Luiz Luizzi VIF 2010
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1) GAS is a leading Brazilian asset management firm with $1B AUM and a 19.2% annualized return over 11 years. 2) They focus on long-term value investing in Brazilian equities using fundamental analysis and meeting with management. 3) Two investment opportunities presented are AGRA, a homebuilder trading at a discount to its net tangible assets, and PDG Realty, a residential developer with a strong track record and competitive advantages.
Luiz Luizzi VIF 2010
- 1. Value Investing Forum Luiz Liuzzi, CFA - Managing Partner December-2009 1
- 2. About US • One of the largest independent equity asset managers in Brazil with approximately US$1 billion of assets under management. • History: A consistent track record. Annualized net return of 19,2% p.a. in dollar terms over the last 11 years. • Balanced Management Team: GAS combines experience and expertise. The founding partners have over 30 years of successful investing in Brazilian stocks, while our young research team has been trained in Brazil’s best business schools and the world’s best investment banks. 2
- 3. Performance EXPRESS FUND INTERNATIONAL, SPC RESEARCH CLASS Accumulated Performance since Inception (Jul,98 to November,09) - (July, 98 = 100) 1.000 900 800 645,6% 700 600 500 330,3% 400 306,3% 300 51,8% 200 100 12,75% 0 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Research M SCI - B r Ibo vespa Libo r 6M Do w Jo nes Returns obtained in the past do not constitute a guarantee of future returns. We recommend investors to carefully read the regulation of investment funds when utilizing resources. 3
- 4. History • GAS’s founding partners started as entrepreneurs, but since the 1960s they have been investing their own capital in Brazilian equities. • In 1998, the founding partners created the Express Research Class in partnership with Hedging-Griffo. • In 2003, GAS was created in order to structure and grow this asset management venture. 4
- 5. Our Strategy • Independence: • We are an independent asset manager • Focus: • One Market - Brazilian equities • One Strategy - Long only • One Approach - Value investing 5
- 6. Investment Cases WHAT DO WE LOOK FOR? HOW DO WE CONTROL RISK? Attractive opportunities: • Knowledge is our most important risk. • History of superior return on capital • Magin of safety concept on valuation. • Sustainability of superior returns • Although we do not have a volatility target, our historical volatility has been • Competitive advantages lower than the Ibovespa's • Competent and honest management • Alignment of interest with shareholders • Reasonable price (high margin of safety) 6
- 7. Company Research Steps Stock Idea to assess the sustainability of company return > Study company's fundamentals, build a DCF model, read sell side reports, due diligence > Meetings with management and on-site visits > Identify, research and discuss with suppliers, peers, customers > Presentation of case studies by research team to portfolio managers at weekly meetings > Investment Committee meets once a week to define changes in portfolio > Invested companies are closely monitored by research team and portfolio managers 7
- 8. Investment Cases Brazilian Home Building Industry • 1st case: Clearly Undervalued Stock (AGRA) • 2nd case: Company with superior returns discounted to fair value (PDG Realty) 8
