Cosan (CCZ, Financial) is an interesting Brazilian conglomerate with a presence in ethanol, farming, rail, gas stations, utilities, lubricants and many more divisions. On a break up basis, it looks like it is trading at a discount to NAV.
The company trades on the New York Stock Exchange at $6.78 and has a market cap of $4.5 billion. It also sports a 1.34% dividend yield. I found Cozan while looking at Third Avenue International’s (TAVIX, Financial) holdings on the SEC website. This Investor’s Presentation will give you a quick idea of what the company does. Growth has been awesome for the last few years. Sales were 22.6 billion real ($6.8 billion) in 2011 and Ebitda was 2.1 billion ($633 million). In 2015, sales were up to 48.5 billion real ($14.6 billion) and Ebitda 6.2 billion ($1.9 billion).
The Raizen Division is a joint venture between Cosan and Shell (RDS.A, Financial). This division has 5,832 Shell gas stations and several stations at airports and for the wholesale market. It has a 25% share of the Brazilian market. The second part of Raizen mills sugar and produces ethanol. It crushed 63 million tons of sugar last year.
Last year, the station division produced 2.5 billion real ($753 million) in Ebitda. Casey’s General Stores (CASY, Financial) trades at 12 times Ebitda, so we will give this division a value of 30 billion real ($9 billion). Cosan owns 31.2%, so this stake could be worth 9.36 billion real ($2.8 billion).
As for the ethanol and sugar refining division, it produced 3.7 billion real ($1.11 billion). This is the most challenging division for me to value because energy is down and it is difficult to find comparables. Over the last few years, it averaged about 2.5 billion real ($750 million) in Ebitda. I am going to go with five times Ebitda since energy is down, thus we come to 12.5 billion real ($3.7 billion). Cosan owns 31.2%, so its take could be 3.9 billion real ($1.15 billion).
The Comgas Division distributes gas to residential homes and businesses. It has 1.6 million residential homes and 15,450 commercial. Last year, it produced 1.378 billion real ($415 million). Cozan owns 60.1% of Comgas, which is worth 3.79 billion reals ($1.14 billion).
The Lubricants Division produces motor oil and other lubricants. Cozan has an agreement with Exxon Mobil (XOM, Financial) to market their brands. It’s interesting that Cozan has agreement with Exxon and Shell. Lubricants produced 126 million ($38 million) in Ebitda last year. I am going to give it a valuation of ten times Ebitda as there are not many publicly traded lubricant companies. So we get 1.26 billion real ($380 million). Cosan owns 62.5% of lubricants, so we come to 787 million real ($237 million).
The farming division, named Rader, owns 257,000 acres. The main crops include sugarcane, corn, soybeans and cotton. The company gives the land a fair value of 2.7 billion real ($813 million), so we will go with that. Cosan owns 23.5%, worth 635 million real ($191 million).
The last division is a standalone company, Cosan Logistica. Logisitica owns railroads and terminals at ports. Cosan owns 28.3% of Logistica, which has a market cap of 1.82 billion real ($1.31 billion). So this value comes to 515 million real ($160 million).
The balance sheet is pretty strong with 4.4 billion real ($1.33 billion) in cash and 1.04 billion real ($313 million) in accounts receivables. This is to 1.84 billion real ($554 million) in accounts payable and 14.9 billion ($4.5 billion) in debt. S&P rates Cosan’s debt as BB. Later on in the valuation, I am not going to add cash or subtract debt as these figures below to each division.
The real has been volatile over the past five years. At the beginning of 2011, it only took 1.629 real to buy one dollar. At its depth, it took over 4. Now, it takes 3.32.
One major drawback is the shareholding structure. The controlling group has a 40% economic interest and 85.7% voting interest. The Mello family controls the company. This fellow on Seeking Alpha did a good job analyzing Cosan.
Cosan and Sumitomo (TSE:8053, Financial) have a new joint venture to produce pellets from sugarcane to be sold to energy producers. The goal is to reach 2 million tons of annual production by 2025 for European and Asian countries hoping to cut emissions.
I am going to come up with a rough estimate that each of Cosan’s five divisions is worth $5.678 billion. Since Cosan has a market cap of $4.5 billion, it trades at a discount by 20%. Granted, this is a very rough back-of-the-envelope calculation. I wouldn’t buy the stock on a discount to NAV basis because Brazil is too volatile. Third Avenue loves buying into growth situations at a discount. I am not an expert on Brazil, but Cosan has been growing gangbusters. I would buy it as a proxy on the Brazilian economy.
Disclosure: We own none of the stocks mentioned.
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