Cosan S.A. (CSAN)

Executive Summary / Key Takeaways

• Cosan S.A. is undergoing a significant capital structure transformation, highlighted by two primary public offerings of shares aimed at raising up to R$7.25 billion to reduce financial leverage and unlock shareholder value.
• The company's diversified portfolio, spanning energy, logistics, and land management, provides a resilient foundation, with key subsidiaries like Rumo (RAIL3) and Compass demonstrating strong operational performance and strategic growth.
• Technological differentiators, such as Raízen's (RAIZ4) second-generation ethanol (E2G) and Compass's Edge platform for LNG arbitrage, are central to Cosan's long-term strategy and competitive positioning in evolving energy markets.
• Despite a challenging macroeconomic environment and a negative net income in recent quarters, management is aggressively pursuing asset divestitures and liability management, targeting a 30% reduction in HoldCo debt in the coming months and a long-term goal of near-zero HoldCo debt.
• Key risks include the successful execution of the public offerings, the turnaround at Raízen amidst its capital needs, and the ongoing volatility in Brazilian interest rates and commodity markets.

A Brazilian Powerhouse in Transformation

Cosan S.A., founded in 1936 in São Paulo, Brazil, has evolved into a diversified powerhouse with significant stakes across the energy, logistics, and land management sectors. Its strategic journey, marked by consistent value creation through acquisitions over the past 15 years, has positioned it as a key player in Brazil's industrial landscape. The company's current strategic imperative is a profound capital structure recalibration, designed to fortify its balance sheet, enhance financial flexibility, and unlock intrinsic value for shareholders amidst a dynamic and often challenging macroeconomic backdrop.

The company's operational footprint is substantial, encompassing leading businesses such as Raízen (fuel distribution, sugar, ethanol), Rumo (railway logistics), Compass (natural gas distribution and infrastructure), Moove (lubricants), and Radar (agricultural land management). This integrated model, particularly in Brazil and extending internationally, provides a unique competitive advantage, allowing for synergies and diversified revenue streams. Cosan's overarching strategy emphasizes disciplined capital allocation, aggressive liability and portfolio management, and a relentless focus on operational excellence and safety across its subsidiaries.

Technological Edge and Innovation Driving Growth

Cosan's long-term strategy is significantly underpinned by its commitment to technological differentiation and innovation, particularly within its energy-focused subsidiaries. Raízen, a joint venture with Shell (SHEL), is at the forefront of bioenergy with its second-generation ethanol (E2G). This advanced biofuel technology leverages agricultural waste to produce ethanol, offering a notably lower environmental impact compared to traditional fossil fuels and potentially attracting eco-conscious customers. Raízen currently operates two E2G plants, COPE and Bonfim, with Bonfim having been operational for nearly a year. Two additional plants are under commissioning, and two more are under construction, demonstrating a clear commitment to scaling this innovative technology. While specific quantifiable benefits like efficiency gains or cost reductions for E2G were not detailed, the strategic intent is to enhance Raízen's competitiveness and profitability in the sustainable fuels market.

In the natural gas sector, Compass's Edge platform represents a significant operational and technological differentiator. Edge is actively ramping up its terminal operations in the Port of Santos and strategically accessing Brazil's non-regulated gas market. A key aspect of its success lies in the "optimization of LNG cargoes... to do arbitrage operations in the LNG market," which management has highlighted as a successful part of its strategy. This capability allows Compass to capitalize on market inefficiencies and directly serve industrial consumers, contributing to higher margins and increased volumes. For Moove, the lubricants segment, the reconstruction of its Rio de Janeiro plant following a fire is envisioned to result in a "better and more modern plant," which is expected to "leverage competitiveness, profitability" by focusing on large-scale products and migrating specialized production to other facilities. These technological and operational advancements are crucial for Cosan's competitive moat, enabling it to capture market share, improve margins, and drive long-term growth across its diverse portfolio.

Financial Performance and Deleveraging Imperative

Cosan's recent financial performance reflects both the resilience of its underlying assets and the significant challenges posed by its capital structure. In the second quarter of 2025, the company reported an EBITDA under management of approximately BRL 6 billion, a slight decrease from the previous year, and a net loss of about BRL 1 billion. This followed a net loss of R$1.8 billion in the first quarter of 2025, which, however, saw a relevant reduction in net debt to R$17.5 billion, primarily due to the strategic divestment of its Vale (VALE) stake in January. For the full year 2024, EBITDA under management, excluding nonrecurring items, was approximately R$30 billion, yet the company recorded a negative net income of R$900 million, largely influenced by the depreciation of the Brazilian Real and mark-to-market impacts on its total return swap.

The company's debt service coverage ratio (DSCR) stood at 1.2x in Q3 2024 and was stable in Q2 2025, supported by BRL 600 million in dividends from Rumo and Radar. However, management acknowledges that the DSCR is expected to organically decline in future quarters, reinforcing the "sense of urgency" to reduce net debt. The long-term objective is to achieve a structural debt level "closer to 0 at the holdco level" to eliminate fiscal inefficiencies and allow subsidiaries greater autonomy for growth. Cosan's average cost of debt has seen a slight decrease to CDI + 88 bps in Q2 2025, with an average duration of 6.2 years, reflecting active liability management efforts.