- 9. Below net tangible asset opportunities Bovespa: companies trading below its net tangible assets 12% 10% 8% 6% 4% 2% 0% nov-08 jul-08 set-08 jan-09 mar-09 mai-09 jul-09 set-09 Usually hard to find, in crises times it becomes reality 9 Source: GAS Investimentos
- 10. Brazilian Demographics 2008 Population Profile 2018 Population Profile The Brazilian population is in the process of aging This structural change will last decades. 10 Fonte: IBGE
- 11. Heading to a fast growing market População na faixa de 25-60 anos Population between 25-60 years old 100 95 Annual Increase: 1.4 mn people 90 85 MM de pessoas 80 75 70 65 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 11
- 12. Huge Home Deficit Necessidade Demanda Potencial imediata: 5 milhões de Potential Demand Número de famílias por classe de renda 5 mln unidades families 0,1 100% 0,9 Renda 0,4 3,3 Family (Salários 95% income mínimos) 90% 0,69 13 mln 1,5 85% 4,4 >10 families 80% 75% 5-10 1,6 4,4 70% 3-5 65% 5,6 60% <3 7,4 21,2 55% 50% Déficit habitacional Locatários Proprietários Defict Rent Owners Million Units Total 7 11 33 Above 3 ms 1 4 12 Bellow 3 ms 6 7 21 Potential Demand = 18 million 12 Fontes: Fundação João Pinheiro Neto, IBGE e Itaú
- 13. Affordability: Commercial banks 2005: Income > R$ 2009: Income > R$ Hoje: Antes: 6.213 = Renda > R$ 6.200 2,4 mln 2.797 = R$ 2.797 Renda > 7,1 mln 14,9% população 5,1 % da Populac. families pessoas families 7,12 mi pessoas 2,4 mi 100% Credit demand R$ 6.000 90% Better financing conditions R$ 3.000 80% 70% 60% R$ 1.200 Credit Offer Legal improvement 50% Savings Acc Obligation 40% Bank competition 30% 2005 2005 2005 2009 2008 Unit Price 100.000 100.000 Tenor 100 360 Interest 18% 10% Installment 1.864 839 Min Income 6.213 2.797 13 Source: GAS e IBGE
- 14. Minha casa minha vida – Govt. Plan 2008 MCMV Unit Value 90.000 90.000 • Launched in 2Q09 - Crisis Subsidy (23.000) • Target = 1 million units • Through CAIXA = Official bank Down payment 10,0% 6,50% • Subsidy of home buyer Residual Value 81.000 62.645 • Caixa takes the client risk Interest rates 8,16% 4,50% Tenor 25 30 • Financing of construction • Challenge: approval process Installment 711 335 Family Income 2.844 1.342 Number of families 12 mi 25 mi 14
- 15. Market Reaction before and after the crisis New Mortgage Loans 35 30 25 Growth trend sustained 20 • Strong growth last 7 years R$ BI 15 • Very short deceleration period 10 • Robust recovery 5 0 Sales Speed Sales Velocity 08 09 01 02 04 05 06 07 8 9 03 08 t/0 t/0 20 20 20 20 20 20 20 20 9M 9M se se 35,0% 30,0% 25,0% Reason for deceleration 20,0% • More because of consumer 15,0% confidence 10,0% 5,0% • Less on credit availability 0,0% 15 07 08 m 7 no 7 m 8 no 8 m 9 9 m 7 m 8 7 8 9 7 8 9 m 9 /0 /0 /0 /0 /0 0 t/0 0 t/0 0 t/0 l/0 l/0 l/0 /0 v/ v/ n/ n/ n/ ar ar ai ai ai ar se se se ju ju ju ja ja ja
- 16. AGRE • AGRE = AGRA + Klabin + Abyara • Control = Spanish Investor + AGRA Mgt • AGRE´s Land Bank = R$ 19 bi 100% • Market CAP: R$ 2,4 bi • Liquidity over R$ 50 mln • Focus on medium to high income residential • Results oriented culture 16
- 17. Recent Performance 200 180 160 Crises + 140 Cyrela Event 120 100 Abyara + Klabin P/NTA = 0,7 80 Acquisitions 60 40 P/NTA = 0,2 20 0 7 09 7 08 8 09 9 07 08 09 08 08 7 08 9 07 r-0 t-0 t-0 t-0 -0 -0 r- o- v- v- r- n- o- o- z- z- n n ab ou ou ou ab ab fe de de ag fe ju ag ag ju ju No solvency problems = very undervalued 17
