One for the Vegans…Not!

Sadia (SDA) is a Brazilian based international purveyor of meat and other processed foods.

They are a classic fallen knife which fell hard and fast due to their finance department screwing the foreign exchange pooch. They were caught by both the US dollar appreciation and the fall in commodity prices. They were hedged the other way, double doh!, and the result is a massive hole in their balance sheet. the opportunity maybe that the stupidity could be a one-off thing and their core business remain strong and growing a good clip, 25% in first half.

“It lost some $416 million [R $760M] — or more than what it had earned for all of last year — as Sadia’s financial team exceeded the company’s internal limits for currency risk.” http://www.fool.com/investing/small-cap/2008/09/29/a-really-bad-bet.aspx

As Sadia report in Brazilian Real it can be slightly more difficult than usual to obtain a clear picture of this company. I’ve found the best resource to be their website. From this page you can more easily examine their financials in USD. They provide an excellent breakdown of their business, sliced and diced in many ways. Though keep in mind the recent R$760M loss occurred after Q2 data.

A remaining danger is they are still hedged for six months, which represents approximately US$ 1.8 billion in hedges. Their average exports per month are US$300 million and the average currency in these contracts is 1.75. The current rate is almost 1.97.

Due to the hedging losses and heavy investment in growth Sadia’s net debt/EBITDA has ballooned past their historical upper 2x to 3x. However, they have strong operational cash flows and believe they will bring this down to 2x in 12 months.

Sadia is or at least was a Bill Mann recommendation at TMF Hidden Gems, I no longer subscribe, but am sure he and other HG members have been discussing SDA at length. Maybe someone else can comment on that.

When Bill first recommended Sadia I felt the dividend was attractive, but I didn’t buy in. As you can see by their dividend history anyone counting on those high dividends would be sorely disappointed. Since 2005 dividends per 100 ADRs is $18.39, $41.19, $12.54 and $1.76

Last Earnings Release
Q2 Transcript discussing the currency loss

Anyway, I’ve only just started looking and thought I’d mention it here as others may be able to shed some light on whether SDA is a good buy at these levels. My initial reaction was SDA is a steal after a one off financial bungle, but after looking at the numbers and seeing falling margins, increased spending on capital investment and increased debt at the worst possible time I am not no sure. Their income may be growing at 25%, but due to deteriorating margins caused by higher commodity costs and significantly higher operating costs (http://ri.sadia.com.br/enu/PI_PLANILHA_DRE_C_AP-enu.html) it is not translating to higher profit.

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