Sector Report · Initiation of Coverage Monday, July 13, 2009 report we are initiating coverage of...

Monday, June 8th, 2009

Initiation of Coverage Monday, July 13, 2009

IMOB versus Ibovespa: Rebased (base 100 = 11/07/2008)

Source: Economática and Safra

Rafael C de Pinho (55 11) 3175-7783 [email protected]

In search of sustainable growth Positive Outlook based on Brazil’s housing plan. In this

report we are initiating coverage of Brazilian homebuilders. Our

outlook for the sector is positive in the wake of Brazil’s

government “Minha Casa, Minha Vida” plan, which aims to be

part of the country’s anti-cyclical policies at the same time it

helps to decrease the historical high housing deficit among the

bulk of its population.

Crisis exposed lack of long-run planning. It is our opinion

that over the last couple of years many homebuilder stories

lacked the most important fundamental: sustainable long term

growth. At the same time all listed players posted impressive

growth, those companies missed a clear long run strategy and

were forced to abruptly interrupt their growth cycles as the

current world economic crisis developed, resulting in tight credit

markets.

Sustainable growth gains importance. Going forward, our

view is that investors will give preference to those stories

positioned for longer-term growth based on a set of more solid

fundamentals: sales velocity and strategic positioning in the

lower-end segments, which, in our view, secure growth

sustainability.

CEF’s operational bottlenecks are a source of risk. In order

to be effective, Brazil’s housing plan needs Caixa Economica

Federal (CEF) to increase its processing capacity in order to be

able to grant approvals for both home buyers and companies in

a timely fashion. The risk CEF will not be able to review its

procedures and turn them as efficient as needed is the highest

we perceive towards our positive call for lower-income players.

At the same time we are concerned, we see recent steps taken

by CEF to improve its efficiency as positive and, thus, decreased

our initial skepticism to acceptable levels.

PDG is our Top Pick. Based on its positioning and track record

in low-income we are rating PDG shares with an Outperform

rating and a 12-month price target of BRL 30.00/share, our top

pick. Also based on positioning, we rate Rossi with an

Outperform rating and BRL 12.00 target price. As for Cyrela, we

rate the shares Neutral (BRL 17.00/sh.) to wait development of

more sound track record in its Living subsidiary. We are rating

Gafisa shares Underperform (BRL 17.00/sh.) based profitability

and focus concerns. We rate Tecnisa shares’ an Outperform

rating based on its compelling valuation, though we recognize

the story lacks short-term drivers.

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11/07/2008 11/10/2008 11/01/2009 11/04/2009

Real Estate Sector

Sector Report

- 2 -

Monday, July 13, 2009

Investment Thesis

It is no longer news for any investor involved in Brazil’s equity

markets that homebuilders were brought from crisis-laggards

back to the spotlight. In terms of valuation, extraordinary

performances brought companies in the sector from a near-

bankrupt scenario to pricing in growth once again.

The key variable behind this repricing was the announcement of

the Brazilian’s government much anticipated housing plan. It is

the first time in decades that the country has been able to put

together a set of measures to decisively address Brazil’s

estimated 8 million home deficit.

This report does not intend to praise the government’s positive

initiative but to price in the sustainable side of the growth

spurred by it.

It is our opinion that many homebuilding investment cases

brought to investors over the past couple of years lacked a basic

fundamental: sustainable growth.

Growth, as measured by any metric employed, was present

across the board between 2004 and 2008. While the numbers

were impressive, they were deceitful as the tightened credit

markets over the past few quarters proved. Many companies

were taken by surprise and were forced to halt their expansion

abruptly, which gave us the impression that controllers and

managers of such companies lacked the conservative approach

or a sustainable and carefully planned growth strategy for the

long term. Markets seemed to agree with our opinion as the

clear separation between the wheat and the chaff priced during

the crisis still exists.

The bottom line here is the assessment that the government’s

plan creates the opportunity for sustainable long-term growth

for homebuilders, away from the São Paulo/Upper middle class-

centric strategy employed by most companies in the past.

However, we must avoid being overly optimistic about its

consequences for companies under coverage, as the public

sector’s involvement always implies a certain level of uncertainty

in delivery.

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Our take on the “Minha Casa, Minha Vida” (My House, My Life) plan

It took us long to do it, but we ended up relaxing our initial

skepticism towards the “Minha Casa, Minha Vida” (MCMV) plan

to a point where we include it in our scenario as the main source

of sustainability for the sector’s growth going forward.

The main reason behind our cautious stance towards the plan

was that, from the very beginning, it seemed to target next

year’s elections. This impression came along with the risk that, if

the ruling Workers’ Party (PT) does not win in 2010, the plan

might be called off. Finally, the execution risk in terms of speed

in government actions is always a cause for concern.

On the other hand, after studying the plan, our impression is

that long-term fundamentals seem to be firmly in place:

(i) the Brazilian government, just as other governments,

is seeking to spur economic growth-driving activities during

recessionary times and now seems convinced of the multiplier

effect the homebuilding segment has on the economy;

(ii) There are political motives to the plan though but,

given its appeal and the all popular movement it has created

recently, we believe it has only gained importance since its

launch and the next government, whether of the PT or the

opposition, will only have incentives to sustain or expand it, and

not otherwise;

(iii) Our biggest concern, which was the government’s

capacity to fully implement the plan, declined to acceptable

levels on account of the involvement of high-ranking

government officials in closely monitoring its execution.

Our conclusion is that, if properly executed, MCMV has the

potential to rank along Mexico’s public strategies targeted at low

income housing. In our view, this clear support to low income

housing is something the Brazilian homebuilders’ case lacked in

order to be comparable to Mexican’s.

By creating the necessary financing conditions to include the

vast majority of Brazil’s population among potential

homebuyers, the plan addresses the major historical

impediments pointed out by the private sector to exploring the

segment in a viable manner.

MCMV plan in a nutshell: How it will work

As idealized by the government, the “Minha Casa, Minha Vida”

plan has the following objectives: (i) to increase access to home

ownership and reduce Brazil’s housing deficit; (ii) be part of the

government’s anti-cyclical economic policies.

In addition, MCMV’s initial goal is to build 1 million new homes.

The government has not set a construction timeframe for these

1 million units, but our initial estimate points to at least 3 years

since the plan launch in early April 2009.

