BrasilAgro (NYSE:LND) is a company that operates in the acquisition, development, exploration and commercialization of rural properties, with land located in Brazilian states, as well as in other Latin American countries such as Paraguay and Bolivia.

Through active management of a land portfolio, BrasilAgro has delivered a somewhat satisfactory average ROIC in previous years, with a strong performance in 2022, given the high prices of agricultural commodities and thus a strong appreciation of rural and agricultural properties in its home country.

This shows that the company’s management has been able to achieve attractive rates of return on the purchase and sale of rural properties and thus bring reliability to shareholders in generating value over time.

However, as I pointed out in my previous article on BrasilAgro, more precisely at the beginning of this year, I warned about the company’s challenges at the end of last year. Given the volatility of the agribusiness sector in which it operates, and especially the fact that a possible shift in its real estate strategy, could negatively impact the dividend thesis, a reason why many investors seek to invest in BrasilAgro.

“While the long-term investment thesis remains compelling, particularly in valuation, I anticipate a potential shift in the real estate segment’s strategy. This could involve the company making land acquisitions this year, possibly through leveraging or raising additional capital. Such actions may introduce added risk, short-term share price volatility, and negatively impact dividend distribution.”

In theory, BrasilAgro’s business model is simple: during bonanza periods, when the harvest is good, the company strengthens its balance sheet by selling land at higher prices and compensates its shareholders by increasing dividends. And when times are bad, and land is cheap, they should take advantage to buy up cheap land usually by increasing leverage.

The company recently sold the Chaparral farm, guaranteeing a good inflow of receivables, but the supply of land at lower prices has not yet arrived. The situation also remains unfavorable for grain prices, the company’s second arm, as BrasilAgro faced substantial challenges in 4Q24, both in soybean and corn production being severely impacted by adverse weather conditions.

As a result, BrasilAgro shares have been moving sideways, still trading at fairly discounted valuations, but with uncertainty over the dividend thesis still hanging over and, therefore, deserving a reinforced neutral outlook.

BrasilAgro’s Q4 Results

For at least the last couple of quarters, BrasilAgro has reported weak earnings results, especially considering that Brazil’s agribusiness sector has been experiencing pressure on its margins due to the fall in commodity prices.

More recently, BrasilAgro reported its fourth quarter results of the 23/24 harvest year, revealing a series of challenges when compared to the same period last year. Adverse factors such as unfavorable weather which resulted in lower production volumes, and falling commodity prices (see below) contributed to a lower operating margin of negative 3% in the quarter. This has led the company to adopt a more conservative stance, changing its product mix and reducing the planted areas compared to the initial estimates.

For example, the soybean and cotton harvest was marked by lower-than-expected rainfall, and high temperatures resulted in low production volumes that were 33% below the company’s estimates.

As a result, net revenue for the quarter amounted to R$519 million, down 23% year-over-year. EBITDA was R$263 million, down 28% on 4Q23. BrasilAgro ended the quarter with a net debt of R$520 million, which I see as reasonable, both on the net debt/EBITDA ratio of 1.86x.

Finally, the company is more optimistic about the 24/25 harvest, given more favorable weather forecasts and a reduction in costs for all crops.

(Note: BrasilAgro reports its results in Brazilian Reais (BRL). As of the latest exchange rate, 1 USD is approximately equivalent to 5.57 BRL.)

Dividends Still Hanging By a Thread, But Sustainability in Question

As detailed in the recent earnings call, the company’s performance in Fiscal 2024 has been a major headwind for cash generation, considering net income from operations falling by around 16% year-over-year to R$226.87 million.

However, it is worth highlighting during the quarter the partial sale of Chaparral Farm, an asset in the company since 2007, bought for R$40 million and sold a third for R$365 million. As a result, BrasilAgro was able to maintain a decent dividend distribution. The company’s commitment to shareholder distribution remained a priority, as CEO André Guillaumon pointed out.

“We saw that the year was very challenging. But we understood that this dividend does not compromise the financial situation of the company. We have R$770 million in receivables from the sale of farms and apart from this the minimum dividend 25% the company decided voted yesterday to distribute a proposal to distribute additional dividends and this dividend proposed is around R$155 million.”

Based on this, the company’s history of paying generous yields with a 5 year average of 9.5%, and with the company currently paying around 6% yield, remembering that the annual dividend is typically paid in November.

Much of this security in paying dividends even in periods of low commodity prices correlates with the good free cash flows in the last three years, even with significant investments in expansion. Debt is also under control with a net debt of R$520 million and a smooth amortization schedule, with cash of R$209 million easily covering the amortizations due in the short term.

However, I see this yield still being threatened in the coming quarters if BrasilAgro is to turn its attention to acquiring land in this cycle in the face of falling grain prices and thus playing offense. And it may take some time for the company to reinstall profitability at the same level as seen in recent years.

One possible explanation for the company’s difficulties in acquiring land recently has been the high prices demanded by producers holding on to their properties. I believe, however, that eventually producers will be forced to sell their land, or at the very least, lease it. So I don’t think the dividend distribution should exceed its minimum payout for the next year at least.

The Bottom Line

In short, BrasilAgro’s investment thesis has been sliding sideways, as it continues to suffer from low commodity prices, and neither to buy land in strategic periods. Dividends have held up reasonably well due to the partial sale of the Chaparral farm, although I don’t expect them to increase soon. The company will likely need to play offense by buying new land during commodity downturns.

Strong cash generation has allowed BrasilAgro to hold on well to the weak results of the last harvest and the trend, according to the company, is for improvement going forward. Although the Net Asset Value (“NAV”) of R$3.5 billion indicates that the value of BrasilAgro’s agricultural properties at approximately R$34.5 per share, or around $6.2 per share in U.S. dollars, this is well above the company’s latest share price at $4.78. In other words, the market value of BrasilAgro is undervalued compared to the intrinsic value of its assets.

Thus, BrasilAgro continues to trade at a cheap valuation, still offering an attractive entry point for long-term holders. However, as long as commodity prices remain under pressure, and difficulties in buying land extend into the coming quarters, LND shares are likely to remain in a limbo between growth and value, distributing less and less dividends going forward.

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