Equity Research

BTG Pactual Affiliate Research

Banco BTG Pactual S.A.
Brazil
Food & Beverages
Company Note
23 June 2020

JBS
Highlights from CFO meeting Rating Buy

Message was quite more bullish than the recent stock price action suggests 12m Price Target R$35.00/US$6.59

Last Friday we hosted a webinar with JBS’ Global CFO Guilherme Cavalcanti and IR Price R$21.65/US$8.24 (ADR)
Director Christiane Assis, where they addressed the main questions and developments RIC: JBSS3.SA, BBG: JBSS3 BZ
on the company and the sector – including commodity cycles and overseas demand,
Trading Data and Return Forecasts
liability management, the US listing, recent investigations and ESG initiatives. Our
52-wk range R$32.45-16.37/US$15.59-6.30
sense is that although JBS’s operating performance started the year just slightly behind Market cap. R$57,698m/US$10,862m
our initial expectations, a normalization on plant operations, combined with still solid Shares o/s (m) 2,665.0
overseas demand and mostly favorable commodity cycles should all allow results to Free float 57%
Avg. daily volume('000 Shares) 21,066
materially improve ahead. Our sense is that the weak recent stock price performance
Avg. daily value (R$ m) 458.2
ignores the powerful combo of stronger operating momentum and compelling valuation. Forecast price appreciation +61.7%
Forecast dividend yield 3.4%
US Beef: positive mid-year seasonality remains in place; better margins ahead Forecast stock return +65.1%
After Q1 earnings, we believe one of the main messages that disappointed investors
was the cautious tone regarding US beef margins. The general view was that with Stock Performance (R$)
40.0 250
spreads widening, margin expansion would be more than enough to offset the
operational deleverage brought by temporary plant closures and the additional 30.0
200

US$150mn (on safety measures and employee bonuses) being spent. Although not 150

20.0

providing guidance, management mentioned that at some point higher spreads should 100

translate into better margins, even with not all of the company’s negotiations being spot. 10.0
50

Ultimately, Q2 and Q3 are the ones where seasonality favors cash flow generation, and 0.0 0
23-Sep-17

23-Dec-17

23-Sep-18

23-Dec-18

23-Sep-19

23-Dec-19
23-Jun-17

23-Mar-18

23-Jun-18

23-Mar-19

23-Jun-19

23-Mar-20

23-Jun-20
this should not be different this year. Also, while slaughtering activity has recovered,
the 1mn head backlog created during the pandemic should mean that cattle supply will Price Target (R$) Stock Price (R$) Rel. Ibovespa

remain abundant throughout the year, with packers’ margins likely benefitting from that.
Management also believes that the current cycle should last for another 2-3 years, Thiago Duarte
given expected calf crop figures, which could help sustaining results too. Brazil – Banco BTG Pactual S.A.
thiago.duarte@btgpactual.com
US poultry and pork production are back; Overseas demand to drive spreads +55 11 3383 2366

Poultry and pork production in the US have also recovered to pre-coronavirus levels. Henrique Brustolin
In the case of pork, management pointed that the domestic market was seeing signs Brazil – Banco BTG Pactual S.A.
of oversupply at the beginning of the year, but stronger overseas demand had helped henrique.brustolin@btgpactual.com
profitability then, and this is expected to continue being the case now. (continues on +55 11 3383 2984

page 2)

Valuation 12/2017 12/2018 12/2019E 12/2020E 12/2021E

RoIC (EBIT) % 9.5 9.6 16.7 17.1 16.5
EV/EBITDA 6.3 6.7 6.0 5.3 5.4
P/E 16.7 7.1 8.6 6.7 8.5
Net dividend yield % 1.5 3.5 2.9 3.7 2.9

