1、Equity Research 29 June 2020 CORE Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Invest
2、ors should consider this report as only a single factor in making their investment decision.This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA.PLEASE SEE ANALYST CERTIFICATION(S)
3、AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 16.Restricted-Internal Americas Agribusiness Chicken(over)supply&demand:Flying into headwinds Chicken supply&demand gap leads to a revaluation of the most exposed companies under our coverage:Contrary to cattle and hog slaughter,which faced stark YoY contr
4、actions in April amid temporary closures,chicken production is fairly protected;egg production and eggs set were only slightly down YoY.Additionally,poultry operations are relatively less labor intense,and chickens take a fairly lower amount of time to grow to their processing weight.Nonetheless,the
5、 strong supply might be too much for the pressured demand to handle;the chicken industry is highly exposed to foodservice,and we dont expect this channel to be fully recovered any time soon.We therefore lower our estimates for PPC,BRF,and SAFM.We are downgrading PPC to EW from OW while lowering our
6、price target to$20 from$28.Besides the aforementioned adverse industry conditions,PPC faces in our view two additional risks that drive our downgrade:an even weaker performance in Mexico,which likely lasts longer,and corporate governance issues.We are downgrading BRF to EW from OW while leaving our
7、price target of$4.50 unchanged.BRF is the company most exposed to domestic consumption in Brazil within our protein coverage.The economic backdrop in Brazil,coupled with likely longer lasting closures within the Brazilian domestic foodservice channel amid rising Covid-19 cases,and FX headwinds drive
8、 our more cautious view in the short term.We reiterate our OW rating on SAFM although we are slightly trimming our price target to$159(was$168).Taking the above-mentioned industry headwinds into account,we reduce our short-term estimates.SAFM in contrast to PPC or BRF operates mainly in the U.S.dome
9、stic market(with less than 10%of sales generated in the export markets),which leaves us with a relatively more optimistic view on the company.Additionally,SAFM among the three has the strongest balance sheet with very limited leverage,which should allow the company to best navigate through the curre
10、nt volatile environment.Risks to thesis and valuation:Poultry supply and demand imbalance could be narrowed sooner than expected.Additionally,FX tailwinds could help exporters and companies like PPC or BRF in their consolidated results,lastly the foodservice channels(across all sub-segments of it)co
11、uld recover sooner than expected.RATING CHANGE Americas Agribusiness NEUTRAL Unchanged For a full list of our ratings,price target and earnings changes in this report,please see table on page 2.Americas Agribusiness Benjamin M.Theurer+52 55 5241 3322 BBMX,Mexico Antonio Hernandez,CFA+52 55 5241 3323
12、 BBMX,Mexico Barclays|Americas Agribusiness 29 June 2020 2 Summary of our Ratings,Price Targets and Earnings Changes in this Report(all changes are shown in bold)Company Rating Price Target EPS FY1(E)EPS FY2(E)Old New Date Price Old New%Chg Old New%Chg Old New%Chg Americas Agribusiness Neu Neu BRF S
13、A(BRFS)OW EW 26-Jun-2020 3.96 4.50 4.50-0.14 0.06-57 0.23 0.20-13 Pilgrims Pride Corp(PPC)OW EW 26-Jun-2020 16.69 28.00 20.00-29 1.74 0.82-53 2.17 2.02-7 Sanderson Farms,Inc.(SAFM)OW OW 26-Jun-2020 115.24 168.00 159.00-5 1.97 1.40-29 8.19 8.19-Source:Barclays Research.Share prices and target prices
14、are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estimates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight;UW:Underweight;RS:Rating Suspended Industry View
15、:Pos:Positive;Neu:Neutral;Neg:Negative Barclays|Americas Agribusiness 29 June 2020 3 A grimmer view on poultry in the Americas Why we are updating our view We are lowering our estimates on PPC,BRF,and SAFM,the companies most exposed to the chicken industry in Americas Agribusiness.Contrary to cattle
16、 and hog slaughter,and subsequently beef and pork production,which faced stark YoY contractions of 10-20%in April amid temporary plant closures(see BBQ Bens Beef Quotes:June 2020,June 22),egg production was down only 2.1%YoY,while weekly eggs set have increased considerably since bottoming at only c
17、.-5%in April.From a supply point of view,we are not worried;poultry operations are relatively less labour intense(and face fewer social distancing restrictions)and it takes just a few weeks to grow chickens to their processing weight.What worries us is a steep decline in demand and subsequent supply
18、&demand gap;we dont expect open channels,i.e.,retail,to fully offset the decline in foodservice demand.Around half of the chicken production in the U.S.is destined for foodservice,and while the companies exposure to foodservice varies highly(11%of consolidated sales for BRF in Brazil,30%for PPC,and
