Remaining Positive On Brazil’s Gafisa S.A.

We are keeping our Buy recommendation on Gafisa S.A. (GFA), one of the market leaders in the construction/incorporation business in Brazil. The company’s second quarter 2008 results were again very positive.

We remain positive on the Brazilian real estate market for the short-to-medium term outlook. We are expecting a very strong growth in the company’s earnings in 2008 and 2009, thus our estimated P/E is quite attractive. However, we believe the tighter monetary policy in Brazil is just a temporary problem, mainly now that commodities prices are declining.

Currently, Gafisa is trading at 13.4x our 2008 estimated EPS. The valuation is now more attractive as a result of the continued growth on the company’s sales and earnings. However, even if we consider a less optimistic view on the company’’s short-term perspectives, the valuation still seems attractive.

We believe Gafisa remains a good short-term alternative, as the potential for growth in the local mortgage business is fantastic, and the huge inventory of land already acquired, construction in progress, bank of land and finished units all point to strong earnings and revenues in future quarters. Our target price of US$42.50 represents a valuation of 18x our 2008 P/E, with a small premium over the industry median due to the company’’s huge growth potential.

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