Financials (R$mn) 12/2017 12/2018 12/2019E 12/2020E 12/2021E

Revenues 163,170 181,680 203,232 241,776 250,820
EBITDA 11,652 12,341 20,196 21,087 20,878
Net Income 1,566 4,363 7,960 8,646 6,771
EPS (R$) 0.59 1.64 2.99 3.24 2.54
Net DPS (R$) 0.15 0.41 0.75 0.81 0.64
Net (debt) / cash (45,283) (49,613) (50,957) (51,261) (52,086)
Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of R$21.65, on 22 June 2020.
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 5
Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Any U.S. person receiving this report and wishing to effect any transaction in a security
discussed in this report should do so with BTG Pactual US Capital, LLC at 212-293-4600, 601 Lexington Avenue. 57th Floor, New York NY 10022.
 JBS
23 June 2020 page 2

In the case of poultry, this was the protein that suffered the most with the closure of
food service venues – given its higher exposure to it – and oversupply of some cuts
drove spreads down in April. Although lower production levels have already brought
the US chicken market to a greater balance, the fact that industry is reaccelerating
output could mean that profitability may be pressured again during 2H20. Overseas
demand and the pace of food service reopening will be both key for chicken margins,
but additional supplies from China and Brazil may also continue to challenge them.

Brazil beef and Seara to benefit from FX; Watch out for global chicken supplies
For Brazil beef and Seara, the favorable FX should continue to benefit results. On the
former, management pointed that domestic demand has somewhat improved
throughout the Q, but that exports, on the back of booming Chinese demand, is what
should drive results. For Seara, domestic demand for FPP remains strong, and new
launchings are not only doing well in terms of volumes, but also helping foster
consumer preference, with the price gap to competition gradually narrowing. Also,
some of the corn price spike this year in BRL terms should be offset by a higher hedging
position, while chicken exports, although with weaker USD denominated prices, are
still carrying good margins due to the weaker BRL. Our understanding is that the main
caveat for Seara continues to be that Brazil, US, and China will all grow their poultry
output this year, which may challenge margins in case overseas demand is not strong
enough to absorb all the additional supply.

US listing remains a priority; Liability management with more to go

The listing of JBS USA was one of the main goals of the company when the year
started, and although the timeframe for that is now unclear, it is still one of JBS’
priorities. Management believes that the move will unlock value for shareholders by (i)
reducing the (excessive) discount JBS currently has to peers (e.g. although JBS’
2020E EBIT is 8% higher than Tyson`s, JBS current EV is 32% smaller); and (ii)
lowering the cost of debt, with interest expenses being reduced further. Although
liability management was one of the main highlights for the company in 2019, with
interest expenses being cut from ~US$1bn last year to ~US$700mn in 2020, JBS’
average debt cost of 5.3% is still 180bps higher than Tyson’s 3.5%. Also, the recent
upgrade by Fitch gave management hope that JBS may be granted with an investment
grade rating if leverage sustainably remains below 2x EBITDA (which they expect to
achieve this year), which could give additional room for the debt cost to go down.

Investigations’ impacts unclear; Being more vocal about ESG

The recent investigations in the US were also addressed during the meeting, although
not much has changed – the indictment in the poultry industry was against PPC’s
management (the fine for the company, if any, is still unclear), while in US beef
investigations are still ongoing, so not much disclosure has been provided.
Management did point though that operations are running smoothly, as they did when
similar cases happened in the past. With increasing investor concern, management
also mentioned that the company is proactively reaching out to ESG rating agencies to
explain JBS’ policies and to try improving their ratings. The company highlighted to
have real time monitoring for deforestation in an area larger than Spain, and that they
 JBS
23 June 2020 page 3

have blocked 9k suppliers from doing business with JBS due to legal Amazon related
issues. Governance initiatives have also advanced in the past couple years, and being
more vocal about all of what they are doing will likely become a reality going forward.

Undemanding valuation; Solid results and FCF ahead; BUY rated

Our sense remains that there are still plenty of reasons to be more optimistic on results
for the rest of the year. US beef margins should remain strong (above normal), likely
offsetting weaker results in US poultry. Still, we believe the current FX alone means
that there is room for us to revise our estimates upwards, while current multiples are
still at the lower end of the historical range. We also believe that JBS’ strong balance
sheet, more professionalized management team, and solid FCF generation (18% in
2020E alone) should all allow multiples to re-rate, giving ample room for the stock to
perform well. We remain BUYers on the name, with JBS being our Top Pick in the food
space.
 JBS
JBS 23 June 2020 page 4

