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Gafisa Gains 70% as Builders’ Cash Crunch Ebbs: Corporate Brazil

Sept. 18 (Bloomberg) -- Gafisa SA, Brazil’s sixth-biggest homebuilder by revenue, is on track to post a record quarterly gain, leading an industry rebound driven by more deliveries of apartments and offices and fewer new projects as growth wanes.

Gafisa has climbed 70 percent this quarter, making it the third-best performing stock on the Bovespa index. PDG Realty SA Empreendimentos e Participacoes, Brazil’s biggest homebuilder, and Brookfield Incorporacoes SA also are rallying. Four of the 10 worst performers in the first half of the year were real-estate shares.

Last year’s glut of new projects at a time of fewer deliveries drained cash from Brazilian homebuilders, prompting companies from Brookfield to PDG to unveil plans to raise capital. Gafisa surged 15 percent on Aug. 10 when it posted a second-quarter profit that topped analyst estimates after the company shifted its strategy to focus on more expensive properties as the expansion in Latin America’s biggest economy slowed to 0.4 percent from 0.56 percent a year earlier.

“Several contractors halted construction of projects because of cash-flow problems” after the global financial crisis in 2008 and 2009, said Jose Luiz Garcia, who helps manage 3.1 billion reais ($1.5 billion) of assets at Rio de Janeiro-based investment fund Mercatto Gestao de Recursos. “There’s potential for the sector to recover its status and show good growth.”

Gafisa fell 2.4 percent to 4.48 reais at the close of trading in Sao Paulo today, while PDG Realty rose 4.1 percent to 4.07 reais and Brookfield climbed 1.7 percent to 4.14 reais.

Surprising Analysts

Gafisa said Aug. 10 it had a profit of 1.05 million reais in the second quarter, surprising analysts who had forecast a third consecutive quarterly loss. The company in the period focused less on its low-income housing unit, Tenda, where cost overruns and home-sale cancellations after preapproved buyers failed to get subsidized mortgages contributed to a 1.03 billion-real loss in the fourth quarter.

“It seems the worst is over for Gafisa,” Erick Hood, an analyst at brokerage SLW Corretora, said in a Sept. 10 telephone interview. “The market now sees a trend for better results and cash-flow generation.”

Demand for mortgages has surged as the central bank cut interest rates and the government increased subsidies for first-time home buyers. Outstanding mortgages rose 40 percent in the past 12 months through July, according to the central bank.

Expensive Stock

Gafisa, based in Sao Paulo, has become the most expensive stock on the Bovespa index with shares trading at 189 times estimated 2012 earnings. Rio de Janeiro-based Brookfield trades at 22 times, while Sao Paulo-based Cyrela Brazil Realty SA Empreendimentos e Participacoes trades at 9.7. Rossi is the cheapest homebuilder with a ratio of 5.1, compared with an average of 20 for all companies on the Bovespa index.

Recent gains among homebuilders probably are connected to the overall rebound in Brazilian equities rather than renewed confidence in the industry, said Marcos Paulo Fernandes, an analyst at brokerage Votorantim Corretora. The Bovespa index is up 14 percent this quarter. The benchmark fell 0.5 percent yesterday to 61,805.98, and closed little changed today.

Recovering Profits

“Even though homebuilders are taking action to resolve the problems they faced in recent quarters, they can’t guarantee they are going to recover profitability,” Fernandes said by telephone from Sao Paulo. Fernandes said he has a buy rating on Gafisa, PDG and Belo Horizonte, Brazil-based MRV Engenharia e Participacoes SA because of the steps they are taking to reverse losses.

Gafisa, PDG and Rossi press offices didn’t respond to phone calls for comments. Brookfield Chief Financial Officer Cristiano Machado said recent measures should be sufficient to help it return to a profit and reduce uncertainty.

“When announcing the second quarter results, we cut launchings guidance and disclosed plans for a capital increase, so the market could understand better the company’s strategy,” Machado said in a phone interview yesterday. “That clarification helped Brookfield to recover investors’ confidence.”

Gafisa said Sept. 10 it may sell a stake in its Alphaville unit, while Rossi said Sept. 5 it’s planning a 500 million-real capital increase through a private placement. Brookfield approved a capital increase of 400 million reais through a private placement, according to a regulatory filing on Aug 15.

Brookfield approved a capital increase of 400 million reais selling as much as 130 million shares at 3.06 reais each in a private placement, according to a statement today. Shares fell as much as 6.4 percent to 3.81 reais in the steepest intraday decline since Aug. 14.

Home Prices

Gafisa announced 61 percent fewer new projects in the second quarter compared with a year earlier as home prices rose at a slower pace. Average home-price growth in Brazil slowed to a 1 percent monthly pace in August from a high of 2.69 percent in April 2011, according to the Fipe Zap index.

Homebuilders also declined in the first half of the year amid slowing growth in Brazil. Relatively low unemployment and rising incomes may help sustain the rally going forward, said Eduardo Silveira, an analyst at BES Securities. The unemployment rate fell to 5.8 percent in May from 6 percent the month before.

“Most companies went through a tough adjustment,” SLW’s Hood said. “Once economic growth picks up, they should be able to post better results.”

To contact the reporters on this story: Katerina Petroff in Sao Paulo at; Denyse Godoy in Sao Paulo at

To contact the editor responsible for this story: Jessica Brice at

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