By Jessica Bahia Melo

Investing.com: 2021 proved to be a difficult year for Brazilian companies involved in the meat industry. 2022 looks more hopeful. For the major players of the sector in Brazil and globally, there are several encouraging signs. These include the return to beef imports from China and Russia as well as the continuing high demand. The European chains’ boycott of Brazilian brands due to deforestation, however, will remain a negative factor if it persists.

The publically listed four meat producers were able to produce very different results in 2021. In 2021, they showed strong appreciation. One year ago they were valued at $112; on Wednesday 22nd December they surpassed $135. The situation at, however, was quite different. They were quoted at $112 in December 2001, but have since fallen to $82.

With this in mind, while companies like Marfrig (SA:) (OTC:) and JBS (SA:) (SA:) – whose consumer market is mainly in the United States – saw a year of high margins that analysts view as unsustainable, Minerva (SA:) (OTC:) suffered with the restrictions in China, and BRF (SA:) (NYSE:) from the drop in income and unemployment in Brazil, because the latter has a greater focus on the domestic market than the other meat producers mentioned.

Their stock performance over the past year reflects these contrasts. Mafrig increased 52%, JBS rose 66% and BRF finished the year at 2.2%. Minerva was up 4.1%. Based on Brazilian listing data, performance

Improving Trade Outlook

There were promising trade news at the end of the year. Russia has announced that it will not impose import tariffs or quotas on pork and beef. Russian officials are expected to inspect Brazilian new plants and approve them for export within the first quarter in 2022.

China lifted its embargo against Brazilian beef in December. Following the September mad cow disease cases in Minas Gerais (Mato Grosso), restrictions on Brazilian beef were placed. Brazilian beef exports experienced consecutive declines in the months that followed after its biggest buyer suspended shipments. Hyberville Neto is a market consultant with Scot Consultoria, columnist at Investing.com Brasil. She believes the lifting of the embargo was due to China’s increased demand for beef because of the Chinese New Year celebrations in February.

Global Outlook for the Meat Sector in 2022

Bank of America’s (BofA), in a report about the future of the meat industry, stated that companies could maintain margins because of strong US and Mexican demand. BofA doesn’t expect commodity prices to fall significantly in 2022. This will lead to increased costs and limit margin expansion. While the United States might withdraw stimulus, it is expected that the yields will not drop significantly.

Brazil’s cattle cycle is expected to see a quicker turnover, higher availability, and lower costs. Lower grain prices are a boon for chicken. A boon should also be inflation – consumers will tend to choose chicken over beef when they are facing higher costs.

Domestically, it is expected that improved weather conditions will help soybean and corn crops. This should reduce cost pressure. Hyberville Neto feels that, even China has stopped producing some pork products, Brazil still has the potential to increase its exports.

China’s expectations for next year’s meat production are low. “While pork production rebounded during the last two year, there is a strong expectation that it will drop in 2022,” he says.

According to the expert, the current trend in cattle supply is increasing in this country with less female retention. We expect an increase in the supply but not enough to bring down prices.

An Overview of the Big Four Meat Producers

Marfrig

Marfrig is primarily a U.S. beef company with installed plants. It has benefited from U.S. government funding to the economy and achieved margins that were higher than their historical average. Analysts expect this situation will normalize.

The company recorded an adjusted EBITDA increase of R$4.7 billion in the third quarter. It also saw an increase in net income by R$1.7 billion. That’s up 148.7%.

XP recommends that the stock be bought with a price target of R$34.80. Leonardo Alencar (NASDAQ: Investimentos), an agro, drink, and food analyst, thinks that there is a favorable supply-demand balance in the U.S.

Itaú BBA classifies Marfrig as Outperform, with a target price of R$26. Gustavo Troyano, food and beverage analyst at Itaú BBA, agrees that the year was atypically positive and expects above-average results next year as well, but with lower margins. According to him, the industry average margin is between 4% and 7%. However, this year, there have been companies that had margins exceeding 20%. They are expected to remain within the double-digits, however.

JBS

The company’s 3Q2021 adjusted EBITDA (+74.2%) was more diverse in terms of proteins and the market in which it operates. Comparing to the previous quarter, R$7.6billion represents an increase of 142.1% on net income. The company is also well-known in the United States. It exports to Australia and Europe, as well. It can be used with beef and pork. This diversification provides greater security to the company. Although the U.S. had been expected to experience a greater recovery, inflation is now more prevalent, making shares less appealing,” states analyst at Nord Research, Fabiano Vaz.

However, JBS is among BofA’s top picks in the meat sector, as it believes that even with lower margins in the North American market, new acquisitions should boost the next year’s results. R$70 is the target price.

XP recommends that you buy the stock with a target price of R$51.80.

Itau BBA rates JBS outperform at R$47. It is also benefited by factors such as the American beef market’s up cycle and company diversification.

BRF

Another diversified producer, BRF is one of the largest global food companies, owner of brands such as Sadia, Perdigão, and Qualy. This company is more concerned with processing, and more exposed to Brazil’s economy. However, it does export to many other countries, including to the Middle East. The high grain prices, which are necessary to make poultry and pork, have negatively impacted the company, cutting their margins. BRF posted a third-quarter net loss of R$271million, as compared with a 3Q20 net income of R$219million. But revenue increased 24.6% in the third quarter of 2021, to R$12.3 million. Itaú BBA classifies BRF as Market Perform, with a target price of R$24.

XP has a neutral recommendation for the stock, with a target price of R$30.40. Leonardo Alencar notes that the company failed to recover margins despite the increase in meat prices.
It exported more to Asia but couldn’t arbitrage that well. He points out that the company was very focused in the home market. This did not work well, and the cost pressures of production made it a less profitable year. According to an analyst, however, cost pressure will decrease in 2022.

Marfrig, BRF are also subjects of intrigue. BRF also announced that 325,000,000 shares would be offered in a secondary sale. BRF is expected to raise R$6.6billion with this operation. The money will allow the company to grow its operations and make strategic investments. At the general shareholder meeting on January 17th, this measure will be up for vote.

Brazilian analysts believe that Marfrig will be able to acquire control of BRF through this operation. Marfrig is currently holding 33.2% of BRF share. BRF’s Bylaws state that the shareholder with 33.3% must launch an open offer for all shares to be purchased at 40% over either the 30 day average or the 120-day average. The price could rise to as high as 65% over the market value of BRF.

In the case of capital increases, however, BRF shareholders would lose their control under the shareholder-control rule. Analysts have not been able to see how Marfrig’s move on BRF, despite an impressive history of acquisitions. We will be following this story in 2022.

Minerva

Minerva, a leader in South America’s production and sales of fresh meats and meat byproducts is also able to export live cattle. The company saw a 24% increase in net income over the previous year. It reached R$72.4 millions. EBITDA for 3Q21 reached R$648.1million, a record and an 17% increase over 3Q20.

Itaú BBA classifies Minerva as Outperform, with a target price of R$17. According to the Itaú analyst, the company is the biggest beneficiary of the Chinese government’s lifting of the embargo, since it is the company with the largest market share in that market.

Nord Research recommends the stock as a buy, however it does not have an expected price. Marfrig is an excellent company with great exposure in the United States. However, it has higher prices and is more competitive. Minerva’s exposure to China is an advantage. This market is growing rapidly. Recent years have seen a rise in the income of the middle classes and improvements to their food habits. Minerva takes advantage of these opportunities and it remains a vast market,” says Fabiano Vas.

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