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The target in terms of units was subdivided by gross family

income and the regions’ share of the total housing deficit.

Exhibit 1 shows the geographical distribution of the units in

terms of income range.

Exhibit 1 – MCMV units - geographical distribution

It is important to highlight that the plan was designed to

address the concerns of most companies about exploring the

low-income segments. Executives’ opinions were used by the

government while designing the plan incentives to ensure

companies’ adherence and interest in it.

In addition, different incentives and level of government

subsidies are offered for each income bracket, with the key

incentives being:

(i) Guarantee Trust – a government-funded initiative that

guarantees payments for up to 36 months, to homebuyers in

the 0-3 minimum wages (MW) bracket for loss of income caused

by unemployment. Besides increasing security for Caixa

Econômica Federal (CEF) as a lender, the main advantage of this

measure is that it increases homebuyers’ confidence with regard

to taking on long-term debt such as mortgages.

(ii) Financing subsidies – depending on income levels and

geographic region, homebuyers will receive a subsidy of up to

BRL 23,000 (~USD11,500) in their mortgages.

(iii) Life-insurance subsidies – policies usually sold

together with mortgages to benefit the lender in case of death of

the borrower will be subsidized.

(iv) 100% financing – loan-to-value within MCMV

mortgages will be 100%.

(v) Discount in notary fees – since most notary fees in

Brazil are tied to the property value, lower income segment

buyers may have difficulty in bearing this additional cost. Units

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

South East North East South North Middle-West

Nu

mber of

Un

its

0-3 MW* 3- 6 MW* 6-10 MW*

* Note: 1 minimum wage (MW) = BRL 465.00/month, aprox. USD232.50/monthSource: CEF and Safra

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covered by the MCMV will have massive discounts on such fees

and taxes.

The primary objective of most of these measures is to fit the

resulting mortgage payment into each family’s monthly budget

without compromising it to an extent that would increase the

risk of default or the impairment of its usual spending habits.

Put differently, the government’s intention, especially for the

lowest segment, is to match whatever these families pay as rent

with an equivalent mortgage. Exhibit 2 summarizes the

incentives described above for each income segment.

Exhibit 2 – MCMV incentives

Last, but not least, the speed of approval of projects offered by

companies to the CEF to be included in the MCMV is a critical

factor for its success and, in our view, the main risk in terms of

the plan’s limitations. As CEF is aware of this, the bank has

proposed an enhanced project approval workflow significantly

faster than CEF’s usual 4 months to approve a project.

The main reason for the speed gain, CEF officials say, is the

debureaucratization of the approval procedures. One example is

engineering inspection, which used to analyze a list of roughly

250 items, taking weeks to complete and which has now been

reduced to roughly 50 basic quality items to be checked in

projects of companies with long dated track record operating

with Caixa.

Another proof of CEF’s willingness to speed up approvals was

evident during the recent strike by its engineers for higher

salaries. With the dispute taking time to be resolved, CEF hired

third-party engineers to avoid delays in the inspection

0-3 MW* 3-6 MW* 6-10 MW*

Total Units within plan 400,000 400,000 200,000

RJ/SP Urban Areas Maximum Unit

Values (BRL/unit)52,000 130,000 130,000

Urban Areas Maximum Financing

Subsidy (BRL/unit)23,000 16,000 -

Income-loss insurance length 36 months 24 months 12 months

Average Monthly Family Income

(BRL/month)698 2,093 3,720

Maximum Monthly installment as %

of income10% 30% 30%

Maximum Loan-to-value 100% 100% 100%

Interest Rate Range (p.a.) 0.00%-4.00% 4.50% - 6.00% 7.66%-8.16%

Discount in notary fees for home

buyer100% 90% 80%

Discount in notary fees for home

builder90% 80% 75%

*Note: 1 minimum wage (MW) = BRL 465.00/month, aprox. USD 232.50/month

Source: CEF and Safra

Income BracketIncentives

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procedures. Although the effort was not entirely successful, it

partially offset the impact of the strike.

Which Companies are poised to benefit from MCMV?

We believe that most companies will initially explore the 3+ to

10 MW range units because:

(i) most of the companies’ current land banks for the

low-income segment were targeted at the 5+ MW bracket and;

(ii) the 0-3 MW bracket requires the involvement of

municipal governments, which should either donate land or

provide other financial support and/or tax exemption in order to

make the projects viable. It is a known fact that, with the

exception of urban areas, municipalities in Brazil are not cash

rich.

In that sense, though 40% of the plan is targeted at the 0-3 MW

segment and we see developments targeting those families

taking longer to ramp up, we do not envisage their value being

ignored by developers. Exhibit 3 shows companies’ exposure in

terms of land available in their land banks that is eligible for the

plan as of 1Q09.

Exhibit 3 – Land bank exposures to the plan

Source: Companies and Safra

Observing data similar to that shown above, we saw many

companies’ intention to explore low-income housing after the

announcement of MCMV with skepticism. Nonetheless, the plan

was devised jointly with the private and public sectors to

remove the historical obstacles to the creation of a proper

market for the low income population that would be viable for

companies to explore.

In this sense, we see that the companies’ long-term aversion to

the segment is mostly related to the absence of accessible credit

lines to both homebuyers and builders targeting lower income

64%

30%42%

12%

32%

34%

37%

70%

4%

36%

21% 18%

PDG Gafisa Rossi Cyrela

MCMV eligible SFH Eligible Others

- 7 -


segments. With this issue being resolved should the plan be

properly executed, we believe the companies’ pledge to devote

more resources to the segment gains in credibility.

On the other hand, we must not confuse the serious intention to

explore the newly arisen market demand with disregard for

recognizable track record in the segment.

In no way do we imply here that those with less experience in

the segment will be unable to build significant and efficient

operations in it. However, there will be learning curves in the

segment that may place them behind during the initial phases of

their venture.

There are at least three operational challenges we reckon

newcomers to the segment will face: (i) construction technology

is usually built upon the background in the segment as most

engineering solutions to cost issues usually arise from

experience; (ii) client servicing/management has scale issues

when shifting from units/hundreds of units per project in the

middle-high income segment to thousands in low-income

developments; (iii) differentiated marketing approaches/vehicles

are required while targeting low-income segments. This aspect

is partially offset by the government’s intensive

participation/massive advertisement of its initiatives regarding

the housing plan.

