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18 July 2011
Brazilian Malls
Initiating on the Three Larger Caps - BR Malls (OW), Multiplan (N) and Iguatemi (N)
We are initiating coverage on the 3 largest mall companies in Brazil, rating BR Malls OW, with 39% upside potential to its Dec-12 price target, and rating both Multiplan and Iguatemi N, with 30-40% upside potential to their Dec-12 price targets. In the last 30 days, Iguatemi was down 13% vs a contraction of 6-7% for peers, explaining the attractive upside despite our Neutral rating. Although we believe decreasing inflation expectations and lower GDP growth this year remove part of the strong momentum we saw in 2010, we are positive on the sector given attractive valuation vs international peers, strong growth and attractive potential upside. Our top picks are BR Malls and Sonae Sierra Brasil, while among our Neutral-rated stocks Aliansce and Iguatemi are our preferred names. In this report we differentiate the 3 large caps based on growth strategy, margins, leverage, room for potential upside and asset quality. Please click here to see our June-10th report initiating on the sector and Sonae Sierra Brasil and assuming coverage of Aliansce. Valuation is not cheap for the large caps but remains attractive. The sector is trading at 15.9x P/FFO 12 months forward, 17% below its peak of 19.0x reached in Nov-2010, with BR Malls trading at the top of the range at 17.7x, a premium justified by its superior growth. When compared with American, European and Asian names, the sector trades at a discount of 5-15% on P/FFO 12e with superior growth: we expect aggregated revenues for the large caps to grow 27% this year and 28% in 2012 vs 2-7% for international peers. Why should investors buy BR Malls? We believe the companys premium valuation is justified by superior growth and execution. BR Malls has multiplied by 4x its total gross leasable area (GLA) since 2006, reaching 1.2mn m2 of total GLA as of 1Q11, making it now the largest company in the sector, with superior margins. Moreover, we see attractive potential upside of 39% in the name and believe the company will post superior growth over the next 3 years, supported by its pipeline of acquisitions that should reach R$1.9bn in greenfields and expansions. Neutral on Iguatemi and Multiplan: Our ratings of Iguatemi and Multiplan are warranted by the relatively smaller potential upside, based on our DCF models, and the companies lower growth vs BR Malls; however, we recognize that the two companies have room to surprise positively given their unleveraged balance sheets. We prefer Iguatemi vs Multiplan on the back of slightly higher potential upside of 40% vs 29% for Multiplan, higher FFO growth and lower 2012e multiples, with Iguatemi trading at 14.1x P/FFO, a 6% discount to Multiplan. Risks to the sector: Higher- (lower)-than-expected interest rates and/or lower(higher)-than-expected GDP growth, impacting companies occupancy rates, rental growth and margins. In addition, construction bottlenecks and access to capital can impact the pipeline and returns of greenfields and expansions.
Shopping Malls Marcelo Motta
AC
Adrian E Huerta
(52-81) 8152-8720 adrian.huerta@jpmorgan.com J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero
Marina Mansur
(55-11) 3048 3893 marina.x.mansur@jpmorgan.com Banco J.P. Morgan S.A.
Equity Ratings and Price Targets Company BR Malls Multiplan Iguatemi Symbol BRML3.SA MULT3.SA IGTA3.SA Mkt Cap (R$ mn) 7,733.90 5,999.52 2,773.96 Rating Price (R$) 17.21 33.48 35.00 Cur OW N N Prev NC NC NC Price Target Cur Prev 24.00 43.00 49.00
Source: Company data, Bloomberg, J.P.Morgan estimates. n/c = no change.All prices as of 15 Jul 11.
See page 81 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.morganmarkets.com
Table of Contents
Summary of Estimates.............................................................5 Industry Overview ....................................................................6
What differentiates the 3 largest shopping mall companies in Brazil? .......................7 Why are the Brazilian companies underleveraged?.................................................12 With higher leverage we could see another 35-65% growth in GLA after 2013.......14 Earnings growth Main driver for share performance............................................16 Sector already trading more than US$30mn daily...................................................17
BR Malls ..................................................................................31
Ready to keep growing with premium execution. We initiate with an Overweight rating and 39% potential upside.............................................................................31 Investment Thesis .................................................................................................31 Risks to Rating and Price Target............................................................................37 Financial Outlook..................................................................................................38 Valuation ..............................................................................................................40 BR Malls Management Team and Controlling Shareholders...................................41 Recent Events .......................................................................................................42
Multiplan..................................................................................44
Multiple growth opportunities, but limited upside and FFO growth. Initiate with Neutral..................................................................................................................44 Investment Thesis .................................................................................................44 Risks to Rating and Price Target............................................................................48 Financial Outlook..................................................................................................49 Valuation ..............................................................................................................51 Multiplan Management Team and Controlling Shareholders ..................................52 Recent Events .......................................................................................................53
Iguatemi...................................................................................55
A good story, fairly valued. Initiate with Neutral....................................................55 Investment Thesis .................................................................................................55 Risks to Rating and Price Target............................................................................59 Financial Outlook..................................................................................................60 Valuation ..............................................................................................................62 Iguatemi Management Team and Controlling Shareholders....................................63 Recent Events .......................................................................................................65
Appendix I 5 Things to Know about Brazilian Malls.........66 Appendix II Main Sector Metrics ........................................67 Appendix III Pipeline of Projects ........................................68 Appendix IV Listed Companies Portfolios .......................70 Appendix V Company Financials .......................................75
Pricing in this report is as of the close on July 15th, 2011, unless otherwise indicated.
OW N OW OW OW N N N N UW OW NR N NR NR NR OW N N OW OW N
Mueller Mueller Mueller Mueller Mueller Mueller Mueller Rob Stanton Luk Stanton Luk Lopez
Source: J.P. Morgan estimates, company data and Bloomberg consensus for noncovered companies. Priced as of Jul-15th. *Revenues CAGR 2010e-2012e.
Source: J.P. Morgan, Bloomberg and company reports. Cap rate = Net operating income NOI / EV. *Considering BR Malls follow-on.
Summary of Estimates
Table 4: Shopping Malls estimates summary
Financial Info (R$ mn) Net revenues 10 Net revenues 11e Net revenues 12e Net revenues 13e CAGR 10-13e NOI 10 NOI 11e NOI 12e NOI 13e CAGR 10-13e EBITDA 10 EBITDA 11e EBITDA 12e EBITDA 13e CAGR 10-13e Net income 10 Net income 11e Net income 12e Net income 13e CAGR 10-13e FFO 10 FFO 11e FFO 12e FFO 13e CAGR 10-13e Margins, Leverage and Profitability NOI margin 10 NOI margin 11e NOI margin 12e NOI margin 13e EBITDA margin 10 EBITDA margin 11e EBITDA margin 12e EBITDA margin 13e FFO margin 10 FFO margin 11e FFO margin 12e FFO margin 13e Net Debt/EBITDA 10 Net Debt/EBITDA 11e Net Debt/EBITDA 12e Net Debt/EBITDA 13e Valuation P/BV curr P/FFO 11e P/FFO 12e EV/EBITDA 11e EV/EBITDA 12e BRML 546 827 1,121 1,322 34% 448 687 943 1,126 36% 428 656 895 1,057 35% 268 374 476 599 31% 285 383 493 619 29% 88.2% 89.3% 89.8% 90.0% 78.3% 79.4% 79.8% 80.0% 52.2% 46.4% 44.0% 46.8% 2.9x 3.3x 3.0x 1.8x 1.3x 20.2x 15.7x 14.4x 10.7x MULT 604 649 778 965 17% 425 481 611 837 25% 357 426 532 711 26% 218 256 278 369 19% 368 377 398 498 11% 86.6% 87.6% 90.7% 95.4% 59.1% 65.6% 68.4% 73.7% 43.5% 47.9% 43.8% 45.7% (1.1x) 0.3x 0.8x 0.4x 1.8x 15.8x 15.0x 13.4x 10.2x IGTA 264 315 386 478 22% 203 249 312 393 25% 185 219 272 337 22% 152 143 168 198 9% 172 166 196 233 11% 78.6% 80.2% 81.4% 82.0% 70.2% 69.5% 70.5% 70.4% 65.2% 52.7% 50.8% 48.8% (0.7x) 0.4x 1.1x 1.0x 1.8x 16.7x 14.1x 12.6x 9.8x ALSC 207 258 306 367 21% 163 216 261 314 24% 138 181 223 271 25% 71 74 99 137 25% 92 102 130 171 23% 78.8% 83.8% 85.2% 85.6% 66.9% 70.0% 72.8% 73.8% 44.7% 39.4% 42.4% 46.5% 2.7x 2.5x 2.2x 1.4x 1.9x 19.1x 15.0x 12.9x 10.5x SSBR 185 223 289 367 26% 150 187 245 315 28% 140 171 227 295 28% 122 161 183 231 24% 130 120 142 184 12% 81.2% 83.7% 84.6% 85.8% 75.8% 76.5% 78.4% 80.5% 110.3% 78.8% 63.9% 63.3% 3.4x (0.3x) 0.5x 0.4x 2.7x 15.2x 12.8x 13.4x 8.5x
Source: J.P. Morgan estimates and company reports. *Net income adjusted by nonrecurring expenses.
Industry Overview
Figure 2: P/FFO 2012e
15.7x 15.0x 15.0x 14.1x 12.8x
The sector is composed of 6 listed companies with a combined market cap of US$14bn and a daily liquidity of more than US$30mn. BR Malls is the most liquid name, trading more than US$20mn daily. None of the companies is part of the IBOV index, but we believe that BR Malls, because of its size and liquidity, could be added to Ibovespa as soon as the next index revision, in September, with a participation of around 0.5pp. BR Malls, Multiplan and Iguatemi represent 25% of the IMOB index, with participation of 15.3%, 6.3% and 3.8% respectively. The shopping mall industry offers exposure to growing retail consumption in Brazil and to potential appreciation in property values, on the back of a compression in cap rates and lower interest rates long term. Also, it offers inflation protection though its rent structure, as retailers (both anchors and satellites) are subjected to monthly payments, represented by the maximum of a percentage of sales or a minimal rent adjusted by inflation (IGP-M or IPCA). On the other hand, the properties side has the benefit of stable and predictable cash flows, hedging investors against inflation via 5to 10-year contracts with retailers. We are positive on Brazilian shopping malls despite the sectors outperformance of the IBOV YTD of 8pp, down 7% on average, led by BR Malls (+3%), with the sectors valuation multiples trading at 15.9x based on FFO for the next 12 months, 17% below their top. The main reasons for our optimism are the following: i) Attractive organic and inorganic growth. We have seen the sector grow strongly over the last 3 years, with listed malls increasing revenues by 28% CAGR in 07-10, coming from 50% GLA growth in the period (~ 17% per year). We believe that going forward we will continue to see companies adding new greenfield/expansion projects and also making acquisitions, especially BR Malls, which has been the most active name to date. Going forward, we expect a 25% CAGR (1013e) in sector revenues, led by a 60% increase in own GLA by 2013. Simple value proposition and increasing share liquidity. Since 2008 the aggregate volume traded has multiplied eightfold, reaching over US$30mn daily, helped by 2 IPOs (ALSC and SSBR), which increased the number of listed players in the segment to 6 names, and by 5 follow-on offers (3 from BR Malls) that have amounted to R$2.9bn since 2008. In addition, the value proposition from malls is simple, easy to model and has multiple growth sources. Valuation remains attractive vs international peers. The sector is trading at 14.7x P/FFO 2012e vs ~16.0x for American, European and Asian names, but, more importantly, growth prospects are much stronger with healthy balance sheets. Value creation in the long term, when interest rates decline and assets revalue. In our view this driver is largely overlooked by investors given the recent tightening in monetary policy; however, we believe this will one of the main drivers of future sector performance as lower interest rates will lead to cap rate compression and a consequent
Figure 3: Brazil is cheaper then other regions, with higher growth projected
P/FFO 2012 Rev. growth
ii)
16.9x 15.6x
iii)
iv)
increase in property values. Also, companies will be able in the long term to leverage their balance sheets at lower interest costs. Malls offer indirect exposure to the secular trend of consumer expansion in Brazil, given their unique rent structure, in which rents are represented by the larger of a minimum rent adjusted by inflation or a percentage of sales. Over the last 10 years GDP per capita has almost tripled in Brazil, to US$10,814 in 2010 vs US$3,766 in 2000. Unemployment is running at record-low levels 6.4% as of April with wage mass growing 12.7% over the last 12 months, given the reduction in unemployment and growth of 10% in real wages in the last 12 months, and reaching R$35bn as of March 2011. However, we are relatively more optimistic about Brazilian homebuilders vs the malls, on the back of: i) Cheaper valuation for Brazilian homebuilders, which are trading at 6.5x 12 months forward P/E, only 1% above their trough, while malls are trading at 15.9x P/FFO 12 months forward P/E, 17% below their peak; Mall outperformance YTD vs IBOV and IMOB, with malls outperforming the IBOV by 8pp, led by BR Malls, up 3% in the period, and excluding SSBR, which IPOd this year and is up 19%. On the other hand, homebuilders are down 30% and underperforming the IBOV by 15pp; Positive momentum as inflation expectations continue to decrease: we believe that, given their higher beta, homebuilders should benefit more than malls from the recent decrease in inflation expectations and a stabilization in interest rates, as most investors see malls as a defensive sector; however, we recognize that 2Q results are not likely to be a trigger for the Brazilian homebuilders.