19、60%for SAFM),the industrys high exposure to this channel and relatively stable supply leads to our expectation of oversupply.While chicken usually becomes the protein of choice amid a recessionary environment,conditions for these companies certainly do not bode similarly.We therefore:Downgrade PPC t
20、o EW from OW,and lower our PT to$20 from$28.Downgrade BRF to EW from OW,and keep our price target of$4.50 unchanged.Reiterate our OW rating on SAFM,but lower our PT to$159 from$168.One similarity among all protein companies,not only chicken producers,is their need to spend on equipment to abide by t
21、he new social distancing measures,as well as on special worker bonuses in some cases.Our ratings and price targets within our protein companies coverage are as follows:FIGURE 1 Summary of rating and price target changes Source:Bloomberg,Company reports,Barclays Research.Pricing as of 06/26/2020 OW:O
22、verweight;EW:Equal Weight;UW:Underweight For full disclosures on each covered company,including details of our company-specific valuation methodology and risks,please refer to http:/.Rating Price TargetLast PriceUpside/Downside PotentialHighest protein exposureHighest regional exposureBRFEW$4.50$3.9
23、6 13.6%PoultrySouth AmericaBY NDUW$115.00$141.68-18.8%Alternative meatNorth AmericaHRLEW$44.00$48.21-8.7%PorkNorth AmericaJBSOW R$30.00 R$21.71 38.2%BeefNorth AmericaMRFGOW R$16.00 R$12.71 25.9%BeefNorth AmericaPPCEW$20.00$16.69 19.8%PoultryNorth AmericaSAFMOW$159.00$115.24 38.0%PoultryNorth America
24、TSNOW$83.00$58.28 42.4%BeefNorth AmericaAmericas Agribusiness-Protein companiesWe dont expect retail demand to fully offset the decline in foodservice demand.Barclays|Americas Agribusiness 29 June 2020 4 PPC:Downgrading to EW;PT down to$20 Pilgrims Pride Corp(PPC):Quarterly and Annual EPS(USD)2019 2
25、020 2021 Change y/y FY Dec Actual Old New Cons Old New Cons 2020 2021 Q1 0.35A 0.27A 0.27A 0.27A 0.38E 0.38E 0.37E-23%41%Q2 0.69A 0.35E-0.10E 0.34E 0.61E 0.55E 0.66E N/A 650%Q3 0.45A 0.68E 0.37E 0.61E 0.66E 0.65E 0.65E-18%76%Q4 0.14A 0.44E 0.28E 0.42E 0.53E 0.44E 0.49E 100%57%Year 1.62A 1.74E 0.82E
26、1.66E 2.17E 2.02E 2.30E-49%146%P/E 10.3 20.4 8.2 Source:Barclays Research.Consensus numbers are from Bloomberg received on 26-Jun-2020;12:50 GMT Company-specific headwinds to assess We are downgrading PPC to EW from OW,while lowering our price target to$20 from$28.Besides the aforementioned potentia
27、l oversupply and lower demand in the U.S.,PPC faces two additional company-specific risks,which drive our rerating:1)likely continued weak performance in Mexico;and 2)corporate governance issues.Mexico:conditions arent greener on the other side While the company has been posting fairly volatile and
28、mostly weak performance in Mexico throughout the last couple of quarters including a loss at the gross profit level in 1Q20 we expect 2Q20 conditions to be even worse.Mexico accounts for slightly over 10%of consolidated revenues,and while its profitability has been mostly above consolidated figures
29、with the exception of one year throughout the last eight years we expect FY20 to present the greatest gap on a negative basis.We also expect PPC to close the year with its first operating loss within the same eight-year period,which is a significantly more cautious view vs.our previous estimates cal
30、ling for operating income to be around breakeven.Our estimate revision is driven by a likely more pressured gap between supply and demand in the Mexican market,as a result of:1)production in the country being fairly unaffected by Covid-19,while the U.S.-Mexico chicken trade channel remains open;2)de
31、mand has been affected amid foodservice channels being closed for more than two months across the country,and some areas the lockdown can be expected to last longer;and 3)USD-denominated COGS pressuring profitability across the industry.Contrary to the animal protein supply chain in the U.S.being ha
32、lted due to Covid-19 outbreaks,operations in Mexico have been running fairly uninterrupted,deemed as essential by the Mexican government and with major Covid-19 outbreaks taking place in the largest metropolitan areas of the country.Additionally,the U.S.-Mexico trade channel remains open,which adds
33、to further oversupply;Mexico accounts for a large amount of U.S.poultry exports:c.20%of total broiler exports and c.50%of total other chicken exports.In the meantime,foodservice channels,which account for c.30%of chicken demand,have been either closed or reduced to takeout/delivery options.With a ch
34、allenging consumer environment expected to continue throughout the coming quarters following social distancing measures,which have an ending date still unknown,we expect consumers budgets to be negatively impacted,adding to the aforementioned demand pressure.We add to our estimates,besides the lower
