BofA Downgrades Cosan, Prefers Cosan SA; Says Latin Agribusiness 'Won't Get Simpler Soon'

• Cosan Limited (USA) CZZ shares have been on a downward trend since touching a high of $11.45 in October 2014, and have lost 73 percent in the last one year.
• BofA Merrill Lynch’s Isabella Simonato downgraded the rating on the company from Buy to Neutral, while reducing the price objective from $8.4 to $3.6.
• Cosan SA shares have higher upside potential than Cosan Limited, despite the sell-off, Simonato believes.

Analyst Isabella Simonato mentioned that despite the significant selloff in Cosan’s shares year to date, several other challenges may prevent the re-rating of the stock in the near term. These include Cosan’s complex corporate structure - a double holding company, its “distance from the subsidiaries’ cash flow generation and exposure to Rumo Logistica.”

Simonato believes that Cosan SA Industria e Comercio CSAN has better operating and valuation metrics than Cosan Limited. He maintained a Buy rating on Cosan SA, while reducing the price objective from R$31 to R$24. Although Cosan SA is a holding company, it is closer to the cash flow generation of its subsidiaries Raizen and Comgas.

Cosan SA’s consolidated debt is also lower than that of Cosan Limited. The BofA Merrill Lynch report noted, “In addition, we expect faster de-leveraging at Cosan SA versus CZZ, despite the higher debt at the holding level.”

Cosan SA is expected to use the dividends paid by Raizen and Comgas to reduce its $4.5 billion debt.

Simonato expects an expected 22 percent decline in capex at Raizen Energeia in 2015-2016 to boost cash flow generation and possibly enhance dividend payments. Cosan SA’s management is expected to raise R$1.0 billion from the divestiture of its land development business, Radar.

Other factors that go in favor of Cosan SA include its estimated higher ROIC, at 8 percent in 2016, as compared to 6.7 percent for Cosan Limited, and its attractive stock valuation.