Latin Finance - May/June 2011 - 14

brazilian corporate focus

Grupo Pão de Açúcar (GPA) is a grocer services will play a major role in the that has expanded into new sectors with continued movement into the C class, the 2009 acquisition of electronics chain though it is less clear how best to play Globex and the 2010 buy of white goods the sector. The Panamericano blowup and electronics retailer Casas Bahia. has scared off many from the mid-sized Restructuring benefits from integrating banking sector, so it may be the big banks acquisitions and food retail strength with the largest retail presence – Itaú, should keep the stock a compelling story, Bradesco and Banco do Brasil – which Barclays says. It is a long-run pick, the are in the best spot to expand credit to bank says, to be scooped up during dips. new C class entrants. Joint ventures and GPA is also poised to capitalize on acquisitions in insurance, such as Banco growth in periphery areas of Brazil’s large do Brasil’s taking control of Brasilveiculos cities – a key demographic trend in middle- last year, make use of the banks’ large income growth, according to Citi. Casas customer bases to push into broader areas. Bahia and the lower income-targeting unit “If people are reticent on the banks, it’s Assaí should account for 37% of total GPA because many have been calling the banks sales, and grow at faster rates than the rest a buy, on the basis of cheap valuation, and of the company, according to Citi. it hasn’t yet worked,” Newman says. Prices Bigger chains with broader product offerings are best Brazilian Income Equality positioned to handle risks to Getting better the sector, Kuczma says, such as margin pressure, the main risk 0.6 for retailers. They face increases in cotton prices, wages and 0.55 rents. An unclear credit picture 0.5 is also a threat. Renner and its peers all have their own credit 0.45 services or joint ventures to provide credit to buyers, in 0.4 addition to relying on customers’ 0.35 borrowing from banks to help with purchases. 0.3 “Retail is very credit Brazil US UK dependent, and the central bank 0.25 has been pretty clear that they 1994 1997 2000 2003 2006 would like to slow the growth of *0 = perfect equaity, 1= perfect inequality consumer credit,” says Larson. Source: Fundação Getúlio Vargas, World Bank, UK DWP, US Census Bureau “This sector would be pretty vulnerable to that.” All consumer sectors will watch the have been affected by tightening and government’s moves with concern. The government policy. central bank wants to see credit grow 10%A lot of risk is priced in at the moment 15% per year, while the banks had their with banks, says Kuczma, who owns Itaú. eyes on 15%-20% growth. In early April, The days of loan growth of more than 20% the government announced an immediate per year are perhaps gone, but he notes increase in the IOF tax on consumer that 15%-18% is still attractive. loans, to 3.0% from 1.5%, in an effort to prevent a credit bubble. Recent troubles My House, My Life at mid-sized consumer-focused banks like An area where lending is not seen as out Banco Panamericano, which required a of control is in Brazil’s small mortgage bailout and sale to BTG Pactual after large market, which represents less than 5% accounting gaffes were discovered, have of GDP, according to the central bank. encouraged this view. Most of Brazil’s listed homebuilders have Investors agree that credit and financial exposure to the C class, where entrants are
Gini Coeficcient*

keen to buy a first home. Rio-based PDG Realty is the consensus overweight for many investors, based on a track record of performing well and beating estimates. “PDG has the best management team in the country, combining a finance-oriented management on the top level, while keeping the people who really understand real estate and construction,” says Marcelo Motta, an analyst at JPMorgan. PDG has grown through acquisitions, notably a $1.4 billion takeover of rival Agre last year which made it Brazil’s largest builder. It has a strong presence in the key lower-income growth areas of São Paulo state and the Northeast. Meanwhile, a stake in newly-listed TGLT gives it Argentina exposure. MRV Engenharia offers slightly more exposure to the lower-income segment than the others, Motta says, a model that will last in the long-term. JPMorgan has an overweight on both MRV and PDG. There also seems to be plenty of market share for all of the big players going forward. “We are not competing with each other, we are competing with our supply capacity,” says Michel Wurman, CFO of PDG. He says all developers are launching about 700,000 units per year, when the market needs 1.2 million to 1.5 million. The 2009 top five homebuilders account for about 80% of the volume, he adds, leaving space for both organic growth and continued M&A. Homebuilders’ share prices have seen some skepticism recently, Larson says, due to a fear of rate hikes. He says this has been somewhat undeserved, as the sector is not that rate sensitive, but rather sensitive to mortgage availability. He adds that the central bank does not object to mortgage growth in the same way it looks to reign in consumer lending. “With Minha Casa Minha Vida,[a government program supporting lowincome housing development] there has been some talk that there is some money expected from the government that’s not going to make it into the budget,” says

14 LatinFinance

May/June 2011

Latin Finance - May/June 2011

Table of Contents for the Digital Edition of Latin Finance - May/June 2011