The bottom line is that we prefer to be conservative at first and

favor companies with sound track records in low-income

development vis-à-vis newcomers.

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Valuation

In order to value Brazilian homebuilders we use a hybrid model

that evaluates the companies by adding a DCF-based initial

stage with a Price-to-Book multiple stage in order to evaluate

each company’s terminal value. We advocate the use of this

model because homebuilders in Brazil grow at largely unstable

levels on account of the sector’s high-growth characteristics and

the cyclical nature of the business, which make conclusions

drawn from simple DCF-based DDM/Gordon approaches less

meaningful.

Our valuation applies a DCF over the shorter term (2010-2012),

reducing the risk of forecasting the economic cycle and

perpetuating abnormal growth levels. After that we apply a

Price-to-adjusted book value multiple based on companies’

fundamentals as defined by Gordon, shown in Exhibit 4. In order

to avoid over/underestimating our long-term view, we currently

assume that the real long-term growth for the sector is zero.

Thus, our valuation will only price in growth within the first

stage of the model. Exhibit 5 summarizes our valuation

procedure and Exhibit 6 shows possible outcomes for the P/B

multiple for different Ke and g assumptions at the 20% ROE

level.

Exhibit 4: Justified P/B multiple Formula

Exhibit 5: Valuation Methodology

Exhibit 6: Justified P/B multiples for 20% ROE levels

Valuation Summary Discount Rate

PV of FCFE (2010-2012) (1) Ke

PV of Equity Value in 2012 NPV of (2) Ke

Estimated Book Value of Equity in 2012 (A)

Estimated PV of Revenues Back Log in 2012 (B) Ke

Adjusted Book Value (C)=(A)+(B)

Fair Price-to-Adjusted Book Value Multiple (D)

Equity Value in 2012 (2)=(D)x(C)

Total Equity Value =(1)+NPV of (2)

Source: Safra

0.0% 1.5% 3.0% 4.5% 6.0% 7.5%

15.0% 1.33x 1.37x 1.42x 1.48x 1.56x 1.67x

16.0% 1.25x 1.28x 1.31x 1.35x 1.40x 1.47x

17.0% 1.18x 1.19x 1.21x 1.24x 1.27x 1.32x

18.0% 1.11x 1.12x 1.13x 1.15x 1.17x 1.19x

19.0% 1.05x 1.06x 1.06x 1.07x 1.08x 1.09x

20.0% 1.00x 1.00x 1.00x 1.00x 1.00x 1.00x

Source: Safra

g

Ke

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After applying our above-mentioned valuation model to

companies under coverage, we reached our 12-month price

targets and ratings, shown in Exhibit 7. The table also contains

relevant metrics and multiples to facilitate comparisons among

different companies. A more detailed set of company-specifics

for these companies is provided under each company’s section

further ahead.

Exhibit 7: Ratings and Target Prices

Exhibit 8: Current P/BV and P/ABV valuations

CompanyMarket

Cap

1Q09 Book

Value of EquityP / BV

1Q09

Backlog of

Revenues

Adjusted

Book Value

of Equity

P / ABV

Premium or

Discount to

Peers

Cyrela 5,166 2,224 2.32x 4,921 2,779 1.86x 11.3%

PDG 3,155 1,595 1.98x 1,736 1,808 1.74x 4.5%

Rossi Residencial 1,768 1,267 1.40x 1,798 1,402 1.26x -24.5%

Gafisa 2,208 1,655 1.33x 3,011 1,876 1.18x -29.5%

Peer Group Average 16,203 8,345 1.94x 12,479 9,705 1.67x

Rodobens 874 611 1.43x 418 645 1.36x 56.7%

Tenda 1,518 1,075 1.41x 1,097 1,156 1.31x 51.9%

JHSF 921 871 1.06x 584 914 1.01x 16.5%

Tecnisa 886 817 1.08x 1,054 933 0.95x 9.8%

Even 795 792 1.00x 1,176 878 0.91x 4.7%

Eztec 739 829 0.89x 387 857 0.86x -0.3%

Brascan 1,472 1,729 0.85x 1,457 1,729 0.85x -1.6%

Helbor 334 376 0.89x 660 424 0.79x -9.0%

Agra 790 908 0.87x 1,293 1,003 0.79x -9.0%

Inpar 580 763 0.76x 962 834 0.70x -19.6%

Trisul 311 418 0.74x 556 458 0.68x -21.6%

Camargo Corrêa 466 641 0.73x 851 703 0.66x -23.5%

CR2 224 373 0.60x 285 394 0.57x -34.3%

Abyara 122 195 0.62x 976 267 0.46x -47.4%

Klabin Segall 194 378 0.51x 1,311 474 0.41x -52.6%

Peer Group Average 10,225 10,775 0.95x 13,068 11,820 0.87x

Global Average 26,428 19,120 1.38x 25,547 21,526 1.23x

Source: Safra

Cyrela Gafisa PDG Rossi Tecnisa

Target Price 17.00 17.00 30.00 12.00 9.00

Rating Neutral Underperfom Outperform Outperform Outperform

Volatility High High High High High

Upside in BRL 17.1% 0.3% 41.2% 29.4% 47.8%

Upside in USD 12.3% -3.8% 35.5% 24.1% 41.8%

Multiples

P/B 2.32x 1.33x 1.98x 1.40x 1.08x

P/B at Target 2.72x 1.33x 2.80x 1.81x 1.60x

P/ABV 1.86x 1.18x 1.74x 1.26x 0.95x

P/ABV at Target 2.18x 1.18x 2.46x 1.63x 1.40x

PER10E 6.83x 6.79x 6.50x 8.52x 4.70x

PER10E at Target 8.00x 6.81x 9.18x 11.03x 6.95x

Key Valuation Assumptions

Ke 18.4% 18.4% 18.4% 20.2% 20.2%

WACC 15.0% 14.2% 14.2% 15.6% 15.6%

2013 Target P/ABV 1.20x 1.00x 1.20x 1.10x 0.85x

2009-2013 Avg. ROE 23.0% 16.4% 25.0% 17.7% 19.9%

Source: Safra



PDGR3 versus Ibovespa: Rebased (base 100 = 11/07/2008)


Rafael.C de Pinho (55 11) 3175-7783 rafael. [email protected]

In the Right Place at the Right Time

PDG is our Top Pick among homebuilders. We

assume coverage of PDG Realty with a 12-month target

price of BRL 30.00/share and an Outperform rating

according to our system. As extensively substantiated by

the investment thesis in our sector review, PDG is well

positioned to take advantage of the government’s

housing plan.

