Sugar and Ethanol Outlook Drives São Martinho Stock Recommendation

J.P. Morgan has upgraded São Martinho’s stock recommendation from neutral to buy, reflecting a positive shift in their assessment of the company’s prospects.

The bank’s analysts see promising signs in sugar prices and ethanol market dynamics. However, they’ve also lowered their target price for the company’s shares from R$38 to R$35.

This decision reflects a mixed outlook on São Martinho‘s future. The new target price still suggests a potential 30% upside, indicating optimism despite short-term concerns.

Analysts Lucas Ferreira and Froylan Mendez believe sugar prices are showing signs of recovery. They expect ethanol to benefit from price increases due to tighter supply conditions.

The bank remains bullish on both sugar and ethanol prices. Their forecast for 2025/26 sugar prices is 23% above the market consensus.

J.P. Morgan notes that the market has begun to recognize Brazil’s smaller sugar harvest. This realization has led to a reevaluation of the expected 42 million-ton sugar production. Lower global production is likely to drive prices upward.

Ethanol Market Outlook

Analysts are cautiously optimistic about ethanol prices. They believe a longer off-season period could further tighten the supply-demand balance. Most of São Martinho’s production is hedged, which could impact ethanol prices.

Recent wildfires in sugarcane fields may extend the off-season, potentially pushing ethanol prices higher. If prices exceed R$2.80 per liter, J.P. Morgan may revise their projections upward.

This could lead to an adjusted EBITDA near R$4 billion in the best-case scenario. Despite the wildfires affecting about 20,000 hectares, the operational impact on São Martinho is expected to be minimal.

The company’s additional investments to preserve productivity are estimated at R$70 ($13) million. This figure is relatively low compared to their $2 billion capex.

On the downside, sugar and ethanol prices have been low year-to-date. Increased investment expenses have also forced a revision of São Martinho’s target price.

However, J.P. Morgan still finds the company’s valuation attractive. São Martinho’s shares are trading at an EV/EBITDA multiple of about 3x for 2025.

The company also boasts an interesting free cash flow yield of 17% when excluding capex. As of midday, São Martinho’s stock (SMTO3) was up 2.32% at R$27.37.

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