We recently upgraded Cosan Limited (CZZ), the largest sugar and ethanol producer in Brazil, to a Neutral recommendation. The stock was previously rated Underperform.
The company ranks third in sugar and fifth in ethanol production in the world. Apart from its core operations, the company is also engaged in energy production from sugarcane bagasse and has an annual installed capacity of 860 MW.
Fuel distribution is another of Cosan's businesses with the company becoming the third largest distributor in Brazil after the consummation of the joint venture with Shell in June 2011.
Cosan's joint venture with Shell (RDS.A) gave rise to Raizen Energia Participacoes S.A., the world´s largest sugar, ethanol and cogeneration producer out of sugarcane and Raizen Combustiveis S.A., one of the largest fuel distributors in the Brazilian market.
For the fiscal year 2012, management expects the following from Raizen Energia: crushed cane volumes to range within 56-60 million tons; sugar volume to be sold within 4.2-4.6 million tons; ethanol volume to be sold within 2.1-2.3 billion litres; volume of energy sold to range within 1.4-1.6 million MW and, finally, EBITDA to be within R$1.9-R$2.3 billion range.
Fuel volume sold by Raizen Combustiveis is expected to be within the 21.0-23.0 billion liter range and EBITDA to be within R$0.85-R$1.05 billion range in the fiscal year 2012.
Moreover, Cosan posted encouraging results for the fourth quarter 2011 with net income surging 64% y/y, supported by a solid top-line growth and lower cost of sales. Going forward, growth in sugar and ethanol demand will boost our confidence and enable Cosan to achieve its fiscal year 2012 top-line target of R$25.5-R$27.5 billion.
Thus, we upgraded the stock to a Neutral recommendation. However, positive momentum might get restricted from headwinds expected from a highly cyclical industry and sensitiveness of Cosan to domestic and international changes in supply and demand.
COSAN LTD-A (CZZ): Free Stock Analysis Report
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