ii)
iii)
In this report we initiate coverage of the 3 largest shopping mall companies in Brazil, BR Malls (BRML3, OW), Multiplan (MULT3, Neutral) and Iguatemi (IGTA3, Neutral). Our ratings are based on price target and potential upside, current valuation, efficiency, revenue growth and leverage. Within our universe of coverage, BR Malls and Sonae Sierra Brasil, both rated OW, are our top picks. Among our Neutral-rated stocks, Aliansce is our preferred name, given discounted valuation, followed by Iguatemi and Multiplan. For more details on Aliansce and SSBR, please click here for our initiation of coverage, published June-10th, 2011.
of 17% based on projects announced as of 4Q10, with BR Malls growing at a faster pace based on acquisitions. Also, we believe BR Malls could accelerate the development of greenfields from around 2 per year to 3-4 going forward, as BR Malls has so far opted for a consolidation strategy given the early stages of the mall industry in Brazil. Greenfields represent most of the GLA expected to be added by Iguatemi, Multiplan and Sonae Sierra Brasil, at around 160-170k m2 per company over the next 3 years. Given Iguatemis and Multiplans relatively unleveraged balance sheet, we see upside risk in their project pipelines.
Figure 4: Companies should invest R$6bn over the next 3 years
R$ in millions
2,582
Greenfields Acquisitions
Greenfields Acquisitions
1,900
1,501 536 942 43 899 IGTA 694 99 595 SSBR 348 150 198 ALSC
188 26 162
180 11 169
132 40 92
950
MULT
IGTA
ALSC
BR Malls Playing the consolidation game: We expect BR Malls to invest more than R$1.9bn into acquisitions over the next 3 years and see upside potential to this; however, it is also important to flag that BR Malls also expects to invest R$330mn in greenfield and R$350mn in expansions, for a total capex of R$2.6bn to be disbursed over the next 3 years. BR Malls is the only company for which we include acquisitions in our estimates given its track record with this growth strategy. Since its IPO in 2007, BR Malls made acquisitions for R$3.8bn, which included 33 deals. BR Malls already tracked 75 malls, totaling an R$18bn investment considering an entry cap rate of 10.0% for possible acquisitions. Iguatemi Greenfield developer: The company expects to open 6 new malls, adding 169k m2 to its own GLA over the next 3 years, including the recently opened Shopping Alphaville. It has the largest pipeline of greenfields, followed by Sonae Sierra Brasil (GLA of 162k m2 in 3 greenfields) and Multiplan (GLA of 160k m2 in 5 greenfields). Early this year the company issued a R$330mn debenture, which is expected to be invested in opportunistic acquisitions not included in our estimates. YTD the company has invested only R$12mn in the acquisition of a small stake in Shopping Esplanada. Multiplan Multiuse company: The company expects to invest more than R$530mn into greenfield projects over the next years, but most of it will be for commercial towers representing a total GLA of 90k m2 that it will rent and a smaller portion for
projects to be sold. Cristal Tower and Centro Profissional Ribeiro, which are almost completely sold, will have a potential sales value (PSV) of R$145mn. While we are not considering future expansions in our estimates for Multiplan, we recognize that there is significant potential to be developed inside its current portfolio. This is not included in our estimates given the lack of information on capex and timing to develop the potential projects. To exemplify this potential, the new master plan for Shopping Ribeiro that includes 32k m2 in expansions and a Residential and Medical Center tower with an expected PSV of up to R$600mn according to our calculations, based on the price/m2 obtained on Centro Profissional Ribeiro, representing upside risk to our numbers. For Iguatemi we are not including the second phase of Shopping Votorantim expected to be opened in Sep-2018 as we are not including expansions for any of the other malls post 2014. We are including only announced projects as of 4Q10 in our estimates for all companies and therefore not including the remaining 100k m2 Iguatemi expects to launch by 2014 to reach own GLA of 520k m2.
Figure 6: Greenfields and Expansion plans for the next 3 years
Own GLA (000) m2
Figure 7: Listed Malls increased their GLA by 120% in the last 4 years
Total GLA (000) m 2
+24%
747 143
+42%
+77%
+92%
+34%
+61%
+404%
1,197
+48%
+138%
+60%
+20%
2006
+153%
1Q11
521 155 604 366 420 183 392 188 204 SSBR 353 89 264 Aliansce
551 201
477 271
432 292
351 225 89
237 Iguatemi
BR Malls
Multiplan
MUTL
ALSC
IGTA
SSBR
GSHP
Source: J.P. Morgan estimates, company data. Based on 4Q10. Excluding multiuse projects and developments for sale.
(2) Why does BR Malls have higher margins? In 2010 BR Malls posted a 78% EBITDA margin vs 70% from Iguatemi and 59% from Multiplan. As can be seen in the figures below, BR Malls has a lower COGS as % of revenues at 10.6% in 1Q11 vs 16-21% for peers; however, it is important to flag that Multiplan includes construction costs from its multiuse projects to be sold, which explains its higher cash COGS as % of revenues. In 1Q11 Iguatemi had nonrecurring expenses of R$4mn represented by a legal action against Nossa Caixa Nosso Banco and a strategic consultancy. On administrative expenses as % of revenues, BR Malls and Iguatemi are more efficient than Multiplan, reporting around 10% of administrative expenses as % of revenues; however, it is important to flag that Iguatemi hires a third party for commercialization expenses and those expenses are recognized in COGS, which leads to a relative understatement of its administrative expanses vs BR Malls and
9
Multiplan. Of the three companies we are initiating on, Multiplan had the highest level of administrative expenses as % of revenues at around 15% in 1Q11 and 16.3% in 2010. Excluding nonrecurring expanses, Iguatemi EBITDA would be at R$45mn, with a margin of 65% in 1Q11, vs 70% for full-year 2010. In the case of Multiplan in 1Q11, excluding the real estate revenues and costs from EBITDA, margin would be at 70.7%, based on J.P. Morgan calculations. In the figures below, we show the companies 1Q11 and 2010 EBITDA margin above the columns representing the breakdown between COGS, administrative expenses and other expenses as percentage of revenues.
Figure 8: Companies EBITDA margin decomposition as of 1Q11
% of Revenues
64.4%
78.2%
70.2%
78.3%
8.9 10.3
20.9
IGTA COGS
IGTA
69.7 69.5
70.4
2009
2010
2011e
2012e
2013e
10
(3) Asset quality and operational figures Iguatemi stands out as the company having a higher-income asset portfolio among peers, with average monthly sales/m2 at R$1,300 and monthly rent/m2 at R$105.
Figure 11: 2010 Sales/m2 (R$)
1,293 1,208 2010 1,194 1,066 1,072 938 914 822 904 832 2009
Iguatemi
Multiplan
BR Malls
Aliansce
SSBR
Iguatemi
Multiplan
BR Malls
Aliansce
SSBR
Although not all companies release sales and rent per m2, based on the information available in 4Q press releases, we rank individual malls by sales/m2 and rent/m2, as can be seen in the figures below. Among the top 10 malls in terms of sales/m2 Multiplan stands out, with 6 malls on the list, having the top 3 malls, followed by BR Malls with 3 malls on the list. Regarding rent/m2 Multiplan also has 6 malls on the list, followed by Iguatemi with 3 malls. We would like to highlight Iguatemi Salvador (45% stake Aliansce) sales and rent per m2 as the mall is ranked among the top 5 malls on rent/m2 and among the top 6 on sales/m2.
Figure 13: Sales/m2 Top 10 Malls MULT as 6 names on the list
R$/m 2
Figure 14: Rent/m2 Top 10 Malls MULT has 6 names on the list
R$/m 2
1,738 1,681
1,624 1,599
BR Malls
Aliansce
Aliansce
Multiplan
Iguatemi
116
108
108
100
99
95
Morumbi Shopping
Barra Shopping
Diamond Mall
BH Shopping
Esplanada
Park Barigi
Villa-Lobos
Iguatemi So Paulo
Morumbi
Iguatemi Salvador
Diamond Mall
Barra Shopping
Shopping Recife
Ptio Savassi
BH Shopping
Iguatemi has lower same store sales (SSS) and same store rents (SSR) vs peers as SSS have ranged from -3% to 10% since 1Q08 vs 5% to 15% for BR Malls and Multiplan. On SSR, Multiplan and BR Malls have similar performance while Iguatemis numbers are also lower than peers, though relatively more stable, suffering a lower contraction vs Multiplan during the 1H10 and averaging since 1Q08 8.1% vs 10.2% for BR Malls and 9.3% for Multiplan.
Iguatemi Salvador
Ptio Savassi
11
Anlia Franco
Figure 15: SSS for Iguatemi is on average, since 2008, below Multiplans and BR Malls
20% 15% 10% 5% 0% -5% BR Malls Multiplan Iguatemi
Figure 16: SSR for BR Malls has averaged 10.2% since 1Q08 vs 8.1% for Iguatemi and 9.3% for Multiplan
15% 13% 11% 9% 7% 5% 3% BR Malls Multiplan Iguatemi
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
3Q10
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
BR Malls also stands out by having the lowest occupancy cost as percentage of sales at 10.5% in 1Q11 vs 12.2% and 13.7% from Iguatemi and Multiplan, respectively. Regarding occupancy rates, given the quality of its portfolio Multiplan has the lowest vacancy rates among the large caps, at only 1.6% in 1Q11, based on Multiplan historical information since 1985. Its vacancy rate was as high as 9.3% in 1999. According to our conversations with the companies, vacancy rates above 10% are considering potentially harmful for margins and assets.
