Yes, indeed the time is now to start looking for other ways to fuel our cars. I own an Infinity G35 - At first glance as an observer or passenger you might say,”The speed, the rush, what a feeling”, however as a driver I can’t help but almost cry every time I set foot at the dreaded gas station. Nymex Crude Oil Future is now $143.57. This realization has led me to write my newest article on Cosan (CZZ), the world’s largest exporter of Sugar Cane Ethanol. Is it the future of alternative energy? As much as I would love the answer to be Yes, it is difficult to predict, however, is it a smart investment that will pay off? Yes. Sugar Cane Ethanol will continue to be an alternative to OIL for many years to come. Now all ramblings aside, lets look at the company profile.
Cosan Limited (CZZ) is a leading global ethanol and sugar company in terms of production, with low-cost, large-scale and integrated operations in Center-South region of Brazil, one of the world’s most productive sugarcane regions.
Market Position
Sugarcane: Cosan is the largest grower and processor of sugarcane in the world, having crushed 36.2 million tons in fiscal year 2007 and 27.9 million tons of sugarcane in fiscal year 2006 (planted on approximately 572,000 hectares, of which approximately 50% is leased by company, 40% is supplier owned and 10% is company owned);
Ethanol: Cosan is the largest ethanol producer in Brazil and the second largest in the world, having produced 326.7 million gallons (1.2 billion liters) in fiscal year 2007 and 241.7 million gallons (915.0 million liters) in fiscal year 2006, and the largest exporter of ethanol in the world, having exported 72.6 million gallons (274.7 million liters) in fiscal year 2007 and 61.0 million gallons (230.9 million liters) in fiscal year 2006;
Sugar: Cosan is the largest sugar producer in Brazil and one of the three largest sugar producers in the world, having produced 3.2 million tons in fiscal year 2007 and 2.3 million tons of sugar in fiscal year 2006, and the largest exporter of sugar in the world, having exported 2.8 million tons in fiscal year 2007 and 2.1 million tons in fiscal year 2006.
The company operates 17 mills, two refineries, two port facilities and numerous warehouses.
The company significantly expanded its businesses through acquisitions and organic growth, increasing its crushing capacity to 40.0 million tons currently from 13.2 million tons since Cosan’s inception in February 2000. From fiscal year 2006 to fiscal year 2007, its net sales increased 53.1% to US$1,679.1 million.
Products
The company mainly produces two products:
Sugar: All varieties.
Ethanol: Hydrous, anhydrous and industrial ethanol.
Other: Electricity generation etc
Revenue
The company generates revenues from:
Sale of sugar and ethanol in domestic and international markets.
Port services provided to third parties.
Sale of Electricity and diesel to agricultural services providers.
Sale of carbon credits.
Segment
The company operates in three segments:
Sugar: Mainly operates and produces a broad variety of sugar products, which are sold to a wide range of customers in Brazil and abroad.
Ethanol: Produces and sells hydrous, anhydrous and industrial ethanol, which are sold primarily to the Brazilian market.
Other products and services: Consists primarily of port services provided to third parties, consumer products under the “Da Barra” brand, electricity sales and fuel diesel sales to agricultural services providers.
Customers
Sugar is sold in domestic as well as export market. Company sell ethanol primarily through gasoline distributors in Brazil mainly at the mill that sell it directly at the pump to customers.
Competition
The sugar industry in Brazil has experienced increased consolidation through merger and acquisition activity during the last several years. Despite this recent wave of consolidation, the industry remains highly fragmented with more than 320 sugar mills and 100 company groups participating. The company faces competition from all these producers. The company also faces competition from international sugar producers
The company also face competition from domestic ethanol producers and also from international producers that use other ethanol sources, such as corn and sugarbeet for the generation of fuel ethanol.
Company’s Strength
Size and reach: The company is the third largest producer of sugar in world and sells its products worldwide.
Product switching capacity : The company can switch its product mix between ethanol and sugar according to the market outlook.
Self controlled sugarcane production: Nearly 60% of sugarcane that the company process comes from company controlled fields and this allow company to control the quality of sugarcane produced and thereby quality of end product.
Owned support infrastructure: The company has its own port infrastructure which company use to export it’s products.
Strong brand name for domestic market (Brazil): The company primarily sell crystal sugar and amorphous refined sugar in the Brazilian market, mostly under the Da Barra brand name. In fiscal year 2007, it had domestic net sales of sugar of US$158.7 million, which represented 9.5% of it’s total net sales.
Financials ($ in million)
Cosan’s financial year ends on April 30.
The company has shown significant growth on operational front in last few years, revenue has rise from 644.4 million in FY 2005 to 1679.1 in FY 2007.
Operational income has grown from 90 million in FY 2005 to 232.9 million in FY 2007.
Sugar industry is very much cyclical/seasonal in nature and past performance don’t reflect its future outlook. In last one year the sugar sector outlook has totally changed due to shift of demand supply balance in favor of demand where supply is more than demand which leads to a consistent fall of sugar and ethanol prices and with more production capacities coming up all over world the prices are not expected to recover soon.
Company Outlook
The company’s future depends upon the price of sugar and ethanol in world market and also to some extent real/dollar exchange rate.
Negatives
Slowdown in industry.
High offer price.
Positives
Due to its size company can handle current adverse industry conditions reasonably well.
Demand of ethanol is picking up due to high crude oil prices.
It is important to remember that every company has it’s upsides and downsides, even companies like Google have risk to consider. Do not be fooled by “Slowdown in industry” or “High offer price”, these are just variables which mask the true potential of this great company. The growth and revenue is almost limitless as they have no competitors at the moment (Corn Ethanol in the US is 8 times less potent versus Sugar Cane Ethanol), and it is also rumored that the US will remove it’s ban on trade with Brazil. But then again, who really cares when they are inking Million Dollar deals with Sweden and the EU? Get in on this stock around $12.50 while you still can, don’t let this ‘tomorrow’s monster stock’ pass you by!
