Brazilian homebuilders
SECTOR REVIEW
Research Analysts
Marcelo Telles, CFA
55 11 3841 6338
marcelo.telles@credit-suisse.com
Rodrigo Oliveira
55 11 3841 6314
rodrigo.oliveira@credit-suisse.com
Guilherme Rocha
55 11 3841 6337
guilherme.rocha@credit-suisse.com
2009 outlook - Trick or treat?
Launchings decline in 2009 on tight credit market and lower demand: We have lowered our forecasts in light of the expectation of tighter credit markets in 2009 and the expected slowdown in demand. Brazilian homebuilders should continue revising their guidance downwards for next year, since some expectations are still on the optimistic side. We forecast an average 10-20% reduction in 2009 launching guidance versus 2008 and expect the tighter credit market to lead developers to carry receivables for a longer period of time, deteriorating their working capital cycle. Potential margin declines and reduction in sales velocity should add to further earnings risk.
Focus on deep value liquid names: We believe the market should remain volatile in the near term, so we continue to recommend investors to focus on deep value liquid names and avoid small caps. As stated previously, in times of higher risk aversion, commercial banks are likely to concentrate their portfolio in more premium companies, placing leading homebuilders further ahead of competitors in the dispute for financing.
Sales speed should continue to slow down – we favor lower income exposure – PDG, MRV, Rossi rated OUTPERFORM: We continue to prefer players with lower income exposure, such as PDG, MRV and Rossi, which offer the best risk-reward relationship (higher sales speed, higher financing availability and more gvt support). Rossi, PDG and MRV are highly undervalued, trading at 09’ P/BV of 0.4x, 0.7x and 0.6x, respectively, and offering high upside of 107% on average despite more conservative assumptions. Rossi’s valuation reflects a company in financial distress, which is not the case, especially after the reduction in guidance and the R$150mn capital increase, leaving the company in a even more comfortable financial position.
But what to do with Cyrela and Gafisa? We believe Cyrela and Gafisa will be among the winners in the long-term, given their long track record and healthy balance sheets. And in the current volatile markets their high stock liquidity and strong cash position are certainly positives. But despite those features, we continue to rate Cyrela and Gafisa as Neutral, given their higher exposure to higher end segments (which can pose further downside risk to our forecasts) and furthermore, less attractive valuation versus peers. We are also maintaining our Neutral rating on CCDI due to the weak earnings momentum.
We prefer Gafisa over Cyrela in the short term: We highlight, however, that Cyrela’s much lower upside potential and excessive premium versus Gafisa leads us to prefer Gafisa at current levels. Although we agree Cyrela should trade at a premium given the superior profitability and operational track record, we believe there is room for it to narrow. Our R$15 TP for Gafisa implies 48% upside versus 18% for Cyrela. Cyrela is trading at 09’ P/BV of 1.1x, a 54% premium to Gafisa, way above the 20-25% premium that we consider fair. If we look at reported instead of forward-looking book value, we can also see Cyrela‘s is almost at historical peak levels, which, in our view, creates a very good opportunity for a relative trade.

Table of contents
Brazil real estate: Challenging times 3
Volatility should continue, but there are deep value opportunities – Rossi, PDG and MRV are our preferred picks 8
But what to do with Cyrela and Gafisa? 8
We prefer Gafisa over Cyrela in the short term 8
PDG Realty (PDGR3) 13
Still highly attractive despite more conservative assumptions 13
MRV Engenharia (MRVE3) 15
Higher cash burn already priced in 15
Rossi Residencial (RSID3) 17
Trading at financial distress multiples despite solid performance 17
CCDI (CCIM3) 19
Subtitle 19
Gafisa (GFSA3) 21
More attractive upside elsewhere, but interesting pair trade with Cyrela 21
Cyrela Brazil Realty (CYRE3) 23
Premium player, but limited upside 23