Bunge: Conservative EPS Guidance And Potential For Share Buybacks (NYSE:BG)

Description

As a result of the significant drop in Black Sea supplies, the global food market continues to support the demand for vegetable oil, while the demand for fuel is rising thanks to the establishment of renewable diesel projects in North America. Moreover, the world’s largest exporter of soybean meal will be unable to fully utilize its capacity this year due to a significantly reduced harvest, necessitating high operating rates and crushing margins in other crucial markets for both production and consumption.

I think a major focus is on how would Bunge Limited (NYSE:BG) allocate its capital. I like to point out that BG’s balance sheet has gotten a lot stronger since the turnaround that the current management has accomplished (in all metrics). I note that even though BG has started a multi-year growth capex plan, its dividends can be easily paid out of its current FCF. Consequently, there are potentially enormous sums of money sitting idle on the balance sheet that could be put to better use elsewhere, such as in increasing returns to shareholders. For example, I believe there is a compelling opportunity for management to repurchase shares more regularly. And this is especially true when M&As are risky and the company would be better off buying its own stock.

4Q22 Review

BG reported adjusted 4Q22 EPS of $3.24, below consensus of $3.22. Adjusted segment EBIT came in at $740 million. While 4Q22 headline EPS of $3.24 was modestly ahead of consensus, I note that majority of the segments were outperforming (Agri, Refined & Specialty Oils, and Sugar), and these outperformances were dragged down by Milling, higher corporate cost and tax rates. In particular, Milling slowed because of lower origination volumes and high supply chain costs brought on by a small Argentine wheat crop. Qualitatively, management commented that the limited availability of soybeans due to drought in Southern Brazil and Argentina is helping to support oilseed crush margins, while the latter has become a headwind in Milling due to a smaller wheat crop in Argentina.

Oilseed crush margin

Crush margins in Argentina are expected to remain low all year due to a poor soybean harvest, but management pointed out that margins have improved in most other parts of the world. Management’s comments on the FY23 earnings cadence are concerning, as they hint at deteriorating crush margins later in the year. Still, I think management is being cautious on guidance because there are a few drivers that could lead to margins improving more quickly than expected:

1. Increasing crush margins in Brazil due to a larger soybean crop
2. China’s crush margins could increase as a result of the reopening and its increased reliance on soybeans from South America.
3. The poor crop in Argentina in 2023 bodes well for the crush in Europe.

Additionally, rising demand for soybeans from the US renewable diesel sector may help offset the impact of increased supply from Brazil, which is putting downward pressure on US crushing margins.

Merchandising

The low end of merchandising guidance, in my opinion, accounts for the 1Q23 strong profitability while assuming a return to normalcy over the course of the year. Once again, I think management is being overly cautious with this. With interest rates expected to rise, premiums for holding inventory before shipping it around the world should follow suit, so I don’t think a return to normal levels is realistic. Since BG will likely increase prices to compensate for rising interest rates, there is a good chance that they will exceed guidance here.

Guidance

Management has guided for EPS of at least $11 for FY23. To reiterate, I think management is being too cautious, and the EPS has plenty of room to grow. Particularly when considering past performance, BG has consistently outperformed EPS estimates in recent quarters. While management anticipates lower Agribusiness results in 2023 compared to 2022, they have noted upside potential due to strong demand and tight crop supplies. Milling is expected to decrease as a reversion to historical performance, while positive demand trends from food and fuel are anticipated to result in a slight decline in Refined and Specialty Oils relative to 2022. As with Corporate & Other, the Sugar segment is expected to show no year-over-year growth or decline.

Summary

Aside from the macro view and FY23 EPS cadence, the attention I like to bring is to the balance sheet strength of BG. In my opinion, it could be a strong catalyst that drives capital into the stock. BG’s strong financial position, with ample funds on the balance sheet, could be easily used for large amounts of share buybacks – which could potentially drive the stock up on narrative alone.