Agricultural companies in Q2 2024 posted mixed results, with big names falling short of expectations. Archer-Daniels-Midland Company (ADM) dropped 33.29% (YoY) with revenues falling 11.7% (YoY) while Bunge Global (NYSE:BG) was down 17.74% (YoY). Bunge’s total earnings dipped 12.01% (YoY) with the company admitting lower revenues in the Americas and Asia. Despite this decline, I will explain why Bunge Global is on hold owing to new market expansion opportunities after its intended acquisition of Viterra was recently approved by the European Commission.
Bunge’s net sales in Q2 2024 hit $13.24 billion, a 12.01% (YoY) drop from $15.05 billion recorded in Q2 2023. The decline was also replicated in the 6 months to June 30, 2024, which saw the company post $26.66 billion from $30.38 billion in the prior year. Bunge’s quarterly earnings have been on a steady decline since Q2 2022 when it recorded its historic high of $17.933 billion, boosted by surging demand in South America for vegetable oils (especially Brazil).
Market Expansion
Bunge Global announced that its acquisition of Viterra (owned by Glencore since 2013) was recently approved by the European Commission. Bunge entered into this definitive agreement in June 2023 with the acquisition valued at $8 billion divided in stock and cash. It must be noted that this acquisition was set to help the agribusiness segment, which, over the years, has been Bunge’s largest source of revenue.
Bunge Global Q2 2024 Sec Filing
As seen above, Bunge’s earnings in Agribusiness declined 11.2% (YoY) to $9.657 billion from a high of $10.875 billion in Q2 2023. The same decline was witnessed in other key segments of Bunge’s revenue stream. As the company’s largest earner, it is evident that the company had to look for new markets, seeing there was some exhaustion in North and South America. In its Q2 2024 transcript, Bunge stated and I quote,
Agribusiness, processing results of $265 million in the quarter or down from last year as higher results in Europe soy and soft seed crush, but more than offset by lower results in North and South America and Asia”
Bunge’s main agribusiness locations are in the Americas and Asia-Pacific, while Europe is still in recovery, especially with the cooling down of warring pressure in Ukraine. The 10% decrease in Bunge’s cost of goods sold (COGS) in Q2 2024- in Processing was attributed to higher “recovery of inventory” in Ukraine as opposed to the prior period which declined to 7%. As it stands, there has been a positive response from Europe, and I believe Bunge intends to capitalize on this by growing its agribusiness in the continent.
The Commission was investigating whether the transaction between Bunge and Viterra would lower competition, particularly for “oilseeds and related products.” The merger is expected to grow the agribusiness company manifold. Of special interest was the competition concerns in Hungary and Poland. While releasing the Commission’s findings, Margrethe Vestager, EC’s Executive Vice President for competition policies, had this to say,
Preventing market concentration in agricultural supply chains is crucial for both farmers and consumers. We had concerns that the transaction could affect the supply chains of rapeseed and sunflower seed in Central Europe, with potential ramifications across the food, feed, and biofuel industries. The divestiture of Viterra’s entire oilseeds business in Hungary and Poland will preserve competition in these markets.”
What does this mean?
Viterra operates in 11 countries, owning more than “30 processing and refining plants.” The company produces crude oil, refined oil, biodiesel, glycerine, refined sugar, and feed meals in at least 13 oilseed crushing plants, 12 processing mills, six biodiesel processing facilities, and two sugarcane mills. This merger will increase Bunge’s asset-holding
As the EU stated, Hungary is a significant market for its oilseeds (particularly sunflower and rape seeds) with an annual turnover of more than 500,000 tons. Most importantly, the main customers of the oilseeds are biodiesel and cooking oil manufacturing companies. In Poland, the EU Commission forecasted lower harvests of rapeseed in 2024 (relative to 2023) that would also be experienced in Germany, Romania, and the Czech Republic. The Commission indicated that about 3.5 million tons of rapeseed would be harvested in Poland in 2024, indicating a decline in supply against higher demand.
Despite the fact the merger between Bunge and Viterra may take a few more months before completion, it is still safe to consider the timing. In the FY 2023/24 Europe recorded an increase in imports of soybeans/ meal as opposed to a combination of oilseeds and soybeans.
USDA FAS
Valuation
Bunge Global currently has a market capitalization of $13.94 billion, with a total common share outstanding balance of 141.6 million shares. The company indicated that it would be purchasing about 65.6 million shares of Viterra for an aggregate value of about $7 billion. This would bring the cost per share to $106, which would also mean an 11% premium to the current Bunge share price. This acquisition would then increase the company’s valuation above $21 billion, with ADM at $28 billion.
Bunge’s forward price-to-earnings ratio is at X13.61 against the industry average of 19.52. This gives off a difference of -30.28% indicating the company is undervalued with a significant upside potential. In addition, I foresee that Glencore will be a major shareholder in Bunge Global, seeing it already owns 49.99% of Viterra if the transactions go through.
Risks
In my view, Bunge’s merger with Viterra will determine the course of the stock’s price. The company’s expansion into Central Europe and beyond depends on the success of this deal.
Further, Bunge has a debt balance of $5.92 billion against a cash balance of $1.33 billion. This transaction may cause a reduction in dividend payouts heading into Q4 2024 seeing the company is already offering a forward yield of 2.76%. The company was also silent on the topic of share buybacks for the remainder of 2024, indicating it may come to the market for financing.
Bottom Line
In this article, I have given a hold rating to Bunge Global seeing that it is on the verge of merging with Viterra, an affiliate of global miner, Glencore. The company’s intended acquisition was approved by the European Commission, indicating positive competition for the oilseed business in Poland and Hungary. I have indicated my reservations since the company has yet to outline a proper financing framework for the transaction, seeing that it is set to cost more than $8 billion while the company has a debt of $5.92 billion and a cash balance of $1.33 billion. Bunge also needs to grow its revenues to support capital investments and lower debts into 2025.
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