Sales velocity should keep moving up. We expect the

company to continue posting above-average sales

velocity indicators, boosted by demand in the lower-

income segments.

Discount gap to peers expected to reduce. We also

expect the company’s current P/ABV discount to other

low-income players to decrease once the market starts to

perceive PDG more as a pure low-income player. We

base this on the fact that only 66% of the company’s

launches focused on this segment in the past, whereas

we expect the 2009 launch mix to be 90% dominated by

the low-income segment.

Company capitalization remains a plus. Moreover,

the company is well capitalized after issuing convertible

debentures amounting to BRL 276 million in April this

year. Since the conversion price of the debentures is BRL

17.00/share, we expect all of them to be converted and

have therefore valued the company including the dilution

effects.

CEF’s operational bottlenecks are a source of risk.

As for the risks to our scenario, we believe CEF’s capacity

to speed up its approval processes and deliver a

significantly higher number of units to be financed is

crucial to PDG’s investment case. As pointed out in the

sector review part of this report, we recognize that the

risk exists, but expect CEF to increase its efficiency,

given the government’s determination to make the plan

work.

Conservative valuation assumptions. To add an

element of conservatism, we assumed a target P/ABV

multiple of only 1.20x in our model, versus a justified

multiple of 1.50x, mainly due to PDG’s superior average

expected 2009-2013 ROE. These compare to the current

P/ABV multiple of 1.74x.

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100

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160

11/07/2008 11/10/2008 11/01/2009 11/04/2009

PDG Realty (PDGR3) OUTPERFORM (OP)

Company Report

PDGR3 OP

Price (07/10/2009) R$ 21,24

Target Price R$ 30,00

Upside potential 41,2%

12 - Month High R$ 24,34

12 - Month Low R$ 7,23

Average Vol. (Million, 21 d) R$ 17,65

Market Cap (Million) R$ 3.155

Performance (%)

1 month 3 months 12 months

PDGR3 7,80% 34,50% 7,40%

Ibovespa -7,80% 8,10% -18,30%

Multiples

2008A 2009E 2010E

P/E 14,2x 10,8x 5,9x

EV/EBITDA 10,0x 8,8x 4,9x

Current P/BV 2,0x

Current P/ABV 1,7x

Source: Economática and Safra estimates

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Exhibit 9: Valuation Summary and Discount Rates

Income Statement (BRL MM) 2008 2009E 2010E 2011E 2012E

Launchings 2,612 3,117 3,501 3,501 3,501

- Real Estate Sales 1,812 2,456 3,359 3,451 3,501

Gross Revenues 1,261 1,830 3,120 3,925 4,082

Net Revenues 1,210 1,748 2,980 3,748 3,898

- COGS (738) (1,203) (2,072) (2,616) (2,916)

Gross Profit 472 545 908 1,132 982

- Sales Expeditures (93) (110) (151) (177) (175)

- G&A Expenditures (95) (91) (108) (111) (114)

- Other Operational 22 14 - - -

EBIT 275 356 642 836 682

Financial Results 9 (8) (9) (6) 1

Non-Operational Results (0) - - - -

EBT 299 347 632 830 683

Income Tax (32) (52) (95) (127) (104)

Minority Interest (44) (3) - - -

Net income 222 292 538 704 578

Depreciation (0.5) (3.1) (7.0) (8.8) (11.1)

EBITDA 314 359 649 845 693

Adjustments - - - - -

EBITDA 314 359 649 845 693

Gross Margin 39.0% 31.2% 30.5% 30.2% 25.2%

EBITDA Margin 26.0% 20.5% 21.8% 22.5% 17.8%

Net Margin 18.4% 16.7% 18.0% 18.8% 14.8%

Balance Sheet (BRL MM) 2008 2009E 2010E 2011E 2012E

Assets

Cash and Equivalents 256 187 187 187 187

Accounts Receivable 1,264 1,087 762 708 458

Inventories 1,056 1,995 2,121 2,111 1,609

Other 670 870 1,712 2,115 3,227

Total Assets 3,247 4,138 4,782 5,121 5,481

Liabilities

Short-Term Debt 219 331 331 331 331

Clients Advance Payments 61 37 145 - -

Long-Term Debt 380 766 666 566 566

Other 1,110 1,242 1,474 1,530 1,456

Equity 1,476 1,764 2,167 2,694 3,128

Total Liabilities 3,247 4,138 4,782 5,121 5,481

Free Cash Flows (BRL MM) 2008 2009E 2010E 2011E 2012E

EBITDA 314 359 649 845 693

Taxes on EBIT (30) (54) (96) (128) (104)

Change in Net Working Assets (957) (933) 225 (99) 807

CAPEX (71) (13) (28) (35) (44)

FCFF (744) (641) 750 583 1,351

Change in Debt 376 485 (100) (100) -

Share Issue 4 - - - -

Financial Results 9 (8) (9) (6) 1

Tax Difference (3) 1 1 1 (0)

FCFE (358) (164) 642 478 1,352

Source: Safra

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Exhibit 11: Target PE 2010 and Target Price sensitivities to Ke and Model P/BV

Valuation Summary

1 - PV FCFE (2008-2011) 2,010

2012 Book Value of Equity 3,128

2012 PV of Revenues Back Log 256

Book Value Adj. by Back Log 3,385

Price-to-Adj. Book Value Multiple 1.20x

2012 Equity Value 4,061

2 - PV of 2012 Equity Value 2,897

3 - Stake in BBKR3 28

Total Value (1+2+3) 4,936

Target Price / Share 30.00

Source: Safra

Cost of Equity (Ke) - in BRL

LT US Risk-Free Rate 4.50%

Equity Risk Premium 6.00%

Beta 1.40

US - BZ Inflation Differential 2.50%

BZ Country Risk 3.00%

Ke 18.40%

Source: Safra

P/E 2010 at Target

Ke / PBR 1.00x 1.10x 1.20x 1.30x 1.40x

20.40% 8.1x 8.5x 8.9x 9.4x 9.8x

19.40% 8.2x 8.6x 9.1x 9.5x 9.9x

18.40% 8.3x 8.7x 9.2x 9.6x 10.1x

17.40% 8.4x 8.9x 9.3x 9.8x 10.2x

16.40% 8.5x 9.0x 9.4x 9.9x 10.4x

Target Price (BRL/Share)

Ke / PBR 1.00x 1.10x 1.20x 1.30x 1.40x

20.40% 26.34 27.75 29.17 30.59 32.01

19.40% 26.70 28.14 29.58 31.02 32.47

18.40% 27.07 28.53 30.00 31.47 32.93

17.40% 27.44 28.94 30.43 31.92 33.42

16.40% 27.83 29.35 30.87 32.39 33.91

Source: Safra



CYRE3 versus Ibovespa: Rebased (base 100 = 11/07/2008)



Waiting for Living…

We are initiating coverage of Cyrela's shares with a

Neutral rating and a 12-month target price of BRL

17.00/share. Our neutral stance towards the company

is closely linked to its strategic positioning, which we

recognize is about to change.

