Sao Martinho, issuing a downbeat forecast for sugar prices, revealed a raised reliance on tapping the futures curve, and a depreciating real, for underpinning takings in the sweetener.
The Brazilian sugar and ethanol group said that sugar prices were “trending downwards”, hurt by a triple whammy of high world sugar stocks, a depreciating real, and government measures in countries such as India and Thailand to support output of the sweetener.
While the El Nino weather pattern could dent output in some northern hemisphere countries, notably Thailand – where dryness prompted Green Pool on Monday to cut its forecast for the country’s sugar output – Sao Martinho offered little hope for sugar bulls.
“We do not expect a recovery in prices by the end of this crop year [in March 2016], as global sugar inventories are still elevated,” the group said.
Forward selling
The thinking was reflected in a marketing strategy which has seen the group sell substantial sugar far forward, and for distance delivery – it had hedged the equivalent of 68% of its 2015-16 cane volumes as of the end of June.
Besides allowing the group to reduce its exposure to the latest downswing in sugar prices, this policy has allowed it to exploit the premium that the market has been giving to supplies for distant, rather than immediate, delivery.
Indeed, it has signally sold far more sugar ahead than a year ago of delivery late in the season.
Against New York’s March 2016 futures contract the group had as of the end of June hedged forward more than 200,000 tonnes of sugar – compared with 30,481 tonnes for the March 2015 contract as of a year before.
Earnings fall
However, strategy, in meaning deferred sales, prompted a drop of 6.7% to R$476.7m in underlying revenues for the April-to-June quarter.
“The decrease was mainly due to the lower sales volumes of sugar, -13.3%, and anhydrous ethanol, which is explained by the company’s strategy to concentrate sales in the second half of the [financial] year,” Sao Martinho said.
Earnings for the quarter tumbled 53% to R$28.30m.
The deferral strategy was also evident in increased inventories, which for sugar were, at 227,044 tonnes, 48% higher as of the end of June than a year before.
Depreciation exploitation
Sao Martinho also highlighted that it had not hedged forward all its exposure to the dollar, with the equivalent of 47% of its cane volumes covered on currency terms, below the 68% of the crop sold in terms of raw sugar futures, and meaning the group can exploit depreciation in Brazil’s currency.
“The recent depreciation in the Brazilian real will enable the company to obtain better prices in reais per tonne in the coming quarters,” the group said.
At Itau BBA, analyst Antonio Barreto called this “mismatch” between sugar and currency hedging a “highlight” of the results, and one which “will allow the company to leverage on the currency devaluation after this quarter”.
The bank kept an “outperform” rating on Sao Martino shares, with a price target of R$44.0.
Share price fall
BTG Pactual, terming the results “nice and consistent”, restated a “buy” rating on the shares with a price target of R$47.00.
“[The] recent share price pullback offers a good entry point” for investors, the bank said.
Shares in Sao Martinho, which released its results after the close of Sao Paulo markets, ended the last session down 0.3% at R$31.42, a seven-month closing low.
The fall in the shares reflects pressure on sugar and ethanol prices, besides “expectations that rainy weather would postpone cane crushing and sales”, BTG Pactual said.
However, the bank flagged that Sao Martinho stood by expectations of a cane crush of 19.5m tonnes this season.