JBS

Income Statement (R$mn) 12/2014 12/2015 12/2016 12/2017 12/2018 12/2019E 12/2020E 12/2021E
Revenue 120,470 162,915 170,381 163,170 181,680 203,232 241,776 250,820
Operating expenses (ex depn) (109,020) (149,606) (159,238) (151,571) (169,192) (183,091) (220,689) (229,942)
EBITDA (BTG Pactual) 11,090 13,300 11,287 11,652 12,341 20,196 21,087 20,878
Depreciation (3,261) (4,121) (4,539) (4,870) (5,157) (6,440) (6,044) (6,270)
Operating income (EBIT, BTG Pactual) 7,829 9,179 6,748 6,782 7,184 13,756 15,043 14,608
Other income & associates 0 0 0 0 0 0 0 0
Net Interest (3,638) (1,301) (6,311) (5,595) (8,282) (5,477) (8,151) (5,480)
Abnormal items (pre-tax) 0 0 0 0 0 0 0 0
Profit before tax 4,192 7,879 436 1,186 (1,098) 8,279 6,891 9,128
Tax (1,785) (2,750) 271 (92) 1,308 (1,223) (1,958) (2,718)
Profit after tax 2,406 5,129 708 1,095 210 7,056 4,934 6,410
Abnormal items (post-tax) 0 0 0 0 0 0 0 0
Minorities / pref dividends (371) (489) (332) (491) (185) (400) (186) (465)
Net Income (local GAAP) 2,036 4,640 376 603 25 6,656 4,747 5,945
Adjusted Net Income 3,928 13,865 (3,583) 1,566 4,363 7,960 8,646 6,771
Tax rate (%) 43 35 0 8 0 15 28 30
Per Share 12/2014 12/2015 12/2016 12/2017 12/2018 12/2019E 12/2020E 12/2021E
EPS (local GAAP) 0.76 1.74 0.14 0.23 0.01 2.50 1.78 2.23
EPS (BTG Pactual) 1.47 5.20 (1.34) 0.59 1.64 2.99 3.24 2.54
Net DPS 0.23 1.30 (0.34) 0.15 0.41 0.75 0.81 0.64
BVPS 8.96 10.40 8.92 9.11 9.62 12.66 13.09 12.68
Cash Flow (R$mn) 12/2014 12/2015 12/2016 12/2017 12/2018 12/2019E 12/2020E 12/2021E
Net Income 3,928 13,865 (3,583) 1,566 4,363 7,960 8,646 6,771
Depreciation 3,261 4,121 4,539 4,870 5,157 6,440 6,044 6,270
Net change in working capital 172 (714) 2,801 653 (574) (1,341) (2,228) (520)
Other (operating) 0 0 0 0 0 0 0 0
Net cash from operations 5,468 8,047 7,716 6,127 4,609 11,755 8,564 11,695
Cash from investing activities (6,419) (15,404) (2,269) (5,323) (6,703) (12,168) (5,274) (5,477)
Cash from financing activities 6,716 22,337 (8,727) 373 434 (2,085) 1,737 (867)
Bal sheet chge in cash & equivalents 5,897 3,934 (9,488) 2,386 (2,806) (1,438) 3,594 (0)
Balance Sheet (R$mn) 12/2014 12/2015 12/2016 12/2017 12/2018 12/2019E 12/2020E 12/2021E
Cash and equivalents 14,910 18,844 9,356 11,741 8,936 7,497 11,092 11,092
Other current assets 22,632 30,966 24,564 24,364 27,964 32,052 37,453 38,736
Total current assets 37,542 49,810 33,920 36,106 36,900 39,549 48,545 49,828
Net tangible fixed assets 39,831 66,289 60,402 61,627 64,789 71,399 70,628 69,834
Net intangible fixed assets 0 0 0 0 0 0 0 0
Investments / other assets 4,671 5,654 8,494 10,963 12,457 13,502 13,502 13,502
Total assets 82,044 121,753 102,816 108,696 114,146 124,449 132,674 133,163
Trade payables & other ST liabilities 11,181 18,801 15,200 15,653 18,679 21,426 24,600 25,362
Short term debt 13,687 20,907 18,149 13,526 2,923 3,162 3,162 3,162
Total current liabilities 24,868 39,707 33,349 29,179 21,602 24,588 27,761 28,524
Long term debt 26,392 44,976 38,112 43,499 55,626 55,292 59,191 60,017
Other long term liabilities 5,141 7,768 6,441 9,877 8,971 8,099 8,099 8,099
Total liabilities 56,401 92,452 77,901 82,555 86,200 87,979 95,051 96,639
Equity & minority interests 25,643 29,301 24,915 26,141 27,946 36,471 37,624 36,524
Total liabilities & equities 82,044 121,753 102,816 108,696 114,146 124,449 132,674 133,163

