Rio-Sao Paulo Toll Gives CCR Inflation Hedge: Corporate Brazil

Rio-Sao Paulo Toll Gives CCR Inflation Hedge
CCR SA, which manages highways including the main route connecting Sao Paulo and Rio de Janeiro, has the highest analyst rating among Latin American infrastructure companies, even after posting a 30 percent rally in the past year. Photographer: Orlando Kissner/AFP via Getty Images

Brazil’s struggle to rein in inflation is making a toll-road operator whose revenue is tied to price increases the top stock pick of the region’s industry analysts.

CCR SA, which manages highways including the main route connecting Sao Paulo and Rio de Janeiro, has the highest analyst rating among Latin American infrastructure companies, even after posting a 30 percent rally in the past year. The company has a consensus rating of 4.24, beating its eight peers covered by at least four analysts, according to data compiled by Bloomberg. The stock’s 59 percent gain over the past two years is ninth-best on the benchmark Ibovespa index, which fell 14 percent.

Central bank President Alexandre Tombini has been unable to bring inflation down to the country’s 4.5 percent target since he took office in 2011, crimping consumers’ purchasing power and adding to an economic slump that shrank the growth rate to 0.9 percent last year, the lowest among major Latin American nations. For CCR, the 6.49 percent annual inflation rate is a boon, prompting analysts to forecast 15 percent revenue growth this year, double the average 7.3 percent increase estimated for the industry across the region.

“With companies like CCR, you have a steady revenue that’s protected from inflation,” said Henrique Kleine, head analyst at Sao Paulo-based Magliano SA, who rates the stock a buy. “Given all the concern right now about how successful the central bank will be in getting inflation under control, it’s a good way of hedging yourself without leaving the equity market.”

Upper Limit

The 6.49 percent inflation rate is at the upper end of the government’s 2.5 percent to 6.5 percent target range.

The central bank raised the benchmark lending rate for the first time in 21 months on April 17, lifting it a quarter-point from a record low to 7.5 percent, in a bid to bring inflation to the 4.5 percent target midpoint. Policy makers will boost the rate another quarter-point at the end of their two-day meeting today, according to the median forecast of economists surveyed by Bloomberg.

Economists predict inflation will end the year at 5.8 percent, according to a central bank survey released May 27.

Inflation in Latin America’s biggest country is higher than that of regional peers with similar investment-grade ratings. Consumer prices rose 4.65 percent in the past 12 months in Mexico, 2.02 percent in Colombia, 2.3 percent in Peru and 1 percent in Chile, according to data compiled by Bloomberg.

Ferry, Subway

In the fourth quarter, 97 percent of CCR’s revenue was linked to Brazilian consumer price increases, as measured by the benchmark IPCA index, according to the company’s 2012 financial statement. Some of its contracts, including the one with the federal government to manage the Via Dutra highway between Sao Paulo and Rio de Janeiro that expires in 2021, allow for periodic toll increases based on changes in the index.

Tolls accounted for 85 percent of first-quarter revenue. The company also operates a ferry service in Rio de Janeiro state, is part of the group that built Sao Paulo’s newest subway line and owns stakes in airports in Costa Rica and Curacao.

“In times of inflationary pressure, having contracts that set automatic price increases periodically is an important advantage,” Felipe Silveira, an analyst at brokerage Coinvalores, said by phone from Sao Paulo. “The company is also diversifying its business to other areas including airports and public transportation, so it doesn’t depend only on its toll-road unit, which is positive.”

CCR trades at 23.4 times its estimated 2013 earnings, almost double the Ibovespa’s average ratio of 12.8 times, according to data compiled by Bloomberg. None of the 21 analysts surveyed by Bloomberg recommends selling the stock.

Highway Improvements

The company needs to make improvements to its highways, including adding lanes to allow for more traffic, to increase revenue as the economy expands, said Welliam Wang, who helps manage 2.1 billion reais at Quest Investmentos.

“Investing more in its current assets allows CCR to demand contract amendments for additional rate hikes or extend due dates,” Wang said in a phone interview from Sao Paulo.

CCR’s contracts give it a “competitive advantage” over companies in other industries that don’t get inflation-based adjustments, said Marcos Macedo, the toll-road operator’s manager for investor relations.

Intervention Risk

“In a scenario of faster inflation, you may not be able to reach your goals if your revenue doesn’t keep up with costs,” Macedo said by phone from Sao Paulo. “In the longer term, however, inflation is not a good thing. For our customers, high inflation means price increases, and higher prices may end up pushing sales volumes down.”

Some companies that have concessions from the government have slumped as President Dilma Rousseff intervened in industries including energy and utilities in a bid to curb inflation and spur growth. The risk of intervention in the infrastructure industry is lower because the government is seeking to encourage investment before hosting the 2014 World Cup and 2016 Olympic Games, said Coinvalores’s Silveira.

Brazil will offer a return rate of 7.2 percent for investments made under new licenses to operate highways that the government plans to sell, up from 5.5 percent offered in the latest round of auctions, Finance Minister Guido Mantega said May 8.

“Regulatory risks in this sector will always exist, but we’ve seen government officials signaling a more positive attitude toward companies,” Silveira said.

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