Rossi Restructuring Spurs Bets on Brazil Builder’s Profit
Rossi, backed by Government of Singapore Investment Corp.’s Reco Aster and Vinci Partners, is exiting low-income housing and dozens of cities to focus on apartments costing 200,000 reais to 1 million reais ($99,900 to $500,000) in regions such as Rio de Janeiro and Sao Paulo, Chief Executive Officer Leonardo Diniz said in an interview. The steps will help Rossi return to profit in 2013 and generate cash starting in July, he said.
Rossi and Cyrela Brazil Realty SA (CYRE3) are leading a turnaround in an industry that piled on debt to expand and then was saddled with too much inventory after overestimating demand, according to Wesley Bernabe, a Banco do Brasil analyst. At 123 percent of shareholder equity, Rossi’s debt tops Brazil’s 10 biggest homebuilders by market value, data compiled by Bloomberg show.
“Before, the focus of the company was growth, sales and launches,” Diniz said at Bloomberg’s office in Sao Paulo. “The company’s focus now is on generating cash and deleveraging.”
The stock rallied 9.7 percent in April, the first monthly gain in 2013 after a 32 percent first-quarter plunge. Rossi traded on April 30 at 6.2 times estimated 2013 earnings, the lowest of Brazil’s 10 biggest homebuilders. JHSF Participacoes SA (JHSF3), the fourth-largest, has the highest multiple at 14. Shares declined 2.1 percent to 3.31 reais at the close of trading in Sao Paulo today.
Cyrela’s 4.9 percent gain last month also beat the 0.8 percent decline for Brazil’s benchmark Ibovespa index. Its price-earnings ratio was 8.9, according to data compiled by Bloomberg.
Rossi is in talks with private-equity funds to sell a minority stake in Rossi Urbanizadora, which builds gated communities and has a land portfolio valued at 6.8 billion reais, Diniz said. He declined to elaborate.
The asset sales will reduce Rossi’s land holdings to 8.8 billion reais from about 20 billion reais, he said. New projects fell to 2.7 billion reais last year from 5.5 billion reais in 2011, according to company regulatory filings.
“We’re working to have a land bank compatible with a much smaller company,” Diniz said. “There’s no use in having a lot of launches without profitability, without a return.”
General and administrative costs were cut to 221 million reais in 2012 from 261 million reais a year earlier, and Rossi is targeting expenses of 180 million reais annually through 2015.
Rossi may be seeking to emulate Cyrela, the nation’s biggest homebuilder by market value, which implemented a restructuring plan in 2011, said Banco do Brasil’s Bernabe, who is reviewing his rating on the stock.
“The main challenge for Rossi now is execution of projects -- the company is committing to operate in fewer regions, improve cost controls, meet delivery deadlines and not use contractors by doing its own projects,” Bernabe said in a telephone interview from Sao Paulo. Cyrela “already obtained good results that inspire others. If Rossi can create strategies that prove to be successful, other homebuilders may follow.”
Net income at Sao Paulo-based Cyrela rose 33 percent last year to 660 million reais, the biggest gain in the industry, data compiled by Bloomberg show. Rossi swung to a net loss of 205.7 million reais in 2012 from a profit of 78.7 million reais the year earlier.
Brazilian consumers struggling under bigger debt burdens may derail homebuilders’ efforts to generate cash flow and profits, according to Cristiane Spercel, a Sao Paulo-based analyst at Moody’s Investors Service, which rates Rossi as Ba2 with a negative outlook. Last year, Rossi had 1.3 billion reais of cancellations on 2.8 billion reais in sales, she said.
“Consumer debt commitments have increased,” she said by phone. “After a couple of years, when the apartment is ready to be delivered, and the buyer is being passed on to a bank, they are more in debt than before and the bank rejects the loan.”
Default rates on personal loans fell 0.1 percentage point to 7.6 percent in March to the lowest since November 2011, the central bank said in a report last week. Defaults matched a 30- month high as recently as September.
Five analysts rate Rossi as sell, 11 say hold and one recommends buying the shares, according to data compiled by Bloomberg.
Other measures aimed at boosting profitability include reducing third-party contractors to 10 percent of projects from 50 percent, Chief Financial Officer Rodrigo Medeiros said at the interview with Diniz.
“Rossi’s plan makes a lot of sense -- that’s why the stock is doing better now,” Banco do Brasil’s Bernabe said. “We won’t see the results of these steps in a quarter or two, but the expectation is more positive now.”