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1、,Credit,GlobalMarketsResearch,EmergingMarkets,2.8,5,408 2.6,Mar 9.5 20,12,Minerv 12.25,22,JBSSBZ 7.25,14,6,JBSSBZ 10.25,20,16,4 BRFSBZ 6.875,20,8,Global Emerging Markets BrazilFood13 November 2012,BRF-Brasil Foods SA3Q12 profitability continues tosag-lower to SellThough sales improved,credit metrics
2、 continue to deteriorate,ratings at riskNet revenues in 3Q12 increased 5.1%qoq and 14.3%yoy to BRL7.2bn.Theyearly increase was generated despite the impact of the TCD process(terms andconditions imposed by the CADE anti trust agency in order to obtain the go aheadfor the merger of Perdigao and Sadia
3、).The better than expected revenue resultwas offset,in our view,by a relatively steep decline in operating margins andanother in a long line of increases in leverage.Though we expect BRFs 4Q12results to be stronger in terms of margins,CFs and credit metrics,we believe thatBRFs credit ratings are at
4、risk and the companys bonds are overvalued relative toits steady state metrics and relative to peers,and we lower our Holdrecommendation to Sell.Despite price increases,grain costs compressed operating marginsOur expectations regarding the negative impact of grain price increases and theTCD were ref
5、lected in BRFs operating performance.Gross profit increased 2.5%qoq but declined 5.0%yoy to BRL1.5bn.BRFs gross margin declined 24.9 bpsqoq and 430.5 bps yoy to 21.2%.Reported EBITDA,which includes“other resultsfrom operations and JVs”,was flat qoq and 21.8%lower yoy to BRL565m with amargin decline
6、of 40.2 bps qoq and 362.7 bps yoy to 7.9%.Moreover,ourcalculated,recurring EBITDA was BRL474.3mn,-8.8%lower qoq and-29.4%lower yoy with a margin of 6.6%.This margin level contrasts with BRFs historicalEBITDA margin levels,nearing 10.0%,reflecting a still weak international freshpoultry market,the el
7、imination of brands under the TCD and the incomplete passthrough of higher prices to recover higher grain costs in the quarter.Little benefit from positive cattle cycle,TCD hurdles and higher leverageUnlike Brazilian protein peers,BRF has little exposure to the cyclically highmargins-available in th
8、e Brazilian beef segment fresh beef and pork account foronly 7.3%of volume sold(not broken down),while fresh/chilled poultry accountsfor 33.5%.Furthermore,timing has not supported operating performance as thisquarters results were also impacted by asset transfers and the discontinuation ofcertain br
9、ands in key product categories as per CADEs requirements and the startup of new products and distribution centers.Leverage metrics in 3Q12 thusgrinded higher for the fifth consecutive quarter reported LTM net leverage,increased from 2.57x in 2Q12 to 2.76x.and in our calculated recurring format thism
10、etric increased from 2.83x to 3.14x.Gross leverage reached 3.53x(reported)and 4.09x(calculated)with cash/S-T below 1.0 x for the fourth consecutive quarter.These are levels that,if maintained,should put downward pressure on BRF creditratings and upward pressure on bond yields and spreads,in our view