We prefer a cautious stance towards enhancement

of Living operations. With all respect to Cyrela’s sound

strategic moves towards building sizeable operations in

the lower-income segments through its ‘Living’

subsidiary, we prefer to take a cautious approach and

wait till ‘Living’ posts a stronger track record in the

segment. At this point, Living’s key challenges are:

o (i) building a long-standing relationship with

CEF, which has a significantly different modus

operandi compared to the private banks Cyrela

has been used to dealing with;

o (ii) strategic land bank acquisitions in the

segment to enhance its potential by increasing

its MCMV-eligible land, which currently accounts

for only 12% of its total land bank;

o (iii) consistent development of standardized

projects, applying technology similar to that

employed by other players, ensuring scalability

and profitability.

P/ABV discount to lower-income players justified

by the latter’s stronger fundamentals. We see

Cyrela’s current P/ABV valuation multiple of 1.86x

consistent with its industry leadership in terms of

operational size and liquidity. At the same time, its

discount to players focused on the lower-income

segments is justified by the brighter demand scenario for

those companies ready to take advantage of the positive

momentum created by the government’s housing

package.

Sales surprise may be a source of risk to our call.

As a risk to our call for Cyrela, the company’s capacity to

post significant higher-than-expected sales figures in its

traditional mid-high income business in the coming

quarters on the back of Brazil’s overall economic

recovery should not be completely ruled out.

Nonetheless, we still lack clear signs of a sales recovery

on that front.

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11/07/2008 11/10/2008 11/01/2009 11/04/2009

CYRELA (CYRE3) NEUTRAL (N)

Company Report


CYRE3 N

Price (07/10/2009) R$ 14,52







Performance (%)


CYRE3 6,70% 29,60% -24,40%

Ibovespa -7,80% 8,10% -18,30%

Multiples

2008A 2009E 2010E

P/E 14,6x 11,3x 7,1x


Current P/BV 2,4x

Current P/ABV 1,8x

- 14 -


Exhibit 12: Financial Statements


Launchings 4,902 5,000 5,750 6,168 6,168


Gross Revenues 2,783 3,235 4,410 5,899 6,134

Net Revenues 2,667 3,106 4,234 5,663 5,889

- COGS (1,596) (2,010) (2,688) (3,570) (3,789)

Gross Profit 1,071 1,096 1,545 2,093 2,100


- G&A Expenditures (195) (160) (158) (162) (167)

- Management Fees (9) (11) (15) (21) (21)

- Other Operational (29) 0 - - -

EBIT 526 629 949 1,344 1,252

Financial Results (9) 21 2 (13) (6)

Non-Operational Results 0.5 - - - -

Equity Pick-Up - - - - -

EBT 517 651 950 1,331 1,247

Income Tax (107) (103) (143) (200) (187)

Employee Interest (4) (4) (4) (4) (5)

Minority Interest (39) (68) (48) (67) (62)

Net income 366 475 756 1,060 993

Depreciation 3.9 12.1 16.2 18.2 20.5

Amortization - - - - -

Employee Interest (4) (4) (4) (4) (5)

EBITDA 526 637 960 1,357 1,268

Gross Margin 40.1% 35.3% 36.5% 37.0% 35.7%

EBITDA Margin 19.7% 20.5% 22.7% 24.0% 21.5%

Net Margin 13.7% 15.3% 17.9% 18.7% 16.9%


Assets


Accounts Receivable 2,661 1,703 1,239 1,028 1,083

Inventories 2,926 3,186 3,769 4,022 3,962

Other 1,107 2,812 3,260 4,267 4,939

Total Assets 7,558 8,264 8,614 9,555 10,223

Liabilities

Short-Term Debt 155 200 200 200 200

Real Estate Acquisition Payables 423 375 391 400 400

Clients Advance Payments 1,686 1,246 366 0 -

Long-Term Debt 865 1,300 1,300 1,300 1,300

Other 2,307 2,549 3,007 3,245 2,920

Equity 2,121 2,594 3,350 4,410 5,403



EBITDA 526 637 960 1,357 1,268

Minority Adjustment (535) (204) (237) (271) (126)

Taxes on EBIT (109) (101) (142) (202) (188)

Change in Net Working Assets (1,087) 435 (702) (244) (144)

CAPEX (92) (42) (32) (36) (41)

FCFF (1,297) 726 (153) 605 769

Change in Debt 1,249 466 (200) (200) (167)

Emission - - - - -

Financial Results (9) 21 2 (13) (6)

Tax Difference 1 (3) (0) 2 1

FCFE (56) 1,210 (351) 394 598

Source: Safra

- 15 -




Valuation Summary

1 - PV FCFE (2010-2012) 408


2012 PV of Revenues Back Log 1,032





3 - Cyrela`s Stake in Agra 132

Total Value (1+2+3) 6,048


Source: Safra


LT US Risk Free-Rate 4.50%


Beta 1.40



Ke 18.40%

Source: Safra

P/E 2010 at Target

Ke / PBV 0.80x 1.00x 1.20x 1.40x 1.60x

16.40% 5.8x 7.0x 8.3x 9.6x 10.8x

17.40% 5.7x 6.9x 8.2x 9.4x 10.6x

18.40% 5.6x 6.8x 8.0x 9.2x 10.4x

19.40% 5.5x 6.7x 7.9x 9.0x 10.2x

20.40% 5.4x 6.5x 7.7x 8.9x 10.0x


Ke / PBV 0.80x 1.00x 1.20x 1.40x 1.60x

16.40% 12.30 14.98 17.66 20.34 23.02

17.40% 12.07 14.70 17.33 19.96 22.59

18.40% 11.84 14.42 17.00 19.58 22.16

19.40% 11.62 14.15 16.68 19.22 21.75

20.40% 11.40 13.89 16.38 18.86 21.35

Source: Safra



GFSA3 versus Ibovespa: Rebased (base 100 = 11/07/2008)



In need of focus to make things happen

Profitability and lack of focus drive Underperform

rating. At the risk of sounding repetitive, our rationale

for Gafisa’s Underperform rating is based on a frequent

concern of those who are following the story:

profitability. Lack of focus at a crucial moment for the

sector is also a concern.

