Equity Research 29 June 2020 CORE Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 16. Restricted - Internal Americas Agribusiness Chicken (over)supply & demand: Flying into headwinds Chicken supply & demand gap leads to a revaluation of the most exposed companies under our coverage: Contrary to cattle and hog slaughter, which faced stark YoY contractions in April amid temporary closures, chicken production is fairly protected; egg production and eggs set were only slightly down YoY. Additionally, poultry operations are relatively less labor intense, and chickens take a fairly lower amount of time to grow to their processing weight. Nonetheless, the strong supply might be too much for the pressured demand to handle; the chicken industry is highly exposed to foodservice, and we don’t expect this channel to be fully recovered any time soon. We therefore lower our estimates for PPC, BRF, and SAFM. We are downgrading PPC to EW from OW while lowering our price target to $20 from $28. Besides the aforementioned adverse industry conditions, PPC faces in our view two additional risks that drive our downgrade: an even weaker performance in Mexico, which likely lasts longer, and corporate governance issues. We are downgrading BRF to EW from OW while leaving our price target of $4.50 unchanged. BRF is the company most exposed to domestic consumption in Brazil within our protein coverage. The economic backdrop in Brazil, coupled with likely longer lasting closures within the Brazilian domestic foodservice channel amid rising Covid-19 cases, and FX headwinds drive our more cautious view in the short term. We reiterate our OW rating on SAFM although we are slightly trimming our price target to $159 (was $168). Taking the above-mentioned industry headwinds into account, we reduce our short-term estimates. SAFM in contrast to PPC or BRF operates mainly in the U.S. domestic market (with less than 10% of sales generated in the export markets), which leaves us with a relatively more optimistic view on the company. Additionally, SAFM among the three has the strongest balance sheet with very limited leverage, which should allow the company to best navigate through the current volatile environment. Risks to thesis and valuation: Poultry supply and demand imbalance could be narrowed sooner than expected. Additionally, FX tailwinds could help exporters and companies like PPC or BRF in their consolidated results, lastly the foodservice channels (across all sub-segments of it) could recover sooner than expected. RATING CHANGE Americas Agribusiness NEUTRAL Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2. Americas Agribusiness Benjamin M. Theurer +52 55 5241 3322 benjamin.theurer@barclays.com BBMX, Mexico Antonio Hernandez, CFA + 52 55 5241 3323 antonio.hernandez@barclays.com BBMX, Mexico Barclays | Americas Agribusiness 29 June 2020 2 Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold) Company Rating Price Target EPS FY1 (E) EPS FY2 (E) Old New Date Price Old New %Chg Old New %Chg Old New %Chg Americas Agribusiness Neu Neu BRF SA (BRFS) OW EW 26-Jun-2020 3.96 4.50 4.50 - 0.14 0.06 -57 0.23 0.20 -13 Pilgrim's Pride Corp (PPC) OW EW 26-Jun-2020 16.69 28.00 20.00 -29 1.74 0.82 -53 2.17 2.02 -7 Sanderson Farms, Inc. (SAFM) OW OW 26-Jun-2020 115.24 168.00 159.00 -5 1.97 1.40 -29 8.19 8.19 - Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research. Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended Industry View: Pos: Positive; Neu: Neutral; Neg: Negative Barclays | Americas Agribusiness 29 June 2020 3 A grimmer view on poultry in the Americas Why we are updating our view We are lowering our estimates on PPC, BRF, and SAFM, the companies most exposed to the chicken industry in Americas Agribusiness. Contrary to cattle and hog slaughter, and subsequently beef and pork production, which faced stark YoY contractions of 10-20% in April amid temporary plant closures (see BBQ – Ben’s Beef Quotes: June 2020, June 22), egg production was down only 2.1% YoY, while weekly eggs set have increased considerably since bottoming a...
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