Figure 17: Occupancy cost BRML has the lowest level among the 3 companies
17% 15% 13% 11% 9% 7% 5%
1Q07 2Q07 3Q07
BR Malls Iguatemi Multiplan
Figure 18: Occupancy rate All companies have occupancy rates above 95%
100% 98% 96% 94% 92% 90% 88%
BR Malls Iguatemi Multiplan
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
1Q07
2Q07 3Q07
4Q07
1Q08
2Q08
3Q08 4Q08
1Q09
2Q09
3Q09
4Q09 1Q10
2Q10
4Q10
1Q11
1Q11
to our estimates Multiplan will invest R$850mn this year, Iguatemi R$235mn and BR Malls R$1.5bn (75% on acquisitions). We expect leverage to increase in the coming years given large investments by 2013 of more than R$5.0bn for the 3 large caps for the next 3 years. We expect average net debt to equity to be at 1.0x by 2013 for these companies compared to 2.1-2.5x for BR Malls and Aliansce and net cash of 0.6x-1.8x for Multiplan, Iguatemi and SSBR now. While companies will likely announce new projects in the coming years that will require investments post 2013, in our models we are not assuming any further organic or inorganic growth.
Figure 19: Net Debt to EBITDA Companies will start to deleverage in 2013e
3.3x 2.1x 1Q11 3.0x 1.8x 0.3x 0.8x 0.4x 0.4x 1.1x 1.0x 2.5x 2.5x 2.2x 1.4x 0.5x 0.4x (0.3)x (1.8)x BRML MULT IGTA ALSC SSBR 2011 2012 2013
(0.9)x
(0.6)x
Source: J.P. Morgan and company estimates. If we exclude BR Malls US$ debt of around R$670mn as of 1Q11 that is not included in BR Malls covenant, net debt to EBITDA would peak at 2.3x rather than 3.3x in 2011.
Debt cost remains high in Brazil Regarding companies cost of debt, it is worth highlighting that Multiplans cost of debt in 1Q was below Selic at 11.9%, while BR Malls reported a debt cost of 12.5% (IGP-M+6.7%) and Iguatemi had a debt cost of 12.7% (104.1% of CDI). On a company basis we would like to highlight the following: BR Malls has two US dollar perpetual bonds on its balance sheet, totaling US$405mn. The first was issued in 2007 at US$+9.75% totaling US$175mn callable in 2015; given a swap agreement. The second was issued in 2011 at US$+8.5% totaling US$230mn, callable in 2016. Considering the hedges involved in those operations, the cost of debt is around 100% of CDI for the first bond and 99.5% for the second. BR Malls has a diversified debt portfolio, with Taxa Referencial (TR) representing 54% of its total debt. The companys weighted average cost was at around 12.5% in 1Q11, based on the companys IGP-M curve, though IGP-M reached almost 10% in 1Q11. Iguatemis debt is 100% Brazilian, with TR and TJLP (BNDESs long-term interest rate) exposure totaling 40% of Iguatemis debt. Iguatemi is the only large company, among the large caps allowed to raise debt from BNDES linked to TJLP given its shareholder structure (controlled by local players). The company ended 1Q11 with a weighted average cost of debt at 104.1% of CDI, or around 12.7%, and a duration of 3.7 years. Multiplans aggregate cost of debt was below the Selic (12.25%) in 1Q11 at 11.9%, as most of it is linked to TR (48%), with a cost of debt of 10.6%. Multiplans most
13
expensive debt was a 2-year debenture issued on June-2009 at 117% of CDI, totaling R$100mn and representing 19% of Multiplans debt outstanding. This debt will be paid down in June this year.
With higher leverage we could see another 35-65% growth in GLA after 2013
Based on our views and on companies guidance on what could be their maximum leverage, we calculated what could be the additional potential growth post 2013 using companies FCF generation and additional leverage. BR Malls and Multiplan stand out as the companies with higher room for growth, which could reach 66% and 64% of their expected own GLA for 2013, adding another 612k m2 and 399k m2 respectively. For BR Malls maximum leverage, we consider its 3.8x net debt to EBITDA excluding the perpetual bonds.
Table 6: Going forward, BR Malls strong cash generation and Multiplans unleveraged balance sheet should allow superior growth
R$ in millions BR Malls and Multiplan stand out with higher potential own GLA growth after 2013 vs peers, given their unleveraged balance sheets and FFO generation. Leverage Net Debt to EBITDA - 2013 Max leverage* Additional leverage Average Capex/m2 Potential GLA (000 m2) FFO 2013 Average Capex/m2 Potential GLA (000 m2) Total GLA upside (000 m2) as % of 2013e owned GLA BRML 1.2x 3.8x 2,750 5,500 500 618 5,500 112 612 66% MULT 0.4x 2.8x 1,694 5,500 308 498 5,500 90 399 64% IGTA 1.0x 2.8x 576 5,500 105 233 5,500 42 147 35% ALSC 1.4x 3.5x 571 5,500 104 171 5,500 31 135 34% SSBR 0.4x 3.0x 660 5,500 120 184 5,500 34 154 43%
Source: J.P. Morgan estimates, company data. *Excluding US$ perpetual bonds for BR Malls.
2012
2013
406 222
14
years, on the back of significant amortization of goodwill from acquisitions which have totaled R$3.8bn since 2007. In the case of Multiplan the company has a significant amount of deferred taxes, leading to an effective tax rate of around 13% also, or 28% excluding deferred taxes, given goodwill on past acquisitions that should last for the next year or two. For this reason, in our model we consider a reduction in deferred taxes, leading to an effective tax rate of approximately 30%. Iguatemis effective tax rate is around 22%, the highest among the large caps, and we believe its taxes will remain at this level, given its tax structure, as 50% of its structure is based on Lucro Real and 50% on Lucro Pressumido.
Table 7: BR Malls Tax disbursements
R$ in millions BR Malls low effective tax rate is a consequence of the amortization of goodwill on acquisitions. As of 2010 the company still had ~R$279mn to be amortized, representing a tax benefit of approximately R$95mn with 7.5 years duration. BRML Top line taxes Bottom line taxes Taxes Differed Total taxes Total taxes (ex diff.) As % of revenues Total taxes Total taxes (ex diff.) 1Q09 (8) (3) (4) 0 (11) (11) 12.4% 12.9% 2Q09 (8) (8) (8) 0 (17) (17) 16.3% 16.3% 3Q09 (8) 4 4 0 (5) (5) 4.4% 4.4% 4Q09 (12) (431) (5) (426) (443) (17) 313% 12.2% 1Q10 (10) (1) (6) 5 (11) (16) 9.2% 13.5% 2Q10 (11) (10) (10) 0 (21) (21) 15.7% 15.7% 3Q10 (12) (10) (10) 0 (21) (21) 14.9% 14.9% 4Q10 (17) (219) (14) (206) (236) (31) 116% 15.1% 1Q11 (15) 4 (11) 14 (11) (26) 5.7% 13.2%
As of 1Q11 Iguatemi had no goodwill to be amortized. Its tax plan is 50% under Lucro Pressumido and 50% under Lucro Real.
15
Price
5 0
May-09
May-10
May-11 May-11
Mar-09
Jul-09
Mar-10
Jul-10
Mar-11
Sep-09
Nov-09
Sep-10
Nov-10
Jan-09
Jan-10
Aug-09
Oct-09
Dec-09
Feb-10
Aug-10
Oct-10
Dec-10
Feb-11
Jun-09
Jun-10
Source: Bloomberg.
Jun-11
Source: Bloomberg.
Jan-11
Apr-09
Apr-10
Apr-11
Jul-11
15
1.40
1.50
May-09
May-10
Jul-09
Mar-10
Jul-10
Sep-09
Nov-09
Sep-10
Nov-10
Source: Bloomberg.
16
Mar-11
1.30
Jan-10
Jan-11
Not a dividend yield play yet In 2010, BR Malls and Iguatemis net income payout stood at 25%, while Multiplans payout was 50%, representing a dividend yield of almost 2.0%. Despite their lower payout, the dividend yields for BR Malls and Iguatemi were also around 2.0% in 2010. In our models we forecast a payout of 25% for the next 3 years, representing an average dividend yield of around 1.5% in both 2011 and 2012, based on current prices. However we believe this payout should increase as the companies portfolios mature and capex decelerates. Iguatemi stated that from 2011 to 2014 the company will distribute at least R$0.63/share of dividend and/or interest on own capital, representing a yield of more than 1.5% based on current prices.
32 23
22.7
6.0
10 5
10
2007
2008
2009
2010
2011*
BRML3
MULT3
IGUA3
SSBR3
ALSC3
17
2.1
Brazilian mall companies trade around 0.3-0.6% of their free float daily vs 1.0-2.0% from Brazilian homebuilders and less than 0.5% for Petrobras and Vale.
1.9
0.2
0.1
IGTA
18
Figure 27: Malls relative to Ibov Peaks and troughs (Feb-2007 = 100)
BZ Malls
Since 2007 the sector has outperformed the Ibovespa by more than 100pp, and most of the companies are trading above their IPO prices. BR Malls is 134% above its IPO price, Multiplan +34%, Iguatemi +17%, Aliansce +55% and SSBR +19%. GSB is the only company below its IPO price, down 9%.
IBOV
230
180
130
80
Table 11: Malls vs Ibov During bear markets, the sector outperformed by 5pp on average
Period Mar/Jul 07 Jul/Aug 07 Aug/Nov 07 Nov/Jan 08 Jan/May 08 May/Nov 08 Nov/Apr 10 Apr/Jul 10 Jul/Nov 10 Nov/Now Avg. Malls 46% -13% 15% -27% 17% -57% 260% 1% 50% -6% IBOV 41% -17% 35% -17% 37% -57% 130% -18% 23% -18% Relative performance 5pp 4pp (20)pp (10)pp (20)pp 0pp 130pp 18pp 27pp 12pp Bear market 4pp (20)pp (10)pp (20)pp 0pp 130pp 18pp 27pp 12pp 5pp 24pp Bull market 5pp
In the table below, we can see the mall operators performance since each IPO and follow-on offer in the segment. Since 2007 weve had 6 IPOs and 5 follow-ons, totaling more than R$5bn (~US$3bn) raised. Stocks outperformed the IBOV by 34pp on average, with BR Malls outperforming the sector most of the time.
Table 12: Sector stocks relative performance after IPOs and Follow-ons
Date 6-Feb-07 3-Apr-07 26-Jul-07 26-Jul-07 18-Oct-07 1-Jul-09 24-Sep-09 22-Oct-09 27-Jan-10 2-Feb-11 10-May-11 BRML NA 134% 49% 49% 37% 130% 70% 65% 67% 19% 2% Stocks performance MULT IGTA NA 17% NA 10% 34% 12% 34% 12% 37% 25% 69% 90% 24% 32% 14% 21% 11% 21% 8% -3% -3% -13% IBOV 32% 29% 11% 11% -6% 16% -1% -10% -8% -11% -8% Outperformance vs IBOV BRML MULT IGTA NA NA (15)pp 105 pp NA (19)pp 38 pp 23 pp 1 pp 38 pp 23 pp 1 pp 43 pp 42 pp 31 pp 114 pp 53 pp 74 pp 71 pp 25 pp 33 pp 75 pp 24 pp 30 pp 76 pp 20 pp 29 pp 29 pp 19 pp 8 pp 10 pp 5 pp (5)pp
Malls have outperformed the IBOV by 34pp on average or 21pp excluding BR Malls that outperformed its peers by 39pp on average, pushing the sector performance given its superior market cap.