Company Profile: Financial ratios 12/2017 12/2018 12/2019E 12/2020E 12/2021E

EBITDA margin 7.1% 6.8% 9.9% 8.7% 8.3%
Operating margin 4.2% 4.0% 6.8% 6.2% 5.8%
The Group's principal activities are production, distribution,
marketing and export of processed, frozen and fresh beef, Net margin 1.0% 2.4% 3.9% 3.6% 2.7%
poultry, pork and its by-products. It operates in the processing of RoE 6.5% 17.5% 26.8% 25.2% 19.7%
beef, pork, lamb, chicken and also produces value added and RoIC 9.5% 9.6% 16.7% 17.1% 16.5%
convenience food products. JBS is currently the largest protein EBITDA / net interest 2.1x 1.5x 3.7x 2.6x 3.8x
processor and the second largest food company in the world, with Net debt / EBITDA 3.9x 4.0x 2.5x 2.4x 2.5x
otver 300 production facilities worlwide, being present in 22 Total debt / EBITDA 4.9x 4.7x 2.9x 3.0x 3.0x
countries on five continents, serving over 150 nations. Group's
Net debt / (net debt + equity) 63.4% 64.0% 58.3% 57.7% 58.8%
revenues are around R$150bn (LTM), with beef representing
more than 30%, prepared and others another 30%, poultry Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
accounting for 22% and pork for the remaining. based on share price as of 22 June 2020
 JBS
23 June 2020 page 5

Required Disclosures

This report has been prepared by Banco BTG Pactual S.A.

The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual Definition Coverage *1 IB Services *2

Rating
Buy Expected total return 10% above the company’s sector 55% 50%
average.
Neutral Expected total return between +10% and -10% the 43% 35%
company’s sector average.
Sell Expected total return 10% below the company’s sector 2% 0%
average.

1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy

Analyst Certification

Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed
herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions
contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual
S.A. and/or its affiliates.
Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature
list.

Statement of Risk

JBS S.A. [BRJBS] (Primary) - JBS is subject to local macroeconomic conditions, mainly FX-rate, GDP growth and inflation. Run for consolidation (likely increasing cost of growth), threat of diseases
and sanctions from importing countries and exposure to commodities are key concerns of the protein sector, while company-specific risks would include legal disputes and limited cash flow in the
short term.

Valuation Methodology

JBS S.A. [BRJBS] (Primary) - Our TP is DCF-based, using Ke and g of 8.6% and 2.5%, both in USD terms.

Company Disclosures

Company Name Reuters 12-mo rating Price Price date

JBS 1, 2, 4, 6, 18, 19, 20, 22 JBSS3.SA Buy R$21.65 22-6-2020

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.
2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services
from this company/entity within the next three months.
4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.
6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which
represents the same interest of this company/entity.
18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of
common equity securities
19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months.
20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.
22. Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.
 JBS
23 June 2020 page 6

JBS
Stock Price (R$) Price Target (R$)
40.0

30.0

20.0

10.0

0.0
23-Jun-17

23-Jun-18

23-Jun-19

23-Jun-20
23-Sep-17

23-Dec-17

23-Sep-18

23-Dec-18

23-Sep-19

23-Dec-19
23-Mar-18

23-Mar-19

23-Mar-20
Buy
Neutral
Sell
No Rating

Source: BTG Pactual and Economatica. Prices as of 22 June 2020

 JBS
23 June 2020 page 7

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