Brasilagro - Brazilian Agricultural Real Estate Co. (20-F) Summary
Business Context and Reporting Period
Company: Brasilagro - Brazilian Agricultural Real Estate Co.
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended June 30, 2015
Accounting Standards: International Financial Reporting Standards (IFRS)
Currency: Brazilian Real (R$) with U.S. Dollar (US$) translations provided.
Brasilagro is an emerging growth company focused on the acquisition, development, and exploitation of agricultural properties in Brazil and Paraguay. The company cultivates grains (soybean, corn) and sugarcane, and sells developed properties to realize capital gains. As of June 30, 2015, the company held approximately 253,342 hectares of land.
Key Financial Metrics (Year Ended June 30, 2015)
| Metric | 2015 (R$ '000) | 2015 (US$ '000) | 2014 (R$ '000) |
|---|---|---|---|
| Net Revenue | 174,351 | 45,103 | 131,314 |
| Gain on Sale of Farms | 193,464 | 50,048 | 21,845 |
| Gross Profit | 204,076 | 52,793 | 13,673 |
| Operating Income | 157,933 | 40,856 | (27,363) |
| Net Profit (Attributable to Parent) | 180,810 | 46,774 | (13,362) |
| EPS (Basic/Diluted) | R$ 3.10 | US$ 0.80 | R$ (0.23) |
| Cash & Equivalents | 75,620 | 19,562 | 86,745 |
| Total Debt (Loans & Financing) | 110,079 | 28,476 | 120,162 |
| Net Cash Flow (Operating) | (11,175) | (2,891) | 22,880 |
| Net Cash Flow (Investing) | 19,952 | 5,161 | (9,850) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company recorded a net profit of R$180.8 million in 2015, a significant improvement from a net loss of R$13.4 million in 2014. This was primarily driven by a R$193.5 million gain on the sale of the Cremaq farm (27,745 hectares) in June 2015.
- Revenue Growth: Net revenue increased 32.8% to R$174.4 million, driven by higher grain sales volumes (160,386 tons vs. 122,415 tons) and increased sugarcane harvest area.
- Financial Income: Financial income surged to R$122.6 million (from R$40.1 million in 2014), largely due to gains on remeasurement of receivables from farm sales and foreign exchange income resulting from the depreciation of the Brazilian Real against the U.S. Dollar.
- Debt Reduction: Total consolidated indebtedness decreased to R$110.1 million from R$120.2 million in the prior year.
- Operating Cash Flow: Operating cash flow turned negative (R$11.2 million used) compared to positive generation in 2014, primarily due to the payment of the remaining installment for the acquisition of Cresca S.A. (R$33.0 million).
Guidance, Outlook, and Risks
Management Commentary: The company expects to continue operating in a competitive and regulated environment. Management highlights the depreciation of the Real as an incentive for farmers to expand planted areas, despite higher financing costs. The company plans to continue using derivative instruments to hedge commodity and foreign exchange risks.
Key Risks and Contingencies:
- Macroeconomic Environment: Brazil faces economic slowdown, high inflation, and political instability (including impeachment proceedings and corruption investigations like "Lava Jato"). Credit ratings for Brazil were downgraded to speculative grade by S&P.
- Foreign Ownership Restrictions: Approximately 78.6% of shares are held by foreigners. Brazilian law imposes restrictions on land acquisition by foreign-controlled companies, requiring approvals from INCRA or Congress for certain transactions, which could delay expansion.
- Commodity and Weather Risks: Operations are exposed to volatile global commodity prices and unpredictable weather conditions (droughts, floods) which can impact yields.
- Legal Proceedings: The company is involved in 84 pending legal proceedings (labor, tax, civil, environmental). Provisions of R$3.7 million have been recorded for probable losses.
- Customer Concentration: The three largest customers accounted for 73.2% of total revenue in 2015. The company has a long-term supply contract with Brenco for 100% of its sugarcane production from specific farms.
Investor Verification Checklist
- Gain on Sale Sustainability: Verify the extent to which the 2015 profit relies on the one-time R$193.5 million gain from the Cremaq farm sale versus recurring agricultural operations.
- Escrow Conditions: Confirm the status of the R$202.5 million held in escrow from the Cremaq sale, which is contingent on deed registrations and environmental license approvals.
- Foreign Exchange Exposure: Assess the impact of continued Real depreciation on future financial income (gains on receivables) versus increased costs for imported inputs (fertilizers, machinery).
- Land Acquisition Barriers: Review the status of pending regulatory approvals for future land acquisitions given the foreign ownership restrictions and the ongoing legal challenges regarding the São Paulo exemption.
- Customer Concentration: Evaluate the risk associated with the exclusive supply agreement with Brenco and the concentration of revenue among the top three clients.
- Environmental Compliance: Monitor the progress of environmental licensing for the Nova Buriti farm and the resolution of the IBAMA fine regarding the Araucária farm.