IGTA IPO BRML IPO MULT IPO GSHP IPO BRML Follow-on BRML Follow-on MUTL Follow-on IGTA Follow-on ALSC IPO SSBR IPO BRML Follow -on
Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11
19
30
BR Malls and Multiplan performance has been relatively similar since 2008, with stocks up 50-60% and outperforming the Ibovespa by 60-70pp, however, BR Malls has outperformed the segment since 2010, up 63% vs 3% from Iguatemi and 3% for Multiplan.
Figure 28: Stock performance has been very close since 2008 . . . .
250 200 150 100 50 0 Apr-08 Jul-08 Oct-08 Apr-09 Jul-09 Oct-09 Apr-10 Jul-10 Oct-10 Jan-08 Jan-09 Jan-10 Jan-11 Apr-11
BRML MULT IGTA IBOV
BRML
MULT
IGTA
IBOV
Table 13: Stocks are trading 12-49% above their 52-week lows.
BRML Price performance Current price 52 weeks High 52 weeks Low vs HIGH vs LOW Performance 2009 2010 YTD 17.53 19.45 11.95 -10% 47% 136% 59% 5% MULT 33.50 40.75 30.00 -18% 12% 164% 14% -8% IGTA 35.00 44.00 31.16 -20% 12% 162% 22% -17% ALSC 13.94 14.55 11.15 -4% 25% NA 52% 0% SSBR 23.81 26.05 19.45 -9% 22% NA NA 19% GSHP 12.65 13.43 8.50 -6% 49% 277% 53% 1% IBOV 59,679 72,996 59,679 -18% 0% 83% 1% -15% IMOB 837 1,144 836 -27% 0% 205% 10% -19%
Although companies are trading 4-20% below their 52-week highs, they are outperforming the IBOV, year to date, by 6pp on average.
Malls have also outperformed traditional defensive sectors such as telcos and utilities, based on the Bloomberg benchmark indexes for those segments, ITEL Index and IBOVIEE Index respectively. As can be seen in the figures below, since 2007 malls have outperformed telcos and utilities by 65pp and 21pp respectively.
Figure 30: Malls performance since 2007 vs Telcos and Utilities
300 250 200 150 100 50 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 0 Malls Utilities Telco IBOV
20
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11
70
4%
May-04
Mar-03
Oct-03
Dec-04
Jul-05
Feb-06
Sep-06
Apr-07
Nov-07
Aug-09
Mar-10
Jun-08
Jan-09
Oct-10
Source: IBGE.
Source: Bloomberg.
Apr-03
Jul-04
Oct-05
Apr-08
Jul-09
Jan-02
Jun-02
Jan-07
Jun-07
Oct-10
Regional consumer analysis Brazil secular growth in consumption is based on: i) Consumer credit growth, which has being growing above 10% since Jan-2010, reaching R$164bn in May vs only R$38bn in May-04, representing a CAGR of almost 30%; ii) Decrease in unemployment rates, 6.4% as of May; and iii) Market formalization, with 52% of occupied individuals having formal jobs, on average, for the large cities, vs 44% in 2002. Although IBGE does not provide aggregate information regarding labor markets by region, looking to the main states of each region we can see that real wage growth in Rio de Janeiro and Recife grew 16% and 11% in the last 36 months.
Figure 35: Real Wage growth Selected cities
Percentage
36M Growth 24M Growth 12M Growth 7.2 6.2 5.3 1.5 (1.0) (0.5) Porto Alegre So Paulo
55 52
56 54 53 49
Apr-11
Apr-10
Apr-09
8.7
50 48 45 47 47
49 44
43
Rio de Janeiro
Salvador
Recife
Porto Alegre
So Paulo
Rio de Janeiro
Salvador
Recife
Retail sales North and Northeast posting superior growth In the last 36 months, retail sales in Brazil have increased significantly. Northern and Northeastern retail sales increased 38% and 35% respectively, above the national average of 27%. The higher growth in the North and Northeast could be partially explained by government social programs such as Bolsa Famlia and other conditional cash transfer programs that were mainly focused on the North and Northeast. However, in the past 12 months, the South posted the second-strongest growth in retail sales, at 9.4% behind only the Northeast.
Figure 37: Retail Sales growth by region
Percentage
41.2
South
Source: Central Bank of Brazil.
Southeast
Mid West
22
Is this growth sustainable? The regions with higher retail growth are also the regions with higher delinquency ratios for loans to individuals. As of April 2011, the Northern and Northeastern regions had respectively 4.7% and 4.6% nonperforming loans (NPLs) for loans to individuals versus 3.8% in the Southeast and Mid-West and 3.1% in the South. However, we note that NPLs have been decreasing and getting close to the lowest levels since October 2008.
Figure 38: Delinquency Loans to Individuals are higher in Regions with higher Retail growth
10 9 8 7 6 5 4 3 2 South Southeast Mid West Northeast North
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
May-04
May-05
May-06
May-07
May-08
May-09
May-10
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
In addition, malls continue to capture a higher percentage of retail consumption as the sales growth in malls is running above traditional retail sales by around 4pp over the last 5 years, reaching 17% in 2010 vs 11% from traditional retail. In 2010, according to company releases, same store sales (SSS) ranged from 7% to 14% while SSS for retailers were at 6-10%. In 1Q11 companies reported 5-10% SSS yoy, with Aliansce and SSBR at the top of the range with 10.2% and 9.8% respectively.
Figure 39: Sales growth Shopping Malls vs Traditional Retail
Retail 13% 9% 5% Shopping Malls 15% 9% 6% 10% 10% 16% 9% 11% 6% 10% 11% 17%
-4% 2003
Source: Multiplan.
2004
2005
2006
2007
2008
2009
Resilient sector The sector has also proved to be resilient during crises, as can be observed in the figure below. During the credit crisis of 2008-09, when average GDP growth was at 2.4%, sales grew 10%. Another good example is the Russian crisis and the real depreciation (1998-2000); in that period, GDP growth averaged 1.5%, with the average Selic over 21%. But mall sales grew 20%.
Sep-10
2010
Jan-11
23
Avg. inflation (1995-2009): 7.6% Avg. GDP (1995-2009): 2.9% Sales CAGR (1995-2009): 15.0%
23 26 32 36 42 46 58 50
65
71
10
12
14
16
18
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Mexican Crisis (94) & Asian Crisis (97) Avg. GDP (95-97): 3.3% Avg. Inflation (95-97 ): 12.4% Avg. Int. rate (95-97): 34.5% Sales growth (95-97): 18.3%
Source: BR Malls and J.P. Morgan estimates.
Russian Crisis (98) & Real Depreciation (99) Avg. GDP (98-00): 1.5% Avg. Inflation (98-00): 5.5% Avg. Int. rate (98-00): 21.3% Sales growth (98-00): 20.0%
2002 Crisis Lula Election Avg. GDP (03-05): 3.3% Avg. Inflation (03-05): 7.5% Avg. Int. rate (03-05): 17.4% Sales growth (03-05): 12.0%
Sub prime Crisis (2008 and on) Avg. GDP (08-09): 2.4% Avg. Inflation (08-09): 5.1% Avg. Int. rate (08-09): 11.2% Sales growth (08-09): 9.9%
24
Sector Valuation
Not a bargain, but potential upside remains attractive In aggregate terms, including 5 of the 6 listed companies (there is no consensus for General Shopping), malls are trading at 16.0x P/FFO 12 months forward, a 16% discount to the peak (excluding the credit crisis period) reached on Nov-10, when the sector was trading at 19.1x and at a 1% premium to its average multiple since 2010. In terms of FFO yield, the sector is trading at 6.3%, 100bps above its low. During the credit crisis malls traded as low as 4.1x P/FFO in Oct-08. From a company perspective, at the bottom of the range we have SSBR trading at 13.9x and at the top BR Malls at 17.7x.
Figure 41: Historical P/FFO Since 2010
20 19 18 17 16 15 14 13 12
Avg 10-Now Jan-10 Nov-10 May-10 Jan-11 May-11 Mar-10 Jul-10 Mar-11 Sep-10 Jul-11
Mar-10
Jul-10
Mar-11
Jan-10
Sep-10
Nov-10
While BR Malls has traded at a premium to its historical multiple since 2010, Multiplan and Iguatemi are trading at small discounts: In the charts below we compare companies historical FFO multiples and yields based on their 12 months forward figures. While BR Malls has traded at a premium of 8% to its average multiple since 2010, Multiplan is in line with its average at 14.9x, and Iguatemi is trading at a discount of 8%. In our view, BR Malls premium is warranted by the companys superior execution and higher growth.
Figure 43: BR Malls Historical P/FFO
21 20 19 18 17 16 15 14 13 12 Avg 10-Now
Jan-10
Nov-10
May-10
Jan-11
May-11
Mar-10
Jul-10
Mar-11
Sep-10
Jul-11
Jan-10
Nov-10
May-10
Mar-10
Jan-11
Jul-10
Mar-11
Sep-10
Jul-11
25
4.5%
Jan-11
Jul-11
May-10
Nov-10
Jan-10
Jan-11
May-11 May-11
Mar-10
Jul-10
Mar-11
Sep-10
May-10
Nov-10
Jan-10
Mar-10
Jan-11
Jul-10
Mar-11
26
Sep-10
Jul-11
Jul-11
Sector risks
Figure 49: Real GDP growth
Percentage
7.5
Deceleration/acceleration in consumer and domestic growth Given the structure of rent contracts, a deceleration/acceleration in consumption growth and/or domestic GDP can affect companies, influencing rent readjustment and affecting our growth forecasts. Higher- or lower-than-expected inflation While malls provide a hedge against inflation given their rent contracts, which are adjusted annually by inflation, high/low inflation can impact consumption and domestic growth, impacting consumers disposable income and therefore impacting occupancy rates and reducing/increasing same store sales and margins. Higher(lower)-than-expected inflation can also lead to higher- (lower)-than-expected interest rates slowing down/speeding up economic growth. Higher- or lower-than-expected returns from greenfields, expansions, acquisitions Although we have a conservative approach in our models, we rely on company estimates regarding capex, expected rents, opening schedules and project returns. It is important to flag that lower- or higher-than-expected construction and/or financial costs, delays in or faster-than-expected mall openings and higher- or lower-thanexpected rents can impact our estimates and companys returns. Acquisitions are, in our view, the most difficult item to forecast given all the uncertainties related to pricing and timing of transactions, and, given the difficulties in forecasting this item, we are not incorporating any expansion of GLA through acquisitions for Iguatemi and Multiplan but some for BR Malls given the companys premium execution. Higher- or lower-than-expected interest rates Although on the leverage side the impact from higher interest rates is limited as part of each companys debt is linked to TR (Taxa Referencial), which has a small correlation with the Selic, it can impact consumption and GDP growth for better or worse. Currently our economists forecast a year-end Selic of 12.75% vs 12.25% currently; for end-2012, we expect the Selic at 12.75%. Higher interest rates increase the attractiveness of fixed income assets such as government bonds. E-commerce may take retail market share from malls Despite being an underpenetrated market in Brazil, with an average of 49m2 in total GLA for each 1,000 inhabitants vs 81m2 for Mexico and 2,180m2 for the US, companies can lose market share to E-commerce given the services offered by those companies and the agility with which they allow consumers to compare prices. Change in rent contract structure Any change to the current contract structure can impact the expected return on future and current malls. In our view, these changes could include the removal of the step up clauses and the percentage-of-sales rent. Mismatch between demand and supply Though we dont expect a short-term mismatch between demand and supply of GLA, an excess of GLA can impact companies bargaining power and, consequently, the amount of key money received, impacting the future returns. An imbalance could also cause a reduction in expected rents. Too little GLA could enhance returns.
