Global agriculture giant Bunge Limited (BG, Financial) is experiencing the heat due to macroeconomic conditions. Bunge has observed slowdown in farmer selling activities throughout this calendar year due to continuous decrease in the commodity prices. Also, farmers in most of the regions are utilizing their crops as an inflation and foreign exchange hedge. These ongoing activities are affecting its performance this year so far. Let us look at Bunge growth initiatives and smart moves that could possibly assist the company in driving its growth forward and yield handsome return to the shareholders.
A closer look at the business
Bunge continues to perform exceedingly well in its Agribusiness segment as well as in its Food and Ingredients. It expects its agribusiness to carry strong returns on invested capital for the fiscal year and into 2015. The company is now seeing positive market conditions in the Northern Hemisphere in crushing and exports. Its facilities in the Northern Hemisphere are expected to grow at a healthy rate with relatively strong margins driven by large soft seed and grain crops in Europe. It is observing strong demand from the livestock sector that is accelerating its crush margins in the United States. Its crush margins are expected to reach historically strong levels.
Besides, the company is realizing a reversal to income for its mark-to-market impacts. Bunge expects approximately $60 million in mark-to-market reversal in the fourth quarter. Also, it anticipates additional reversal in the first half of 2015. Moreover, its agribusiness should benefit from strong trade flows, high capacity utilization and likely advancement on both industrial cost and logistics. Also, its favorable crush and export margins coupled with excellent capacity utilization should enhance its growth going forward.
Additionally, Bunge is experiencing relatively higher volume for its Food and Ingredients in United States, Brazil and Mexico. It expects its Food and Ingredients margins to further strengthen during the fourth quarter and into 2015. The company is also progressing well with the integration of its mills in Mexico and rolling out various commercial and operational excellence programs in the United States and Brazil. Besides, its performance improvement programs now appear to be great with the reduction of its cash cycle by five days as compared to last year. These favorable movements coupled with strategic initiatives such as lowering production costs and increasing production capacity should augment its performance in the future.
Some positives
In addition, Bunge expects is Sugar and Bioenergy segments to remain strong growth drivers for the company going forward and create value for the shareholders in the long run. Bunge remains on track to effectively execute its cost containment initiatives that are enhancing its energy sales. Also, the higher ethanol and power prices should improve its performance and drive its growth in the future. Most of its plants in this segment are running in full capacity. The company is expected to crush approximately about 20 million tons of cane that should assist the company to attain positive EBIT.
Furthermore, the global agriculture giant has recently entered into a joint development agreement with the private company Proterro. Proterro has successfully installed two photo-bioreactors for Bunge‘s Moema Fazenda sugarcane mill. Bunge expects this Moema Fazenda sugarcane mill to generate production effectively in 2015. Bunge is planning to use this generated fragmental sugar for the production of ethanol. According to the company, Proterro is the only bio-feedstock company that makes sucrose instead of extracting it from crops or deconstructing cellulosic materials. This will certainly reduce its costs of sugar production. Further, the company also remains on track to divest some of its sugar interests. Bunge has recently bought back a 20% share of its joint venture with Itochu, which resulted in Bunge's 100% ownership of two mills that initially cost around $800 million.
Valuation
Bunge is currently trading at the trailing P/E multiple of 67.07 and forward P/E multiple of 12.40. Its bottom line is expected to strengthen into 2015 with plenty of growth initiatives in place. That will certainly make its valuation pretty good. Also, its PEG ratio of 1.94 continues to support its growth for the next five years. Its balance sheet carries total cash of $3.27 billion, while its total debt is $6.88 billion. The company has operating cash flow of $2.44 billion and free cash flow of $1.36 billion. The analysts are estimating CAGR of 8.00% for the next five years that indicate sound growth prospects for the company in the long run.
