EZ Tec Discount Masks Biggest Margin for Brazil Builders

EZ Tec Empreendimentos e Participacoes SA, Brazil’s second-largest homebuilder, is trading at a discount to peers even as it reaps the industry’s top profit margin by shunning the expansion that hurt rivals.

A forecast for apartment starts this year valued at as much as 1.4 billion reais ($585 million) is “guaranteed,” Chief Financial Officer Emilio Fugazza said. Demand for EZ Tec properties remains strong while other builders struggle after growing too fast, Fugazza said.

Homebuilders that stretched into new regions and lower-income government housing are dialing back after facing labor cost increases of about 40 percent that squeezed margins. Their strategy contrasts with Sao Paulo-based EZ Tec’s focus on the geographical and income markets where it has long operated, which produced a 46 percent profit margin last quarter.

“We have been able to grow with the same margin since 2007,” Fugazza said in an interview this week at Bloomberg’s Sao Paulo office. “Our big differential from the other public companies is that we opted to grow based on our own cash-flow generation.”

EZ Tec’s latest quarterly margin was almost three times as large as that of No. 2 JHSF Participacoes SA, according to data compiled by Bloomberg. Sao Paulo-based JHSF said in a statement that gross profit margin for its homebuilding segment was higher than the companywide total.

Index Discount

EZ Tec traded yesterday at a 72 percent discount to the BM&FBovespa Real Estate index of 20 commercial and residential companies, the data show. The shares’ 6.8 percent gain this year through yesterday beat the 17 percent decline for Brazil’s benchmark Ibovespa index. The stock rose 0.2 percent to 27.50 reais at 11:37 a.m. in Sao Paulo.

“They have always reached and surpassed their guidance ahead of schedule,” said Henrique Kleine, head analyst at Magliano SA brokerage in Sao Paulo.

The stock is being weighed down by investors’ disappointment with the rest of the building industry and the broader market, he said. The BM&FBovespa Real Estate index fell 24 percent this year through yesterday; EZ Tec and Tecnisa SA are the only companies in the gauge to post gains in 2013.

Even as Brazil’s economy slows, apartment demand has been a bright spot because of an estimated residential deficit of 5 million homes, according to Daniel Gewehr, executive director of equity strategy at Banco Santander SA.

‘Proven History’

EZ Tec has a “proven history of returns,” Gewehr said. Mortgages are also gaining in popularity, and they’re not being damped by an economy that expanded at annual rate of 2.2 percent in the first quarter, he said.

“When you look at the growth of mortgages at banks, they are focusing a lot on them and any measure shows that mortgages have a low penetration rate in Brazil,” Gewehr said. “The sector has low multiples and has interesting potential demographics.”

EZ Tec revenue almost doubled to 598.7 million reais in 2013’s first half from a year earlier, and gross profit rose 84 percent to 304 million reais, according to a regulatory filing. EZ Tec’s return on common equity, assets, capital and invested capital all more than doubled in the five years ended in 2012, based on data compiled by Bloomberg.

“It’s not that we haven’t suffered from the same problems as our peers, but we’ve been able to deal with them and minimize their impact,” Fugazza said.

Regional Focus

The company’s focus “has always been” on the Sao Paulo middle class with apartments in a range of 200,000 reais to 500,000 reais, Fugazza said.

All construction sites are within 50 kilometers (31 miles) of EZ Tec’s headquarters, and the company has been able to anticipate and revise its strategies in the face of rising labor costs that surprised many competitors, Fugazza said.

“The civil construction sector has had a hard time controlling costs -- it’s very hard,” said Magliano’s Kleine. With a limited geographic reach and middle-income focus, “EZ Tec has a good handle on its costs.”

Wesley Bernabe, an analyst at Banco do Brasil SA in Sao Paulo, said he doesn’t expect a big run-up in the stock because investors are already pricing in management’s efficiencies.

“In relation to the fundamentals and the long-term, we like EZ Tec a lot, she is among the best in terms of stability, cash generation and expectations related to launches,” said Bernabe, whose market perform recommendation is the equivalent of hold. “But the company’s good operational and financial results are already known.”

Magliano’s Kleine, who rates EZ Tec as buy, expects the company to keep delivering good news. He projects a profit of 400 million reais this year.

“There is a good chance that they’ll beat my estimate,” Kleine said. “You have the construction sector, and then you have EZ Tec. It’s really in a different category.”

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