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Morningstar | Bunge Shares Beginning to Look Attractive; Higher Soy Crush Profits Ahead in Near Term. See Updated Analyst Note from 01 Aug 2018

Bunge reported decent second-quarter results as adjusted segment operating income grew nearly 50% year on year to $117 million during the quarter. Profit growth was primarily driven by a higher soy crush spread that boosted oilseeds profits in the Agribusiness segment. This was partially offset by a loss in the grains business, which also operates within the Agribusiness segment. In its earnings release, management reiterated its 2018 guidance for $1.3 billion in adjusted segment operating income. We think this number is achievable and, after updating our forecast, we maintain our $75 fair value estimate and no-moat rating. However, the market reacted negatively to management only maintaining full-year guidance a day after competitor ADM guided for higher results amid favorable grain marketing conditions. Shares closed the day down roughly 4.5%. At current prices, we think Bunge looks modestly undervalued.

In the agribusiness segment, oilseeds adjusted operating income increased $100 million from the prior year period to $118 million during the quarter, driven by higher soy crush margins. We note that the soy crush spread, based on Chicago Board of Trade data, currently sits around $1.70 per bushel, which more than double the 2013-2017 average of roughly $0.80. While the soy crush spread is just one variable that drives Bunge's profits, the higher spread has boosted 2018 operating results.

That said, Bunge’s overall profitability in the first half of the year actually declined year on year due to the company's forward hedging that resulted in a mark-to-market loss of $125 million. However, management expects the lower priced forward contracts to roll off during the second half of the year and be replaced with hedges that lock in the higher soy crush spread. This should allow the company to generate higher profits in the second half of 2018 and early 2019.

Over the long term, Bunge's profits will be driven by increased demand for soy-based proteins, which will allow the company to spread its fixed costs over greater volumes. Our long-term operating margin forecast for the Agribusiness is roughly $7 per metric ton, up from the 2013-17 average of $5.50.

Our increased near-term profit outlook for the oilseeds business is partially offset by our decreased outlook for Bunge's grains business, both of which operate within the Agribusiness segment. During the second quarter, the grains business generated an adjusted operating loss of $22 million, compared with a $16 million operating profit in the prior year period. On the earnings call, management pointed to elevated freight costs in Brazil, which appears to have been a significant factor. Management maintained 2018 segment guidance of an adjusted operating income range of $800 million to $1 billion. We expect Agribusiness profits to come in closer to the high end of the guidance range due to the strength of the oilseeds business.