BRF S.A.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

BRF S.A. is a global food company focused on producing and processing poultry and pork products, with a vertically integrated operation spanning from farm to table.

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

BRF S.A., based in Brazil, is a leading producer of fresh and frozen protein foods in the world, focusing on poultry and pork. The company operates a vertically integrated production chain, from breeding and raising animals to processing, distribution, and marketing of the final products. The company also generates revenue from:

  • Animal Feed: Production and sale of feed for their integrated operations
  • Processed Foods: Production of processed meats and ready to eat meals
  • In-Natura: Sale of whole frozen chicken and pork carcasses, as well as frozen and marinated meat and poultry products.
  • Other: Consists of products sold both domestically and internationally

BRF operates both in Brazil and international markets.

  • Brazil market has 57% of net sales, while international markets has 43% of net sales as of 2022
  • Main International markets are in the Middle East, Asia, Africa, and Latin America.

The company’s product portfolio is a mix of branded products with differentiated characteristics (e.g., Sadia, Perdigao, Qualy and Sadia Veg&Tal) as well as unbranded products.

In recent years, they have focused on expanding into value-added product categories, including prepared meals and plant-based foods. Their focus is on branding, marketing and distribution of their own branded products, to avoid being seen as commodity food manufacturer.

  • Market Goals
    • Maintain leadership in the Brazilian market
    • Expand its global footprint to create value
    • Create new markets and continue diversification.

The global protein market is driven by several factors:

  • Growing population and income, particularly in emerging markets, is increasing demand for protein.
  • Consumers are increasingly focused on healthy eating, resulting in a preference for lean protein.
  • Demand for convenience foods is also rising.
  • Increasing popularity of ready to eat, and easy to cook foods The industry is also undergoing consolidation, with large players acquiring smaller companies, and a high volatility in commodities that may affect profitability. Moreover, increasing regulations, especially in terms of food safety and health standards, have a significant impact.

In 2022, the world food market was estimated at 9.6 Trillion and forecast to reach US$13.9 Trillion by 2027. The global meat market was estimated at $1005 billion in 2021 and projected to grow by approximately 4.4% a year until 2028. The Brazilian market is one of the largest markets in the world, particularly in the poultry and pork sectors. There is also a growing demand for more sustainable and responsible production methods, due to growing environmental consciousness from consumers.

  • Main trends:
    • Increased automation in facilities to increase efficiency and productivity
    • Implementation of higher production, welfare and quality standards
    • Growing focus on supply chain efficiency and digitization of operations

Competitive Landscape

BRF faces strong competition from other global protein producers, with limited differentiation in terms of basic products and prices. Companies mainly compete on basis of quality, brand recognition, cost, operational efficiency, and distribution capabilities. The presence of low-cost producers from China and Southeast Asia is a major threat to domestic companies. BRF’s main competitors are:

  • JBS SA
  • Marfrig Global Foods
  • Minerva Foods
  • Cargill
  • Tyson Foods
  • Sanderson Farms
  • Global export partners from China and Thailand

BRF claims that they are one of the largest poultry exporters worldwide with a strong presence in both domestic and international markets, including more than 150 countries, with diversified brands and distribution channels. They also believe they have a high degree of integration across the production chain, from feed to finished products, but this integration also increases the level of financial risk in case commodity prices decline or new disease outbreaks.

Moat Assessment

BRF’s moat is rated as a 3 out of 5.

The company has some strengths which can help maintain its profitability above competitors, but also there are considerable risks and weaknesses which prevents them from having wide economic moats.

Here’s a breakdown of BRF’s key attributes:

  • Intangible assets (Narrow Moat): BRF has strong brand recognition within Brazil and some emerging markets for some of its brands, which gives it some pricing power, and has a long relationship with suppliers and customers. But, this brand perception is not as strong outside of its traditional markets, and lacks global recognition compared to large competitors like JBS and Tyson. Also, its brands are more for value products rather than premium products, which makes them less valuable.
  • Switching costs (Limited/None): For most of its products, switching costs for consumers are relatively low, and retailers can easily change suppliers. However, with some products targeted at industrial customers such as processors, this is where BRF’s vertical integration can create some minor switching costs due to higher traceability and food-safety concerns. These costs can be easily replicated if necessary to compete directly with BRF by a competitor.
  • Network effects (None): BRF does not benefit from direct network effects, because its business is mostly selling physical products. Indirect network effects, such as a larger distribution network, are offset by the highly competitive nature of the markets they operate in, therefore, no real defensible network moat.
  • Cost advantage (Narrow Moat): BRF benefits from cost advantages due to its scale, production efficiency, vertical integration, and proximity to key feed ingredients and other raw materials in Brazil. But, its cost advantage can be eroded by factors such as disease outbreaks, fluctuations in commodity prices, and regional protectionist policies. This advantage isn’t fully sustainable because competitors can easily copy the vertical integration system, or move production to low cost countries, while it lacks the size advantage in some markets.

