Bunge Global SA

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Bunge Global SA is a global agribusiness and food company, providing critical services from farm to consumer, including processing agricultural commodities, trading, and distributing food.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Bunge is a leading global agribusiness and food company that operates across the entire value chain, from farm origination to the end consumer. Their business is segmented into four areas: Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy.

  • Agribusiness: This segment is the core of Bunge’s operations and includes the origination, processing, and distribution of agricultural commodities like oilseeds (soybeans, rapeseed, canola), grains, and other crops. It involves purchasing commodities from farmers, processing them, and then marketing and transporting these products globally. Bunge leverages its global network to buy grains and oilseeds from farmers in over 40 countries, sell them to customers worldwide. In 2021, the agribusiness segment accounted for approximately 73% of Bunge’s revenues.
    • Key operations include oilseed processing and grain origination.
    • Has diversified its operations by expanding into regions with significant production of oilseeds and grains, such as Brazil.
  • Refined and Specialty Oils: This segment involves the refining, processing, and packaging of vegetable oils, including oils made from soybeans, rapeseed, canola, and palm oil. It’s a high-margin business focused on producing premium and niche products for both food and industrial applications. Their diverse offering of oils are sold under their own brands or directly to manufacturers.
    • A key factor in this sector is their presence in Europe, where demand for palm oil is particularly high.
  • Milling: The milling segment includes the processing of wheat and corn into flours, flaking grits, and other products for baking, convenience foods, and the beverage and feed industries. The company has facilities for milling wheat, corn, and rice.
    • Milling has more regional market dynamics given distribution costs.
  • Sugar and Bioenergy: Bunge operates sugarcane mills in Brazil, producing and marketing sugar, ethanol, and related products. Sugar and Bioenergy has been very volatile because of the supply and demand dynamics and changing weather.
    • The bioenergy sector is expected to grow substantially in the coming years as governments and the global economy seek to become more carbon neutral.

Bunge has been transforming itself, moving away from pure commodities and into value-added products and services.

Bunge’s business model is a commodity-based model. The company buys, processes, transports, and distributes agricultural commodities and food products. It relies heavily on its global network and logistics infrastructure. They benefit from their geographical diversification, which helps to protect them from volatility in one specific region.

Moat Assessment

Bunge’s moat is moderate, rated 3 out of 5. Here’s why:

What is a Moat? An economic moat is a company’s ability to maintain a competitive advantage over its rivals to protect long-term profits.

  • Scale-Based Cost Advantages: Bunge has a very extensive global network in terms of storage, processing, and logistics, including pipelines, which is a massive cost advantage as a physical network. While it can be reproduced, the initial investment would be very prohibitive, hence giving Bunge a narrow moat.
  • Switching Costs: Bunge does not typically benefit from high switching costs on the level of a consumer as commodity crops are substitutable and producers can switch between commodity buyers, which limits their pricing power. However, it can benefit from a sticky long-term relationship with farmers and customers as logistics and quality are important in Bunge’s area of expertise and they have established deep relationships. This means that their customers are unlikely to switch.
  • Geographic Advantage: Bunge has established strong operations in specific geographical niches over a long time. This is useful when products are too heavy, and therefore too expensive to transport. The company has an established network in many South American countries, giving them a competitive edge in specific regions.
  • Intangible Assets: Bunge’s brand is well-known in the commodities markets, which gives a form of limited moat. However, these brands are not as valuable as those in consumer good space, where consumers actively seek certain brands.

Risks to the Moat and Business Resilience

Here are some legitimate risks that could threaten Bunge’s moat:

  • Commodity price volatility: Bunge’s business is inherently tied to commodity prices, which can fluctuate greatly and create difficulties in earnings. This affects the ability to earn consistent returns on capital and creates volatility in the business. It’s imperative to have good risk management to minimize this volatility.
  • Geopolitical risk: Because Bunge is a global business, its operations are subject to varying political risk and policy decisions in each country they operate in. A sudden policy or legislation change can upend the business operations.
  • Climate change risk: As an agricultural commodities company, Bunge is very dependent on agricultural yields. Extreme weather events and changing climate will have negative impacts on crop yields, prices, and the supply chain.
  • Competition: While Bunge is a large player, there are other competitors that are large as well, such as Cargill, Archer Daniels Midland, and Louis Dreyfus. Competitors may also look to move into Bunge’s niche businesses, and vice versa, creating additional competition.
  • Technological disruption: Agricultural processes are not immune to technological change. Any new way to produce the crops would mean competitors can take over.