35、 volumes and sales prices,a cost headwind driven by higher COGS due to the severe MXN depreciation(c.20%YTD),which in our view could more than offset a potential tailwind from lower raw materials prices.These could We now expect an operating loss in Mexico in FY20.Added to the supply&demand gap in M
36、exico,FX plays a(negative)role.PPC Stock Rating EQUAL WEIGHT Industry View NEUTRAL Price Target USD 20.00 Price(26-Jun-2020)USD 16.69 Potential Upside/Downside+19.8%Barclays|Americas Agribusiness 29 June 2020 5 further pressure profitability,especially if chicken production in the country is not adj
37、usted to reflect the lower demand.We expect these headwinds to impact PPC beyond 2Q20,and we hence further revise our estimates for 2H20 down.A legal affair:what the subpoena could mean for PPC(and investors)Earlier this month,it was announced that PPCs CEO,Jayson Penn,was indicted on antitrust char
38、ges.According to the indictment,from at least as early as 2012 until at least early 2017,Mr.Penn,alongside three other current and former chicken industry executives,played a role in a conspiracy to fix prices and rig bids for broiler chickens,according to the Department of Justice.While the indictm
39、ent is specific to the four current and former executives and not to the companies they work or worked for,the magnitude of a potential fine for the company remains undetermined(see:PPCs CEO among others indicted on antitrust charges,June 3).A few days later,PPC announced that Jayson Penn was taking
40、 a paid leave of absence,which in our view is positive so that the company can continue focusing on operations,especially amid volatile times,without the distraction that the legal dispute with the CEO could entail.Fabio Sandri,PPCs CFO since 2011,has been meanwhile appointed interim President and C
41、EO(see:First Look:PPCs CEO to take paid leave of absence,June 14).We believe there is an overhang for PPC,as more executives could be indicted or a potential fine for the company could be determined,and we see some similarities with the recent Bumble Bee Foods case.In December 2019,the former presid
42、ent and CEO of food company Bumble Bee Foods was convicted of contributing to a price-fixing conspiracy between the company and two other players.After being found guilty,the former executive faced up to 10 years in prison and a fine of$1mn,which were ultimately reduced to a 40-month term of incarce
43、ration and a$100,000 fine.As a consequence,the company also faces a potential fine of at least$25mn,after being reduced from a potential$100mn fine.While the stock has already been impacted by the news flow PPCs stock price fell sharply after the news broke(down 12.4%on June 3 vs S&P 500 Consumer St
44、aples up 0.2%)we expect this overhang to limit potential upside,and hence apply a higher risk premium to our valuation methodology.While we expect current operations to remain fairly unaffected by the legal conflicts,we do believe reputational risk concerns should not be overlooked.Change in Estimat
45、es We are lowering our estimates,as we expect a weaker performance in 2Q20 across all operating regions,with a higher cut in the Mexican operations,while synergies from the recently acquired Tulip assets could take longer than previously assumed.We also lower estimates for 2H20,although at a minor s
46、cale,while our 2021 estimates remain fairly unchanged with just some minor downside revisions of profitability.Taking those changes as well as a higher risk premium into consideration,we are lowering our price target to$20 from$28,while downgrading PPC to EW from OW.The monetary consequence of the p
47、rice fixing subpoena remains unknown.Barclays|Americas Agribusiness 29 June 2020 6 FIGURE 2 PPC Change in Estimates in$mn(except EPS)2020e(new)2020e (old)Change in%2021e (new)2021e (old)Change in%Net Sales 12,088 12,371 (2.3%)12,789 12,596 1.5%Operating Income 357 659 (45.8%)780 828 (5.7%)Adj.EBITDA
48、 678 964 (29.6%)1,119 1,138 (1.7%)Income Before Tax 287 589 (51.2%)666 713 (6.6%)Net Income(consolidated)205 433 (52.7%)505 541 (6.6%)EPS(majority)0.82 1.74 (52.7%)2.02 2.17 (6.6%)Operating Margin 3.0%5.3%(237)6.1%6.6%(47)Adj.EBITDA margin 5.6%7.8%(218)8.7%9.0%(28)Net Margin 1.7%3.5%(181)4.0%4.3%(34
49、)Source:Company Reports,Barclays Research Valuation We are adjusting our valuation methodology to imply additional risk,as we increase our WACC to 9.0%from 7.9%,on the basis of a higher beta(1.25 vs.1.0 previously).We derive our US$20 price target based on a DCF calculation assuming a WACC of 7.9%an
50、d a terminal growth rate of 1.2%.The WACC is calculated on the assumption of PPC slightly reducing its relative debt exposure to 35%of total capital with a cost of debt running at approximately 5.8%and a Ke of 9.0%,which is based on an equity risk of 7.0%,a beta of 1.25,and a tax rate of 24%.Our dow