- 18. Net Tangible Assets Analysis AGRE Relative Valuation P/NTA AGRE 2,00 Net Tangible Assets Analysis 1,80 1,60 Net Receivables from Sold Units 2.379 1,40 Net Mkt Value of Units for Sale 1.227 Net Book Value of Land 837 1,20 Other Assets 340 1,00 0,80 Net Debt + Other liabilities (1.350) 0,60 Net Asset Value 3.433 0,40 Market Value 2.399 0,20 Market/Tangible 69,9% 0,00 Cyrela PDG MRV Rossi Gafisa AGRE 18
- 19. AGRE Valuation AGREs FCFE Yield 700 30% 600 AGRE DCF Model 25% 500 Mkt Value 2.399 20% Target Value 4.251 400 Upside 77% 15% 300 Ke 13,0% 200 10% Growth 2 yrs 8% Growth Fw 5% 100 Growth Perp 5% 5% - 0% AGRE Multiples 2010 2011 2012 2013 2014 2015 2016 2017 (100) PE 10 7,5 FCFE -5% PE 11 6,0 (200) FCFE Yield (300) -10% 19
- 20. Reasons to be undervalued Market Concerns GAS View Solvency Acquisitions + capitalizations = over R$ 500 mi cash Acquired companies land bank quality High quality land bank New partner reputation Wont vote as shareholder Liquidity Top 3 in sector Lack of consistent earnings Still a concern 20
- 21. Post Consolidation Numbers 21
- 22. Trading at deep discount to peers 4,5 4,0 3,5 3,0 2,5 P/BV 2,0 1,5 AGRE 1,0 AGRE 0,5 - (1.000) - 1.000 2.000 3.000 4.000 5.000 6.000 7.000 PSV AGRE is trading bellow the P/BV of its peer group 22
- 23. PDG Realty • Residential developer created by Pactual, leading IB in Brazil • Financial discipline • Focused on results and meritocracy culture • Merger and acquisitions created value • Controls real state companies (low income = Goldfarb, medium income = CHL) • National footprint • Market Cap R$ 6 bi • IPO in jan-07 23
- 24. PDG Structure and Land Bank PDG Land Bank Profile Unit Price R$ Units % Financing Low Income 0-100 31.476 47% Government Plan Eligible 100-130 11.463 17% Government Plan Eligible 130-250 19.332 29% SFH Comercial Banks financing Total 62.271 92% 24 Medium Income Over 250 5.219 8% SFH Comercial Banks financing 67.490 100%
- 25. Competitive advantages Land Bank Acquisition Discipline Construction Project Results oriented conception culture Access to Permits financing 25
- 26. Operational Performance Sales Speed 3Q09 45,0% 40,0% 35,0% 30,0% • Sales over launchings 25,0% • One of the highest in sector 20,0% 15,0% 10,0% 5,0% 0,0% E ul a en r s od si a n r a 2 G V Br o a pa bo en nd is el is ca g R R R os is PD Ev ar af cn C yr AG In M el Tr ob as Te R am G C H Te C ROE 2009E R 30,0% 25,0% 20,0% 15,0% • Net Margins 10,0% • Showing operational efficiency 5,0% 0,0% 26 SF 2 c re lty G rela en H V i r G d r do a oo a Te a ns ss bo pa te Ro nd Cr l Br nis is R ie Ag ea be Ev JH Ro Ez af M In el kf PD Cy c R Te
- 27. Consistency 350 22% 25% 22% 330 300 20% 19% 20% 250 250 LL 15% ROE 200 150 10% 130 100 5% 50 43 0 0% 2006 2007 2008 2009 High earnings growth and return on equity above 20% 27
- 28. PDG Realty Valuation PDG Realty Net Tangible Assets Analysis Net Receivables from Sold Units 2.488 Net Mkt Value of Units for Sale 968 Net Book Value of Land 376 Other Assets 1.041 Net Debt + Other liabilities (1.084) Net Asset Value 3.788 Market Value 6.412 Market/Tangible 169% 28
- 29. PDG Realty Valuation PDG FCFE Yield 1.200 20,0% PDG DCF Model 1.000 Mkt Value 6.400 15,0% Target Value 8.964 800 Upside 40% 600 10,0% Ke 13,0% 400 Growth 2 yrs 8% 5,0% Growth Fw 5% 200 Growth Perp 5% - 2010 2011 2012 2013 2014 2015 2016 2017 0,0% PDG Multiples (200) FCFE PE 10 10,0 FCFE Yield PE 11 7,7 (400) -5,0% 29
- 30. Thanks Contact information Luiz Liuzzi, CFA Phone: 55 11 2185-0922 e-mail: lliuzzi@gasinvestimentos.com.br 30