Elite Client Idea #80

CropEnergies AG ‘CE’ (Ticker: CE2; Price: €7.17/share)

(Latest financials are for the quarter ended September 30th 2023; Year-end: December 31st)

CE is a leading European producer of biofuels - used to reduce vehicle CO2 emissions.

It generated sales primarily from ethanol (78% of FY23 revenues), and food and animal feed products (21%). 

Geographic sales split: Germany (19%), UK (26%), Netherlands (21%), Belgium (17%), France (8%), Sweden (4%), and others (5%).

CE is exposed to fluctuating ethanol prices and competes with imports into Europe – primarily from Brazil and US. It’s also exposed to rising costs of wheat/grain prices. Recent Q2 results revealed a substantial decline in comparable operating profits (€20mn vs. €93mn) due to lower ethanol prices and rising raw material costs.

Moreover, EU regulations that solely encourage electric vehicles rather than exhaust emission reductions are detrimental to the industry.

CE engages in substantial derivative transactions (wheat, ethanol, gas, etc.) for cash-flow hedging. Practically all are designated as hedges and effective – unrealized fluctuations are recorded outside the income statement under other comprehensive income, and only realized gains/losses flow through the income statement. Initial recognition (mostly forward contracts) and subsequent movements are recorded under other assets and liabilities.

CE reported TTM revenues of €1.3bn (FY23: €1.5bn), ebit of €107mn (FY23: €253mn), and net profits of €88mn (FY23: €197mn). 

Average five-year ebit (including unflattering FY19 figures) was ~€120mn and average after-tax earnings were €92mn – backed by satisfactory free cash flows. This also corresponds with management guidance for FY24 - a year of ‘normalization’.

10% swings in wheat prices impacts profits by ~€22mn (ethanol: ~€6mn, and gas: ~€4mn).

The balance sheet is strong with net cash of €207mn (no borrowings and minimal lease liabilities).

Tangible equity stood at €749mn and primarily comprised technical equipment/machinery (~€200mn), land/buildings (~€85mn), assets under construction (~€66mn), inventories (€106mn), trade receivables (€170mn), and loans to the parent (Sudzucker AG) of €65mn. [Loans to Sudzucker AG were largely collected in the last six months (FY23: €271mn).]

Operating margins are decent at ~11% and returns on equity are satisfactory at ~12%. 

The equity trades for €625mn, which is 3.9x ebit (net of cash), 7x average earnings, and 83% of tangible equity.

Dividend distributions are consistent and healthy. Recent dividends of €52mn yielded ~8% at market.

CE is a leading company with general regulatory tailwinds indicating stable future sales. It continues to invest in expanding and improving its production facilities.

Though subject to volatile ethanol and wheat prices, it’s well managed and sells at an investment price.