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Morningstar | Maintaining $72 Fair Value Estimate as Bunge Reports Improving Results; Shares Undervalued. See Updated Analyst Note from 08 May 2019

Bunge reported solid first-quarter results as adjusted segment EBIT nearly doubled to $166 million driven largely by improved agribusinesses results. We have reduced our near-term forecast for Bunge's SG&A expenses to reflect an acceleration of the company's cost savings program. Further, new CEO Greg Heckman has simplified Bunge's management structure, which we think will allow the agribusiness to run more efficiently.

Separately, we have slightly reduced our near-term forecast for agribusiness gross margins as we think soy crush margins will be negatively impacted by the Asian Swine Flu, or ASF. ASF will drive hog curtailments in China that, in our view, will lead to lower soy meal demand over the next couple of years. However, our long-term outlook is intact, that the agribusinesses will benefit from greater global demand for protein, which will benefit soy crush margins.

Having updated our model to reflect these changes, we maintain our $72 per share fair value estimate for Bunge. Our no-moat rating is also intact. At current prices, we view shares as undervalued, but we reiterate our very high uncertainty rating. We also updated our bear-case fair value estimate to reflect a more negative outcome for the agribusiness as a result of ASF leading to lower soy crush margins over the next several years. Our bear-case fair value estimate falls to $32 per share from $37.

Over the past several months, the board of directors has been conducting a strategic review of Bunge's businesses. On the earnings call, management gave few details of the review other than to state the board is working to divest some portions of the portfolio. With no concrete announcements as to where and when any possible divestitures will occur, we do not incorporate any transactions in to our model. However, the possibilities are wide ranging from some small divestitures, such as the sugar or fertilizer businesses, to a larger separation, such as the food and ingredients or agribusiness.