Tenda’s turnover is a challenge. We will not argue

against the fact that the Tenda acquisition definitely

placed Gafisa among the stronger players in the lower-

income segments. However, turning around Tenda’s

operations and management is a formidable enough

challenge to draw attention away from growing the

business at a crucial moment.

Gafisa’s follow-on offering, another distracter. On

the capital market front, we see Gafisa's announcement

of an equity follow-on as another factor driving us away

from its shares in the short run. Temporarily postponed,

the deal could still occur should demand for the shares

increase. Besides, the Gafisa-Tenda double listing

structure makes it difficult for the proceeds of the

offering to be invested in the low-income segment, an

investment that would make sense to us. In addition, we

currently do not see value in increasing market share in

the mid-high income markets, Gafisa’s traditional

business.

Time-consuming debt renegotiations. Last but not

least, Gafisa’s need to renegotiate its debt given a

covenant breach is another distracter at this point, which

besides being time-consuming may be an impediment

against the further leveraging needed for ongoing

projects.

Current market valuation not supported by

fundamentals. Valuation-wise, the company’s shares

are currently trading at a P/ABV of 1.18x, which we

believe is mostly related to their domestic and

international liquidity. This multiple is not justified by the

fundamentals, which indicate a fair P/ABV of 0.86x,

largely due to expected average 2009-2013 ROE of

16.40%. Based on the fundamentals-based multiple, we

reach a target price of BRL 17.00/share and an

Underperform rating according to our system.

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11/07/2008 11/10/2008 11/01/2009 11/04/2009

GAFISA (GFSA3) UNDERPERFORM (UP)

Company Report


GFSA3 UP

Price (07/10/2009) R$ 16,95







Performance (%)


GFSA3 2,00% 19,00% -29,10%

Ibovespa -7,80% 8,10% -18,30%

Multiples

2008A 2009E 2010E

P/E 20,1x 9,8x 6,6x


Current P/BV 1,3x

Current P/ABV 1,1x

- 17 -




Launchings 3,040 3,152 3,275 3,275 3,275


Gross Revenues 1,475 2,520 3,479 3,939 3,424

Net Revenues 1,740 2,418 3,340 3,782 3,287

- COGS (1,214) (1,756) (2,474) (2,793) (2,434)

Gross Profit 526 662 866 989 853


- G&A Expenditures (181) (200) (210) (214) (220)

- Other Operational 30 22 - - -

EBIT 221 306 422 510 403

Financial Results 42 (15) (21) (28) (27)

Non-Operational Results (52,635) - - - -

EBT 210 291 401 483 375

Income Tax (43) (55) (68) (82) (63)

Minority Interest (57) (12) - - -

Net income 110 224 333 401 312

Depreciation 1.8 12.8 7.2 8.1 9.1

EBITDA 223 319 429 519 412

Gross Margin 30.2% 27.4% 25.9% 26.2% 25.9%

EBITDA Margin 12.8% 13.2% 12.9% 13.7% 12.5%

Net Margin 6.3% 9.3% 10.0% 10.6% 9.5%


Assets


Accounts Receivable 2,119 1,271 1,323 2,294 2,198

Inventories 2,029 2,357 2,386 2,342 2,329

Other 786 2,204 3,073 2,516 2,575

Total Assets 5,539 6,228 7,038 7,372 7,322

Liabilities

Short-Term Debt 509 529 529 529 529


Clients Advance Payments - - - - -

Long-Term Debt 1,043 1,484 1,484 1,484 1,484

Other 2,286 2,312 2,844 2,862 2,599

Equity 1,612 1,787 2,037 2,337 2,571



EBITDA 223 319 429 519 412

Taxes on EBIT (31) (58) (72) (87) (67)

Change in Net Working Assets (1,260) 550 81 (922) 44

CAPEX (43) (10) (14) (16) (18)

FCFF (1,112) 801 424 (507) 370

Change in Debt 863 461 - - -

Emission - - - - -

Financial Results 42 (15) (21) (28) (27)

Tax Difference (12) 4 4 5 5

FCFE (220) 1,250 407 (530) 348

Source: Safra

- 18 -




Valuation Summary

1 - PV FCFE (2010-2012) 207







Total Value (1+2) 2,267


Source: Safra




Beta 1.40



Ke 18.40%

Source: Safra

P/E 2010 at Target

Ke / PBV 0.80x 0.90x 1.00x 1.10x 1.20x

20.40% 5.4x 6.0x 6.6x 7.2x 7.8x

19.40% 5.5x 6.1x 6.7x 7.3x 7.9x

18.40% 5.6x 6.2x 6.8x 7.4x 8.1x

17.40% 5.7x 6.3x 6.9x 7.6x 8.2x

16.40% 5.8x 6.4x 7.0x 7.7x 8.3x


Ke / PBV 0.80x 0.90x 1.00x 1.10x 1.20x

20.40% 13.47 14.96 16.44 17.93 19.42

19.40% 13.68 15.20 16.72 18.24 19.75

18.40% 13.91 15.46 17.00 18.54 20.09

17.40% 14.14 15.72 17.29 18.86 20.44

16.40% 14.38 15.98 17.59 19.19 20.79

Source: Safra



RSID3 versus Ibovespa: Rebased (base 100 = 11/07/2008)



Rossi: Clearly ahead of peers

In the group consisting of Cyrela, Gafisa and Rossi, we

believe Rossi to be the most seasoned player when it

comes to low-income markets. From 1992, when it

debuted with the “Plano 100” project, till now, Rossi has

delivered more than 25,000 low-income units. However,

it was forced out of the segment for some years due to

the lack of sustainable credit and/or long-term

government support, something we are beginning to see

now. During this period, it focused on upper-middle

apartment developments.

