Friday, March 19, 2021

An International Equity holding: Cosan Limited (CZZ, $19.91): “The Heights and Depths of 2020” by: Sam Shibilski, AIM Student at Marquette University

Cosan Limited (CZZ, $19.91): “The Heights and Depths of 2020”

By: Sam Shibilski, AIM Student at Marquette University 

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.



• Cosan Limited (NYSE:CZZ) produces, distributes, and transports renewable energy sources. They operate through five operating segments which serve to produce and market sugarcane products, ethanol, and biproducts; distribute fuel; distribute natural gas; storage and rail transportation logistics for fuels and sugarcane; and to produce and market lubricants. Cosan primarily engages with Brazilian (89.9% of revenues) commercial, industrial, and residential customers with the United Kingdom, France, Spain, Argentina, the US, among other countries which make up the remaining revenues.


• Cosan’s integral relationships with Shell and ExxonMobil are deeply integrated into two of Cosan’s revenue segments, Raizen and Moove, providing a both a strong foundation and a confidence to remain into the future.


• The relationship between Cosan and Shell continues to be beneficial as the joint segment, Raizen, is set to acquire and integrate Biosev SA into the segments sugar and ethanol operations.


• The current increasing macro trend of both sugar and natural gas prices allow for increased top-line revenues.


Key points: 

Cosan and Shell plc are currently engaged in a joint venture, Raizen, which contains two primary segments within itself: Energia which focuses on producing and marketing sugarcane biproducts (sugar, ethanol, and biomass energy); and Combusiveis which is the distributor and marketing focused portion which operates through the Shell brand name throughout Brazil and Argentina operating equivalents of gas stations encompassing convenience stores, fuel sales, and industrial lubricant sales. Additionally, Cosan’s Moove segment has a partnership with ExxnMobil to produce and distribute lubricants throughout much of South America, US, and Europe under the Mobil brand name. This partnership with Mobil and lubricant manufacturing and sales equates to about 20% of revenues for Cosan.


As of February 8th, 2021, the joint venture segment Raizen, of both Cosan SA and Shell plc, have agreed to acquire Biosev SA from Louis Dreyfus. This acquisition gives Raizen ownership of 9 new mills in Brail bringing their total mill count up to 35. Furthermore, Biosev is an optimal purchase because of strategic fit Biosev has with respect to Raizen and the quality of its mills; currently Biosev’s mills have higher yielding sugarcane crops allowing for more sugarcane, biomass energy, and ethanol to be harvested. In sum based upon 2019/2020 crop figures the acquisition will increase Raizen’s sugar production by 30.68%, its crushing capacity by 43.84%, its ethanol production by 53.88% and in Raizen’s EBITDA by 52.94%. Furthermore, this acquisition will require no new debt for Raizen and will be a cash and stock acquisition.


Throughout the first two quarters of 2020 sugar prices saw a massive decrease in prices, about 40%, due to COVID-19. However, in the latter half of 2020 sugar prices rose back to their pre-pandemic levels and now moving through the first months of 2021 sugar prices are still on the rise hitting their highest prices since 2017, currently seeing a 16.68% increase from last year’s price. Similarly, natural gas prices were also greatly reduced during 2020 due to COVID-19 because many industrial and commercial projects were slowed or shut down, resulting in about a 37% decrease in natural gas prices in 2020 from 2019. Again, similar to sugar, natural gas has risen back to its pre-pandemic levels and looking forward they are expected to remain at or slightly above pre-pandemic levels. These increases in price from last year are a welcome sight for Cosan as their natural gas segment Comigas can earn higher margins throughout tis segment which makes up a significant 40.51% of Cosan’s revenues. Similarly, the Raizen segments can expect higher margins on their sugar even though it won’t be as impactful as sugar sales are less than 5% of the company’s revenue.


What has the stock done lately?

Since 2021 began CZZ has risen 6.95% this continues the continuous increase CZZ saw throughout 2020 which correlated with their business operations opening back up over time and the sugar and natural gas commodity price increases. This recent increase leaves CZZ only about 10% under its pre-pandemic price which notably was CZZ’s highest price ever. With the coming acquisition and flattening or slightly increasing commodity prices CZZ is set up well to reach retake their pre-pandemic price in 2021.


Past Year Performance: 

Going into 2020 CZZ had a steep drop in price, dropping 57% in value from the first day of 2020 to mid-March. However, then throughout 2020 and 2021 thus far as mentioned CZZ has retaken 90% of its large price drop at the start of the pandemic. Subsequently, CZZ’s current P/E ratio is above its ratio at the start of 2020 indicating a continue price increase may be expected. However, CZZ is trading consistently with respect to its EV/EBITDA ratio relative to its peers.


1 Month Stock Chart

Source: FactSet


My Takeaway

With the Biosev acquisition recently being finalized in comes a new wave of production capabilities, economies of scale, and along with-it positive energy and outlook for the Raizen segments of Cosan. Furthermore, the macro commodity price trends that increased throughout the latter half of 2020 greatly helped Cosan’s stock price and look to do the same moving in the near future as sugar and natural gas prices steady out. Cosan have the pieces to continue to be a leader in their markets; things are looking up and the ball is in their court moving into the rest of 2021.  

1 Year Stock Chart vs. Benchmark

Source: FactSet