Gafisa Forecast Cut Most by Homebuilder Bears: Corporate Brazil

Analysts bearish on Brazilian homebuilders are cutting share-price estimates for Gafisa SA (GFSA3) by the most in the industry as surging interest rates and a drop in consumer confidence discourage new-home purchases.

Gafisa’s 38 percent plunge in booked sales was the biggest drop among seven homebuilders that reported preliminary third-quarter figures. Analysts covering the Sao Paulo-based company lowered their forecasts for the share price by 8.3 percent in the past four weeks, data compiled by Bloomberg show. Shares fell 1.3 percent to 2.99 reais at 3:49 p.m. in Sao Paulo.

Home sales are slumping as policy makers raise borrowing costs at the fastest pace in the world to tame inflation that has exceeded the central bank’s target range since 2010. The BM&FBovespa Real Estate index is down 17 percent in the past year, twice the benchmark Ibovespa gauge’s drop, following a 436 percent surge from a 2008 low to its 2010 peak on wagers that builders would benefit from a government program to boost homeownership among lower-income Brazilians.

“People aren’t exactly rushing to buy new homes,” Eduardo Silveira, an analyst at Espirito Santo’s investment banking unit, said in a phone interview from Sao Paulo. “The real estate market has been a bit tough because of macroeconomic conditions.”

The preliminary sales figures signal the industry’s earnings “won’t be good,” Silveira said. The six builders that are in the Ibovespa are scheduled to begin releasing their full third-quarter results next week, starting with PDG Realty SA Empreendimentos & Participacoes on Nov. 5, according to data compiled by Bloomberg.

Inflation Target

Gafisa’s press office said the company wouldn’t comment because of regulatory restrictions before the quarterly earnings report. Chief Executive Officer Alceu Duilio Calciolari said in a conference call after releasing second-quarter results that the company is still looking for ways to reduce costs and boost profitability, which includes focusing on its projects in Rio de Janeiro and Sao Paulo, where profit margins are higher.

Tecnisa SA (TCSA3), which isn’t a member of the Ibovespa, reported third-quarter sales of 436.3 million reais on Oct. 30, trailing the 448 million-real average estimate of three analysts surveyed by Bloomberg. Adjusted earnings per share were 34 centavos, compared with a forecast of 32 centavos. The company said in a press release its profit of 178 million reais this year through September makes up for the net loss of 170.9 million reais in 2012 and is a sign of Tecnisa’s “full recovery.”

Rate Increases

Inflation twice exceeded the ceiling of the central bank’s 2.5 percent to 6.5 percent target range this year and has remained above the 4.5 percent midpoint since January 2010. The annual pace of consumer price increases was 5.86 percent in September. Consumer confidence fell to a three-month low in October, according to a report from the Getulio Vargas Foundation.

Policy makers led by central bank President Alexandre Tombini have raised the benchmark lending rate by 2.25 percentage points this year to 9.5 percent, the most among 49 countries tracked by Bloomberg, to curb inflation. While the increase doesn’t affect mortgage rates, which are controlled by the government, higher borrowing costs cool the economy and erode consumer confidence, Silveira said.

Earnings Outlook

Higher rates also make servicing the homebuilders’ debt more expensive. Brookfield Incorporacoes SA (BISA3), the worst-performing major Brazilian stock this year after Eike Batista’s OGX Petroleo & Gas Participacoes SA and MMX Mineracao & Metalicos SA, with a 59 percent slump, has a 12-month ratio of debt to earnings before interest, taxes, depreciation and amortization of 54 times, compared with an average of 8.5 among the 73 members of the Ibovespa.

Brookfield’s press office said in an e-mailed response to questions that it wouldn’t comment because of regulatory restrictions on what the company can say before the earnings release. The homebuilder is strengthening its screening process to lower the chances of clients missing payments on homes purchased on credit, which should help generate cash to pay off debt, Chief Executive Officer Nicholas Reade said in a conference call with analysts on Aug. 15.

“We are quite convinced that we are at the beginning of a cash generation cycle and deleverage,” Reade said.

JPMorgan Chase & Co. forecasts that the six Brazilian homebuilders it covers, including Gafisa and PDG, will report a combined drop of 50 percent in third-quarter profits.

Inventory Glut

There’s “no reason to build positions ahead of earnings season,” analysts Marcelo Motta and Adrian Huerta wrote in a note to clients dated Oct. 22. “We don’t expect positive developments this quarter.”

PDG’s press office declined to comment, citing regulatory restrictions before its quarterly earnings release.

The rally in homebuilders from 2008 to 2010 came amid surging economic growth that prompted them to expand with new projects throughout Brazil and attracted stock investors to companies linked to consumer spending. As gross domestic product expansion slowed from 7.6 percent in 2010 to 0.9 percent in 2012, the real estate market became oversupplied, according to Citigroup Inc. analysts Paola Mello and Dan McGoey.

“The excessive growth in launches in the past years has oversupplied specific markets in the north, northeast and midwest regions,” which is hurting the companies’ capacity to generate cash, Mello and McGoey wrote in a note to clients on Oct. 29.

‘Takes Time’

While third-quarter results “will not be great,” homebuilders have been taking measures to improve efficiency by reducing the number of less-profitable projects and focusing on those that offer higher returns, which is positive in the long run, said Eric Conrads, who manages about $750 million of Latin American stocks at ING Investment Management.

“You still have a restructuring process in the sector, it takes time,” Conrads said in a phone interview from New York. “It’s not in a quarter, two or three quarters that you’ll see a turnaround.”

As homebuilders focus on more profitable projects to reduce debt and boost cash, an economy that’s losing momentum may outweigh those efforts, said Ari Santos, an equity trading manager at brokerage H. Commcor. Profits at all companies that depend on domestic demand, not just homebuilders, are being hurt, he said.

Brazil’s gross domestic product will expand 2.5 percent this year, according to a central bank survey of about 100 economists published on Oct. 28, which compares with a median forecast of 3.5 percent in a December 2012 survey. The International Monetary Fund in October cut its 2014 growth forecast for Latin America’s largest economy, citing concern that accelerating inflation may damp consumption.

A “weak outlook” for the sector’s third-quarter results has been weighing on the shares, Santos said in a phone interview from Sao Paulo. “The outlook for the earnings season as a whole is weak. The economy isn’t doing well.”

To contact the reporters on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

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

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