Risks to the Moat and Business Resilience

Several risks could impair BRF’s moat and business resilience:

  1. Commodity price volatility: BRF’s products depend on a variety of commodities, such as feed, energy, and other raw materials, whose prices can fluctuate, causing a great impact on the company’s revenue, costs and profitability.
  2. Disease outbreaks: BRF is highly vulnerable to outbreaks of poultry or swine diseases, such as African Swine Fever and Avian Influenza, that could trigger significant decreases in production and sales, and cause reputational damage in the export market.
  3. Economic conditions: Economic downturns in key markets could reduce consumer demand and harm the company’s operating results. Furthermore, high inflation and interest rates can impair its operations.
  4. Regulation: Changes in government regulations, trade tariffs, or food-safety standards can affect its production, distribution, and profitability and its ability to operate both in the domestic and international markets.
  5. Competition: Intense competition from both domestic and international players in various markets can reduce the company’s pricing power and erode its market share.
  6. Operational Risks
    • Complexities in manufacturing, distribution, and logistics.
    • Lack of a strong global brand portfolio.
    • Limited operational efficiencies in markets outside of Brazil

Financial Analysis

The company has experienced negative results and high volatility in profitability. In order to analyze the business performance, we will be analyzing the recent financials.

  • BRF’s balance sheet as of 2022 shows significant assets: 42 billion BRL, with around 47% of total assets stemming from Property, Plant and Equipment.
  • Main liabilities include Long-Term and Short-Term Debt, as well as Trade Payables. The Net Debt was 24.2 Billion BRL as of 2022 and liabilities constituted 59% of the total liabilities and equity, which points to high leverage.
  • In 2022, the company had a net loss of 1 Billion BRL compared with a profit of 1.5 billion BRL in the previous year. This is due to increased cost of production, a decline in prices, a decrease in poultry sales volume in Brazil and a sharp increase in financial expenses.
  • Revenue was up by 11.5% in 2022 year over year.
  • Cost of sales rose up significantly, from 35.3 Billion to 39 Billion BRL, which is a bigger problem than the top line growth.
  • Gross profit is down from 11.2 billion to 9.1 billion in 2022.
  • The SG&A expenses have increased by 23.5% year over year.
  • Financial expenses increased by 79%, and net interest expenses was up by 55% in 2022.
  • Margins: Net margins are very low and have been negative in recent times, mainly due to high input costs, and a highly competitive environment. The EBITDA margins has consistently fluctuated around 7-9%.

The key problem is the high debt load, which results in higher interest rates and higher expenses. The management has been making strategic changes, like cost optimization, to bring the business back to profitability. The recent quarterly reports show that the company has been making progress in that regard, and they have achieved improvements in operational efficiency, productivity, and sales volume in some of its markets, but more work needs to be done. However, the high volatility in earnings remains a risk.

A significant risk stems from the high amount of debt the company currently has. This might put limitations on the ability of the company to sustain positive ROICs, and also makes it vulnerable to unexpected events and crises.

Understandability: 3/5

BRF’s operations are relatively complex due to its integrated supply chain and global presence. Financial statements are relatively hard to understand, mainly because the company operates in multiple segments, both domestically and internationally and has a wide range of products.

  • Complexity of vertical integration
  • Numerous business segments
  • A globalized company * Many financial metrics and items
    • The company reports results using IFRS standards and the numbers are in Brazilian Real, which makes it even harder to analyze for a non-Brazilian investor.
      • Significant reliance on commodities
    • Subject to commodity price volatility
  • Difficult to analyze profitability, due to volatility in earnings
  • However, the company’s business model, as a food producer, is relatively simple to understand in theory.

Balance Sheet Health: 3/5

BRF’s financial health is decent but has some major risks that may cause issues down the line.

  • The company is highly leveraged with significant amounts of debt.
  • The company has limited free cash flow.
  • Current assets are above current liabilities, but this might change.

The company has shown some signs of improvement, through cost optimization and some increased revenue, but it needs to show sustained growth and profitability to strengthen its balance sheet, but as it is now, the high level of debt and high exposure to commodity price risk create substantial concerns.

  • High Debt
  • High sensitivity to currency and commodity price volatility
  • Inconsistent profit generation.
  • Decreasing margins
  • Working capital issues

The company is focusing on resolving some of these issues, through debt management and strategic cost reduction, but it will take time to see if that is enough.