Business Resilience: While the above risks might affect the company in the short term, they will not destroy the long-term value or viability of the company. The moat, though not very large, should provide protection in the long run. The need for agriculture will not abate in the long run, therefore Bunge will have its long-term revenue opportunity.

Financials Analysis

Here is a financial overview of Bunge, focusing on the most recent results:

  • Revenue: Bunge’s Q3 2024 revenues were $16,018 million, which were down from the $16,878 million last year. This is due to the volatile pricing and changing yields.
  • Net Income: Net income attributable to Bunge was $622 million or 4.15 per share. This is a positive sign after their last results, which showed a loss.
  • Margins: In 2023, the total gross profit margins were 5%, while net profit margins were just below 2%. High commodity prices have eroded margins. This is quite common in commodity companies.
  • Cash Flow: Despite negative earnings, the company has a cash position of 11.3B dollars, after making a net loss of $105 million from operations. Overall, the company has a solid liquidity position to weather downturns.
  • Debt Bunge has a total debt of 6.25 billion dollars, while also having a total equity of 13.5 billion dollars. The company has made efforts to reduce debt over the last few years, by paying down debt using excess cash, which helps improve the balance sheet and strengthens its financial foundation. In the third quarter, Bunge had a negative effect from the reevaluation of its borrowing costs due to a change in debt terms.
  • Capital Allocation: Bunge plans to allocate capital with returns of 8 percent, by implementing strategies like repurchasing shares, and investing in long-term strategic opportunities.

The most important things to look for with commodity based companies are revenue growth, low capital expenditure, and high margins. It is crucial for a commodity to have a resilient moat to achieve those.

Bunge’s financials show that the company’s sales are largely driven by the Agribusiness segment, while the Refining and specialty oils provide much better margins. The company has struggled with profitability in the most recent quarters and years due to various macroeconomic factors. The company’s high levels of debt are offset by its high asset base, and hence a somewhat stable financial health.

Understandability Rating

I am assigning an understandability rating of 3 out of 5 to Bunge’s business. Here’s why:

  • Moderate Complexity: Bunge’s business model of buying, processing, transporting and distributing agricultural commodities and food products is not hard to understand.
  • Intricate Supply Chain: What increases the complexity is the global nature of their operations and the numerous factors they depend on, such as geopolitical risks, weather conditions, and commodity pricing.
  • Accounting: As a global organization, Bunge’s income statements can be hard to understand for those without experience, as currency fluctuations and various nonoperating expenses, make it harder to evaluate its profitability.

Balance Sheet Health Rating

I am assigning a balance sheet health rating of 3 out of 5 to Bunge. Here’s why:

  • Debt Levels: The company’s total debt is at an elevated level compared to equity. However, it is not a financial concern currently given the company’s strong liquidity and cash balance.
  • Cash Flow: Although the free cash flow for the last quarter was negative, the company has an overall stable cash flow position. This allows the company to make investment plans for the future.
  • Asset Quality: Bunge has a large number of tangible assets that it uses for its core business operations. The company also has intangible assets, though their influence is not too significant.

Recent Concerns and Management Commentary

  • Geopolitical risks in Ukraine and Black Sea region: The Russia-Ukraine war and related uncertainties have led to higher commodity prices as they affect production capabilities and global supply chains. The company is managing to secure new supply chains while still having some exposure to the Black Sea region.
  • Supply Chain Volatility: The company experienced logistics and supply chain issues, which have been reflected in their higher expenses. This is not an issue unique to the company, but the company is taking steps to mitigate the effects.
  • Climate Change and Food Security Bunge is focused on helping create a more sustainable food supply chain. This involves things like regenerative farming and reducing emissions from its operations.
  • Global Market Volatility: Macroeconomic fluctuations and uncertainty in demand have caused volatility in the prices and their earnings. Company is focused on managing supply to match demand, and also focused on their key segments for growth.
  • Focus on Cost and Efficiencies: Management intends to focus on improving margins and efficiency, while not cutting down on critical functions such as research and new product development. They intend to use their operational excellence in order to boost profits while streamlining operations.
  • Value creation is a priority Executives have a major priority in using new capital to invest in value-creating segments. This includes improving their operations and reinvesting profits into the existing business. They have mentioned the intention of maintaining a “disciplined” approach.