- Brazilian construction major Gafisa (NYSE: GFA ) has released a preview of results for its Q4 and full-year 2012, and it shows robust growth in operations. The company said its unit deliveries increased 43% on a year-over-year basis during the quarter and by 20% for all of 2012. In total, it delivered more than 27,000 units during the year, beating its own guidance of 22,000 to 26,000.
Gafisa also said it ended the quarter with approximately 1.62 billion reals ($796 million) in cash and equivalents, against net debt of 2.63 billion reals ($1.29 billion). Those numbers stood at 1.23 billion ($605 million) and 2.94 billion ($1.45 billion), respectively, at the end of Q3.
Brazil Housing- presents as an opportunity for risk tolerant long-term investors. Gafisa has been severely punished by the market for its poor performance and failure to effectively execute its business strategy in what is a particularly challenging operating environment.
Additionally, the outlook for Brazil's economy and housing market is quite poor, and neither are expected to recover in the short-term. All of these factors have contributed to the fact that the company is now trading at less than half of its book value per share. But with Gafisa trading at such a significant discount to its book value, combined with its growing sales and a stronger financial position, as well as the positive long-term outlook for the Brazilian housing sector, I believe that it presents as an opportunity for risk tolerant long-term investors. Over the long-term, the outlook for the Brazilian housing market is far more positive. In a country with a rapidly urbanizing population, a growing middle-class and an acute housing shortage, it is likely that demand for housing units will significantly increase. It is also estimated that at this time, Brazil has a housing shortage of around 6 million homes. This shortage is also expected to grow, primarily in the low income housing market. Despite the negative near-term outlook for the Brazilian housing market, there are still significant long-term growth catalysts. These should also provide some relief in the short-term.
The cuts to the Selic rate, combined with the government ordering state banks to cut borrowing costs, to help the public. The rapid expansion of the Brazilian economy in 2010, which saw GDP growth hit 7.5%, created a building frenzy among residential property developers and a lending frenzy among Brazil's banks.
This has created a housing glut with the volume of new properties on the market exceeding demand, particularly as the economy slowed and domestic consumption stalled. It has been predicted that Brazil will experience sufficient economic growth over this year and the next, and that the housing market can absorb this excess supply by the end of 2013.
The company also has broad-based market appeal, serving all segments of the Brazilian real estate market through its three brands: Gafisa, Tenda and AlphaVille. This makes Gafisa one of the most diversified builders in terms of products, including residential properties, subdivisions and projects for low-income earners. Government sponsored housing development
As part of its ambitious social reform package, the Brazilian government has established a housing program called Minha Casa Minha Vida, which translates to; "my house, my life." The program's goal is to build 1 million new homes for impoverished and low income families by 2016, with the government contributing an investment of $16.8 million. The program also facilitates housing credit for households that typically would not be able to access regular credit. All of which bodes well for increasing demand for low income housing units, which Gafisa is able to take advantage of through its Tenda unit.
Gafisa strategy and competitive advantage
As part of its company-wide restructuring, Gafisa has also introduced measures to minimize the risks associated with buyers who forfeit possession of completed Tenda units. As part of the new model, housing projects are only be made available to low-income clients if they have been approved by Caixa Economica Federal, the state run bank responsible for financing the Minha Casa Minha Vida program.
However, Brazil's mortgage to GDP ratio at 5% is one of the lowest in Latin America and among developing economies, as the chart below illustrates. This is because Brazilians have typically used cash for property transactions as a result of high borrowing costs and interest rates. But with interest rates and borrowing costs significantly reduced, the uptake of mortgages should increase.