11、.With leverage converging toward HY peers,valuation appears richWith business execution disappointing,improvement visibility questionable anddeteriorating credit metrics,bond valuations look rich in our view.We provideadditional discussion of valuation and risks on page 2 and 3 below.Outstanding Iss
12、ues,ResultsResearch TeamDenis ParisienResearch Analyst(+1)212 250-Natalia CorfieldResearch Analyst(+1)212 Net debt(BRL)and net leverage(x)7,048 7,1255,8124,8642.01.71.53Q11 1Q12 3Q12R debt(BRLm)R lever.(x)BRF sales volume(000 tons)320 550260 525200 500140 47580 4503Q11 4Q11 1Q12 2Q12 3Q12Fresh pork/
13、beef Dairy productsOthers Fresh poultry(RHS)Processed meat(RHS)Protein peer yield vs durationYield,%14Mar 8.375 18Mar 9.625 16Minerv 10.87510 19JBS-Friboi 10.58 16 21JBSSBZ 11.625JBS-Friboi 8.25 JBSSBZ 8.25 BRFSBZ 5.87518 22BRFSBZ 7.251721 2 3 4 5 6 7Duration,IssueBRFSBZ 6.875%BRFSBZ 7.25%BRFSBZ 5.8
14、75%,Maturity201720202022,Outstanding250750750,Mdy/S&P/FtcBaa3/BBB-/BBB-Baa3/BBB-/BBB-Baa3/BBB-/BBB-,Mid Yield*3.77%4.11%5.55%,Mid Z-Spread*311 bps300 bps416 bps,Mid Price*112.76119.38113.00,*Indicative as of Nov 15th 2012Source:Deutsche BankDeutsche Bank Securities Inc.All prices are those current a
15、t the end of the previous trading session unless otherwise indicated.Prices are sourced from localexchanges via Reuters,Bloomberg and other vendors.Data is sourced from Deutsche Bank and subject companies.DeutscheBank does and seeks to do business with companies covered in its research reports.Thus,
16、investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a singlefactor in making their investment decision.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MICA(P)072/04/2012
17、.,MidYield(%),MidYield(%),13 November 2012,Food BRF-Brasil Foods SAValuation trendsThe spread tightening rally in EM corporate credit,as with other risk asset markets,helpedBRF bonds enjoy significant price appreciation and spread compression this year,particularlysince August,despite weak fundament
18、als,a rather tough set of conditions set by anti-trustofficials and despite incremental bond supply from the company earlier in the year.Therecent correction in risk asset markets evident in figures 1 through 4 below,has temperedthat performance somewhat,though has not done much to correct what we c
19、onsider to bean increasingly challenging relative value misalignment for BRF bonds.While most proteinproducers in LatAm have been improving margins and generating a modicum ofdeleveraging,BRF has struggled to adjust to the tough conditions of the TDC and its productmix that has the highest around 50
20、%-exposure to grain fed animals in the commodityprotein chain.These factors and the deterioration in BRFs balance sheet and credit metricsled Fitch to lower to Negative its BBB-rating on BRFs bonds in August.While BRF was notthe only Brazil-based protein producer to have its outlook downgraded in th
