2023-11-21 00:57:13
Argentina’s change of government might benefit at least two Brazilian companies listed on the stock exchange: Raízen and Unipar, which have operations in the neighboring country and have not been able to withdraw money from there for at least three years.
Raízen entered Argentina in 2018, at the worst timing possible. The company paid US$950 million for Shell’s operations in the country, which includes more than 1,200 stations and a refinery that serves this distribution network.
Shortly followingwards, Argentina began to enter a death spiral, with rising inflation and interest rates, and imposed capital controls, basically preventing the withdrawal of cash generated by the business in the country.
The Argentine operation is small for Raízen’s size: it generates an EBITDA of US$ 200-350 million per year, compared to the EBITDA of R$ 13.5 billion that Raízen should make this year, considering the low end of your guidance.
But a change in the country’s political environment might unlock value for the operation in addition to “unfreezing” resources, which might be used to strengthen the capex of the company.
Despite the country’s uncertainty and capital controls, the analysts covering the company were not marking the asset at zero — but were applying a multiple discount in relation to the Brazilian operation.
This discount was not that big because the Argentine operation has a much higher margin than the Brazilian one. This happens for two reasons: it is verticalized, given the refinery’s operation; and competition is more rational in Argentina, as there are no white flag stations given the market dynamics, in which all distributors have their own refinery.
To give you an idea, the margin of the Argentine operation was R$261 per cubic meter in the first fiscal semester — which runs from April to September — compared to R$130/m³ in Brazil.
Operations have also remained at healthy levels, despite the macro context. Raízen has told investors that it has managed, with difficulty, to pass on prices, which is essential given the dynamics of rising oil prices and unfavorable exchange rates.
“They have also tried to be more efficient there, negotiating advance payments to get discounts and taking on debt in pesos, which decreases with the exchange rate devaluation since they receive payments in dollars,” said an investor who follows the company.
For now, the Argentine operation has not had much capital surplus either, as it is in a phase of heavy investment in the refinery, some of which are mandatory.
In the first half of the year, Raízen made a capex of US$88 million in Argentina, of which US$60 million went to integrity, maintenance and fuel quality maximizing projects.
At Unipar, the situation is similar. The company has a plant in the Baia Blanca petrochemical complex that accounts for around 25% of its capacity.
In the last three years, it has also been unable to remit its cash generation back to Brazil. Today, the company has around R$500 million “trapped” in Argentina.
“And the problem is that there’s not much you can do with that money. Because if the company wants to buy a property, for example, it’s very difficult because the guy there doesn’t want to sell it because he doesn’t want to put that money in the bank, as he’s afraid of not being able to buy dollars, or get it out of there,” said another investor.
Unipar has told investors that, more than bringing back capital, the improvement in Argentina might create important business opportunities for the company.
“Argentina has a gigantic lithium exploration opportunity. If the lithium industry were to establish itself there, this would generate a very large demand for Unipar’s products, for example.”
The change in government brought a breath of relief among investors, with shares of YPF and other Argentine companies soaring today in New York.
But the reading among businesspeople and executives who know the country is that the situation will require a lot of work — and that before it improves, it might get even worse.
“I think he [o Javier Milei] there will have to be a huge shock, and this will negatively affect all stakeholders, including Brazilian companies that operate there,” said a businessman. “But he needs to give this bitter medicine. The important thing is to change the mentality towards an efficient, smaller state that does not privilege rentiers.”
Another executive said he thinks it is still too early to draw conclusions, and that movements in Argentine stocks are purely speculative.
“The economic challenges there are enormous and structural. It won’t be easy, overnight. It’s normal for investors to be excited, but from a business point of view you have to be more cautious. Things are very complicated and any change will not be quick and will require sacrifices.”
Pedro Arbex
1700549534
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