GFA - Gafisa S.A.

[cobafdek]

I'm assembling a basket in Brazil, looking for 10-20 Brazilian stocks, mostly 1% positions.  First one was GP Investments, courtesy of Packer earlier this year.

 

This one is a small-cap homebuilder, selling at multi-year lows.  P/B 0.3, was 1.5 in 2010, with industry ave. 1.8.  P/E 3, was 20 in 2010, with industry ave. 9.0.

 

So far, this is enough for me to start a small position.  More interesting is that it's succeeding as a turnaround these past few years, after overbuilding, expanding, and increasing debt loads, reaching > 100% debt/equity in 2012.  Events of the financial restructuring are fascinating.

 

Debt/Equity now down to about 50%, by selling a 70% stake in one of its divisions to Blackstone, et al.  This move signals a major private equity interest in the Brazilian housing market, and boosts GFA's cash position, and shares are being bought back.  Next year, GFA is planning to spin-off or split-out its division that builds low-income housing.

 

In 2012, Sam Zell and GP Investments offered to buy out the company at approximately $5/share.  Current share price is $2.20.  Morgan Stanley recently boosted it's stake to 5.2%.

 

GFA is available as an ADR on NYSE.  No need to pay Fidelity's $130 per international trade.

 

 

 

 

[sternalot]

The Brazilian homebuilders use PoC accounting, so take their earnings for what they are, estimates.

[cobafdek]

The Brazilian homebuilders use PoC accounting, so take their earnings for what they are, estimates.

 

Correct, and always useful to remind ourselves that all accounting numbers are estimates.  The thesis, however, is not killed.

 

The company reconciles Brazilian GAAP to U.S. GAAP in their footnotes:

 

                                                        2013    2012    2011

 

Net Income (R$ 000)  Br. GAAP        867      (127)    (945)

                                  US GAAP      1,335      (89)    (728)

 

Equity (R$ 000)          Br. GAAP      3,191  2,535    2,642

                                  US GAAP      2,822  1,672    1,741

 

Adjusted P/E is therefore 1.5, adjusted P/B 0.33.  My thesis is both helped and hurt by the reconciliation, but GFA remains a screaming bargain.

 

Maybe we should be more worried about the election results in 2 days.  Or not.

[intothebreach]

Gafisa down more than 13% today...  this seems priced as if the market does not expect GFA to survive. I get that the Brazilian economy will be struggling for what may be a very long while, but this can't just be the results of the election. What am I missing here?

[Laxputs]

Seems like its CFO is negative on the year and negative 3 out of the 5 last years yet it has high interest expense. I haven't taken a very in-depth look here but if that is accurate, it is very unappealing.

[intothebreach]

Thanks for looking into it, even if only briefly. I took a position today, so I'm interested in anybody challenging/killing the thesis. As for the points you raise, although your multi-year data seems accurate, the situation appears to have evolved favorably in recent quarters.

 

From what I could gather so far, it seems that Gafisa overextended itself both operationally and financially over the 2010-2012 period. However, they seem to have cut back on the problematic operations (development in regions were they were not before), and have returned to profitability over the last few quarters. Also, as the original poster's thesis explained, by selling 70% of one of their division to Blackstone, they have reduced their debt by about 40%, which translate into much reduced interest payments over the last few quarters. Finally, I view Brazil as being out of favor as a positive.