27
4.0
3.8
(0.2) 2009
2010
2011E
2012E
5.9 4.3
6.5 5.0
2009
2010
2011E
2012E
12.8
2009
2010
2011E
2012E
Company Snapshots
BR Malls
Ready to keep growing. Premium execution. Initiate at Overweight We initiate coverage of BR Malls with an Overweight rating and a Dec-12 price target of R$24.00/share, based on DCF valuation and representing potential upside of 39% from current levels despite the strong YTD performance of +3% vs -15% from IBOV. The company has a portfolio of 40 malls, mostly focused on economic classes B and C, with 634k m2 of owned GLA. BR Malls is the most diversified player in the sector, present in all the regions. The company has the best margins in the sector, reporting an EBITDA margin of 78.3% in 2010, and the best track record regarding acquisitions, which have totaled R$3.8bn since its IPO, with 33 transactions at an average cap rate of 10.3%. BR Malls is our top pick among the large caps. Strong execution: In our view BR Malls has one of the best execution capabilities in the sector given its superior margins. In 1Q11 the company reported a 78.2% EBITDA margin, 18pp and 13pp above Iguatemi and Multiplan respectively. In addition, BR Malls has multiplied its GLA 4x since 2006 vs increases of 20-150% from peers. We also expect BR Malls to have the highest FFO in the sector by 2013, with more than R$600mn giving it resources to keep growing ahead of peers. Consolidation player: Although BR Malls also has exposure to greenfields, expansions and multiuse projects, we believe the main growth drivers for the company are acquisitions, and given BR Malls track record and Brazils fragmented industry, we feel comfortable with our estimates, even considering the pipeline of R$1.9bn to be invested in the next 2 years. Leverage is not an issue: We dont expect BR Malls leverage to be a bottleneck for future growth given its strong cash generation by 2013 and comfortable leverage as we expect net debt to EBITDA to pick up to 3.3x by year end, or 2.3x if we exclude the perpetual bond not included in the BR Malls covenant. Considering BR Malls cash generation by 2013 and its leverage levels, we believe the company can add up to 600k m2 to its own GLA by 2013, an increase of 66%, based on an average capex of R$5.5k/m2. Liquidity: BR Malls is the most liquid name to play the sector, trading more than US$20mn daily vs US$3-6mn from peers. BR Malls liquidity is helped by its 100% free float and by its 3 follow-ons that amounted to R$1.6bn. Valuation: Even though BR Malls trades at a premium to the other large caps of 510 % at 15.7x P/FFO 2012e, we believe this is justified by its higher projected growth as we expect the company to report growth of 51% in revenues this year and 36% in 2012 vs 7% and 20% from Iguatemi and Multiplan respectively. Risks: The main risks to our price target and OW rating for BR Malls, in addition to changes in the macroeconomic scenario that would impact mall performance (such as higher-than-expected interest rates and GDP contraction) are delays and lower-thanexpected returns on acquisitions, which represent more than 70% of our estimated capex for the next 2 years.
28
Multiplan
Multiple growth opportunities but limited upside. Initiate with Neutral We initiate coverage of Multiplan with a Neutral rating and a Dec-12 price target of R$43.00/share, based on DCF valuation, representing potential upside of 29% from current levels. The company has a portfolio of 13malls, with 372k m2 of owned GLA, concentrated in the South and Southeast regions (10 of 13 malls) and focused on the higher-income classes. Multiplan has the best assets in the market, with 6 malls between the top-10 in rent and sales/m2. The company also has significant exposure to multiuse projects that will represent an additional 92k m2 in own GLA. Multiplan trades at 15.0x P/FFO 12e a vs 14.1x for Iguatemi and 15.7x for BR Malls. On a relative basis, it is our least-preferred Neutral stock given its exposure to multiuse projects Premium portfolio: Based on the information released by listed companies in their 4Q10 releases, in terms of sales/m2, Multiplan has 6 malls in the top-10 list with Shopping at the top of the list with R$1.7k/m2, followed by Diamond Mall and Barra Shopping. In terms of rent/m2 Multiplan also has 6 malls on the top-10 list, with Shopping Iguatemi So Paulo on top of the list and Shopping Morumbi in the 2nd position, followed by Barra Shopping and Diamond Mall. Strong balance sheet: Even though we expect Multiplan to end 2011 with a net debt position, the company ended the 1Q11 with net cash of R$382mn, or -0.9x net debt to EBITDA, the lowest leverage level among peers. According to our estimates and considering capex of R$1.5bn, leverage should peak at 0.8x net debt to EBITDA in 2012e. Moreover, considering the companys leverage in 2013e and its significant cash generation, Multiplan could add up to 400k m2 in own GLA that year, representing a 64% increase to its own GLA in 2013. Multiuse company: Multiplans exposure to multiuse projects is noteworthy given the companys potential land bank of more than 500k m2. Multiplan will invest more than R$530mn into multiuse projects over the next years R$500mn on commercial towers for rent, totaling own GLA of 92k m2, and R$30mn on projects to be sold, Cristal Tower and Centro Profissional Ribeiro, which are almost completely sold, generating a potential sales value (PSV) of R$145mn to Multiplan. It is important to flag that in our estimates we are not incorporating any value from projects to be developed from this land bank. Although we believe multiuse projects represent potential upside to our estimates, those projects, especially the one for sale, could result in lower-than-expected margins, given the risks involved in construction, leading to lower-than-expected results. Valuation: Multiplan is trading at a premium to Iguatemi of 6% and at a 5% discount to BR Malls at 15.0x P/FFO 2012e. In our view, the premium to Iguatemi is not warranted given similar growth and higher execution risk from multiuse projects. Risks: The main upside risk to our estimates for Multiplan is higher-than-expected GLA expansion given the companys strong balance sheet, as in our estimates we consider only projects already announced by the company. On the other hand, lowerthan-expected margins and/or lower-than-expected returns on greenfields and multiuse projects are the main downside risks to our estimates.
29
Iguatemi
Strong pipeline of new projects fairly valued. Initiate with Neutral We are initiating coverage of Iguatemi with a Neutral rating and a Dec-12 price target of R$49.00/share, based on DCF valuation and representing potential upside of 40% from current levels. The company has a portfolio of 13 malls, with 238 m2 of owned GLA, concentrated in the state of So Paulo (9 malls) and in the South region (4 malls), focused on the middle- and higher-income segments. The companys portfolio also includes 2 commercial towers totaling GLA of 29k m2. Iguatemi is our preferred Neutral-rated stock given what we see as its relatively higher potential upside and lower execution risks. The company holds a 51% stake in Shopping Iguatemi So Paulo, the first mall opened in the country in 1966, and has the highest rent/m2 in the country at around R$210/m2. The company is trading at 15.7x P/FFO 2012e, a 5-11% discount to Multiplan and BR Malls. Greenfields are main driver: Iguatemi will add more than 169k m2 in own GLA over the next years, through 6 greenfields, including Shopping Iguatemi Alphaville, opened on April with a 95% occupancy rate. The company has the largest pipeline of greenfield projects among the listed companies. Iguatemi expansion will continue to focus on the wealthiest regions of the state of So Paulo, such as Ribeiro, Jundia and So Jos do Rio Preto. We also recognize Iguatemi has a differentiated relationship with international brands vs peers and premium services in its malls, given its focus on higher-income segments. In our estimates we are not including an additional 100k m2 scheduled to be opened by 2014 in order to reach company guidance of 520k m2 in own GLA by 2014. Strong balance sheet supports future growth: We expect Iguatemi to invest more than R$940mn over the next 3 years; however, given the companys comfortable balance sheet, with a net cash position of R$98mn as of 1Q11, leverage should peak at 1.1x net debt to EBITDA by 2012, in our view, leaving room for additional GLA growth. According to our estimates, based on Iguatemis 2013e leverage and its FFO generation, the company has the potential to add up to 150k m2 in own GLA that year, representing a 35% increase to its own GLA in 2013e. In addition to greenfields, Iguatemi issued at the beginning of this year a R$330mn debenture, expected to be invested in opportunistic acquisitions not included in our estimates. YTD the company has already invested R$12mn for acquisition of a small stake in Shopping Esplanada. Valuation and rating: Iguatemi trades at 14.1xP/FFO 2012e, a 6% discount to Multiplan and a 10% discount vs BR Malls. It is our preferred Neutral-rated stock after Aliansce given the relatively higher potential upside and cheaper valuation, though we recognize investors are concerned about Iguatemis execution capacity given the companys delay on greenfield projects such as Shopping JK. However, we believe its execution risks are lower than Multiplans given its lower exposure to multiuse projects. Risks: The main risks to our price target and Neutral rating on Iguatemi in addition to potential changes in the macroeconomic scenario that would impact mall performance, such as higher-than-expected interest rates and GDP contraction are higher-than-expected costs and/or delays on greenfield projects.
30
BR Malls
Ready to keep growing with premium execution. We initiate with an Overweight rating and 39% potential upside
Overweight
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 17.21 15 Jul 11 19.69 - 11.07 7,733.90 Dec 449 24.00 31 Dec 12 BR Malls (BRML3.SA;BRML3 BZ) FYE Dec EPS Reported (R$) FY EPS Reported FY (R$) Revenues FY (R$ mn) EBITDA FY (R$ mn) Net Income - GAAP FY (R$ mn) Bloomberg EPS FY (R$) 2010A 0.66 0.66 546 428 495 0.67 2011E 0.83 0.83 827 656 374 0.82 2012E 1.06 1.06 1,121 895 476 1.11 2013E 1.33 1.33 1,322 1,057 599 1.35
We are initiating coverage of BR Malls with an Overweight rating and a Dec-12 DCF-based price target of R$24.00/share, which represents potential upside of 39%. The company has the largest portfolio, with 40 malls and 634k m2 of owned GLA. It is also the most diversified player, with presence in all the regions and 12% market share. Moreover, BR Malls has the best margins and the best track record, having grown its total GLA more than 4x in the last 4 years vs 0.2-1.5x for peers. We see BR Malls as the main consolidator, investing close to R$2.0bn in acquisitions in the next 2 years. Since its IPO, BR Malls has invested R$3.8bn in acquisitions in 33 deals. BR Malls is our top pick among the large caps despite its relatively higher multiples as we believe they are justified by lower execution risk and higher growth.
Investment Thesis
Solid track record behind, strong pipeline ahead We expect BR Malls to continue to grow aggressively, adding 300k m2 in own GLA over the next 3 years and growing its GLA by 60% in the period through acquisitions, greenfields and expansions, with 60% of this volume represented by acquisitions assuming an entry cap rate of 10%, in line with past acquisitions. For 2011 we expect an additional investment of R$1.9mn in this line.
Figure 52: Expansion pipeline (owned GLA in 000 m2)
BR Malls expects to open 1 greenfield this year and 2 in 2012. The company also has announced 8 expansions of existing malls for the coming 2 years. Including acquisitions, we believe BR Malls could have a market share of 15% by 2013.
906
30
935
Acquisiton
Greenfields
Expansions
Expansions
Greenfields
Acquisiton
Expansions
2011E
2012E
2013E
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1Q11
BR Malls has the largest track record of acquisitions, with 33 transactions over the last 4 years for R$3.8bn. During this period entry cap rates were between 8.5% and 11.6%. During its 2010 BR Malls day, the company stated that there are 75 malls that could be potential targets for BR Malls, totaling potential investment of R$18bn.
Figure 53: Capex on Acquisitions Solid track record
R$mn Cap rate
11.6%
Since 2007 BR Malls has acquired stakes in 33 malls at entry cap rates of 8.5% to 11.6%, investing more than R$3.8bn in the period.
