Gafisa - A Brazil Subsidy Play

After the announcement of the Brazilian stimulus package for the construction sector late last week, we decided to upgrade Gafisa S.A. (GFA) from Hold to Buy. As we were expecting, the stimulus program was announced with the following main points:

• New investments of R$34 billion (US$14.9 billion) in order to build an estimated total of one million new homes, with 400 thousand for very poor families (with a 100% subsidy) amounting a total investment of R$16 billion (US$7 billion) and the monthly installment for this program not to exceed US$22 per month
• 400 thousand homes will be built for low income class families; with some degree of subsidy as annual rates will be 5% or 6% per year - very low for Brazilian standards - depending on the total family income. Total investment for this program should be around R$10 billion (USD$4.4 billion)
• 200 thousand homes will be constructed for middle class families without any new subsidies, but with long-term financing guaranteed
• A guarantee fund should be established to cover defaults for very poor and low-income families
• The government also reduced corporate taxes on the companies involved in this program

The Southeast region of Brazil will concentrate 36.4% of the new units, the Northeast 34.3%, the South 12%, the North 10.3% and the Center-West the balance. We believe the plan is very positive for the Brazilian construction sector, particularly for Gafisa. The company has been investing in the low-income segment through its subsidiary named Tenda and it also has a huge focus on the Southeast and Northeast of Brazil.

Even though the long term credit environment in Brazil remains difficult, we do believe the announced program will help Gafisa get through this difficult period without major problems.

Of course it is highly questionable if the government will be able to actually built one million new homes, or how long it will take. However, we believe this is just a political question - the important point for Gafisa is that the program will provide long-term financing and increase demand from low income customers without credit risk. We are increasing our earnings estimates for 2009 from $1.25 to $1.35 and our new target price is $12.75.

Subscribe by RSS Subscribe by Email