hi, for the profitability, is it comparable to previous year due to the one off gain of disposal (400mil) as well as the income from affiliate(In the past the income from affiliate has been negative)? I believe that if you were to remove the gain as well as income from affiliate, its margin only improve marginally due to price increase as well as cost saving.
Besides, i am just curious on the gain on RMI, based on its accounting policy, changes in fair value of RMI are recognized in earnings as a component of cost of goods sold, does it suggests that the higher profitability is mainly due to changes in inventory value instead of structural change in the company business model? My idea was that the volume didn't change much, so i would presume that their inventory increase was mainly due to revaluation instead of volume, am i right to say so?
1. The one-off gains from disposals are excluded from my LTM EBIT and EBITDA numbers. So there is no earnings inflation in my LTM numbers from these.
2. Affiliates income - this primarily (but not completely) relates to BG's share of income from the BP Bunge Bioenergia JV. You are correct that in FY20 this was negative, but in the current YTD, performance has improved significantly due to higher prices and volumes, with the outlook positive for the segment. On this basis I believe it appropriate.
3. RMI - I don't believe so; of the $3.1bn in LTM EBITDA, ~6% of this earnings number relates to M-T-M adjustments, which is not material and therefore doesn't suggest margin expansion is due to RMI accounting.
It's likely a strategic buyer knew that Bunge's margins could be improved, so were willing to pay what seemed like a high multiple (14x), which in reality is a low multiple (7x) after improving/doubling the margins. If ADM runs at 5% margins, then buying BG at 14.6x/2% margins would be a great deal.
Which is to say, I think you're right that the market has not recognized the margin improvement and repriced appropriately. ADM saw the opportunity four years ago, and now that opportunity is reality for the public to buy.
I'm sure ADM recognised the synergy / cost-rationalisation potential from BG's decentralised model at the time in 2017, and which management have subsequently unlocked. With Viterra buying Gavilon at what looks like at least a 10x multiple, I think this supports a re-rating thesis for BG, if not a takeover target itself.
Also would point to old write-up on numerous accounting issues / red flags. Long time ago (and new mgmt seems good) but similar concerns around actual translation of EBITDA/profits into cash flow https://valueinvestorsclub.com/idea/bunge_limited/2846607573
Thanks yes, am aware of previous flags around EBITDA/FCF, but I'd counter with the following:
1. New management and new operating model means I think business is positioned differently today vs. 2009/10.
2. The working capital / FCF conversion dynamic is common to all players in the industry, and when you look at the M&A multiples paid in the industry these reflect this dynamic as acquirers have all been strategic (Glencore, Viterra, ADM interest in BG), i.e. the market know this, so the conversion point is priced into the historic multiples (which BG is trading well below).
Nice write-up, especially on the potential business model transformation. Historical financials are extremely messy...generally a business that earns low returns on capital (barely 10%) and FCF is consistently negative. I get precedent transactions have traded on EBITDA, but curious what is your bridge on EBITDA -> FCF? What % do you think it converts going forward and what multiple unlevered EV/FCF is it trading at?
Yes, you're correct that FCF conversion historically is muted given the working capital model here - same holds true across the industry for ADM and Viterra also as examples, on a simple OCF-capex basis, FCF is usually negative.
Given that cash is mostly tied up in inventory (RMI which is almost cash equivalent as it is readily convertible to cash), one can look at cash position in two ways:
1. Including RMI with cash/liquidity
2. Adjusted FCF including securitized receivables proceeds - BG (like other commodity traders) uses trade receiveables securitization programmes to generate cash out of working capital, by selling the trade recs to raise cash, this is standard practice for the industry. If I add trade receivable securitization proceeds (in investing cash flows section of CF statement) to OCF-capex, the historic conversion rate for ADM on this "adjusted FCF" basis is ~40%.
Looking at Bunge on this adjusted FCF basis, FCF plus trade rec proceeds converts at 59% in the 9 month period to Sept-21, ahead of ADM's historic rate and reflecting the improved operating model.
Going forward, I would expect BG to convert adjusted FCF (OCF-capex+trade rec securitized proceeds) at something like 40% - 50% of EBITDA.
On PF EBITDA of ~$3bn, at say 45% conversion on adjusted basis, this implies AFCF of ~$1.35bn, and an EV multiple on this basis of ~15.5x.
hi, for the profitability, is it comparable to previous year due to the one off gain of disposal (400mil) as well as the income from affiliate(In the past the income from affiliate has been negative)? I believe that if you were to remove the gain as well as income from affiliate, its margin only improve marginally due to price increase as well as cost saving.