1,301
394 10.3%
3,800
1,507
366 8.5%
232
9.9%
9.6%
GLA m2 BR Malls 100% 3,811 5,515 11,517 11,517 7,668 15,336 4,297 10,852 2,344 7,538 4,344 8,688 6,031 7,231 2,172 2,172 42,184 68,849 25,178 41,963 21,790 36,317 25,403 42,338 72,371 120,618 37,810 39,800 39,800 39,800 40,742 40,742 17,015 17,015 17,015 17,015 17,015 17,015 17,015 17,015 148,602 148,602
% Part. 69% 100% 50% 40% 31% 50% 83% 100% 61.3% 60% 60% 60% 60.0% 95% 100% 100% 100% 100% 100% 100% 100.0%
Opening 4Q11 2013 2013 2012 2012 2013 2013 2012 4Q11 1Q12 4Q12 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Although BR Malls also has exposure to multiuse investments, in our numbers we are not considering the R$167mn expected to be obtained from those projects over the next 5 years. Successful cases In the figures below, from a BR Malls presentation, the company shows for selected projects the entry cap rate and the current cap rate, based on 2010 NOI. In most cases BR Malls suppressed its minimum threshold required of 12% after 3 years. Although the entry cap rate is below 10% for the select cases, it is important to focus on the returns obtained by the company, given BR Malls ability to improve mall results.
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That upside and improvement are part of the companys expertise and include: i) Revenue increases, given its relationship with retailers negotiating with national advertisers and merchandising campaigns, reductions in vacancy rates, contract renewals, among others; ii) Cost reduction, given economies of scale when hiring third parties and services; and iii) Cost synergies on the back of centralization of back office operations.
Figure 54: NOI growth for selected Malls
+61%
65
41
+58% +95%
34
13
21 12
24 16
12.0%
11.9% 12.2%
7.4% 2007 2010 2007 2010 2008 2010 2007 2010 2007 2010 2007 2010
Plaza Niteri
Source: Company data.
Estao
Campinas
Tambor
Plaza Niteri
Estao
Campinas
Tambor
Attractive acquisition prices As can be seen in the table below, cap rates (net operating income or NOI/enterprise value) in Brazil remained constant over the last 12-18 months (above 10%) despite all the money raised by companies in this period, more than R$3bn (5 follow-ons and 2 IPOs), which could have led to a compression in cap rates given higher competition. Although Aliansce and Sonae Sierra Brasil have invested in acquisitions in the past, we consider BR Malls to be the company with the highest expertise in this type of transaction (it acquired more than R$1.0bn during 2010). Based on select BR Malls acquisitions, the IRRs of acquisitions were at 16.1% real and unleveraged vs the companys initial expectation of 13.4%, given better-than-expected revenue growth and cost reductions.
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Source: Company reports. * Based on NOI post improvements, usually reached in 2-3 years.
Worst-case scenario, no additional acquisitions: The FFO multiple is not very sensitive to acquisitions as fewer-than-expected acquisitions would have a positive impact on financial results. According to our estimates, considering no acquisitions, BR Malls price target would be R$22/share, which implies the company will be able to generate R$2/share investing its follow-on proceeds (R$716mn) at an entry cap rate of 10%. Lower-than-expected cap rates: We ran a sensitivity analysis, considering that acquisitions would happen at an entry cap rate of 9% instead of the companys guided rate of 10%. According to our estimates, this reduction of 1.0pp in the entry cap rate would mean a R$1.00 reduction in our price target to R$23.00. Comfortable balance sheet to support acquisitions Although BR Malls leverage is above industry average, we see this as a good bad thing, as in our view the company is making full use of its balance sheet, without compromising liquidity, having funded its above-average growth in the last 3 years. After it raised R$731mn in its follow-on offer concluded in May this year, the company reduced its net debt to EBITDA by 1.2pp to 2.1x. According to our estimates, BR Malls' leverage should peak at 3.3x net debt to EBITDA, or 2.3x excluding its US$ perpetual bond, in 2011, significantly below its covenant of 3.8x. Based on our calculations, this comfortable leverage position leaves room for BR Malls to add over R$2.8bn in debt by 2013 before reaching its covenant, and this in turn represents a potential additional 600k m2 in own GLA, representing a 66% increase in BR Malls own GLA by in 2013. In the table below we provide the breakdown of BR Malls leverage. We believe it is worth mentioning its US$-linked debt, which represents 26% of its debt portfolio. The company has two US dollar perpetual bonds on its balance sheet, totaling US$405mn. The first was issued in 2007 at US$+9.75%, totaling US$175mn callable in 2015; given a swap agreement. The second was issued in 2011 at US$+8.5%,
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totaling US$230mn callable in 2016. Considering the hedges involved in those operations, the cost of debt is around 100% of CDI for the first bond and 99.5% for the second. BR Malls has a diversified debt portfolio, with TR (Taxa Referencial) representing 54% of its total debt. The companys weighted average cost of debt was 12.5% in 1Q11.
Table 20: BR Malls debt structure as of 1Q11 Figure 56: Debt profile as of 1Q11
Unibanco - CCB Ita - CCB Ita - CRI Debentures Debentures HSBC - Finame Santander Santander Ita Ita Banco do Brasil - Finame Bradesco - Finame Banco do Brasil Foreign currency Total Current Unibanco - CCB Ita - CCB Ita - CRI Bradesco Bradesco Debentures Debentures Santander Santander Ita Ita Bradesco - Finame Banco do Brasil Finame Banco do Brasil Foreign currency Total Non-current Total Debt
Source: Company reports.
26%
Due date Feb-19 Feb-19 Mar-20 Jul-14 Jul-16 Feb-12 Oct-19 Dec-19 Oct-21 Feb-23 Aug-12 Jun-12 May-13 Feb-19 Feb-19 Feb-20 Mar-25 Jun-22 Jul-14 Jul-16 Oct-19 43820 Oct-21 Feb-23 Nov-12 Nov-14 May-13
Index IGP-M IGP-M TR CDI IPCA TJLP TR TR TR TR TJLP TJLP DI USD IGP-M IGP-M TR TR TR DI IPCA TR TR TR TR TJLP TJLP DI USD
Rate per year 9.7% 9.8% 10.2% 0.5% 7.9% 3.7% 11.0% 10.0% 11.2% 11.0% 3.8% 4.0% 2.9% 9.7% 9.8% 10.2% 10.7% 9.8% 0.5% 7.9% 11.0% 10.0% 11.2% 11.0% 3,7% a.a. 4.5% 2.9%
BR Malls debt includes 2 perpetual bonds, totaling US$405mn, for which it pays around 100% of CDI including hedges and swaps.
Amount 13 14 66 5 18 0 5 2 5 3 3 1 3 10 148 56 72 440 504 36 15 330 88 28 104 133 0 6 2 661 2,476 2,624
% of total 0.5% 0.6% 2.5% 0.2% 0.7% 0.0% 0.2% 0.1% 0.2% 0.1% 0.1% 0.0% 0.1% 0.4% 5.6% 2.1% 2.8% 16.8% 19.2% 1.4% 0.6% 12.6% 3.4% 1.1% 3.9% 5.1% 0.0% 0.2% 0.1% 25.2% 94.4%
35
861
239
231
231
150
151
142
94
76
69 2022 2023+
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Liquidity of more than US$20mn daily BR Malls is the most liquid name in the segment, trading approximately US$20mn daily, more than 4x peers, which trade around US$2-5mn daily. The superior liquidity is explained by its superior free float, technically 100%, or 74.3% if we exclude the 4 largest shareholders, and its 3 follow-on offers, which amounted R$1.6bn, moreover. The company trades 0.6% of its free float daily vs 0.3-0.5% from peers.
Figure 58: BR Malls liquidity is 4x above peers
R$ in millions
23.5
BRML3
MULT3
IGUA3
ALSC3
SSBR3
GSHP3
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7.5
Acquisitions are the main downside risk: Even though the company has a significant and positive track record in M&A transactions, we cannot predict either the implied cap rate on acquisitions or the time and returns on those projects. In our model we assume the company will invest R$1.9bn in acquisitions over the next 2 years at a 10% cap rate.
3.8
4.0
Deceleration in consumer and domestic growth can impact future growth Given the structure of rent contracts, a deceleration in consumption growth and/or domestic GDP can affect BR Malls, influencing rent readjustment and affecting our growth forecast. Higher-than-expected inflation can hurt consumption While malls provide a hedge against inflation given their rent contract structure, in which contracts are annually adjusted by inflation, high inflation can impact consumption and domestic growth, impacting consumers disposable income and thereby impacting occupancy rates and reducing same store sales and margins. Higher-than-expected inflation can also lead to higher-than-expected interest rates slowing down economic growth. Expected returns on greenfields, expansions and acquisitions might be lower than expected Although we have a conservative approach in our models, we rely on company estimates regarding capex, expected rents, opening schedules and project returns. It is important to flag that higher-than-expected construction and/or financial costs, delays in mall opening and lower-than-expected rents can impact our estimates and the companys returns. BR Malls is the only company for which we include acquisitions in our estimates, given its track record. Even though execution risks are reduced on acquisitions vs greenfields, we recognize there are some uncertainties related to pricing and timing on those transactions that make it difficult to forecast the contribution of this line to our results. Higher-than-expected interest rates Although on the leverage side the impact from higher interest rates is limited as part of companys debt is linked to TR (Taxa Referencial), which has a small correlation with the Selic, it can impact consumption and GDP growth. Currently our economists forecast a year-end Selic of 12.75% vs 12.25% currently; for 2012 we expect the Selic to be at 12.75%. Higher interest rates increase the attractiveness of fixed income assets such as government bonds. E-commerce may take retail market share from malls Despite being an under penetrated market in Brazil, with average of 49m2 in total GLA for each 1,000 inhabitants vs 81m2 for Mexico and 2,180m2 for a developed market like the US, companies can lose market share to E-commerce given the services offered by those companies and the agility with which they allow customers to compare prices on line.
(0.2) 2009
2010
2011E
2012E
5.9 4.3
6.5 5.0
2009
2010
2011E
2012E
12.8
2009
2010
2011E
2012E
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Change in rent contract structure Any change to the contract structure can impact the expected return on future and current malls. In our view these changes could include the removal of the step up clauses and the percentage-of-sales rent. Mismatch between demand and supply Although we dont expect a short-term mismatch between demand and supply of GLA, an excess of GLA could impact BR Malls bargaining power and, consequently, the amount of key money received, thereby impacting future returns. Furthermore, an imbalance can cause a reduction in expected rents.
Company Description
BR Malls is the largest integrated shopping mall company in Brazil. Its portfolio of 40 malls comprises 1.2mn m of total GLA, of which 634k m2 are owned, for average participation of 52.0%. The company has the best geographic distribution in the sector, present in all regions and in 15 states. BR Malls also has the best margins in the segment, reporting an EBITDA margin of 78.3% in 2010. The growth drivers of the company are acquisitions, greenfields and expansions. The company has a proven track record in acquisitions, having invested R$3.8bn in them since 2007, in 33 transactions.
Financial Outlook
We expect BR Malls 2011 FFO (adjusted by properties fair value) to grow 34% (+29% next year) on the back of a 51% increase in revenues (+31% in GLA) that will come mainly from the opening of 2 expansions, Tambore and Campo Grande, and 2 greenfields, Via Brasil and Mooca. In 2012, we expect a 36% expansion in revenues, given the opening of the expansion of Osasco, Recife and Norteshopping as well as the opening of Estao BH and So Bernardo greenfields. We expect the EBITDA margin to expand 110bps in 2011 and 40bps in 2012 to reach 79.8%, on the back of higher dilution of cash COGS and G&A. We expect cash COGS to represent 10.0% of revenues in 2011, a small improvement vs 1Q11 and 2010. In 2012 we expect a further dilution, with cash COGS representing 9.5% of revenues. We also consider a dilution in G&A that should represent 9.2% of revenues this year vs 9.9% in 2010. In the long term, we expect BR Malls to have an 80% EBITDA margin.
