EZTEC S.A. (BOVESPA: EZTC3) Brazil Builder Upgraded
EZTEC S.A. (BOVESPA: EZTC3) the Brazil based builder/developer has been upgraded at Heffernan Capital Management to a strong buy with a 2013 price target of 30 BRL issued today by Economist Shayne Heffernan.
Potential Sales Value (PSV) of between R$1.2 billion a R$1.4 billion in 2012.
|Own PSV Launched||R$1.2 billion to R$1.4 billion|
In addition, its consolidated gross and net margin forecasts for 2012, in line with the prevailing accounting standards, are as follows.
|Gross Margin||Minimum of 40%|
|Net Margin||Minimum of 30%|
This material fact contains projections, which are based exclusively on the beliefs of EZTEC’s management and are therefore subject to risks and uncertainties. These projections take into account such factors as the performance of the economy, the market and the real estate sector, as well as operational conditions. Any changes in perception or in the above-mentioned factors may cause actual results to differ from the disclosed projections.
EZTEC S.A. (BOVESPA: EZTC3) celebrates its 33rd anniversary as one of the most profitable builders and developers in Brazil. The Company announces its results for the fourth quarter of 2011 (4Q11) and fiscal year 2011.
- Net Revenue reached R$744.2 million in 2011, up 16.9% from 2010. In 4Q11, Net Revenue was R$213.3 million.
- Gross Income was R$375.6 million in 2011, up 26.2% from 2010. In 4Q11, gross income reached R$110.3 million, with Gross Margin of 51.7%, accumulating 50.5% in 2011 (10.5 p.p. above our guidance for the year).
- EBITDA was R$289.3 million in 2011, an increase of 27.7% from 2010, for EBITDA Margin of 38.9%. EBITDA in 4Q11 was R$88.4 million, followed by an EBITDA margin of 41.4%.
- Net Income was R$329.0 million, for net margin of 44.2%, Earnings per Share of R$2.242 and Annualized ROE of 29.9%. Considering only 4Q11, Net Income was R$97.6 million in 4Q11, for Net Margin of 45.7%, 5.6 p.p. superior from the same quarter a year earlier.
- EZTEC kept its financial strength in 4Q11, ending the period with Cash Equivalents and Financial Investments of R$302.3 million. Excluding the debt of R$61.0 million (being exclusively of SFH financing), the Company’s Net Cash stood at R$241.4 million, which was complemented by Performed Receivables from real estate projects of R$229.8 million, which are available for securitization and yielding IGPM+12% p.a.
- In 4Q11, the Company launched 5 residential projects, 2 in the city of Sao Paulo and 3 in the Sao Paulo Metropolitan Area (SPMA), totaling own PSV of R$379.0 million, bringing launches in 2011 to R$1,157.4 million, for growth of 30.5% from 2010. As a result, EZTEC complied its Guidance of launches for 2011 by reaching 105.2% of its center, close to the top.
- EZTEC’s stake of Contracted Sales, net of brokerage commissions and rescissions, reached R$249.2 million in 4Q11 and R$884.3 million in 2011, growth of 18.2% from 2010.
- In the forth quarter of 2011, EZTEC acquired six new lots, three in the city of Sao Paulo, two in the coastal city of Santos and one in the SPMA, which mean additional own PSV of R$564.0 million. As a result, on December 31, 2011, EZTEC’s land bank totaled R$4.8 billion in own PSV. The average cost of lot acquisitions, including the costs associated with expanding construction potential, is equivalent to 9.7% of PSV.
PSV (Potencial Sales Value)
Expectation of amount to be obtained from the sale of all units of a given real estate project, at a certain price at launch (long-term payment schedule), proportionally to the Company’s share in the project.
Fees charged for property sale intermediation. It is worth mentioning that approximately 50% of contracted sales are intermediated by brokers of Tec Vendas, EZTEC‘s sales company, whose brokerage fee percentage tends to be lower than that charged by third-party real estate firms, resulting in increased revenue and consequently improving Company gross margin.
Land Cost: comprises costs of acquisition and regularization, if any, of the land, in addition to costs concerning the increase of the construction potential, should they exist (granting or Construction Additional Potential Certificate – CEPAC). Land cost is one of the main costs related to real estate projects, besides being very important for the calculation of PoC (Percentage of Completion), since in accounting terms, regardless of how it is disbursed, it is considered as being incurred right from the beginning. The ratio “land cost versus total cost of projects launched” is available on the “Interactive Results” spreadsheet. If an estimate of the index for future developments is required, it is worth stressing that the “land cost versus total cost of projects” ratio may vary depending on the (i) form of acquisition (cash or exchange); (ii) segment (low or high income); and (iii) location (more/less expensive areas), and, in this case, estimates require a more comprehensive analysis on the part of the analyst.
