earnings release, management lowered full-year adjusted segment EBIT guidance by $100 million, to $1.2 billion, on lower profit margins in the food and ingredients, and sugar businesses, partially offset by an increased outlook for the fertilizer business.

Although we updated our near-term outlook, our long-term forecast is intact. We've slightly lowered our fair value estimate to $74 per share from $75 for no-moat Bunge. The market reacted negatively to the earnings, sending shares down nearly 6%. At current prices, we view Bunge as modestly undervalued. In addition to earnings, Bunge also announced that it will expand the size of its board to 15 seats from 11. Of the four additional board seats, three will be appointed by activist investors Continental Grain and D.E. Shaw. The fourth will be mutually agreed upon by Continental, D.E. Shaw, and management.

Further, the board will conduct a strategic review of Bunge. Although no timetable has been set for the completion of the review, we expect an update in 2019. We note that the recommendations from a strategic review could vary widely and include divesting smaller business segments, selling the company, or acquisitions. Until the review is complete and a definitive plan has been set, our fair value estimate does not reflect any strategic initiatives and assumes that Bunge continues to operate all of its business lines.

In agribusiness, oilseeds EBIT increased $279 million, to $367 million, driven by an elevated soy crush spread. Based on CME Group data, the soy crush spread currently sits around $1.40 per bushel, down from $1.70 per bushel earlier in the year. However, the spread remains above the 2013-17 average of roughly $0.80. While the soy crush spread is just one variable that drives Bunge's profits, the higher spread has aided 2018 profits.

In the food and ingredients, or F&I, business, adjusted EBIT fell 3% year on year to $62 million during the quarter as lower palm oil prices and lower edible oil margins in Brazil weighed on results. Of management's $100 million EBIT guidance reduction, $40 million came from F&I. As Bunge fully integrates the Loders Croklaan acquisition, the company should realize some synergies from lower back office expenses. Combined with higher sales from increased demand for edible oils, we think the edible oil products segment within F&I will be able to grow EBIT margins from 1.7% in 2017 to 2.6% by 2022.