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25% 2013E
2010
2011E
2012E
2013E
2010
2011E
2012E
8.8%
8.6%
2010
2013E
Net Debt/EBITDA
1,630
1,489 1,084
2.9x
3.3x
3.0x
1.8x 32
2010
Source: J.P. Morgan estimates, company data.
2011E
2012E
2013E
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Valuation
BR Malls trades at premiums of 5% to Multiplan and 11% to Iguatemi based on P/FFO 2012e, and we believe these premiums are warranted by its superior growth. We see potential upside of 39% for BR Malls shares, based on our DCF-derived R$24.00/share price target for December 2012. Our DCF analysis assumes a WACC of 9.4% derived from a 3.4% risk-free rate, a 0.85 beta, 1.9% country risk and a 5.0% equity premium risk, and an assumption of 4.0% long-term growth. It currently trades at 15.7x. Our target price implies a target P/FFO 2013e of 17.4x.
Table 22: Shopping Malls Valuation
BR Malls Multiplan Iguatemi Sonae Sierra Brasil Aliansce General Shopping (BBG cons) Average Share Price (R$) 17.25 33.28 35.00 23.80 13.98 12.70 Mkt Cap US$ mn 4,925 3,789 1,762 1,156 1,239 407 Avg. Vol. US$ MM 23.8 6.0 3.9 2.6 2.3 1.2 6.6 P/BV Current 1.5 2.0 1.9 1.4 1.9 1.6 1.7 EV/EBITDA 11e 12e 14.4 10.7 13.4 10.2 12.6 9.8 13.4 8.5 12.9 10.5 9.8 8.3 12.7 9.7 P / FFO 11e 12e 20.2 15.7 15.8 15.0 16.7 14.1 15.2 12.8 19.1 15.0 n/a n/a 17.4 14.5 Cap rate Curr 6.6% 8.3% 7.9% 8.1% 8.6% 10.9% 8.4%
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Treasury 0.7%
BR Malls
Source: J.P. Morgan and company reports.
In theory BR Malls has a free float of 100% as it is a full corporation; however, Dyl Empreendimentos and Richard Paul Matheson, the founder of ECISA, have a combined stake of 10.3%, according to the companys website. Other relevant shareholders include HSBC, Fidelity and Dogde & Cox with more than 5%. We believe it is worth highlighting Equity Internationals 2.4% participation in BR Malls capital structure as the fund, owned by Sam Zell, was one of the main shareholders with a 27.5% stake pre-IPO on 2007. BR Malls board of directors is composed of seven members, elected in shareholders meetings for two-year terms in office and with the possibility of reelection.
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Carlos Medeiros
Vice-Chairman
Director
Thomas Joseph McDonald David J. Contis Jos cio Pereira da Costa Junior
Director Director
Independent Director
Independent Director
Ruy Kameyama
Recent Events
In December 2010, the company completed the acquisition of the remaining 50% it didnt own in Tijuca for R$375mn, for a total 100% stake in this mall and adding 17.7k m2 in own GLA to its portfolio. According to the company, the entry cap rate for Tijuca was 10.0% and is expected to reach 12.2% when stabilized. Tijuca has 287 stores (5 anchors) and 1,300 parking slots. The two commercial towers of the complex represent 10.7k m of GLA and R$25mn of the total value paid.
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In January 2011, BR Malls increased its interest in Shopping Center Crystal Plaza, by 30pp for R$43mn, after acquiring 40% in September 2010. The transaction adds 3.6k m of own GLA, with an initial cap rate of 11.5%. Situated in Curitiba, Crystal Plaza has 147 stores and 600 parking slots. Also in January, the company acquired for R$31mn an additional 15.3% stake of Shopping Piracicaba, achieving 34.4% participation. It had an entry cap rate of 11.5% and added 4.3k m of own GLA to BR Malls portfolio, totaling 9.5k m in this mall. According to the company, an expansion is already planned for the mall due to high demand. Currently, it has 27.8k m of total GLA, with 145 stores (9 anchors) and 2,000 parking slots. In the same month, BR Malls paid R$34.6mn for an additional 3.2k m of own GLA in Shopping Curitiba, representing a 14% stake. The mall has currently 0% vacancy, with 150 stores and 1,000 parking spaces. Also in January, BR Malls sold its stake of 3.4% (815m) on Esplanada Shopping for R$11.8mn to Iguatemi. This stake was acquired in November 2007 for R$7mn. According to company calculations, the investment generated a 16.7% IRR. Located in Sorocaba, the mall has 180 stores and 2,000 parking slots. April 2011 marked the opening of Via Brasil Shopping, in which the company has a 49% stake acquired in 2010, adding 15.0k m to its own GLA. The mall is located in Rio de Janeiro and had 95% of its GLA leased at opening. It has 189 stores and 2,850 parking slots, with a small expansion (1.1k m) expected to be finished in the second half of the year, when it will reach 31.8k m of total GLA. Also in April, BR Malls inaugurated the expansion of Shopping Tambor, adding 15.1k m to the companys own GLA. Acquired by BR Malls in 2007, Tambor has 3 anchors, 3 megastores and 68 satellites, in 46.8m of total GLA. The expansion began in October 2009, also adding parking spaces and a retrofit of the common areas, totaling R$124mn capex. The company financed the project with R$92.5mn of debt, due in 12 years, at a rate of IGP-M+7.75%. In May 2011, the company acquired a 95% stake in Shopping Paralela for R$285mn (R$237.5mn for the mall and R$47.5mn for parking operations), representing a 10.1% initial cap rate. This mall is located in Salvador and has a total GLA of 39.8k m2; the occupancy rate is 91.5%, below BR Malls average 98.1%. Shopping Paralela has 350 stores (4 anchors and 9 megastores) and more than 2,400 parking spaces. Also in May, BR Malls announced a follow-on offer, finished in June, totaling R$731mn, through the issuance of 42.5mn shares at R$17.20 per share. The main focus of these funds will be acquisitions of stakes in shopping malls.
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Multiplan
Multiple growth opportunities, but limited upside and FFO growth. Initiate with Neutral
Neutral
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 33.48 15 Jul 11 41.41 - 29.85 5,999.52 Dec 179 43.00 31 Dec 12 Multiplan (MULT3.SA;MULT3 BZ) FYE Dec EPS Reported (R$) FY EPS Reported FY (R$) Revenues FY (R$ mn) EBITDA FY (R$ mn) Net Income - GAAP FY (R$ mn) Bloomberg EPS FY (R$) 2010A 1.22 1.22 604 357 218 1.33 2011E 1.43 1.43 649 426 256 1.61 2012E 1.55 1.55 778 532 278 1.88 2013E 2.06 2.06 965 711 369 2.47
We are initiating coverage of Multiplan with a Neutral rating and a Dec-12 DCFbased price target of R$43.00/share, which represents potential upside of 29%. The company has a portfolio of 13malls, with 372k m2 of owned GLA, and is concentrated in the South and Southeast regions (10 of 13 malls), with a focus on higher-income segments. Multiplan has the best assets in the market, with 6 malls between the top-10 in rent and sales per square meter. In addition to its pipeline of greenfields, the company has significant exposure to multiuse projects that will represent an additional 92k m2 in own GLA, or 37% of our expected GLA growth by 2013. Multiplan is trading at a 5% discount to BR Malls and at a 6% premium to Iguatemi on P/FFO 12e. On a relative basis, we prefer Iguatemi vs Multiplan as we see lower execution risk in Iguatemi given Multiplans exposure to multiuse projects.
Investment Thesis
Strong and solid balance sheet to support future growth In our view, Multiplan is the company likeliest to post higher-than-expected growth in its GLA given its comfortable leverage. According to our calculations, the company can add 399k m2, or around 64% of its expected own GLA in 2013, based on its FFO generation and leverage position in Dec-2013. This is a consequence of the companys comfortable cash position as Multiplan ended 1Q11 with a net cash position of R$382mn or -0.9x net debt to EBITDA, the lowest leverage among the listed companies. Based on Multiplans current capex schedule of R$1.5bn over the next 3 years, leverage should be only 0.8x net debt to EBITDA in 2012.
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619
1Q11
Greenfield
2011E
Greenfield
2012E
Multiuse
2013E
Multiuse
2014E
Over the next 2 years Multiplan expects to open 5 greenfield projects, with the opening of Park Shopping So Caetano expected for 4Q11 and the other 4 malls Village Mall, Jundia, Park Shopping Campo Grande and Macei expected to be opened by 2012YE. Based in 1Q11 information, all the malls under construction (only Maceio has not started yet) had more than 50% of their stores leased, with So Caetano Mall expected to be opened this year 86% leased. Regarding multiuse, Multiplan also has 3 commercial towers in the pipeline, adding 92k m2 to its own GLA over the next 3 years and adding around R$120mn in revenues in 2014e. In our estimates we consider monthly rent/m2 of R$90-95, adjusted by inflation, for those projects.
Table 27: Expansion pipeline
Shopping Park Shopping So Caetano Village Mall Jundia Shopping Park Shopping Campo Grande Shopping Macei Total Greenfields Morumbi Business Center Park Shopping Corporate Morumbi Corporate Commercial Real Estate for Lease
Source: J.P. Morgan estimates, company data.
Location State SP RJ SP RJ AL SP DF SP
GLA m2 Multiplan 100% 38,661 38,661 25,580 25,580 35,655 35,655 37,690 41,878 18,203 36,405 155,789 178,179 10,635 10,635 6,680 13,360 74,198 74,198 91,513 98,193
% Part. 100% 100% 100% 90% 50% 87.4% 100% 50% 100% 93.2%
Multiuse projects Interesting way to extract value from land bank Over the last years Multiplan has developed more than 800k m2 of multiuse projects in more than 50 developments, including residential and commercial buildings such as Centro Profissional Morumbi Shopping and Chcara Santa Helena in SP and Barra office towers, Golden Green, Royal Green Pennsula in Rio de Janeiro. Currently the company has 5 multiuse projects under development and expects to invest more than R$530mn in these projects, with R$500mn for 3 commercial towers for rent Morumbi Business Center, ParkShopping Corporate and Morumbi Corporate adding more than 90k m2 to companys GLA. Multiplan should invest the R$30mn in the short term to conclude two real estate assets to be sold, named Cristal Tower and Centro Profissional Ribeiro, which are almost completely sold
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(more than 90% as 1Q11), generating potential sales value (PSV) of R$145mn to Multiplan. Most of this revenue will flow to Multiplans income statement in the coming years as Centro Profissional Ribeiro construction started in 1Q11. In our view, multiuse projects especially those for sale, which need to have their revenues and costs flowing through the income statement and balance sheet, thereby distorting company results and margins as this segment has lower margins when compared with Multiplans core business represent an opportunistic approach to developing excess construction capacity available in the companys land bank, increasing the flow and demand for its malls and developing the surrounding areas.
Table 28: Expansion pipeline
Mall Barra Shopping Sul Campo Grande Macei Jundia Park Shopping Barigi Park Shopping Barigi Ptio Savassi Ribeiro Shopping So Caetano Shopping Anlia Franco Total
Source: Company data.