A pivotal development in Cosan's deleveraging strategy is the recently announced Investment Agreement with Anchor Investors for two primary public offerings of shares. The first offering is expected to issue 1.45 billion common shares, with a potential increase of 25%, anchored by a R$7.25 billion commitment from investors at R$5 per share. A second offering of up to 550 million shares will follow, with priority rights for existing shareholders. The total issuance will not exceed 2 billion common shares. The funds raised will be used "exclusively for renegotiation and repayment of its financial debts, in order to effectively reduce its financial leverage." This move is critical for unlocking shareholder value by restoring financial flexibility and increasing share liquidity.

Competitive Landscape and Strategic Positioning

Cosan operates within highly competitive sectors, facing both global giants and strong regional players. In fuel distribution and bioenergy, Raízen competes with integrated energy companies like Petrobras (PBR), Shell, BP (BP), and TotalEnergies (TTE). Raízen's fuel distribution segment "did better than the competition" in Q2 2025, achieving market share gains. Cosan's strategic partnership with Shell through Raízen provides a strong brand presence and distribution network, while its focus on sustainable products like ethanol offers a qualitative edge in environmental impact compared to more fossil-fuel-heavy portfolios.

In logistics, Rumo has demonstrated strong competitive performance, achieving higher transported volumes and an "increase in terms of market share in the Port of Santos" in Q2 2025, despite lower tariffs. This highlights the railway's competitiveness as a logistics solution. Compass, with its Edge platform, is successfully carving out a niche in the non-regulated gas market and LNG arbitrage, differentiating itself through operational efficiency and market access. Moove is also "going back to a considerable market share" after the fire, demonstrating resilience in the lubricants market.

Cosan's overall market positioning is bolstered by its diversified operations and regional expertise in Latin America, which allows for greater adaptability and integrated solutions compared to some global competitors. While it may lag larger rivals in global reach or sheer technological R&D scale, its focused investments in bioenergy (E2G) and gas market optimization (Edge) provide distinct competitive advantages. The company's ability to leverage its integrated logistics network also contributes to cost-effectiveness and efficient supply chains, potentially leading to superior margins.

Outlook, Guidance, and Risks

Cosan's outlook is firmly centered on the successful execution of its deleveraging strategy and the continued operational strength of its subsidiaries. Management aims to reduce HoldCo debt by "at least 30% in the coming months," with a long-term vision of near-zero structural debt. The public offerings are a crucial step towards this goal, contingent on corporate approvals and customary conditions, including the first offering settling by November 14, 2025.

Individual segments offer specific guidance: Rumo is expected to meet its 2025 guidance, with performance "more concentrated towards the second half of the year." Moove is on a recovery trajectory, with production resuming and capacity no longer an issue, aiming for a "much better position" by the end of 2025 in terms of production capacity and strategy execution. Radar anticipates 2024 and 2025 to be its "highest divestment years," continuing its strategy of selling land above appraisal values.

Raízen, however, presents a more complex picture. Despite positive results in fuel distribution in Q2 2025, it faced negative impacts from delayed sugarcane crushing and lower ethanol prices. Cosan has explicitly stated it will not inject more capital into Raízen, prioritizing its own deleveraging. Instead, it is actively seeking a new strategic partner for Raízen, in conjunction with Shell, to address its capital needs. The new management at Raízen is focused on refocusing on core businesses and reassessing peripheral activities, with E2G expansion beyond current projects under review.

Key risks include the inherent uncertainties of forward-looking statements, the volatility of the Brazilian macroeconomic environment (including interest rates and debt trajectory), and commodity price fluctuations. The successful execution of the public offerings and the ability to attract a strategic partner for Raízen are critical. Furthermore, the Altman Z-Score of 0.58 indicates a potential risk of financial distress, underscoring the urgency of the ongoing capital structure adjustments.

Conclusion

Cosan S.A. stands at a pivotal juncture, embarking on a comprehensive strategic recalibration to strengthen its financial foundation and unlock long-term value. The company's proactive approach to deleveraging, epitomized by the recent public offerings and ongoing asset monetization, is a direct response to a challenging macroeconomic environment and a commitment to a healthier capital structure. While recent financial performance has been impacted by market dynamics and operational incidents like the Moove fire, the underlying portfolio of businesses demonstrates resilience and strategic growth potential.

The emphasis on technological differentiators, such as Raízen's E2G and Compass's Edge platform, positions Cosan to capitalize on evolving energy trends and maintain a competitive edge. The company's integrated operational model and regional expertise provide a strong foundation, even as it addresses the capital needs of subsidiaries like Raízen and navigates the complexities of a volatile market. The success of Cosan's transformation hinges on disciplined execution of its deleveraging plan, the strategic evolution of its core assets, and its ability to attract partners that align with its long-term vision, ultimately aiming to reprice the company and transfer significant value to equity holders.