JPM-Sao Martinho A Challenging FY1Q26 Overshadowed by Corn Plant Expansion Approval-20250811

São Martinho reported an adjusted EBITDA of R$805mn in 1Q26, marking a 20%increase y/y, with a margin of 43.3% (+2.7 p.p.), but still falling short of consensusby some 9%. Net income totaled R$63mn, a decrease of 41% y/y, primarily due tochanges in the fair value of biological assets and timing effects related to Intereston Equity payments. Operationally, the quarter was marked by a strongperformance from ethanol, whereas sugar sales faced a somewhat morechallenging environment. Most importantly, the R$ 1.1bn capex related to the2 nd phase of the corn ethanol unit was approved (more details below). While itwas much awaited, we believe most investors (and brokers) had not yet includedit in their numbers. Although we recognize the onus on FCF yld that it mayrepresent in the ST, we welcome the move given the high ROIC, double-digitnature of this business, as extensively discussed in our Grains Ethanol deep divereport.

Key figures include: the unit will process 635 ktons of corn per year and produce270 thousand cubic meters of ethanol + 170 ktons of DDG per year, essentiallydoubling SMTO’s current corn ethanol plant. It will cost R$ 1.1bn in capex,in-line with expectations that mgmt had already been mentioning in interactionswith the market, 40% of which will be disbursed in the current crop year (2025/26),50% in 2026/27 and 10% in 2027/28. The project will be financed with R$ 728million from government-subsidised lines - though interest rates were notmentioned in the Material Fact, we can only assume these will be advantageous tothe company. As a consequence, the company updated its 2025/26 capex guidance,now at R$3bn, versus R$ 2.3bn before, with the difference explained by R$ 439mnfor corn ethanol and R$ 242mn from the Santa Elisa acquisition.