CZZ's Net Falls, Revenue Impressive - Analyst Blog

Cosan Limited (CZZ) reported quite disappointing net results for the first quarter of 2011. The company reported a net loss of US$11.9 million in the first quarter compared with a net income of US$122.6 million in the comparable quarter of 2010. The fall in net income primarily reflects higher expenses that offset top-line growth reported in the quarter.

Revenue

Considering the top line, net sales (excluding eliminations) in the first quarter grew 29.8% year over year to US$2,233.8 million, driven primarily by Cosan Açúcar e Álcool’s results as higher sugar and energy cogeneration revenues offset weaker ethanol results. Also, Rumo Logística and Cosan Combustíveis e Lubrificantes (CCL) results were strong in the quarter.

In the first quarter, sugar volumes sold declined slightly by 5.7% year over year to 932.4 thousand tons while ethanol volumes sold plummeted by 40.0% to 454.4 million litres. Price per unit for both sugar and ethanol escalated in the international and domestic market. Crushed cane volume was 19.9 million tons versus 17.5 million tons in the fiscal year 2010.  

Margins

Cost of goods sold soared 27.7% year over year to US$1,994.5 million,  primarily due to an increase in cost of sales for CCL due to higher ethanol cost.

Operating expenses (in dollar amounts) including selling and general and administrative expenses shot up by 73.6% year over year. As a percentage of net sales, operating expenses rose 220 basis points to represent 8.6% in the quarter.
 
In the reported quarter, EBITDA grew 37.9% year on year to US$193.5 million and accounted for 8.7% of net sales.  EBIT, in the quarter grew 17.8% to US$48.2 million compared with US$40.9 million in the year-ago quarter, while margin dropped 20 basis points to 2.2% in the quarter.

Balance Sheet

Exiting the first quarter 2011, Cosan had cash and cash equivalents and restricted cash of roughly US$629.9 million, down from US$649.0 million in the previous quarter. Long-term liability was US$2,917.6 million compared with US$2,845.7 million in the previous quarter.

Cash Flow

Net cash flow from operating activities was US$295.3 million, down 12.6% year over year from US$338.0 million in the year-ago quarter. Capital expenditure increased 46.8% year over year to US$333.3 million.

Outlook

For fiscal year 2011, management anticipates that revenue would be in the range of R$16.5 -R$18.5 billion, EBITDA in the range of R$2.0 - R$2.4 billion, and capital expenditure in the range of R$1.9 - R$2.3 billion. Crushed cane volumes are expected to range within 58 - 62 million tons, sugar volume sold within 4.7-5.1 million tons, and ethanol volume sold within 2.0 - 2.2 million litres. 

Our Take

We believe Cosan is well positioned for growth with an expected increase in sugar and ethanol production, driven by favorable weather conditions (higher level of rains) and higher yield of sucrose in the cane. Moreover, Cosan’s joint venture with Shell is expected to create better access to ethanol consumer market, enhanced competitiveness in biofuels and fuel distribution businesses, improved debt ratios through more capital and rise in cash profile, and superior growth prospects.

However, the company is greatly exposed to the volatility in domestic and international supply and demand. Ethanol pricing is largely affected by changes in supply and demand for gasoline, while highly regulated market and speculation risks influence sugar prices. Besides, customer concentration risks and sensitiveness to currency fluctuations impact the company’s financial results in adverse conditions. 

Cosan's prime competitors include Archer Daniels Midland Company (ADM) and Copersucar - Cooperativa de Produtores. We currently maintain our Neutral recommendation on Cosan, supported by Zacks #3 Rank.

 
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