21、e report,BRF isthe only one at.risk of losing its IG ratings and being re-classified,at least by one majoragency,to speculative grade.In addition,we believe it will become increasingly difficult forS and 6.875%notes due 2017 at 112.61,YTM of3.77%and zspread of 311bps.,Figure 1:Mid yield vs HG peers(
22、last six months)9.58.57.56.55.54.53.5,Figure 2:Mid yield(%)vs HG peers(last three months)9.58.57.56.55.54.53.5,2.509-May-12,09-Jul-12,09-Sep-12,09-Nov-12,2.509-Aug-12,09-Sep-12,09-Oct-12,09-Nov-12,BRFSBZ 7.25 20BRFSBZ 5.875 22SIGMA 6.875 19,BRFSBZ 6.875 17CSANBZ 7.0 17SIGMA 5.625 18,BRFSBZ 7.25 20BR
23、FSBZ 5.875 22SIGMA 6.875 19,BRFSBZ 6.875 17CSANBZ 7.0 17SIGMA 5.625 18,Source:Deutsche BankPage 2,JBSSBZ 7.25 21,JBSSBZ 7.25 21Source:Deutsche Bank,Deutsche Bank Securities Inc.,MidZ-Spread(bps),MidPrice(USD),13 November 2012,Food BRF-Brasil Foods SARisksUpside risks to our Sell recommendation inclu
24、de potential improvement in weatherconditions that help increase the supply of grains,lower costs and improve margins,particularly in the fresh poultry and pork businesses;a reduction in supply in internationalmarkets from competing countries that would improve international prices in exportedproduc
25、ts and improvement in Brazilian and global growth and/or shifts in consumerpreferences that would increase the demand for poultry,pork,beef,dairy and processedprotein products.,Figure 3:Mid Z-spread vs HG peers(last six months)790690590490390290,Figure 4:Mid price vs HG peers(last six months)1251201
26、15110105100959085,190,09-May-12,09-Jul-12,09-Sep-12,09-Nov-12,09-May-12BRFSBZ 7.25 20CSANBZ 7.0 17,09-Jul-12BRFSBZ 6.875 17SIGMA 6.875 19,09-Sep-12,09-Nov-12BRFSBZ 5.875 22SIGMA 5.625 18,BRFSBZ 7.25 20BRFSBZ 5.875 22SIGMA 6.875 19JBSSBZ 7.25 21,BRFSBZ 6.875 17CSANBZ 7.0 17SIGMA 5.625 18,JBSSBZ 7.25
27、21,Source:Deutsche BankDeutsche Bank Securities Inc.,Source:Deutsche Bank,Page 3,Yield,%,7,5,3,13 November 2012,Food BRF-Brasil Foods SA,Figure 5:Yield versus Duration Latam Food and AgribusinessL atam Food&Agribusiness13GVO 11.75 22,11,GVO 10.5 18,USJ 9.875 19,MIN 12.25 22,9,MIN 10.875 19,JBS 10.5
28、16JBS 10.25 16,JBS 8.25 18ARC 7.25 17,JBS 8.25 20ARC 7.5 19,JBS 7.25 21,COZ 6.375 22,MAB 7.875 19,AJE 6.5 22,BRF 6.875 17,BRF 7.25 20,COR 6.75 21,BRF 5.875 22,SIG 6.875 19,CSA 9.5 14,CSA 7.0 17,SIG 5.625 18,BIM 4.875 20KOF 4.625 20,BIM 4.5 22,1,1.4,2.4,3.4,4.4,5.4,6.4,7.4,DurationSource:Deutsche Ban
29、k,Page 4,Deutsche Bank Securities Inc.,Spotprice(USd)/bushel),Spotprice(USd/bushel),May-12,Mar-12,Sep-12,Oct-12,Oct-12,Jan-12,Apr-12,May-12,Mar-12,Sep-12,Oct-12,Jan-12,Apr-12,Nov-12,Aug-12,Jun-12,Feb-12,Jul-12,Spotprice(BRL/60kg),Spotprice(BRL/60kg),May-12,Mar-12,Aug-12,Sep-12,Oct-12,Jan-12,Apr-12,N
30、ov-12,Jun-12,Feb-12,Jul-12,Jan-12,May-12,Mar-12,Jun-12,Feb-12,Jul-12,Sep-12,Apr-12,Aug-12,Nov-12,Nov-12,Jun-12,Aug-12,Feb-12,Jul-12,13 November 2012,Food BRF-Brasil Foods SA,Figure 6:US spot corn prices(YTD)900800700600500Source:Deutsche Bank,Bloomberg Finance LPFigure 8:Brazilian spot corn prices(Y
