World Cup Connection Helps Mills Beat Bovespa: Corporate Brazil
Stock investors searching for ways to take advantage of Brazil’s construction boom in the run-up to next year’s World Cup and the 2016 Summer Olympics are turning to a little-known supplier of scaffolding and concrete forms.
Mills Estruturas & Servicos de Engenharia SA, a Rio de Janeiro-based company that was left off the Bovespa benchmark of 69 stocks following its 2010 initial public offering, has soared 66 percent over the past year to 33.10 reais. The rally compares with the Bovespa’s 1 percent decline and a 21 percent advance in the country’s small cap index, which includes Mills.
While there are 452 companies with a market value of $1.2 trillion in Latin America’s biggest stock market, Mills is one of just a few that are poised to directly benefit from the building of roads, stadiums and subway stations before the first World Cup soccer game begins, according to Schroder Investment, Europe’s largest publicly traded money manager. That gives the stock a scarcity value that will help propel more gains in the $2 billion company, said Eduardo Carlier, head of core equities at Schroder’s Brazilian unit.
“Options to invest in the sector are so limited that the ones in the market deserve some premium,” said Carlier, who owns Mills shares as part of the 3 billion reais ($1.5 billion) he helps manage at Schroder in Sao Paulo. “It’s one of the few companies that represent well the infrastructure sector in the Bovespa.”
Mills trades at 26.1 times its forecast earnings for 2013, the most expensive stock among the world’s five biggest companies that get at least half of their revenue from renting equipment, data compiled by Bloomberg show. That compares with a ratio of 11.5 times for the benchmark Bovespa index and 13.7 times for the Bovespa’s Small Cap index.
The company raised 686 million reais in an IPO in 2010, more than five decades after it was founded in 1952. Mills rents and sells equipment including concrete forms and lifts used by construction companies and provides services such as painting and heat proofing for industrial plants, according to its website.
Investors are discovering the company even though brokerages’ coverage of it remains limited. Seven analysts review the company, less than a third of the number covering Itau Unibanco Holding SA, Brazil’s biggest bank, or Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the country’s largest retailer, data compiled by Bloomberg show.
Mills’s earnings per share will increase 38 percent to 1.75 centavos this year, and sales will expand 24 percent to 1.08 billion reais, according to the median estimate of those analysts. Shares are forecast to jump 3.9 percent to 34.75 reais in the next 12 months.
Brazil is seeking to boost development of roads, airports and other infrastructure linked to the sporting events by providing financing at below-market rates. In exchange, companies seeking licenses to build and operate the projects must either pay the government a fee or agree to cap the rates they charge. The government is aiming for 54.2 billion reais of investment in ports through 2017 and 133 billion reais in roads and railroads over the next 30 years.
Mills, the supplier of materials and equipment for companies working on 11 soccer stadiums and on subway lines in Sao Paulo and Rio de Janeiro, plans to invest 54 million reais this year in its heavy-construction unit to meet increasing demand, Investor Relations Director Alessandra Gadelha said.
“The World Cup and Olympics present good opportunities for the company, but the infrastructure sector in general has been growing and will be more important in the longer run than those isolated events,” Gadelha said in a phone interview from Rio de Janeiro.
Gadelha declined to comment on the performance of the Mills’s stock.
Companies that may profit from business related to preparations for the World Cup next year include toll road operators such as Cia. de Concessoes Rodoviarias and EcoRodovias Infraestrutura & Logistica SA, which may bid for licenses to renovate highways and expand airports, said Schroder’s Carlier.
Mills has an edge over those companies because it doesn’t have to buy the licenses needed to run the projects nor is it subject to the price caps, making its earnings less vulnerable to government interference, Carlier said.
Shares of CCR, as Cia. de Concessoes is known, jumped 59 percent last year, while Ecorodovias advanced 24 percent.
While Mills is in a “good position” to benefit from increased infrastructure spending in Brazil, its dependence on projects that are financed or overseen by the government still presents a risk for the company, said Marco Aurelio Barbosa, an analyst at Sao Paulo-based Coinvalores brokerage.
“Mills itself doesn’t have contracts with the government, which is good, but it depends on clients that do have those contracts, which makes the company a bit vulnerable after all,” Barbosa said in a phone interview. “If there are any delays on the construction works, or if the government decides to make changes in the projects, Mills would be affected.”
Audrey Kaplan, who manages the $540 million Federated InterContinental Fund (RIMAX), said Mills remains attractive after the rally. She said she bought Mills shares “recently,” without giving further details.
“Everybody in Brazil is worried about infrastructure issues, but because of the World Cup and the Olympic Games coming up quickly, we think there’s going to be a very big effort to speed up the improvements,” Kaplan said by phone from New York. “Mills has many construction projects going on in urban mobility projects, airports, soccer stadiums. So this is the great play on the infrastructure development in Brazil.”
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