OREANDA-NEWS. Fitch Ratings has affirmed Jalles Machado S.A.'s (Jalles Machado) long-term foreign and local currency Issuer Default Rating (IDR) at 'B+' and its long-term national scale rating at 'A-(bra)'. The Rating Outlook has been revised to Stable from Negative

KEY RATING DRIVERS

The revision of the Outlook to Stable reflects more favorable short- to medium-term prospects for the volatile Brazilian sugar and ethanol (S&E) industry. In addition, Fitch considered Jalles Machado's improvement of its operating cash flow generation and liquidity despite the still difficult refinancing scenario for the sector. The company should report positive free cash flow (FCF) and cash to short-term debt ratio of around 1.0x in fiscal year ended March 31, 2016.

Jalles Machado's ratings benefit from a strong business model, moderate financial leverage and robust operating margins. The company has a premium portfolio of products that includes branded organic and crystal sugar, as well as a remaining portion of its energy production. Positively, Jalles Machado has fiscal incentives on the sale of sugar and ethanol and relatively low land lease costs. The ratings incorporate the company's strong agricultural performance due to its adequate investments in the cane fields, the use of irrigation over a relevant portion of its harvest area and self-sufficiency in sugar cane, which explain the lower volatility of Jalles Machado's operating cash flow generation compared to its peers.

Expectation of Positive FCF

Fitch forecasts positive FCF at an average of BRL100 million for Jalles Machado in fiscal years 2016 and 2017. The company reported positive FCF of BRL30 million in fiscal 2015 and BRL106 million in last 12 months (LTM) ended Dec. 31, 2015 despite the challenging sugar price scenario for most of the period. Cash flow from operations (CFFO) amounted to BRL378 million in the LTM ended Dec. 31, 2015, up 48% from BRL254 million reported in fiscal 2015 and sufficient to cover capex of BRL261 million. Jalles Machado's cash flow has benefited from record sugar cane crushed volumes, focus on high-value added products and a disciplined approach toward capex.

The company crushed 4.6 million tons of sugar cane in the 2015/2016 season, comparing favorably with 4.4 million in the previous season. The end of the ramp up period at Usina Otavio Lage (UOL) combined with recent investments in expansion of harvest area and above average agricultural yields is expected to ensure good crushing performance for the next season ending March 31, 2017. The price momentum for sugar and ethanol is positive as international sugar prices have begun to reflect the expectation of a deficit and declining stocks-to-use ratio in the current global season, also contributing to Jalles Machado's positive FCF expected for the ongoing season.

Moderate Leverage

Fitch expects Jalles Machado to report net adjusted leverage at around 2.2x in fiscal 2016, comparing favorably with 3.1x reported for March 31, 2015, and well below the average of the sector. The company posted net adjusted leverage of 2.6x as of the LTM ended on Dec. 31, 2015. Fitch's projected decline in leverage ratios for fiscal 2016 reflect the expectation of positive FCF for the year and the recent strengthening of the BRL against the USD compared to Dec. 31, 2015. As of Dec. 31, 2015, consolidated adjusted debt including obligations related to land lease was BRL1.2 billion, of which USD-denominated debt accounted for 36%. Principal and interest payments up to March 2017 are protected through derivatives.

EBITDAR Margins Above Industry Peers

Jalles Machado offers a differentiated product portfolio that contributes to EBITDAR margins within a range of 66% and 75%, which compare favorably with the industry average. As of the LTM ended Dec. 31, 2015, net revenues increased by 16% to BRL625 million and EBITDAR amounted to BRL468 million, at a 75% margin. The company's premium portfolio of products includes the sale of branded organic and crystal sugar, the latter holding relevant market share in Brazil's Northern and Northeastern retail markets. Prices for both products command large premiums compared to VHP sugar. Product mix also includes sale of hydrous, anhydrous and industrial ethanol.

High operating margins also reflect the company's fiscal incentives provided by the State of Goias on the sale of sugar and ethanol. In the nine months through Dec. 31, 2015, tax incentives added BRL28 million to Jalles Machado's EBITDAR. The company's low land lease costs, well below the average of the State of Sao Paulo, also play a role. The self-sufficiency in sugar cane has a positive accounting impact on Jalles Machado's margins. As spending on the cane fields is accounted for as capital expenditure rather than cost, the higher the share of own cane in the mix, the larger the capital expenditure and the lower the impact on EBITDAR.

KEY ASSUMPTIONS
--Crushed volumes of 4.6 million tons and capacity utilization around current levels in 2016/2017 season and beyond;
--Additional capex needed to increase Usina Otavio Lage crushed volumes to 2.2 million tons by 2018/2019 season from the current 1.7 million tons;
--Product mix relatively unchanged compared to the 2015/2016 season and maintenance of high premiums for organic sugar;
--Average sugar prices at USD15 cents/pound from 2016/2017 season on;
--Petrobras will keep increasing domestic gasoline prices, paving the way for a gradual increase in hydrous ethanol prices.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:

--Net adjusted debt to EBITDAR of 3.5x or above on a sustainable basis;
--Cash plus CFFO over short term debt below 1.0x.

Future developments that may, individually or collectively, lead to a positive rating action include:

--Net adjusted debt to EBITDAR equal to or below 2.0x on a sustainable basis;
--Cash plus finished product inventories at market value to short-term debt equal to or above 2.0x.;
--Generation of positive FCF on a sustainable basis.

LIQUIDITY

Fitch expects Jalles Machado to report cash position near BRL280 million and cash to short-term debt ratio at around 1.0x in fiscal 2016. This would compare favorably with cash to short-term debt coverage of 0.45x as of Dec. 31, 2015. The maintenance of weak cash position in the third quarter of fiscal 2016 was largely motivated by the company's strategy of building up inventories in expectation of higher sugar and ethanol prices during the offseason. While its cash and short-term debt positions amounted to BRL93 million and BRL317 million, respectively, the company reported robust inventories position of BRL340 million at market values. The strategy paid off as crystal sugar and ethanol prices increased substantially in the last quarter of fiscal 2016. In 2015, Jalles Machado's liquidity also benefited from the sale of its 65% stake into Codora Energia Ltda (Codora) to Albioma Participacoes do Brasil (Albioma).