an S.A.-Weak Ethanol And Sugar Prices And Core Operating Structure Impacted Cosan

Core Viewpoint - Cosan's shares have been negatively impacted by weaker commodity prices, adverse currency movements, and a complex business structure, leading to challenges in investor communication and capital allocation plans [1][2][8] Financial Performance - In Q2, Cosan's revenue increased by 15% year-over-year and approximately 8% sequentially, with Raizen showing 18% year-over-year growth [4] - Raizen's ethanol and sugar volumes rose by 19% and 26% respectively, while Rumo experienced a 29% year-over-year revenue growth [4] - EBITDA for Raizen declined by 29% as reported, but adjusted EBITDA was up 13%, while Rumo's EBITDA grew by about 49% year-over-year [4][6] Market Dynamics - The market for sugar and ethanol has become more challenging, with sugar prices dropping to around $0.177/lb and ethanol prices in Sao Paolo decreasing from R$ 3.08/liter to about R $3/liter [5] - Legislative efforts to increase ethanol fuel blend from 27.5% to 30% could drive a 4% increase in consumption, but progress has been slow [5] Structural Complexity - Cosan's complex structure and frequent changes in financial reporting make it difficult for investors to assess the company's health, particularly for retail investors [6] - The company has unwound its collar financing for its stake in Vale, converting 66 million shares into a direct ownership interest, which raises questions about strategic coherence [6] Long-term Outlook - Long-term revenue growth is expected to be around 3% to 4%, with EBITDA margins projected to improve to 13% this year and around 15% by FY'26 [7] - Despite significant reinvestment needs and low-margin operations, discounted cash flow suggests a fair value around$ 15, with an EV/EBITDA fair value above $17 [7] Investment Considerations - There is an argument that Cosan shares are undervalued, particularly with bearish sentiment already reflected in the share price [8] - However, the complexity of Cosan's corporate structure and capital allocation philosophy may deter potential investors from fully capitalizing on the value [8]