Morningstar | Raising FVE to $73 as Bunge Announces Sugar and Ethanol Joint Venture with BP; Shares Undervalued. See Updated Analyst Note from 22 Jul 2019
On July 22, Bunge announced the creation of a sugar milling and ethanol producing joint venture with BP in Brazil. The joint venture, which will be named BP Bunge Bioenergia, will be split 50/50 between Bunge and BP. Bunge will move all eight of its Brazilian sugar mills, which currently make up its sugar and bioenergy segment, to the joint venture while BP will contribute its three Brazilian sugar mills. As a part of the transaction, Bunge will move $700 million of debt to the joint venture and receive a $75 million payment from BP. We expect the transaction to close by the end of 2019.Having updated our model to reflect the transaction, we've raised our Bunge fair value estimate to $73 per share from $72. Our no-moat rating is unchanged. At current prices, Bunge looks undervalued to us on a risk-adjusted basis, trading in 4-star territory. We think Bunge's agribusiness is well positioned to continue its turnaround under CEO Greg Heckman, who took over in January.
The transaction marks the first strategic move for Heckman and the new board of directors since activist investors began appointing new directors in the fourth quarter last year. As the board continues its strategic review of Bunge, we think further moves are likely. They could include divesting Bunge's fertilizer business, which like the sugar and bioenergy segment is not a core business. Other moves could include spinning off the food and ingredients business or an outright sale of the company. However, with no additional transactions announced, our $73 fair value estimate assumes Bunge maintains its current operations.
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