Construction Cost (CC): comprises costs of raw-material as well as own and third-party labor. It is important to emphasize that raw materials alone do not affect in a significant way the total cost of a project.
In addition to the costs aforementioned, the gross margin is impacted by the Production Financing Cost. The company has the option of contracting production financing to supplement the installments paid by customers during the construction period. Production financing is released as construction works are carried out and, in general, the financing agent requires a minimum percentage of sales and of completed works for the release of funds.
EZTEC’S operating expenses include:
Commercial Expenses: comprise expenditure related to assembly of sales stands, decoration of apartment in display and advertising. EZTEC records all its commercial expenses in the result, including expenses related the assembly of sales stands, as they occur.
Administrative Expenses and Management Fees: administrative expenses mainly include outsourced services (audit, consultancy, legal counsel fees, and others), staff compensation and payroll charges, in addition to rent and legal expenses (publication of minutes of meetings and financial statements, expenses with registry and notary offices, board of trade, and so forth). The expenses with management fees include senior management compensation.
EZTEC, so that its customers feel more secure when acquiring a property, adopts the detached assets/designated property (patrimônio de afetação) regime for most of its projects. This way, the amounts disbursed by the real estate unit buyer are mandatorily bound to the building itself, and are separate from the other funds of the developer. Consequently, EZTEC only raises financing for production in order to supplement the cash needed to continue construction.
By adopting the patrimônio de afetação regime, the company is entitled to use the Special Taxation Regime (RET), whose consolidated tax rate (PIS, Cofins, IR and CSLL) is 6.0%, an amount lower than that provided by the presumed profit regime, which has a 6.73% consolidated tax rate.
It is worth highlighting that the calculation of taxes payable is based on the amount received from customers, while in accounting, taxes are recognized together with the revenue. This way, the mismatch between taxes paid and taxes recognized may generate two items on the balance sheet:
Prepaid Taxes (Assets): when more taxes were paid than recognized in accounting;
Deferred Taxes (Liabilities): when more taxes have been recognized in accounting than were actually paid;
Three indexes have a major effect on real estate developers.
INCC: (Brazilian Construction Cost Index) adjusts the outstanding balance of customers during construction, safeguarding the Company from price fluctuation of main inputs used in construction;
IGP: (General Price Index) adjusts, after completion of works, the outstanding balance of customers who chose to finance their property directly with EZTEC; and
TR: (Referential Interest Rate) adjusts production financing installments.
After completion of works, EZTEC offers its customers the option of direct financing with the developer. Currently, the effective rate is IGP + 12% p.a.. It is important to stress that the portfolio of performing (finished) receivables is subject to securitization.
Sales Velocity History of projects is available on the “Valuation Data” spreadsheet.
Construction progress curves, distributed by product type, are available on the “Valuation Data” spreadsheet. It is worth noticing that there is a time interval between the launch of the project and the actual beginning of works, a period needed both to ensure a minimum percentage of sales for allowing project continuance and to raise funds for beginning the works.
Schedule of Receipt
In fact, the customer may choose from 3 different alternatives:
Short-Term Payment Schedule: a payment schedule by which the customer pays 100% of the value of the purchased real estate unit by the end of works;
Long-Term Payment Schedule: a payment schedule by which the customer pays between 20% and 40% of the value of the purchased real estate unit by the end of works, and the after-delivery-of-keys installment is paid through the financing granted by the developer, with maturity terms of up to 10 years, at the current IGP rate + 12.0% p.a.; and
Bank Schedule: similar to the long-term payment schedule, with a difference in the after-delivery-of-keys installment, which is financed by a financial institution with maturity terms of up to 30 years. When the customer opts for this modality, the financial institution transfers the financing amount to the developer after amortization of the debt of production financing, if any.
EZTEC does not dismiss the purchase of land by exchange, but it believes that land acquisition by cash represents a competitive advantage. At the end of 3Q09, 89.5% of the costs related to land acquired by the Company had already been paid.
Percentage of Completion (PoC) Method
According to the Brazilian accounting practices (BR-GAAP), revenues are recognized by the Project Financing Progress (“PoC”) method, measuring progress of the construction work until its completion, in terms of costs incurred versus total budgeted cost.
Cost of Goods Sold
It comprises land costs, project development, construction costs and financial charges related to the production financing (Brazilian Housing System – SFH). The recognition of Cost of Goods Sold is a function of the product of costs incurred and the percentage of sales contracted.
Adjustment to Present Value
Adjustment to Present Value, implemented by Law 11,638/07, is applied to the payment installments falling due, taking into account the end of the construction work in accordance with its registration by “PoC”. As EZTEC has net cash, the discount rate used is the quarterly weighted average of issues of federal government bonds called NTN-B. The model is simplified by adopting a single rate; however, in practice, the rate used is the rate effective in the quarter when the unit is sold.
PIS/Cofins = taxes on revenue; IR = income tax; CSLL = Social Contribution on Net Income.
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