31、TD)3834302622Source:Deutsche Bank,CEPEA/ESALQDeutsche Bank Securities Inc.,Figure 7:US spot soybean prices(YTD)2,0001,8001,6001,4001,2001,000Source:Deutsche Bank,Bloomberg Finance LPFigure 9:Brazilian spot soybean prices(YTD)100908070605040Source:Deutsche Bank,CEPEA/ESALQ,Page 5,-,-,13 November 2012
32、,Food BRF-Brasil Foods SA,Summary FinancialsFigure 10:BRF 3Q12 Summary Financials(USDm),Income Statement(USDm)Net RevenuesCOGSGross ProfitGross MarginGross interest expenseSG&ACash Flow(USDm)EBITEBITDAEBITDA MarginReported EBITDARep.EBITDA MarginChange in WCChange in Net WABroad OCF(w chg in NWA)Net
33、 Interest paidNet capexAcquisitionsBroad Free Cash Flow(FCF w chg in NWA)Net change in debtNet cash generationBalance Sheet(USDm)S-T DebtL-T DebtTotal DebtReported Total DebtReported Cash and cash equivalentsNet DebtReported Net DebtCredit RatiosInterest CoverageEBITDA-Capex/InterestS-T Debt/Total D
34、ebtCash/S-T DebtRun-rate Gross leverage rep.Total debt/LTM EBITDA(x)Total debt/Rep.LTM EBITDA(x)Run-rate Net Leverage rep.Net debt/LTM EBITDA(x)Net debt/Rep.LTM EBITDA(x)Rep.Net debt/Rep.LTM EBITDA(x)LTM OCF/Total Debt(%)Working Capital turnover(days)CAPEX(%)Revenues,3Q113,847.8(2,865.9)982.025.5%(6
35、9.9)(667.3)3Q11278.2410.710.7%441.811.5%(205.9)69.8340.9(39.1)(925.6)(150.0)(899.9)(507.9)(1,132.1)3Q111,652.72,661.64,314.44,509.41,921.42,483.62,588.13Q116.32x-6.92x38.3%1.16x2.44x2.47x2.78x1.41x1.42x1.25x1.30 x33.4%4824.1%,4Q113,939.7(2,859.2)1,080.527.4%(65.7)(689.7)4Q11282.1406.610.3%510.112.9%
36、101.7(110.8)517.4(42.8)(293.6)(8.3)78.2(0.3)(134.5)4Q111,849.42,464.74,314.14,459.01,562.02,846.62,896.94Q117.77x3.30 x42.9%0.84x2.11x2.50 x2.23x1.40 x1.65x1.47x1.50 x35.3%457.5%,1Q123,582.7(2,823.2)759.521.2%(60.9)(587.5)1Q12151.5285.88.0%300.88.4%(26.8)144.7141.2(43.5)(251.4)(347.0)111.7(63.8)1Q12
37、1,965.42,460.34,425.84,520.51,339.03,317.33,181.51Q124.94x0.81x44.4%0.68x3.68x2.83x2.54x2.76x2.12x1.90 x1.82x34.6%527.0%,2Q123,480.2(2,722.8)757.521.8%(61.8)(587.7)2Q12142.7264.67.6%287.48.3%(152.8)(177.8)442.3(51.4)(245.2)(253.8)(96.4)363.3242.02Q121,697.53,091.64,789.14,977.11,469.63,421.53,507.52
38、Q124.65x0.68x35.4%0.87x4.17x3.50 x3.11x2.98x2.50 x2.22x2.28x34.5%517.0%,3Q123,546.8(2,794.3)752.521.2%(87.2)(590.1)3Q12114.5233.96.6%278.67.9%(76.9)(48.7)282.6(42.8)(198.8)5.4(287.7)(254.1)3Q121,309.53,191.94,501.44,660.01,091.63,457.13,568.43Q123.20 x0.92x29.1%0.83x4.04x3.78x3.27x3.10 x2.90 x2.51x2
39、.59x29.9%485.6%,qoq1.9%2.6%-0.7%(54.92)41.1%0.4%qoq-19.8%-11.6%(100.72)-3.1%(40.22)-49.7%-72.6%-36.1%-16.8%-18.9%NMNMNMNMqoq-22.9%3.2%-6.0%-6.4%-25.7%1.0%1.7%qoq bps-145.423.4(635.5)(3.2)-12.727.816.012.640.128.931.4-4.6-4-144.2,yoy-7.8%-2.5%-23.4%(430.50)24.7%-11.6%yoy-58.9%-43.1%(407.93)-36.9%(362
40、.67)-62.7%NM-17.1%9.4%-78.5%NMNM-43.4%-77.6%yoy-20.8%19.9%4.3%3.3%-43.2%39.2%37.9%yoy bps-312.5783.7(921.7)(32.9)159.8130.548.5169.7147.8126.3129.1-3.50-1845.0,201012,892.2(9,635.2)3,257.025.3%(289.8)(2,191.8)2010843.81,287.210.0%1,497.811.6%208.3210.51,076.7(162.6)(396.6)(213.8)179.1(854.3)(673.0)2
