The Tractor: How Ometto turned Cosan into your go-to brazilian compounder
How a small sugar mill in the countryside grew into the owner of multiple irreplaceable businesses in Brazil
Today’s post is not about some special situation case, but rather a brief introduction to one of my favorite stories in Brazil’s equity markets. But first and foremost, I have a question for you:
What would you do if you had the opportunity to invest alongside the modern Rockefeller?
The company presented today is a holding company that already has a long track-record of value creation in the tumultuous brazilian environment, but somehow still trades at an unfair discount to the value of the subsidiaries and to the amount of low-hanging growth opportunities presented today to consolidate Cosan as the Brazilian Standard (ESG) Oil, or to better phrase it, the Berkshire of irreplaceable businesses.
And the man behind this is Rubens Ometto, a.k.a The Tractor. After intense legal and familiar dispute, Ometto took the helm of the company founded by his grandparents in the countryside of São Paulo state, a relevant sugar and ethanol producer, and turned the company into a behemoth whilst their competitors were tore to the ground. Despite all the cyclicality of the underlying businesses, in the last ten years Cosan’s fivefold its EBITDA to over than BRL 22 billion and is poised to maintain its growth for the foreseeable future:
So what exactly is comprised Cosan’s businesses?
Raízen (CSAN stake: 44%), a JV formed between Cosan and Shell that comprises Cosan’s sugar mills with Shell’s downstream fuel distribution, and today is an integrated energy company, being the state-of-the-art producer in sugar, ethanol and bioenergy while still being the second largest fuel distributor in Brazil, behind Vibra Energia (the privatized Petrobras fuel distributor). Listed in B3:RAIZ4;
Rumo (CSAN stake: 30%) is the largest railway operator in Brazil, managing approximately 8 thousand miles throughout Brazil’s main agricultural output regions, the Midwest, the Southeast and South, transporting 70 billion RTKs/year and being a critical artery to connect the farmfields to the ports. Listed in B3:RAIL3;
Compass (CSAN stake: 88%) owns the largest natural gas distributor in Comgas, acquired in 2012, and a 51% stake in Commit, a JV formed with Mitsui that acquired Petrobras’ stakes in 11 regional gas distributors in Brazil.
Moove (CSAN stake: 70%) produces and distributes automotive and industrial lubricants, mainly under the Mobil, Comma, EcoUltra and Tirreno brands. Moove has operations in South America, Europe and United States, this as a result of the acquisition of PetroChoice in May 2022.
Cosan Investments (CSAN stake: 100%) are other subsidiaries not yet relevant to the EBITDA of the group, including 318,000 hectares of farmland owned by RADAR and leased to third parties (CSAN stake in RADAR is worth BRL ~4.2b) and a mining JV with Paulo Brito to operate Porto São Luis, a port terminal acquired for BRL 805mm specialized in iron ore shipments.
Vale (CSAN stake: 4.9%): late last year Cosan acquired a 4.9% stake in Vale, the biggest brazilian company and the second largest iron ore miner in the world. Cosan investment thesis is simple, Vale is an irrepleceable asset and has a long journey of value unlocking due to their high-quality iron ore, nickel and copper production.
Cosan’s investment thesis is simple: invest and develop businesses where Brazil has natural competitive advantages and are exposed to the sustainable development and decarbonization trends, therefore positioning itself as the main brazilian player in the green transition worldwide.
Triggers
Adding to that, Cosan’s businesses are going through multiple positive triggers that should unlock more and more value for the shareholders, to name a few:
Compass has some important triggers in the near term: the first one, Comgas concession was extended last week until 2049 and granted Compass the monopoly in São Paulo’ gas distribution, the biggest market in Brazil. Other near term triggers include the start of operations in TRSP to import and export LNG; natgas commercialization; and its IPO, as mentioned by Valor Pipeline. In a private round in late 2021, Compass was valued at R$ 18.75b.
Vale is nearing a deal to sell a 10% stake in its Base Metals Business, which in turn bodes well for an US IPO in the medium term. Almost every clean transition tech, from solar panels to electric vehicles, are heavy consumers of metals such as copper and nickel produced by Vale. Adding to that, as Vale is turning into the main supplier of the highest grade iron ore, it deserves a premium to other iron ore producers, in our opinion, but Vale trade at a discount to Rio Tinto or BHP.
With record brazilian agri output, Rumo is poised to report record volumes and increase freight prices, in our view. Brazil is set for another record soy and corn cropyear in 2024, supported by El Niño meteorological phenomena helping the Brazilian Midwest. Adding to that, Cosan’s long term agenda in Vale could also include merging Rumo with Vale’s VLi to create the largest railway operator in Brazil with over 23k kms/14k miles throughout lines 1-6 (Rumo) and A-D (VLi):
Raízen should also benefit of better yields, better fuel distribution margins and record sugar prices in 2024. The company also has some relevant E2G projects, but we rather see it as an optionality than a critical component of our valuation.
Valuation
As a holding company, we’ll use a SOTP and give a fair 10% holding discount. Using historical EV/EBITDA multiples and consensus estimates for Raízen, Rumo and Vale (although the latter has more potential for 2024 upward revisions), we see Cosan’s unlisted portfolio valued at BRL 13b while generating BRL 5.75b in EBITDA, or roughly 2.3x EV/EBITDA:
With Compass IPO just around the corner, we deem the market will be able to price Cosan accordingly to the market cap of their parts, representing a +50% upside from current CSAN 0.00%↑ market cap ($17 per CSAN or R$20 per CSAN3).