GFA will go UP
$0.56 on 5/08/09
$10.92 (2,084.00% from time of market call)
Gafisa's rating was recently downgraded to A1.Br from Aa3.br, due to a recent reduction in liquidity. Gafisa's liquidity uncertainty stems from its 230 million dollar cash expenditure to capitalize Tenda, a low income construction and real estate company in which Gafisa has a 60% stake. This cash expenditure is such a concern because of Gafisa's Q4 loss of approximately 232 million dollars. Gafisa needs enough cash on hand to cover twice this amount, and Gafisa's large capital expenditure for Tenda, in this rough economic market, is sufficient reason for concern.
Tenda, Gafisa's low-income subsidiary, is intended to be a stand-alone company. Gafisa does not intend to support Tenda on a financial or a dividend basis, but still risks being obligated to do so to in order for Tenda to be successful. Tenda has also experienced high cancellation rates in late 2008 due to lax credit standards, which increases its overall riskiness. Such low standards can cause future problems with Tenda if Brazil goes deeper into recession. In addition to Tenda's riskiness, Gafisa now also faces a higher cost of debt, making financial risk more of a factor. Gafisa could have a further rating downgrade if it does not reduce its working capital and/or its receivables do not improve. If Gafisa acquires more debt, its risk can also increase. Gafisa currently has 48% debt to equity, but could increase to above 50%.
Conversely, Gafisa can do well if default levels stabilize to bearable levels, or even show signs of decreasing. In addition, if Tenda is successful and needs no more capital infusions, Gafisa will show less signs of riskiness and therefore gain a better rating. Gafisa is also superior to almost all of its peers credit-wise, with a national scale rating of A1.br. In addition, if cash flows from operations pick up momentum and show signs of stability, Gafisa's risk will decrease. Also, if Gafisa's liquidity improves due to better-than-expected credit line disbursements, its risk will have a significantly better outlook. Gafisa, in addition, has stellar diversification in terms of its product offerings to various geographies and income levels. Gafisa is currently priced at $13.55 with a reasonable dividend of $0.24 (1.94%). I see Gafisa's stock fluctuation between $10 and $17 in coming weeks.