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Brazilian Homebuilders
Stay on Sidelines. Up MRV to OW; Cut Gafisa to N,
Rossi and Tenda to UW
Brazilian Homebuilders
Adrian E HuertaAC *
(52-81) 8152-8720
adrian.huerta@jpmorgan.com
J.P. Morgan Casa de Bolsa, S.A. de C.V.,
J.P. Morgan Grupo Financiero
Marcelo Garaldi Motta
(55 11) 3048-6712
marcelo.g.motta@jpmorgan.com
Banco J.P. Morgan S.A.
* Registered/qualified as a research analyst under NYSE/NASD rules
See page 24 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
Figure 1: P/BV 08e
1.4
1.2
0.9 0.9
0.5 0.5 0.5 0.4
CYRE
PDGR
MRVE
GFSA
RSID
RDNI
TEND
TRIS
Source: J.P. Morgan.
In this in-depth report we are updating our estimates, introducing new Dec-09
price targets and making four rating changes. Despite the more attractive
valuations since we turned cautious on the sector on May, we believe it is not yet
the time to build or increase positions in the sector. We believe that valuations
will be 0.6-1.3x BV over the next 6-12 months. Our preference remains with the
lower-income players that should suffer less in terms of growth expectations and
to our top picks PDG and Rodobens now we are adding MRV. We no longer
prefer Gafisa over Cyrela.
• We are upgrading MRV to Overweight from Neutral given its exposure to the
lower-income segment and relatively more attractive valuation, trading at a
20% discount to PDG and at a 31% discount to Cyrela on a P/BV basis. We
are downgrading Gafisa to Neutral as we see similar upside/downside as for
Cyrela and also given the uncertainties regarding Tenda’s business model and
execution capabilities. We are also downgrading Rossi and Tenda to
Underweight from Neutral as they are our least preferred names.
• We have reduced our launches expectations for all companies. For Gafisa and
Cyrela we expect them to be down 17-22% versus 08 and for MRV and PDG
to be flat or slightly up. These changes result in earnings peaking this year and
not recovering for the next 2-3 years. Our new 2010 estimates are on average
30% lower versus prior expectations and similar to 09 expected levels.
• We expect 4Q08 results to be somewhat similar to 3Q results, with presales
relatively flat qoq. Focus should be on cash burned, which was still high in
3Q, and also on inventory supply, which increased considerably last quarter.
• The large and liquid BZ Homebuilders are currently trading at 0.9-1.4x current
BV, with Cyrela trading at 1.4x,, followed by PDG at 1.2x and finally MRV at
1.0x and Gafisa at 0.9x. We still prefer MX HB as there is more clarity on
growth expectations and valuations are relatively the same. Given the dim
view of future earnings and growth expectations, we continue to believe P/E is
not the best metric to compare BZ HB, and we continue to prefer P/BV.
Table of Contents
Investment Thesis ....................................................................3
Setting BZ HB price targets for Dec-09.......................................................................4
Valuation: Not cheap relative to MX Homebuilders ...................................................5
New estimates: Launches to be down 0-20% vs 08. Main impact on 2010 net income
estimates ......................................................................................................................6
Ignore launches, focus should be on inventories, presales and cash burned ................9
Government measures: Trying to boost demand for low income housing.................11
Accounting changes...................................................................................................12
Other things to consider .............................................................................................13
Cyrela (Neutral / Price Target=R$12.00)...................................................................14
Gafisa (Neutral / Price Target=R$15.00)...................................................................14
PDG (Overweight / Price Target=R$18.00)...............................................................15
MRV (Overweight / Price Target=R$18.00) .............................................................15
Rossi (Underweight) ..................................................................................................15
Rodobens (Overweight / Price Target=R$16.00).......................................................16
Tenda (Underweight) .................................................................................................16
Trisul (Neutral) ..........................................................................................................17
Valuation and Risks to Our Ratings......................................18
4Q08 Earnings Preview..........................................................19
Earnings Strips.......................................................................21
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