Rusagro - Looming Sugar Shortage Sweet For Rusagro

Rusagro stands to benefit from what will likely be a shortage in the domestic sugar market, particularly given that Russia's import duties protect the market from foreign competition. Also, the profitability of the company's agriculture and oil and fat divisions should be supported by the weaker ruble via export parity. On the flip side, falling pork prices and rising domestic production create headwinds for the meat division. We upgrade our EBITDA forecast for 2020 by 5% but cut it for 2021 by 3%. This, coupled with a weaker ruble, compels us to lower our target price to $11.50 per GDR. However, given the recent share price decline, we upgrade our recommendation to BUY. > A sugar boost to EBITDA. The previous harvest season (2019-20) saw domestic sugar prices tumble amid a market surplus. This year, however, sown area is down 18%, and we also expect a lower sugar beet yield and lower sucrose rate, which we think will result in 30% lower production. This means a shortage may be looming, which, given import duties, will not be filled by foreign competition. Assuming the sugar price soars toward R30 per kg in 4Q20 and sticks near this level in 1H21, we expect the division's EBITDA margin to rise 9 pp to 22% in 2020 (we see it at 21% next year). > Agriculture also supportive. Supported by a weaker ruble, wheat prices are currently quoted 8% above last year's levels. We expect Rusagro's average wheat selling price to rise 7% y-o-y to R11.2 per kg in 2020, before declining 3% to R10.9 per kg in 2021. This, coupled with higher sugar beet prices should bring the agriculture division's EBITDA margin up to 26% in 2020 and 24% in 2021, in our view. > New pork production capacity to weigh on prices. Pork prices are trending lower, and we see no triggers for a near-term recovery. Though Russia's pork market is balanced, industrial producers continue to add capacity. Thus, price investments will be needed to encourage domestic consumption and to make exports more competitive. We significantly downgrade our forecasts for the segment and now expect an EBITDA margin of 19% in 2020 and 18% in 2021.> Oil and fat margins up in 1Q20, set to ease in 2H20. The division's EBITDA margin rose to 12% in 1Q20 thanks to a weaker ruble and the procurement of sunflowers on favorable terms in 4Q19. However, as sunflower prices have risen and the ruble has strengthened, profitability is set to ease in 2H20. However, this should be more than offset by a weaker ruble, so we pencil in a 10% EBITDA margin in 2020 and 8% for 2021.> Forecasts amended, upgrade to BUY. We raise our EBITDA forecast by 5% for 2020 but cut it by 3% for 2021. We cut our target price to $11.50 per GDR but upgrade to BUY owing to the share price drop. The stock is trading at a 2020E P/E of 6.5, below EM and DM peers. We conservatively model a 35% payout, which implies a 5.3% 2020E dividend yield.