Tereos: Sweet valuation, salty outlook

We are initiating the coverage of Tereos with an Underweight recommendation on the issuer. Even if the bonds appear attractive on a relative value basis, we find the current environment too difficult considering Tereos’ operational strengths and weaknesses. We expect high volatility on Tereos’ notes through the year. Tereos is a France-based agricultural cooperative union , specializing in manufacturing sugar, ethanol and alcohol, starches, sweeteners, and other co-products. It is the second-larges t sugar manufacturer in the world with operations in Europe, Brazil and Africa. In FY18 (year ended March 2018), the group reported revenue s of nearly €5.0bn and adjusted EBITDA of €594m. This year, sugar prices have declined to their lowest level since 2015 owing to favorable weather conditions and the end of the European quota , both boosting sugar production. On the other hand, sugar consumption growth remains subdued ( + 1-2%) on the back of decreased sugar use in developed countries but offset by increased consumption in developing countries (notably India). Even if high oil prices are providing a kind of a floor for sugar prices (pushing Brazil to switch from sugar production to Ethanol), there are no current positive signs for a potential recovery of sugar prices in the short to medium term. Tereos benefits from a relative diversification with higher value-added products than raw sugar but this does not provide a shield for depressed sugar price levels in our view . Moreover, a current governance issue with some cooperators add some uncertainties. Tereos’ results will suffer this year (2018/2019) and there are no clear signs that th e situation will improve in the year 2019/2020. Positively, Tereos could benefit from : 1/ a potential equity raise ; 2/ lower production than forecasted on the back of lower harvest in Europe, Brazil, India or Thailand ; 3/ a renegotiation of the two-year agreement with Tereos’ cooperative growers ; 4/ a World Trade Organization settlement with both India and Pakistan to stop the current subsidies. Nonetheless, we do not expect any of those to happen in the short to medium term.