Pinheiro rates Imperial Sugar a ‘buy’

by Josh Sosland
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PHILADELPHIA — A more hopeful view of near-term earnings prospects for Imperial Sugar Co. was at the center of a range of positive signs prompting Mitchell Pinheiro, an analyst for Montgomery Janney Scott L.L.C., to upgrade the company to a buy from a neutral rating.

Reflecting the upgrade, Mr. Pinheiro has raised his fair market estimate for Imperial’s share to $30 per share from $16. The higher level is based on a multiple of 10 times what Mr. Pinheiro foresees as “new normalized” earnings, anticipated by 2013 or sooner.

The earnings per share forecast of $3 per year represents a dramatic turnaround for Imperial Sugar, based in Sugarland, Texas. The company sustained large losses in 2009 and 2010 and is expected by Mr. Pinheiro to be only slightly profitable in 2011. He forecasts earnings per share of $1.82 in fiscal year 2012 (year ending September), and $3.13 in 2013.

Fueling Mr. Pinheiro’s optimism is the wide spread between bulk and raw sugar prices, margins he said should remain wide for the next several quarters. Longer term, he expects the margins to narrow but not to historical levels.

Also key to his outlook is Mr. Pinheiro’s belief that its Port Wentworth, Ga., refinery is gradually working back to historical levels of production from depressed levels that had been an earnings drag the last three years.

“Looking out two years, Imperial's strategic partnerships aimed at growing downstream profitability (Louisiana Sugar Refining), presence in the higher-margin organic and natural segment (Wholesome Sweeteners), and value-added natural offerings (Natural Sweet Ventures) could provide meaningful earnings upside as they gain traction,” Mr. Pinheiro said. “While Imperial outperformed expectations in the most recent quarter, the lack of visibility in the sugar refining business impairs our ability, to some extent, to predict earnings on a short-term basis. We prefer to look at potential earnings power and how fast the company can achieve this run rate. With the momentum in the business improving, and with investor sentiment likely to turn more positive as near-term earnings performance boost the prospects of achieving normalized earnings power, we believe now is the time to own the stock. We view prevailing spreads as the primary risk to our $3 per share of earnings power. In the near term the prospects of firming refined sugar prices remain high, but a larger-than-expected beet sugar crop could contract the spread, slowing the earnings ramp.”

Elaborating on the discussion of Imperial joint ventures, Mr. Pinheiro expressed disappointment the company did not exercise its option to acquire the 50% of Wholesome it does not currently own.

Based in Sugar Land, the company is half owned by a European partner. The company, established in 2001, markets organic natural, unrefined sweeteners to the North American market. Mr. Pinheiro said the decision not to buy the remaining half of Wholesome is “not the end of the story.”

“Imperial is still able to negotiate with its j.v. partner (Edward Billington & Son, Ltd.). and we get the sense that Imperial will ultimately purchase the remaining 50%,” he said. “Wholesome is projected to have net sales of $117 million and operating profit of $18 million in fiscal 2011.”

Meanwhile, Mr. Pinheiro sees Imperial’s other joint venture as positioning it well in the rapidly emerging stevia market.

“Natural Sweet Ventures, a 50/50 joint venture formed in February 2010 with Pure Circle Ltd., is developing and commercializing sugar/stevia sweetener blends for sale in the NAFTA region,” Mr. Pinheiro said.

He said the venture’s products will have a cost advantage because it will not need to separate the glycoside sugars (a large class of sugar derivatives in which sugar is combined with a non-sugar).

“Product development is focused on delivering desired sweetness levels with reduced calories using all natural ingredients, in-line with Imperial’s strategy to expand into value-added natural offerings,” Mr. Pinheiro said. “Samples of Steviacane (trademark for product family) were provided to large industrial baking, cereal, and beverage companies. Management remains encouraged by preliminary results, and noted that the project has evolved from the conversational stage with customers to the product development support stage; it further commented that it expects initial industrial sales of the product to commence toward the end of calendar 2011.”

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