Actually political opposition to Dilma's backed austerity measures is underlying today's sell-off.
It is at or near time to place your long-term bets on Brazilian equities, IMO. Any company that simply survives this downswing without needing a major bailout represent an outstanding value at these prices.
Having said that, I just bought 1500 shares of EBR today and gambled on a very small stake of OIBR last week.
Larger current Brazilian holdings that I have a much higher level of confidence in include: GFA, CIG, ITUB, and BBD.
This has nothing to do with the spinoff. You guys need to start tracking currency and Brazilian political issues. The whole BVSP is getting whacked today.
Brazil's Rousseff races to contain Congress revolt over austerity
Good morning John,
You did some great analysis on your previous blogs, but I think your understanding of the current macroeconomy in Brazil and the company situation is off. They are already cutting inventory and slowing construction. The Gafisa segment had no new launches in 4Q and the Tenda legacy inventory continues to dwindle. GFA realized admin and marketing expenses as a result.
Brazil has been in stagflation for the past couple of years, even though they only recently passed into negative GDP territory. The high interest rate, high inflation, low growth climate is unique in markets that I follow (with the possible exception of Russia). The bad news is that new austerity and new taxes imposed by the government will continue to crimp growth in the short-term. The good news is that interest rates and the USD/BRL is already quite high and both have room to drop when the situation improves. i suspect that inflation will start dropping dramatically in 2015 given the faltering GDP and weakening employment scenario. The governmental policies of 2010-2011 (lowering interest rates while inflation was surging and milking the energy and electrical sectors) is a known failure and positive steps have been taken to ensure long term stability.
From the CC:
Fred, good morning. Andre here. Concerning gross margin, no special discount project by project, we are always looking and searching for opportunities. We may offer a discount here or there where it make sense. When we see that there was less liquidity but nothing that could influence gross margin.
Lucas, good morning. Rodrigo speaking. The sale of inventory, we did not have a discount policy. Talking about Tenda, we feel that the market is still strong. The macro economic scenario did not have an important influence in our sector, the sector strong demand. Competition has dropped a lot in the last few years, so we understand that’s the sale of inventory was very strong at the end of the yea
Reminds me of when the bond rating agencies downgraded the debt of pretty much all the distressed US and European banks right around the capitulation turns.
Thanks for the sharp analysis Citi. If you had come up with this 3 or 4 years ago, it may have actually made sense. Then again, what kind of lemming would trust advise from a company that had to be bailed out by the government 7 years ago to cover its own bad bets?
Yeah the Brazilian economy is slower and housing is being discounted, but builders have and continue to respond aggressively by cutting production.
What about the cost savings that will be realized through lower labor costs, which will help offset gasoline and electrical increases? Companies that continue to maintain high debt levels will undoubtedly suffer, and not all inventory or markets are suffering the same impact - in other words, demand remains relatively higher in SP and RJ; some houses cost less to build than others.
From Reuters - Brazilian homebuilder Gafisa 4th-quarter profit falls 99 pct
You can't make this stuff up.
Not, Gafisa returns to profitability or Gafisa meets average analyst quarterly outlook. Oh yeah, we forgot to mention they sold approximately 1/4 of their business in 4Q 13. Whoops.
- Net income at Brazil's Gafisa SA slid nearly 100 percent in the fourth quarter as sales fell, costs rose and the middle and low-income homebuilder had to do without a one-time, year-earlier gain, the company said in a statement late Friday.
- Six analysts surveyed by Reuters were divided on whether the company would show a loss or a gain, but the four who expected a gain forecast an average profit of 7.9 million reais, an estimate in line with the result.
The average of the two other estimates was for a loss of 14.7 million reais.
The Company reported a positive net income of R$8.0 million in the fourth quarter. Gafisa reported a
net profit of R$36.8 million, including the R$20.7 million contribution from Alphaville, while Tenda
reported a loss of R$28.8 million. In the 12M14, the net loss reached R$42.5 million. Gafisa reported
a net profit of R$66.9 million while Tenda reported a net loss of R$109.4 million.
Turning to the Tenda segment, last year was a defining point in the turnaround process. Having
focused on the delivery of the remaining units of legacy projects, we ended the year with only
three such construction sites, equivalent to 2,593 thousand units in construction, which we expect
to be completed by the end of the first half of 2015. This compares with nearly 31 thousand
outstanding units in early 2012.
At the end of 2014, the net debt/equity ratio was slightly higher than the previous quarter,
reaching 47.1%. Excluding project financing, net debt/equity totaled a negative ratio of 19.0%.
To be clear regarding my point here, losses are tied to the final delivery of Tenda legacy project. Paradoxically, a greater loss on the books this quarter will be a positive since it will mean accelerated delivery of legacy Tenda units. Under the "old" model, sales were booked as profit when contracts were signed and deposits paid and costs were calculated at the time of delivery.
I don't see it, but I don't normally trade patterns.
Yesterday's break and hold of the 50dma was definitely a positive development. Those bollinger bands are nice and compressed also, and the stock has had plenty of time to consolidate.
I'm thinking a loss similar to what they booked last quarter. The Tenda legacy stock is booked as a loss upon the time of delivery (as I understand it). The profits were booked way back when the contracts were signed and deposits paid.
Dated idea. HFTs have an absolute lock on the spread
It is very clear that the Brazilian RE market is not doing well right now. The good news is that GFA management is well aware of this fact, as you noted in your post, and is responding accordingly by drastically cutting production and focusing on existing inventory sales. Once the Tenda legacy inventory is resolved, their cash flow will significantly improve also.
I understand you point about rolling debt at higher interest rates, but I'm not sure that would be the case, since the company's risk profile is much better than it was in 2011-2012 and because they are also earning a higher rate on their cash as a result. As I noted earlier, financial expenses (ie interest payments and fees) for 9M 2014 (Jan-Sept 2014) were R$137.6 million net financial expenses were only R$19 million net.
The company reported consolidated revenue of R$494.2 in 3Q alone. Even if this gets cut in half, they will have enough to service the debt, especially if reduced costs and reduced legacy backlog inventory positively improve cash flow.
While overall revenue will fall, gross profit margin will improve as the company shifts more toward selling inventory vs. production - which will push down construction expenses. Also, even though the market is soft, there will still be demand for houses. The new financing and sales booking model will simply insulate the company from the impact of dissolutions.
I would like to make it a hold. Depends on the market though. I think BVSP is very close to bottoming if it hasn't already FWIW.
Have a good weekend.
I haven't held IRE for a few years now. That has been the trend with several foreign companies however. DT comes to mind. If you are holding it means the ADR will move to pink sheets, which means lower volume. However, it should continue to track the movement on the Irish shares fairly closely.