Why Indofood Agri's sweet spot in Brazil is genius move

Sugar production could potentially jump to 3.8m tonnes.

According to CIMB, Indofood Agri expects its Brazil mill to raise its sugar production from 2.1m tonnes in FY3/12 to3.8m tonnes in FY15.

CIMB also views the implied EV/tonne for the sugar mill capacity as fair, being within recent market transactions. 

Indofood Agri (IFAR) hosted a briefing to discuss in more detail its proposed acquisition of a 50% interest in the Companhia Mineira De Acucar E Alcool Participacoes (CMAA) group for R$143.4m (around US$71.7m).

Here's more from CIMB:

We gathered that its sugar mill (3m tonnes capacity) currently gets its sugarcane supply from 34,000ha of sugar plantations in the vicinity. 40% of these estates are managed by the company but the land is leased from farmers.

Third parties own the remaining 60%. We gathered that it plans to raise the sugar plantations to 45,000ha and the mill capacity to 3.8m tonnes. The company is still in the ramp-up phase as the mill was only completed in 2011 and the sugar estates are young.

The group will need to put in another US$20m to raise its milling capacity. It expects the assets to be earnings accretive from FY14 onwards. For FY13, the
earnings impact will not be material. 

We remain positive on the acquisition, which is fairly priced as the implied value on mill/tonne basis is US$100 compared to the replacement cost of US$125 per tonne and recent transactions of US$110-120 per tonne.

IFAR should have no problems funding this acquisition as the holding company has US$170m net cash. This purchase will make the group a global sugar player and add to its future earnings.

Lastly, the group has a strong local partner in this venture and the production growth prospects for these assets look compelling.