Agora’s strategist Jose Cataldo wrote the following in a recent report: “In our view, the growing number of property launches hinders our profitability analysis for the sector. Thus, the low margins seen are so far being offset by revenue increases. However, the sector’s expansion potential are limited within this context.”
Bradesco’s brokerage arm Agora made the following recommendations for the seven most actively traded stocks in the real estate & construction sector at Bovespa:
1 – Brookfield – Caution
Agora urges caution with shares of Brookfield (BISA3) in the short term. The company has ventured into low-income projects with the support of the “My House, My Life” (MCMV) program, of which it has little experience.
“As a result, this low-income segment will have greater representation on the company’s results, and margins will be negatively impacted, reflecting our previous expectations,” says the analyst. The company launched an equivalent of R$420 million for this segment in 4Q11.
Although he calls for caution, Cataldo pointed out that BISA3 shares have been trading at a level that makes its ROE attractive in comparison to industry peers.
Target price: R$ 7.90
Upside potential: 49.6%
2 – Cyrela – Top Pick
The company is Agora’s preferred in the sector. “We believe that Cyrela (CYRE3) is the only one among the six most liquid real estate developers’ stocks that will not disappoint in 2012,” says the strategist. He said the builder is trying to prioritize its projects by profitability.
“Growth is being dictated by the company’s ability to execute, and not by demand. Thus, mid and high income projects remain under pressure. The projects that are focused on low income have stronger growth prospects, despite the problems,” he says.
“Cyrela is our main recommendation for the sector, we believe the company offers good value in terms of earnings per share (our estimate exceeds the 12% market consensus).” The estimated ROE of 18.2% for this year is the second largest among the sector, he added.
Target price: R$26
Upside potential: 55.7%
3 – Gafisa – Unknown future
Gafisa (GFSA3) began the year ready to adopt a new corporate strategy. It quickly wrote off losses from its low-income arm Tenda and announced a reduction of launches and geographical coverage.
“In fact, even assuming that Gafisa has made all necessary adjustments to finally solve their problems, we have to admit that its low operating margins should persist in 2012,” he adds.
Agora still foresees a high debt load and a small loss this year. “The generation of free cash flow is a precondition for debt reduction, which is likely to happen only in 2013,” says the analyst.
Target price: R$6
Upside potential: 55%
4 – Helbor – A long-term bet
For Agora, Helbor (HBOR3) is the second best stock in the sector. Cataldo said the company is one of the few where one can be comfortable for the long term.
“The company has greater focus on profitability rather than “growth at all costs”, having been very efficient in the deployment of its own capital, which helped support a high asset turnover,” he says.
Target price: R$ 35.10
Upside potential: 28.1%
5 – PDG – Not even its own management is confident about it
PDG is one of the public companies that have suffered the most in the stock market. To explain its lagging performance, the analyst cites five reasons: 1) an unexpected goodwill amortization of R$214 million at the end of last year, 2) derivatives trading by directors to hedge the company shares, 3) budget reviews , 4) sale of shares by the Board in March and 5) public criticism made by the humor show CQC.
Because of all these factors, investors lost confidence in the company. “We believe that PDG (PDGR3) will take time to regain its leadership position in the market, and even more time to absorb the negative impact resulting from its low-margin projects.”
Target price: R$ 8.30
Upside potential: 74%
6 – Rossi – Cleaning up the house
The analyst explains that, like most companies in the industry, Rossi is facing lower margins due to higher than expected costs, which halted its expansion trend.
“Because it is no longer growing, Rossi (RSID3) is taking the opportunity to rebalance its operations and is selling land in areas that it doesn’t intend to operate. The company is managing to earn decent profits by selling these assets, since they were bought before the boom,” said Cataldo.
According to the analyst, the most important driver for the company is improvement of profit margins, which should enhanced the company’s outlook going into 2013.
Target price: R$13
Upside potential: 47%
7 – Viver – Nothing positive in the short-term
Agora is very straightforward in its outlook for Viver (VIVR3). “We continue to see the absence of positive signs for Viver in the short term. We prefer to recommend the purchase of shares in another situation, after the company’s asset sales materialize and confirm that the deleveraging process works and margins improve,” explains the analyst.
In addition, Cataldo also warns that the company has not defined a solid strategy for its income segmentation and geographical diversification.
Target price: R$ 2.50
Upside potential: 1%