41、0101,340.92,994.84,335.74,385.12,197.72,323.42,187.420105.17x3.80 x30.9%1.64x2.89x3.37x2.89x1.55x1.81x0.74x1.46x24.9%523.1%,201115,355.3(11,377.4)3,977.825.9%(272.9)(2,547.3)20111,195.31,724.811.2%1,937.812.6%204.2177.11,547.7(165.1)(672.1)(155.4)185.6(21.6)136.920111,849.42,464.74,314.14,459.01,562
42、.02,846.62,896.920117.10 x4.64x42.9%0.84x2.23x2.50 x2.23x1.47x1.65x0.61x1.49x35.2%484.4%,LTM14,549.5(11,199.5)3,350.023.0%(275.6)(2,455.0)LTM690.81,190.98.2%1,376.99.5%(154.8)(192.6)1,383.5(180.6)(989.0)(262.1)(359.7)187.0(210.5)LTM1,309.53,191.94,501.44,660.01,091.63,457.13,568.4LTM5.00 x1.41x29.1%
43、0.83x3.27x3.78x3.27x2.51x2.90 x2.51x2.59x29.9%466.8%,Capital Structure 3Q12(USDm),amount,as%total,Liquidity,BRF Foods,3Q12 revenue breakdown,Working Capital,489.7,4.3%,Cash,1,091.6,FINEM-BNDESPESAExport Credit FacilityBondsOthersTotal DebtShareholders EquityTotal Capitalization,665.294.41,379.31,771
44、.5101.24,501.47,009.411,510.8,5.8%0.8%12.0%15.4%0.9%39.1%60.9%100.0%,Commited credit linesTotalS-T DebtSurplus/(Deficit),500.01,591.61,309.5282.1,OtherProcessedProducts0%DairyProducts10%,Others(soyand foodservice)8%,NaturalMeat42%,Debt maturity profile,USDm as of 3Q12,Equity Value,US$mm3,0002,5002,0
45、001,5001,000500,545,815,332,271,2,537,Market Cap.as on 11/12/12Net DebtMinority Interest(BV)Enterprise ValueEV/LTM EBITDA,15,484.23,457.122.018,963.313.77x,ProcessedMeat40%,0,2012,2013,2014,2015,2016+,Source:Deutsche Bank,company data.,Page 6,Deutsche Bank Securities Inc.,-,-,13 November 2012,Food B
46、RF-Brasil Foods SA,Figure 11:BRF 3Q12 Summary Financials(BRLm),Income Statement(R$mm)Net RevenuesCOGSGross ProfitGross MarginGross interest expenseSG&ACash Flow($Rmm)EBITEBITDAEBITDA MarginReported EBITDARep.EBITDA MarginChange in WCChange in Net WABroad OCF(w chg in NWA)Net Interest paidNet capexAc
47、quisitionsBroad Free Cash Flow(FCF w chg in NWA)Net change in debtNet cash generationBalance Sheet(R$mm)S-T DebtL-T DebtTotal DebtReported Total DebtReported Cash and cash equivalentsNet DebtReported Net Debt,3Q116,292.4(4,686.5)1,605.825.5%(114.3)(1,091.3)3Q11455.0671.610.7%722.511.5%384.6741.9(70.
48、2)(64.0)(1,513.6)(245.3)(2,099.4)569.8(1,172.3)3Q113,106.25,002.28,108.48,475.03,611.04,667.64,864.0,4Q117,099.0(5,152.0)1,947.027.4%(118.4)(1,242.7)4Q11508.3732.610.3%919.212.9%161.7(180.4)913.0(77.2)(529.0)(14.9)121.6(54.9)(275.3)4Q113,452.54,601.18,053.58,324.02,916.05,314.05,408.0,1Q126,337.1(4,
49、993.6)1,343.521.2%(107.8)(1,039.2)1Q12268.0505.68.0%532.08.4%(142.4)157.5348.1(76.9)(444.7)(515.3)31.4(184.0)1Q123,590.44,494.68,085.08,258.02,446.06,060.15,812.0,2Q126,842.1(5,353.0)1,489.221.8%(121.5)(1,155.5)2Q12280.6520.17.6%565.08.3%114.727.6492.5(101.1)(482.1)(499.0)(566.6)1,538.2884.62Q123,41
50、1.06,212.29,623.210,001.02,953.06,875.17,048.0,3Q127,192.5(5,666.6)1,525.921.2%(176.8)(1,196.6)3Q12232.1474.36.6%565.07.9%(119.1)(18.5)492.9(86.8)(403.1)(69.3)(501.6)(470.3)3Q122,653.66,468.09,121.69,443.02,212.07,005.57,125.0,qoq5.1%5.9%2.5%(54.92)45.5%3.6%qoq-17.3%-8.8%(100.72)0.0%(40.22)NMNM0.1%-
