Gafisa SA Is A Strong Latin Play

We are keeping our Buy recommendation on Gafisa S.A. (GFA).  The second quarter 2008 results were positive.

The short-term outlook remains promising as the company’s sales are strong and the emergence of a domestic mortgage market continues to support the Brazilian construction sector. The recent joint venture with Tenda will enhance the company’s presence in the low-income segment. We believe the tighter monetary policy in Brazil is just a temporary problem, mainly now that commodity prices are declining.

The potential for growth in the local mortgage business is fantastic, and the huge inventory of land already acquired, construction in progress, and finished units all point to strong earnings and revenues in future quarters. Currently, Gafisa is trading at 11.2x our 2008 estimated EPS. The valuation is now more attractive as a result of the continued growth on the company s sales and earnings. 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, even if we consider a less optimistic view on the company’s short-term perspectives, the valuation still seems attractive. We set a target price of US$40.00, representing a valuation of approx 17.0x our 2008 P/E, with a premium over the industry median due to the company’s huge growth potential.

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