Brazilian sugar and ethanol producer Cosan Limited (CZZ) recently received its Board of Directors’ approval for the renewal of its share buyback program. Pursuant to the approval, Cosan can buyback shares to be held in treasury for future sale or cancellation to the amount of $100 million from July 4, 2011 to July 4, 2012.
Cosan is the largest sugar and ethanol producer in Brazil and ranks third in sugar and fifth in ethanol production in the world. The company, apart from its core operations, engages in energy production from sugarcane bagasse and fuel distribution.
We believe Cosan, over time, has been growing through acquisitions and other expansion strategies. The company seems well positioned to benefit from its Jataí mill, one of its Greenfield projects. In the recently reported first quarter 2012 results, the company fared well posting revenue increase of 29.7% year over year and substantial net income growth due to the formation of Raizen.
Raizen is the company’s joint venture with Shell. Formation of Raizen would serve the purpose of enabling better access to ethanol consumer market, ultimately leading to increased competitiveness in biofuels and fuel distribution businesses. The joint venture will be one of the largest ethanol producers in the world with 2.2 billion litres of annual production capacity.
However, headwinds from a highly cyclical industry, intensive competition and sensitiveness of Cosan to domestic and international changes in supply and demand restrict the positive momentum of the company. Moreover, lowered guidance for Raizen Energia coupled with fears over rise in cost of sales is disconcerting.
Cosan faces stiff competition from its rivals like Archer Daniels Midland Company(ADM) and privately-held Copersucar – Cooperativa de Produtores.
The current Zacks Consensus Estimates for the fiscal years 2012 and 2013 are 90 cents and 73 cents per ADR, reflecting annual decline of 18.18% and 18.89%, respectively.
We currently maintain an Underperform recommendation on Cosan, apprehending that the company would perform below the market.
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