Brazilian Homebuilders: Valuation Method and Risk Statement

Research evidence excerpt

Brazilian Homebuilders: Valuation Method and Risk Statement

Valuation Method and Risk Statement

We value Brazilian homebuilders based on PE methodology backed by a DCF (FCFE).

Main risks for the sector:

The FGTS available budget (for the low-income segment): FGTS (workers fund), the main

fund of the social housing program (MCMV), losing sustainability due to: 1) changes in the

destination of resources to address other sectors of the economy (such as sanitation and

infrastructure); and 2) a considerable increase in FGTS withdrawals. Both points could

reduce the resources available to the real estate sector, damaging the health of MCMV.

MCMV housing program sustainability (for the low-income segment): The non-

implementation, cancellation, suspension or thinning out of MCMV by the government

may affect the conduct of companies’ businesses and results, given the large exposure

they have to these projects.

Material cost increases: Since companies recognize revenue from property sales

according to the accounting method of financial evolution of construction, an increase in

the cost of an incorporated project may reduce revenue and previously calculated

profit. Thus, increases in the prices of construction materials due to inflation can

increase the cost of projects and reduce companies’ profit.

Macro deterioration: Changing market conditions and a worsening Brazilian

macroeconomic scenario may impact customers’ purchasing power and impair

companies’ ability to sell projects and available units at projected prices, which can

reduce profit margins.

Affordability issues (for the middle- to high-income segment): The degree of difficulty

among buyers to maintain unit acquisitions due to unemployment, changes in