Another De-Rating: Rossi Residencial

Another incredible de-rating we could not stop but notice was the one happened with Rossi Residencial. The company lost incredible value in the past month and is now been traded with the distressed players such as Abyara, Inpar and Tecnisa.



We thing again this is unjustified.

Trade idea: Long RSID3 Short CYRE3

Related words: homebuilders, Rossi Residencial, Cyrela Brazil Realty, Real Estate, Brasil.

Iguatemi x Multiplan Performance - Abnormal

Another interesting relative performance that happened on the last few days was Iguatemi Empresa de Shopping Centers´ - IGTA3 - underperformance compared to Multiplan Empreendimentos - MULT3 - shown in the graph below.

In the past we have argued that some underperformance was to happen because of the inflationary pressures in Brazil. Since MULT indexes its rent contracts mainly to IGP-M (very high now) and IGTA indexes it mostly to IPC-A (lower now), so that could create relative preference on one over the other. But, we think the relative performance could have been excessive, and a relative comeback could happen on the short-term.



Trade Idea: Long IGTA Short MULT

Related Words: Iguatemi, IGTA3, Multiplan, MULT3, Brazilian Malls, Malls, stocks, relative value, long-short, real estate, REIT.

On Homebuilders - Klabin Segall De-Rating

Incredible was the de-rating process through which Klabin Segall went this past half month. The stock was, as can be seen on the graphs below, trading equally on a relative basis to PDG Realty, Cyrela, and also Gafisa (graph not shown), but then sharply underperformed this group of stocks in the last 15 days. To me, this indicates that the market saw Klabin as a prime player among local homebuilders, but that it quickly changed its mind lowering the stock to the second tier of performance.





The de-rating process looks reasonable, but its amount was excessive to us, as Klabin appears to have a supperior management and balance sheet control when compared to "distressed" players, Abyara, Tecnisa and so on, to name a few. It is also important to note that KSSA successfuly renegotiated the convenants on its debentures, that were about to be triggered, and that gave us increased confidence that creditors are confortable with management. More to come.

Related Words: Klabin Segall, Gafisa, Cyrela, PDG Realy, Homebuilders, Stocks, Relative Value, Long-short.

BRMalls - Top Pick within the sector

Although this blog is not a stock research service, it is my obligation to post my view on Brazilian players. BRMalls is my stock pick within the sector and the only company on which I have done the math (valuation), and I can offer a bag of reasons as to why I picked it.

Growth and Value Coupled:
At current levels (BRML3 @ 11,9, MULT3 @ 16,4 and IGTA3 @ 15,5), BRMalls poses a 110% up-side in our view, derived from a sum of the parts valuation that consists of i) the mall portfolio of the company in the end of 2Q08, discounted using the USFI curve and a beta of 0,5, that reflects the low risk profile of the industry (minimum rents represent more than 85% of rent revenues) and ii) growth, which consists of a cash flow projection of the expansion of the company in green and brownfields, as described in the company reports and with very conservative inputs in rent per sqm and SSR, and the assumption that the company will acquire 50% of the remaining participations of the company in its current malls (250 th sqm in 4 years). It is important to note that these acquisitions are an intrinsic part of their growth strategy.

We will continue with this as time allows us...

Retail Sales - is brazilian retail really underpenetrated by malls?

Brokerages and Investment Banks often use an argument to strenghten their potitive prospects on the brazilian mall industry, on ML´s Carlos Peyrelongue´s words: "the low penetration of shopping malls within total retail sales in Brazil, coupled with decreasing unemployment, rising salaries, and credit expansion, should allow for material growth of existing malls and green field projects over the next few years". Although not very important, this argument embeds a distortion. In the US, there are strip malls (picture follows), that are accounted as malls and that work properly there because the urban distribution is much different from Brazilian´s. There are suburbs in the US, and the drive away from the city centres makes land cheaper, allowing for horizontal mall configurations. Therefore, little street shops are aglutinated into small, spreaded malls, that drive those statistics up. In Brazil, cities are very dense, and land more expensive. Therefore, malls tend to be more vertical, and strip malls less economically viable. To conclude, this underpenetration argument loses a lot of its appeal.