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Rossi Surges as Earnings Support Strategy Shift: Sao Paulo Mover

Rossi Residencial SA rallied after the builder’s earnings report showed it focused on selling its existing inventory of inexpensive houses and generating cash as it shifted away from government-subsidized projects.

The shares rose 10 percent to 3.52 reais at the close of trading in Sao Paulo, the biggest one-day gain since August 2009. Trading volume was three times the three-month daily average. It was the best performer on the Ibovespa equity benchmark, which rose 0.5 percent.

While Rossi posted an adjusted net loss of 10 million reais, compared with the average estimate for a profit of 24.2 million reais among three analysts surveyed by Bloomberg, the company said in its first-quarter earnings report that it didn’t start any new projects during the period. The company has said it plans to exit low-income housing after it built inexpensive homes faster than it could sell them.

The existing inventory sales in the first quarter show Rossi “remains focused on delivering legacy projects (bearing low margins), such as those outside core regions and core income segments, as well as generating cash, which in our opinion is one of the most important steps in the turnaround process,” analysts including Luiz Mauricio Garcia at Banco Bradesco SA’s brokerage unit, wrote in a note to clients today.

Rossi’s first-quarter sales totaled 720 million reais, exceeding the average estimate of 688.6 million reais among eight analysts surveyed by Bloomberg. The company’s cash burn of 61 million reais during the period was offset by the sale of 97 million reais of land and “significantly less” than the average of 234 million reais in each quarter of 2012, Bradesco’s analysts wrote.

Strategy Shift

“The main positive highlight was the company’s ability to keep cash burn in check,” Itau BBA Securities real-estate analysts including David Lawant wrote in a research note to clients today.

The homebuilder on April 1 announced a restructuring plan that includes concentrating construction in seven metropolitan areas, down from 120 cities in the beginning of this year, and reducing participation in a government program that provides subsidized loans through state-controlled lender Caixa Economica Federal.

“After the first-quarter results, investors are anticipating future gains from all these changes,” Sandro Fernandes, a trader at brokerage Corval, said by phone from Belo Horizonte, Brazil.

The Sao Paulo-based homebuilder’s shares have fallen 23 percent this year, compared with the Ibovespa’s 9.9 percent decline.

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