In response to the significant growth posted by players

like PDG/Goldfarb in the lower-income markets, Rossi

shifted its attention back to the segment in June 2007

and disclosed its plan to explore the segment.

Rossi expects 50% of its FY09 launched PSV to be in the

lower-income segments, totaling 13,000-15,000 units. In

our opinion, Rossi’s rapidly growing exposure to the

segment in comparison with Gafisa or Cyrela can only be

explained by its knowledge of mass market

developments.

While Rossi’s positioning merits praise, its lack of

consistent results over the longer run has clearly

impacted its perceived value from the investors’

viewpoint, to which we attribute most of the discount in

its valuation compared to its peers. We do not expect

such a valuation gap to decrease in the short run.

Rossi’s shares are currently trading at a P/ABV multiple

of 1,26x, implying a discount and 32% to Cyrela and a

small 6% premium to Gafisa. Valuing the shares using a

conservative 1.0x P/ABV target multiple we reach a 12-

month PT of BRL 12.00/share, giving a High-Risk

Outperform rating according to our rating system. We

have Rossi as an option for investors in search of value

among low-income-exposed players but for whom

liquidity is a concern, given that Rossi has a daily

average traded volume of BRL 10+ million.

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140

11/07/2008 11/10/2008 11/01/2009 11/04/2009

ROSSI (RSID3) OUTPERFORM (OP)

Company Report


RSID3 OP

Price (07/10/2009) R$ 9,27







Performance (%)


RSID3 22,60% 99,90% -12,70%

Ibovespa -7,80% 8,10% -18,30%

Multiples

2008A 2009E 2010E

P/E 15,5x 10,3x 8,5x


Current P/BV 1,4x

Current P/ABV 1,2x

- 20 -




Launchings 2,045 1,861 2,305 2,420 2,420


Gross Revenues 1,285 1,638 1,899 2,671 2,940

Net Revenues 1,245 1,574 1,829 2,564 2,822

- COGS (823) (1,114) (1,315) (1,845) (2,041)

Gross Profit 422 461 515 719 781


- G&A Expenditures (117) (97) (130) (140) (143)

- Other Operational (21) (6) - - -

EBIT 150 199 246 385 445

Financial Results (19) 7 1 0 2

Non-Operational Results (4,525) - - - -

EBT 130 206 247 385 447

Income Tax (6) (21) (27) (42) (54)

Minority Interest - - - - -

Net income 114 172 209 319 366

Depreciation 3.5 11.4 8.8 9.1 9.5

EBITDA 144 197 244 370 427

Gross Margin 33.9% 29.3% 28.1% 28.0% 27.7%

EBITDA Margin 11.5% 12.5% 13.3% 14.4% 15.1%

Net Margin 9.2% 10.9% 11.4% 12.4% 13.0%


Assets


Accounts Receivable 1,305 1,065 1,229 1,579 661

Inventories 1,008 1,387 1,488 1,658 1,454

Other 251 602 562 337 1,480

Total Assets 2,866 3,266 3,491 3,785 3,807

Liabilities

Short-Term Debt 124 115 115 115 115

Clients Advance Payments 85 115 58 25 -

Long-Term Debt 393 686 766 766 576

Other 1,025 982 1,028 1,116 1,078

Equity 1,238 1,367 1,524 1,763 2,038



EBITDA 144 197 244 370 427

Taxes on EBIT (7) (20) (27) (42) (53)

Change in Net Working Assets (561) (289) (296) (541) 1,096

CAPEX (32) (9) (10) (11) (11)

FCFF (456) (121) (90) (223) 1,458

Change in Debt 398 272 80 - (190)

Emission - - - - -

Financial Results (19) 7 1 0 2

Tax Difference 1 (1) (0) (0) (0)

FCFE (76) 157 (9) (223) 1,271

Source: Safra

- 21 -




Valuation Summary

1 - PV FCFE (2010-2012) 750









Source: Safra




Beta 1.70



Ke 20.20%

Source: Safra

P/E 2010 at Target

Ke / PBR 0.90x 1.00x 1.10x 1.20x 1.30x

18.20% 10.1x 10.8x 11.5x 12.2x 12.9x

19.20% 9.9x 10.6x 11.3x 12.0x 12.7x

20.20% 9.7x 10.4x 11.0x 11.7x 12.4x

21.20% 9.5x 10.1x 10.8x 11.5x 12.1x

22.20% 9.3x 9.9x 10.6x 11.2x 11.9x


Ke / PBR 0.90x 1.00x 1.10x 1.20x 1.30x

18.20% 10.98 11.75 12.53 13.30 14.08

19.20% 10.75 11.50 12.26 13.01 13.77

20.20% 10.52 11.26 12.00 12.73 13.47

21.20% 10.31 11.03 11.74 12.46 13.18

22.20% 10.10 10.80 11.50 12.20 12.89

Source: Safra



TCSA3 versus Ibovespa: Rebased (base 100 = 11/07/2008)



Value-Play in a Growth Sector

Value clearly stated by multiples. Tecnisa is the only

company from the sector’s smaller caps in the sector

within our coverage universe. Having said that, it is not

surprisingly to see that its current market valuation

reflects that fact and shares trade at 0.95x P/ABV, a low

multiple that helps to explaining why we see value in

them.

Demand in middle-high income segments still

discouraging. However, demand for upper middle-class

developments keeps being not enough to encourage us

to go for a stronger call in the name. Although having

improved in line with general economic sentiment over

the last couple of months, we still lack information to

leave us optimistic about the segment prospects for the

upcoming quarters. Moreover, we do not expect to see a

change in the company’s full positioning towards those

segments in the foreseeable future.

Proven management, through good and bad times.

Over the longer run, though, Tecnisa has value as its low

multiples suggest. In addition, the company is well run

and managed, having endured the worst of the crisis

ahead of most of its peers. Hence, investors looking at

the longer run should definitely place their bets at the

story as deep-value, not growth.

Consolidating the BRL 1 billion launching level. We

currently forecast Tecnisa’s launchings to decrease 35%

yoy in 2009, amounting to BRL 900 million. We prefer to

take a conservative stance and not include growth in our

model, consolidating the company’s position among

those capable of launching around BRL 1 billion, going

forward.

