Rossi Surges as BTG Says Buy on Strategy Shift: Sao Paulo Mover

Rossi Residencial SA, Brazil’s cheapest homebuilder on a price-to-earnings basis, jumped to a seven-week high after Grupo BTG Pactual said the stock is a buy as the company shifts its strategy.

The shares rose 2.5 percent to 3.66 reais at the close of trading in Sao Paulo, the highest since Feb. 19. It was the biggest gainer on the BM&FBovespa Real Estate index, which added 0.2 percent.

Rossi said April 1 it will reduce participation in a government program that provides subsidized loans through state-controlled lender Caixa Economica Federal starting this year. The homebuilder also plans to concentrate construction in seven metropolitan areas, down from 120 cities now.

The Sao Paulo-based company is “poised to generate a substantial amount of cash in 2013 and potentially improve profitability,” Marcello Milman and Gustavo Cambauva, analysts at BTG, wrote in a note to clients today.

The BTG analysts raised their recommendation on the stock to buy from the equivalent of hold, with a price target of 4.60 reais per share over the next 12 months. The stock currently trades at 5.92 times estimated earnings, compared with an average of 10.85 for all Brazilian homebuilders.

“Rossi stands out in our scorecard framework, ranking among the cheapest stocks in the sector,” the BTG analysts wrote.

This year’s earnings before interest, taxes, depreciation and amortization may rise 11-fold from 2012 to 464.1 million reais ($233.7 million), according to BTG estimates.

Focus Shift

Rossi shares have surged 20 percent since April 1 after the homebuilder announced it is shifting its focus to building more expensive projects and away from subsidized low-income housing. The stock is still down 20 percent in 2013.

Apartments and houses for low-income families accounted for 83 percent of Rossi’s new units started in 2012, compared with 35 percent in 2011, according to the company.

Rossi’s shift follows a similar plan by Gafisa SA, which has been moving its focus away from low-income houses as cost overruns and sale cancellations erode profits, and by PDG Realty SA, which said March 27 it will concentrate operations where profit is higher.

“Out of several Brazilian homebuilders that are changing course in an attempt to shore up profitability and leverage, we believe Rossi may be one of the first to start showing concrete results,” Milman and Cambauva wrote.

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