Besides, i am just curious on the gain on RMI, based on its accounting policy, changes in fair value of RMI are recognized in earnings as a component of cost of goods sold, does it suggests that the higher profitability is mainly due to changes in inventory value instead of structural change in the company business model? My idea was that the volume didn't change much, so i would presume that their inventory increase was mainly due to revaluation instead of volume, am i right to say so?
To each of your questions:
1. The one-off gains from disposals are excluded from my LTM EBIT and EBITDA numbers. So there is no earnings inflation in my LTM numbers from these.
2. Affiliates income - this primarily (but not completely) relates to BG's share of income from the BP Bunge Bioenergia JV. You are correct that in FY20 this was negative, but in the current YTD, performance has improved significantly due to higher prices and volumes, with the outlook positive for the segment. On this basis I believe it appropriate.
3. RMI - I don't believe so; of the $3.1bn in LTM EBITDA, ~6% of this earnings number relates to M-T-M adjustments, which is not material and therefore doesn't suggest margin expansion is due to RMI accounting.
Re: past buyout attempts by strategic acquirers
It's likely a strategic buyer knew that Bunge's margins could be improved, so were willing to pay what seemed like a high multiple (14x), which in reality is a low multiple (7x) after improving/doubling the margins. If ADM runs at 5% margins, then buying BG at 14.6x/2% margins would be a great deal.
Which is to say, I think you're right that the market has not recognized the margin improvement and repriced appropriately. ADM saw the opportunity four years ago, and now that opportunity is reality for the public to buy.
I'm sure ADM recognised the synergy / cost-rationalisation potential from BG's decentralised model at the time in 2017, and which management have subsequently unlocked. With Viterra buying Gavilon at what looks like at least a 10x multiple, I think this supports a re-rating thesis for BG, if not a takeover target itself.
Also would point to old write-up on numerous accounting issues / red flags. Long time ago (and new mgmt seems good) but similar concerns around actual translation of EBITDA/profits into cash flow https://valueinvestorsclub.com/idea/bunge_limited/2846607573
Thanks yes, am aware of previous flags around EBITDA/FCF, but I'd counter with the following:
1. New management and new operating model means I think business is positioned differently today vs. 2009/10.
2. The working capital / FCF conversion dynamic is common to all players in the industry, and when you look at the M&A multiples paid in the industry these reflect this dynamic as acquirers have all been strategic (Glencore, Viterra, ADM interest in BG), i.e. the market know this, so the conversion point is priced into the historic multiples (which BG is trading well below).
Nice write-up, especially on the potential business model transformation. Historical financials are extremely messy...generally a business that earns low returns on capital (barely 10%) and FCF is consistently negative. I get precedent transactions have traded on EBITDA, but curious what is your bridge on EBITDA -> FCF? What % do you think it converts going forward and what multiple unlevered EV/FCF is it trading at?
Yes, you're correct that FCF conversion historically is muted given the working capital model here - same holds true across the industry for ADM and Viterra also as examples, on a simple OCF-capex basis, FCF is usually negative.
Given that cash is mostly tied up in inventory (RMI which is almost cash equivalent as it is readily convertible to cash), one can look at cash position in two ways:
1. Including RMI with cash/liquidity
2. Adjusted FCF including securitized receivables proceeds - BG (like other commodity traders) uses trade receiveables securitization programmes to generate cash out of working capital, by selling the trade recs to raise cash, this is standard practice for the industry. If I add trade receivable securitization proceeds (in investing cash flows section of CF statement) to OCF-capex, the historic conversion rate for ADM on this "adjusted FCF" basis is ~40%.
Looking at Bunge on this adjusted FCF basis, FCF plus trade rec proceeds converts at 59% in the 9 month period to Sept-21, ahead of ADM's historic rate and reflecting the improved operating model.
Going forward, I would expect BG to convert adjusted FCF (OCF-capex+trade rec securitized proceeds) at something like 40% - 50% of EBITDA.
On PF EBITDA of ~$3bn, at say 45% conversion on adjusted basis, this implies AFCF of ~$1.35bn, and an EV multiple on this basis of ~15.5x.
This is great! I wasn't aware that you (Conor) were the author of Value Situations!