JPMorgan upgraded SLC Agrícola to buy from neutral, saying Brazil’s listed farming company is entering a more favorable cycle as higher grain prices and lower costs are poised to lift margins in 2027.
The bank sees 36.5% upside through December 2027 from Tuesday’s closing price of $3.31 (16.85 reais). It raised its price target to $4.52 (23 reais) from $3.54 (18 reais). SLC shares rose 6% to 17.88 reais on Wednesday.
“Despite El Niño risks being on the radar, we see a better combination of prices and costs ahead, which should support margins,” JPMorgan analysts team led by Lucas Ferreira wrote in a report.
The recovery is unlikely to be uniform across Brazil’s farm sector, where leverage also varies widely. But companies such as SLC, which has managed fertilizer purchases well and uses hedging strategies, should be better positioned for 2027, according to the bank.
JPMorgan said the recent increase in grain prices does not appear to be reflected in SLC’s valuation. With commodity markets expected to tighten, the analysts expect prices to remain elevated.
The bank raised its forecast for SLC’s 2027 Ebitda by 11% to about $629 million (3.2 billion reais), implying a 34% margin. In late August, BTG Pactual also increased its earnings estimates for SLC, forecasting the company’s first year of Ebitda margin expansion in three years.
Lower Leverage
A decline in leverage should provide another catalyst for SLC shares, JPMorgan said. The bank expects net debt to fall to 2 times Ebitda by the end of 2027, helped by higher earnings and lower capital expenditures, which should improve free cash flow generation.
Most of SLC’s expansion projects have already been completed, leaving annual growth investments largely limited to about $39 million (200 million reais) for irrigation.
Leverage could rise again, however, if SLC is required to buy additional farmland from Radar, including potentially in Maranhão state, according to JPMorgan.
El Niño Risk
JPMorgan said the potential hit to crop yields from El Niño already appears to be priced into SLC shares.
The bank assumes an 8% decline in soybean yields, 7% for cotton and 15% for safrinha corn, the second crop planted on the same land after the soybean harvest. Even under those assumptions, SLC’s results would be slightly better than during the 2015/16 El Niño.
SLC is also better positioned this time because a much larger share of its farmland is mature and more of its acreage is irrigated, two factors that should help mitigate the impact of a potential drought, JPMorgan said.
This story was translated from the original Portuguese with the assistance of artificial intelligence and reviewed by The AgriBiz editorial staff.
