(Adds executive, analyst comments, share moves))
By Asher Levine
SAO PAULO, March 14 (Reuters) - Shares of Brazilian homebuilder MRV Engenharia e Participacoes SA tumbled to their lowest level in seven months on Friday after the company posted a sharp drop in fourth quarter net income.
MRV said its profits fell 37.2 percent to 72 million reais ($30.5 million) in the quarter on an annual basis, driven lower by a spike in sales cancellations, which reached 24.1 percent of total sales value from 19.1 percent in the third quarter.
The quarterly profit, reported late on Thursday, was far short of the average analyst estimate of 130 million reais, according to a Reuters poll of eight analysts.
"The earnings miss and, more importantly, the higher sales cancellations should be a source of concern," Credit Suisse analysts led by Nicole Hirakawa wrote in a client note.
Investors punished Belo Horizonte-based MRV, driving its shares down 12 percent to 7.36 reais in afternoon trading, the biggest drop in the company's stock for nearly two years.
"Revenue in the fourth quarter was a little lower, the amount of cancellations were a bit higher than they had been, which ended up affecting the results," Chief Financial Officer Leonardo Correa told Reuters on Thursday.
STRONG CASH GENERATION, SALES
MRV, like most Brazilian homebuilders, has struggled with cancellations and cost overruns after a very aggressive expansion in recent years. However, it has pulled ahead of many of its peers following efforts to raise margins and cut debt.
It generated 162 million reais in cash in the fourth quarter, four times more than a year earlier, helping to lower net debt to the equivalent of 30.4 percent of equity.
Correa told analysts on a conference call that MRV is comfortable with its current debt levels and will explore options for using its excess cash generation in the future.
According to Thomson Reuters data, MRV remains one of Brazil's least indebted homebuilders.
The company will decide at a shareholders' meeting in April whether to pay a dividend totaling 35 percent of annual profit, up from a company-mandated minimum of 25 percent. Net income totaled 423 million reais for the year.
Its outlook for the year was "very strong" with sales expected to continue to rise, Chief Executive Officer Rubens Menin said on Friday's call.
In 2013, sales rose 27 percent on the year to 5.09 billion reais.
MRV also said Menin, who co-founded the company in 1979, will step down as chief executive officer in order to comply with market governance rules.
He will remain chairman, with the transition likely to be formalized at an earlier shareholders' meeting on March 26, according to MRV's earnings release.
While MRV has not made an official announcement, Menin's son Rafael, and nephew Eduardo Fisher are the most likely candidates to take over as co-chief executives, Correa told Reuters.
Earlier this year, MRV said new project launches more than doubled in the fourth quarter on an annual basis, following a push to sell-off inventory. Most of the quarter's 1.23 billion reais in sales continued to come from existing stock, MRV said.
Sales expenses rose 9 percent from a year earlier, while general and administrative expenses climbed 4 percent.
Gross margins fell to 26.2 percent from 26.6 percent in the previous quarter and 28.3 percent a year earlier. Return on equity declined to 10.6 percent from 11.9 percent in the previous three months and 14.5 percent a year earlier.
Earnings before interest, taxes, depreciation and amortization (EBITDA), or cash flow, fell 18.9 percent from a year earlier to 133 million reais, short of the average analyst estimate of 192 million reais.