Bloomberg News

Ultrapar Bets Pizza to Extend Best BRIC Rally: Corporate Brazil

January 09, 2013

Ultrapar Participacoes SA (UGPA3) is expanding food sales at gas stations to sustain earnings growth that made the Brazilian fuel distributor the top-performing stock on a risk-adjusted basis among emerging-market peers.

The Sao Paulo-based company is set to extend last year’s 45 percent gain as it adds more AM/PM convenience stores that sell sandwiches and pizza and converts newly acquired stations to its flagship Ipiranga brand, fund managers said. On a risk-adjusted basis, Ultrapar’s 7.2 percent gain since 2008 tops 54 fuel distributors in Brazil, Russia, India and China, the so-called BRIC countries, Bloomberg’s Riskless Return Ranking shows.

Ultrapar’s plans to invest 1.44 billion reais ($700 million) this year should support more than 10 percent growth in earnings before interest, taxes, depreciation and amortization, or Ebitda, for the company’s fuel distribution unit, Paula Kovarsky, an analyst with Itau Unibanco Holding SA (ITUB4), said in a note to clients. The unit accounts for 87 percent of sales.

“It’s one of the best managed companies in Brazil,” said Eduardo Carlier, head of core equities at Schroder Investment, which manages about 3 billion reais in shares including Ultrapar. “The stock isn’t cheap, but it merits the premium because they always deliver on the promise.”

Ultrapar’s shares have tripled in the past five years, compared with a 2.5 percent fall for Brazil’s benchmark Bovespa index. Four of the 11 analysts who follow Ultrapar rate the stock a buy, six have a hold recommendation and one says sell. The shares, which slid 0.7 percent to 46.89 reais at 10:49 a.m. today, trade at 25.8 times estimated 2013 earnings, compared with 21 for BRIC peers, according to data compiled by Bloomberg.

Targeting Growth

The company is Brazil’s second-largest fuel distributor after state-run Petroleo Brasileiro SA (PETR4), or Petrobras.

Ultrapar said Dec. 21 it would increase annual investments by 13 percent from 1.28 billion reais in 2012. About 61 percent of the budget is earmarked for Ipiranga, while 19 percent is set aside for the Oxiteno unit, which makes chemicals used in detergents, paint and cosmetics. Oxiteno is targeting North American growth by increasing capacity at chemical plants in Pasadena, California, and Coatzacoalcos, Mexico.

Ultrapar would be more attractive without its bottled gas subsidiary, according to Andre Facury, who helps manage 2 billion reais at Perfin Investimentos including Ultrapar stocks. The Ultragaz unit, a direct supplier of canisters of cooking gas, represents about 7.1 percent of total sales.

Bottled Gas

“The Ultragaz business is losing ground to piped gas, but the controlling family likes it and haven’t shown any interest in divesting,” Facury said in a phone interview from Sao Paulo. “I don’t like Ultragaz, and as an investor, I would be much happier if they got rid of it.”

A press official at Ultrapar, who can’t be named because of internal policy, declined to comment.

Ultrapar was founded in 1937 by Ernesto Igel, an Austrian immigrant. Ultra SA Participacoes, which is primarily owned by the Igel family, is Ultrapar’s biggest shareholder with a 24 percent stake.

Ultrapar’s performance has been driven by growing consumer demand over the past decade, during which government policies have pulled as many as 40 million Brazilian residents out of poverty, according to Eric Conrads, a portfolio manager at ING Investment Management, who owns Ultrapar.

“It has very predictive cash flow,” Conrads said in a telephone interview from New York. “At the end of the day, you have a company that as a conglomerate is offering products and services with very low risk on the regulatory front, low risk on the global front. Basically the cash flow is going straight to the bottom line.”

To contact the reporters on this story: Lucia Kassai in Sao Paulo at lkassai@bloomberg.net; Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net


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