Gafisa to Lead Profit Gains With Pricier Homes: Corporate Brazil

Gafisa SA (GFSA3)’s return to building higher priced homes after slowing growth derailed its low-income strategy is winning over analysts, who project the company’s profit gain will be the best among major peers in 2013.

Gafisa, which earlier this year rejected an asset purchase offer from Sam Zell’s Equity International, will earn 46 centavos per share next year, a 24-fold increase from 2012 and the steepest jump among members of the Bloomberg World Real Estate Index of 308 companies. Russian developer PIK Group (PIKK)’s earnings are set to more than triple to 5.88 rubles per share, the second-biggest increase, according to data compiled by Bloomberg.

Gafisa is turning away from government-sponsored projects aimed at low-income families, said Guilherme Vilazante, a housing analyst at Barclays Plc. The company lost money in six of the past eight quarters as it overestimated demand and built inexpensive homes faster than it could sell them. Brazil’s economic growth is forecast in a central bank survey to slow to 1.03 percent this year from 2.7 percent in 2011.

“In 2009 Gafisa, as other homebuilders, was betting heavily on growth strategies,” Vilazante, who rates the stock the equivalent of buy, said by phone from Sao Paulo. “But eventually it found out that profit margins were disappointing. Earnings suffered for a while because of this problem. Now the company seems to be scaling back new projects and focusing on profit margins, which should bring good results.”

Shares of Gafisa, Brazil’s sixth-largest homebuilder by sales, have gained 17 percent this year, while the benchmark Bovespa index is up 4.5 percent. The stock has jumped 126 percent since its 2012 low on June 6.

Mortgage Subsidies

Cyrela Brazil Realty SA Empreendimentos e Participacoes, Brazil’s biggest homebuilder by revenue, is expected to post earnings per share of 2.11 reais next year, 25 percent more than in 2012, according to the average estimate of 14 analysts surveyed by Bloomberg. PDG Realty SA Empreendimentos & Participacoes and Brookfield Incorporacoes SA are forecast to turn this year’s losses into profits in 2013.

Demand for new homes increased after former President Luiz Inacio Lula da Silva unveiled in 2009 the program Minha Casa, Minha Vida, or “My Home, My Life,” to subsidize mortgages for low-income families. His successor, Dilma Rousseff, took office in 2011 and continued the program as part of her effort to shore up economic growth.

Total loans in Brazil to individuals buying houses rose to 244 billion reais ($117.8 billion) in October, up from 81 billion three years earlier, data from the central bank show.

Housing Prices

Brazilian real-estate prices have jumped 50 percent in the past two years, according to a housing price index from the Sao Paulo-based Foundation Economics Research Institute which covers seven major cities in the country. In the U.S., home prices slid 0.7 percent in the period, according to the S&P/Case-Shiller index of property values in 20 cities.

While the subsidies boosted demand for homes by lower- income individuals, Sao Paulo-based Gafisa struggled to profit from it, which justifies the company’s decision to turn to higher-end projects, said Otavio Vieira, who helps manage 270 million reais as a partner at hedge fund Fides Asset Management.

“Demand is growing in the low-income segment, but one should bear in mind that houses built for this market are cheaper, with very tight profit margins, so a company must have a certain set of skills to keep its operations very efficient if it wants to succeed in this business,” Vieira said by phone from Rio de Janeiro. “That wasn’t the case for Gafisa, and now that the company is turning away from this segment, things seem to be improving.”

Third-Quarter Losses

Tenda, Gafisa’s low-income unit, posted a net loss of 18.8 million reais in the third quarter, less than the year-earlier loss of 55.7 million reais, as it postponed new projects and focused on the units already being built, Chief Executive Officer Duilio Calciolari said in a statement on its website.

Gafisa’s press office declined to comment on the company’s outlook for 2013.

The homebuilder confirmed in a Feb. 2 regulatory filing that it was in talks with Equity International to sell some assets. Four weeks later, the company said it didn’t reach an agreement with Zell’s fund because the bid “significantly” underestimated the value of the company. Equity International bought a stake in the company in 2005, before Gafisa’s initial public offering, and sold the stock in 2011.

While there are signs of improvement in its operations, Gafisa’s share price already reflects the strategy shift and has little room to rise, said Fausto Gouveia, who helps manage 380 million reais at Legan Administracao de Recursos. The stock trades at 10.4 times its estimated earnings, compared with an average ratio of 10.9 among members of the Bovespa index and 12.2 for the Bloomberg World Real Estate Index.

‘Fair Price’

“As you can see from many analysts’ estimates, most people already expect the company to post better figures next year,” Gouveia said by phone from Sao Paulo. “I don’t see it as a buying opportunity.”

With Gafisa scaling back Tenda’s operations, profit should be fueled by its Alphaville subsidiary, which focuses on the high-income market, said Rodolfo Amstalden, an analyst at consulting firm Empiricus Research.

“Alphaville is a strong brand in the market, and it has good growth potential for the coming years,” Amstalden said by phone from Sao Paulo. “With Gafisa working to resolve the problems it had with Tenda and Alphaville’s business growing, we should see earnings improving in the near future.”

To contact the reporter on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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