Liquidity discount justifies our 0.85x P/ABV

multiple. We are valuing Tecnisa’s shares using a 0.85x

P/ABV target multiple, which is 20% below the

fundamentally justified multiple to account for a liquidity

discount on the shares based on low trading activity

around the name.

Valuation: 12-month BRL 9.00/sh. PT, Outperform.

The resulting 12-month target price for Tecnisa’s shares

is BRL 9.00/share, implying a High-Risk Outperform

rating according to our system.

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11/07/2008 11/10/2008 11/01/2009 11/04/2009

Tecnisa (TCSA3) OUTPERFORM (OP)

Company Report

TCSA3 OP

Price (07/10/2009) R$ 6,09






Market Cap (Million) R$ 886

Performance (%)


TCSA3 16,90% 45,20% -10,80%

Ibovespa -7,80% 8,10% -18,30%

Multiples

2008A 2009E 2010E

P/E 10,9x 7,2x 4,7x


Current P/BV 1,1x

Current P/ABV 0,9x


- 23 -




Total Launchings 1,730 1,059 1,059 1,000 1,000

Launchings - Tecnisa Stake 1,376 900 900 900 900

Total Real Estate Sales 1,359 983 1,066 1,263 1,018

Gross Revenues 519 772 1,237 1,688 1,378

Net Revenues 498 743 1,192 1,627 1,327

- COGS (315) (470) (758) (1,051) (861)

Gross Profit 183 273 434 576 466


- G&A Expenditures (64) (61) (86) (88) (91)

- Management Fees (7) (10) (17) (23) (19)

- Other Operational 23 (1) - - -

EBIT 83 130 231 332 243

Financial Results 28 31 34 34 34

Non-Operational Results 2 - - - -

EBT 110 161 265 366 277

Income Tax (19) (24) (53) (73) (51)

Employee Interest - - - - -

Minority Interest (10) (13) (24) (24) (17)

Net income 81 124 188 269 208

Depreciation 2.1 20.0 16.5 18.7 20.8

EBITDA 85 150 247 351 264

Gross Margin 36.7% 36.8% 36.4% 35.4% 35.1%

EBITDA Margin 17.1% 20.1% 20.8% 21.6% 19.9%

Net Margin 16.3% 16.6% 15.8% 16.5% 15.7%


Assets


Accounts Receivable 560 463 493 1,102 408

Inventories 685 915 847 874 712

Other 140 302 964 333 799

Total Assets 1,455 1,780 2,404 2,409 2,019

Liabilities

Short-Term Debt 108 162 162 162 162


Clients Advance Payments 20 8 4 - -

Long-Term Debt 173 351 756 406 56

Other 238 288 371 528 332

Equity 795 888 1,029 1,231 1,387



EBITDA 85 150 247 351 264

Minority Adjustment (54) (33) (30) (30) (21)

Taxes on EBIT (15) (19) (46) (66) (45)

Change in Net Working Assets (285) (271) 33 (632) 838

CAPEX (33) (28) (33) (39) (48)

FCFF (301) (202) 172 (417) 988

Change in Debt 202 232 405 (350) (350)

Emission - - - - -

Financial Results 28 31 34 34 34

Tax Difference (3) (5) (7) (7) (6)

FCFE (75) 56 604 (740) 666

Source: Safra

- 24 -




Valuation Summary

1 - PV FCFE (2010-2012) 450






2 - PV of 2012 Equity Value 859



Source: Safra




Beta 1.70



Ke 20.20%

Source: Safra

P/E 2010 at Target

Ke/PBR 0.65x 0.75x 0.85x 0.95x 1.05x

10.35% 6.0x 6.6x 7.1x 7.7x 8.2x

11.35% 5.9x 6.5x 7.0x 7.6x 8.1x

12.35% 5.9x 6.4x 6.9x 7.5x 8.0x

13.35% 5.8x 6.3x 6.9x 7.4x 7.9x

14.35% 5.7x 6.2x 6.8x 7.3x 7.8x


Ke / PBR 0.65x 0.75x 0.85x 0.95x 1.05x

15.35% 7.81 8.53 9.25 9.97 10.69

15.85% 7.71 8.41 9.12 9.83 10.54

16.35% 7.61 8.31 9.00 9.70 10.39

16.85% 7.52 8.20 8.88 9.57 10.25

17.35% 7.43 8.10 8.77 9.44 10.11

Source: Safra



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Opinions, estimates, and projections expressed herein constitute the current judgment of the

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currency, a change in exchange rates may adversely affect the price or value of, or the income

derived from, the financial instrument, and the reader of this report assumes any currency risk.

Income from financial instruments may vary and its price or value, either directly or indirectly, may

rise or fall. Past performance is not necessarily indicative of future results, and no representation or

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warranty express or implied, is made herein regarding future performances. Safra Group does not

accept any liability whatsoever for any direct or consequential loss arising from any use of this

report or its content.

5. This report may not be reproduced or redistributed to any other person, in whole or in part,

for any purpose, without the prior written consent of Safra Corretora. Additional information relative

to the financial instruments discussed in this report is available upon request.

Additional note to U.S. Investors: Safra Securities Corporation accepts responsibility for the content

of this report. Any US Person receiving this report and wishing to effect any transaction in any

security discussed in this report should do so with Safra Securities Corporation at 546 5th Ave, 2nd

Floor, New York, NY.

RATINGS CRITERIA 12-month horizon

OUTPERFORM (OP) – Stock’s return expected to outperform the market’s expected return in at

least 5%.

NEUTRAL (N) – Stock’s return expected to lie within a range of -5% and +5% of the market’s

expected return.

UNDERPERFORM (UP) – Stock’s return expected to underperform the market’s expected return by

at least 5%.



EQUITY RESEARCH

STRATEGY/ / RETAIL/ CONSUMPTION Sergio Goldman [email protected] (55 11) 3175-7387

Carolina da Costa Carvalho [email protected] (55 11) 3175-7821 MINING/STEEL/PULP & PAPER

Luiz Francisco Caetano [email protected]. (55 11) 3175-8492 OIL/UTILITIES/TELECOM

Vladimir do Nascimento Pinto [email protected] (55 11) 3175-7167

Diogo Almeida do Amaral [email protected] (55 11) 3175-9740 REAL ESTATE/FINANCIALS

Rafael C. de Pinho [email protected] (55 11) 3175-7783

mailto:[email protected]






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