Description

Bunge Limited - BG

Bunge is one of the world's leading agribusiness companies, with global scale in vegetable oil, plant protein, and grain processing, shipping, and storing.

In 2019, new management took over the 200-year-old business and effected a turnaround that has substantially increased the quality of the franchise, as evidenced by ROIC more than doubling, EBIT more than tripling, and EPS more than quintupling since 2018. 

Today, the business is a far better-run operation with economies of scale, geographic and product diversity, mid-teens returns on invested capital, low leverage, a good capital return program, and an attractive valuation on mid-cycle earnings. I believe it has over 40% upside to fair value.

Key Stats:

• ROIC: 15%, up from 6.5% in 2018

• Net debt to EBITDA: 1.1x, down from 3.3x in 2018

• 2023e FCF yield: 11%

• P/E on long-term, mid-cycle earnings power: 8.9x

Background:

Bunge operates three core segments – Agribusiness, Refined and Specialty Oils, and Milling – and one non-core segment which it is working to dispose, Sugar and Bioenergy. The company has a substantial global footprint across North and South America, EMEA, and Asia.

The Agribusiness segment is the company’s largest, generating about 66% of its operating income. The segment purchases, stores, processes, and transports oilseeds like soybeans, rapeseed, and canola, and grains, primarily wheat and corn. The company purchases the commodities directly from farmers, then processes, stores, distributes, and sells them to large downstream companies like animal feed manufacturers, livestock industries, and food manufacturers. This segment also produces biodiesel, a small but growing demand category.

The Refined and Specialty Oils segment generates about 25% of the company’s operating income. The segment refines and sells vegetable oils and specialty oil-based ingredients like lecithin to large food processors and food service companies, as well as to renewable diesel producers. This segment often uses raw materials sourced from the Agribusiness segment, but also acquires commodity feedstocks from other companies. 

The Milling segment drives about 5% of total operating income. The segment mills wheat, corn, and other grains supplied by the Agribusiness segment or other third parties and sells these staples to food processing and service companies.

The Sugar and Bioenergy segment is a joint venture with BP in a Brazilian biofuels business, and drives about 3% of total operating income. Bunge is seeking to find an exit for this business, and expects any such exit to be neutral or accretive to long-term earnings.

Business Quality:

Historically (2007-2018), Bunge operated with 2% average operating margins and 6% average ROIC – not exactly a high-quality business. This all changed when new management took over in 2019 and pruned the company’s portfolio of non-core assets, re-organized from a geographically-driven organizational structure, which had effectively turned the company into a collection of many separate, uncoordinated businesses, to a coherent, business-operations-driven structure, and brought new capital allocation discipline to the company. The results are clear in the numbers, with margins doubling, ROICs more than doubling, and earnings more than quintupling. If you listen to a couple of the company’s earnings calls, this new level of strategic discipline is immediately apparent. 

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While some of the gains over the last few years are due to a strong ag cycle, and to some extent the company is currently over-earning (2023 earnings guidance is for $11 though the company tends to guide conservatively), the company has also overcome significant challenges in this period as well, including the pandemic, energy inflation, and the ongoing war in Ukraine. 

Valuation:

To help analysts understand core, mid-cycle earnings power, the company has provided mid-cycle earnings targets several times over the past few years, steadily increasing them each time as the company has executed on its turnaround. The most recent of these updates came last summer in Q2 earnings, when the company laid out a long-term, mid-cycle earnings power target of $11/share and a baseline upside north of $12. 

While management targets should always be taken with caution, this management has consistently beaten and raised its guidance, earning it some credibility. In addition, the structural improvements the company has made reduce its dependence on the market environment and its volatility, making it more analyzable.

Today, the company trades just over 8x NTM earnings and 9x its estimate of long-term mid-cycle earnings. Historically it has traded around 12x two-year forward earnings. Re-rating to 12x would drive about 40% of upside. Yet the business is clearly far higher quality today than it has been in the past so a higher multiple is likely justified. 

In addition, Bunge has substantial balance sheet capacity to either increase its buyback plan from the currently committed $250 mm/year or invest in accretive M&A. Last year, the company generated over $2 bn in discretionary cash flow, and after dividends, growth capex, and share buybacks still had $1.2 bn of retained cash flow. Over the next three years, the company is estimated to have similar or higher levels of operating and free cash flow, indicating the company could scale its buyback program significantly with ongoing cash flow. Furthermore, given its low leverage, the company could add debt to accelerate buybacks or M&A. In the most recent call, management said they did indeed plan to be more aggressive on buybacks at these valuation levels. 

While the company has targeted $1-1.50 of earnings growth by 2026 from capital allocation, it’s clear there’s capacity for several multiples of this, easily raising the mid-cycle earnings baseline above $12.

With a higher quality business justifying better than historical multiples, and significant excess capacity for earnings accretion from capital allocation, and a disciplined management team, I can see the potential for over 50% upside to fair value in the stock.

Risks:

Global ag cycle overwhelms internal improvements

Improvements deemed to be structural turn out to be cyclical

Poor capital allocation

Upside opportunities:

China re-opening (commented on in last earnings call) drives pricing and global demand higher

Resolution of Ukraine war increases food processing volumes (Bunge has idled operations in Ukraine)

Successful accretive M&A, capital allocation

Catalyst

Continued execution that demonstrates stability and core improvements to the business, driving multiple expansion

Increased buybacks or M&A driving earnings growth

Global geo and macro improvements driving pricing and volume growth