Brazil: BRF SA Looking At A Long Road Back


  • Amidst ongoing regulatory/legal and operational challenges, shareholders have elected a new board of directors that includes the highly-respected CEO of Petrobras.
  • BRF’s high debt load limits the company’s flexibility, particularly as the company could benefit from a comprehensive restructuring of its cost and production base, including reinvestment in automation.
  • Although BRF shares appear to still offer long-term value, 2018 will likely be a tough year, and many investors are likely to stay away until there is a new CEO.

“How can it get any worse?” certainly has a place of distinction among the most foolish validations that investors will try to use with struggling companies, and Brazil’s BRF SA (BRFS) is a case in point. In addition to ongoing criminal investigations, BRF has been effectively banned from the EU for the time being, is facing rising costs and weak market share, has high debt and modest near-term free cash flow prospects, and has to find a new CEO and craft a turnaround strategy.

BRF’s new board does appear to be an upgrade, and the company still has some positives going for it – including a meaningful overseas presence and a still-strong presence in the Brazilian market. While the valuation may look modest relative to the long-term potential of a successful turnaround, investors need to appreciate that such a turnaround is going to take time, and success is far from certain.

Okay Results, But Likely To Get Tougher From Here

I would argue that BRF is on the cusp of where investors care less about quarter-to-quarter profitability and more about liquidity. Be that as it may, BRF’s first quarter wasn’t too bad relatively to repeatedly lowered expectations, but the year ahead is likely to be more challenging.

Revenue rose 5% as reported, with strong growth in OneFoods (up 40%), Asia (up 13%), and Latin America (up 12%) offsetting weaker growth in Brazil (up less than 3%) and a 40% decline in revenue from Europe.

Brazil saw a surge in fresh product volume (up 23%), while the processed food business ticked down slightly as weaker pricing (due in part to a mix shift away from higher-value brands) offset volume growth. OneFoods saw good growth in both businesses, but processed food is still less than 20% of the mix in this segment.