It is important to flag that in this table, land bank and projects are illustrative and only suggest the types of investments that may be made. Moreover the land size does not represent potential construction capacity.
Multiplan stake 100% 90% 50% 100% 84% 94% 96% 100% 100% 36% 81%
Project Residential, Hotel Residential, Commercial Residential, Commercial, Hotel Commercial Apart-Hotel Commercial Commercial Residential, Commercial, Medical Center Commercial Residential
Land size m2 12.1 71.5 140.0 4.5 0.8 27.4 2.6 195.9 24.9 29.8 509.5
To give one example of the potential from multiuse projects, last month Multiplan announced its new master plan for Ribeirao Shopping (46.8k m2, Multiplan stake 76%) that includes 3 expansions, adding up to 32k m2 in total GLA (+45% vs current GLA). The master plan also includes a parking deck with 1,200 parking slots, 1 hotel and an apart-hotel with 19.2k m2 and 4 residential towers with 86k m2. According the company, further details on expected capex and on timing for this development will be announced in the future. Well wait for the details before including these projects in our estimates. In a back-of-the-envelope calculation, if we assume a price/m2 of R$6,000, in line with the prices obtained in Centro Profissional Ribeiro, Multiplan would generate around R$630mn of PSV on those projects. FFO growth in the short term is not a trigger We believe Multiplan will report a lower-than-peers FFO growth over the next 2 years at 2/5% vs 10-30% from peers. This is a consequence of lower revenues growth, higher financial costs and higher taxes. Regarding revenues, we have a CAGR (10-13e) of 17% vs 34% for BR Malls and 22% for Iguatemi. In addition, Multiplans and Iguatemis FFO will be impacted by higher financial expenses as the companies will end 2011e with a net debt position. In the case of Multiplan, the company also expects it effective tax rate (excluding deferred taxes) to increase in the coming quarters. Despite our expected growth of 12% in revenues from the current portfolio this year, we expect Multiplan net revenues to grow only 7%, on the back of a contraction in real estate revenues and key money of 12% and 11% yoy respectively. Moreover, we expect weak growth in services of 4% yoy, and, given this, we expect 2% growth in FFO in 2011 despite the expected improvement in EBITDA margin, which we expect to rise 890bps this year to 69.3%. For 2012, we expect 20% growth in
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revenues and 6% growth in FFO, on the back of an increase in financial expenses resulting on a loss of R$35mn vs a gain of R$21mn in 2011e. Why do we prefer Iguatemi vs Multiplan? We believe Multiplan is likelier to deliver growth above expectations; however, we believe Multiplans slower growth in the short term and intensive development of multiuse projects could mean that the real estate assets to be sold end up reducing the companys margins and exposing investors to a different type of risk. Multiplans debt structure Current debt cost is below Selic In addition to Multiplans comfortable leverage position, mentioned before, its cost of debt is also relatively cheap. In 1Q11 the company had an aggregate debt cost of 11.9%, below the Selic rate (12.25%), as most of its debt is linked to fixed rates plus TR (48%), resulting in an average cost for this line of 10.6%. Multiplans most expensive debt was a 2-year debenture, issued in June-2009 at 117% of CDI and totaling R$100mn, representing 19% of Multiplans debt outstanding, but paid on June this year.
Table 29: Multiplan Debt structure as of 1Q11
Due date
TR
CDI
TLJP
IGPM
IPCA
BNDES Real Ita IBM IBM BNDES Real Others Current Real Ita Ita IBM IBM BNDES Real Others Non-current Total Debt
Source: Company reports.
Rate per year 5.2% 10.0% 10.0% 0.8% 1.5% 3.5% 10.0%
173
75
89 65 51 27 18 40
2011
Source: Company data.
2012
2013
2014
2015
2016
2017
2018+
47
7.5
4.0
3.8
Expansions and multiuse projects are the main upside risk to our estimates: As we are incorporating only already-announced projects in our GLA growth estimates, we believe Multiplan could surprise on the upside given its significant land bank, its potential to leverage its balance sheet and its track record developing multiuse projects. On the other hand, lower-than-expected margins and returns on those projects are the main downside risks to our thesis, as weak returns on the real estate side could compromise mall returns. Deceleration/acceleration in consumer and domestic growth Given the structure of rent contracts, deceleration or acceleration in consumption growth and/or domestic GDP can affect Multiplan, influencing rent adjustment and affecting our growth forecast.
(0.2) 2009
2010
2011E
2012E
5.9 4.3
6.5 5.0
Higher- or lower-than-expected inflation While malls provide a hedge against inflation given their rent contracts, in which contracts are annually adjusted by inflation, high inflation can impact consumption and domestic growth, thereby impacting consumers disposable income and, thus, same store sales and margins. Higher-than-expected inflation can also lead to higherthan-expected interest rates slowing down economic growth. Conversely, the less inflation there is, the more money there is for everyone to spend at the mall. Expected returns from greenfields, expansions and acquisitions Although we have a conservative approach in our models, we rely on company estimates regarding capex, expected rents, opening schedule and project returns. It is important to flag that higher- or lower-than-expected construction and/or financial costs, unexpected delays or advances in mall openings and higher- or lower-thanexpected rents can impact our estimates and the companys returns.
2009
2010
2011E
2012E
12.8
Interest rates Although on the leverage side the impact from higher interest rates is limited as part of companys debt is linked to TR (Taxa Referencial), which has a small correlation with the Selic rate, higher interest rates can impact consumption and GDP growth. Currently our economists forecast a year-end Selic of 12.75% vs 12.25% currently, and for 2012 we expect the Selic to be at 12.75%. Moreover, higher interest rates increase the attractiveness of fixed income assets such as government bonds. E-commerce may take retail market share from malls Despite malls being an underpenetrated market in Brazil, with an average of 49m2 in total GLA for each 1,000 inhabitants vs 81m2 for Mexico and 2,180m2 for the US, companies can lose market share to E-commerce given the services offered by those companies and the agility with which they allow customers to compare prices on line. Changes in contract structure Any change to the current contracts structure can impact the expected return on future and current malls. In our view, these changes could include the removal of the step up clauses and the percentage-of-sales rent.
2009
2010
2011E
2012E
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Company Description
Multiplan holds a premium portfolio, with 6 malls in the top ten lists of rent/m2 and sales/m2, given the companys focus on higher-income segments. It owns an average share of 67.4%, for the highest overall participation among the large caps. From a total 551k m GLA, it possesses 372k m in 13 malls, of which 77% are situated in Brazils Southeast region. In addition to shopping malls, Multiplan has investments in residential and commercial real estate assets, searching to attain synergies with its core business. In our view these multiuse projects help to leverage companys growth and portfolio. Multiplan was founded and is controlled by the Peres family, which holds a 32% stake in the company.
Financial Outlook
We expect timid growth in net revenues this year, only 7% vs 20-50% from peers, mainly as a result of lower real estate revenues (-12% yoy) and lower key money revenues (-9%). We expect 12% growth in its current portfolio and 4% in revenues from services. This translates to only 2% growth in FFO (adjusted by deferred taxes), the lowest growth among its peers. For 2012 we expect a 20% increase in revenues as we expect the company to open Shopping So Caetano (39k m2) in 4Q11 and the Morumbi Business Center (11k m2) in 1Q12. However, FFO should grow only 6% given the increase in leverage as company debt should peak in 2012e at 0.8x net debt to EBITDA, resulting in a net financial loss of R$35mn vs a projected gain of R$21mn in the previous year. For 2013 we expect strong growth of 23% in revenues given the opening of 4 greenfields in 4Q12 Village Mall (26k m), Jundia Shopping (36k m), Park Shopping Campo Grande (42k m) and Macei (36k m). These shopping malls should increase the companys year-end GLA by 29%. To compensate for the lower revenue growth, we expect EBITDA margins to expand 890bps in 2011 and 160bps in 2012, on the back of higher dilution of cash COGS and G&A as there were one-offs in 2010. We expect cash COGS (including real estate for sale) to represent 16.8% of revenues in 2011, an improvement vs the 18.6% reported in 1Q11 but in line with 2010. For 2012 we expect further dilution, to 14.4%, as the participation of real estate for sale starts to decline in the Multiplan revenue mix. The significant improvement in EBITDA margin in 2011e is mainly the result of a contraction in SG&A that was negatively impacted in 2010 by Multiplans 35th anniversary advertising campaign and elections, reaching 23.5% of revenues vs our expectation of 17.3% for 2011.
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6% 2%
6%
2010
2011E
2012E
2013E
2010
2011E
2012E
2013E
14.0% 10.0%
2009
2010
2011E
2013E
855
Capex
Net Debt/EBITDA
0.4x
113
2011E
2012E
2013E
50
Valuation
Multiplan is trading at 15.0x P/FFO 2012e, a 6% premium to Iguatemi and a 5% discount to BR Malls. We see potential upside of 29% for Multiplan shares, based on our DCF-derived R$43.00 price target for end-December 2012. Our DCF analysis assumes a WACC of 9.3% derived from a 3.4% risk-free rate, 0.9 beta, 1.9% country risk and an assumption of 4% long-term growth. Our target price implies a target P/FFO 2013e of 15.5x.
Table 31: Shopping Malls Valuation
Multiplan BR Malls Iguatemi Sonae Sierra Brasil Aliansce General Shopping (BBG cons) Average Share Price (R$) 33.28 17.25 35.00 23.80 13.98 12.70 Mkt Cap US$ mn 3,789 4,925 1,762 1,156 1,239 407 Avg. Vol. US$ MM 6.0 23.8 3.9 2.6 2.3 1.2 6.6 P/BV Current 2.0 1.5 1.9 1.4 1.9 1.6 1.7 EV/EBITDA 11e 12e 13.4 10.2 14.4 10.7 12.6 9.8 13.4 8.5 12.9 10.5 9.8 8.3 12.7 9.7 P / FFO 11e 12e 15.8 15.0 20.2 15.7 16.7 14.1 15.2 12.8 19.1 15.0 n/a n/a 17.4 14.5 Cap rate Curr 8.3% 6.6% 7.9% 8.1% 8.6% 10.9% 8.4%
51
Treasury 0.7%
Multiplan
Source: Company reports.
52
Background Elected in 2010, his term of office ends in 2012 Founding member of ABRASCE and the Association of Managers of Real Estate Companies Holds a degree in economics from Faculdade Nacional de Economia da Universidade do Brasil Joined the company in 1988 Graduated in business administration from Universidade Cndido Mendes Member of the International Council of Shopping Centers and of Building Owners and Managers Association Currently Cadillac Fairview's chief executive officer Graduate in economics and business administration from Waterloo Lutheran University in Canada Current executive vice president of investments at Cadillac Fairview Graduate in business from St. Francis Xavier University and chartered accountant Member of the board since 2007 Founder of the Amil group (healthcare), for which he is currently chairman of the board of directors Graduate in business administration from Pontifcia Universidade Catlica do Rio de Janeiro and Harvard Business School and in medicine from Faculdade Nacional de Medicina da Praia Vermelha Former CEO of Furnas Centrais Eltricas S.A. and Grupo Bozano Graduate in civil and economic engineering from the Universidade do Brasil Joined the company in 1976 Served as technical director for Veplan Residncia Empreendimentos e Construes S.A. and IodBauen de So Paulo Construes S.A. Graduate in civil engineering from the Escola Nacional de Engenharia do Rio de Janeiro
Recent Events
In November 2010, Multiplan acquired for R$45mn an additional 25% interest in Shopping Santa Ursula, bringing its stake to 62.5%, following its first acquisition in 2008. Recently renovated, Santa Ursula has 23.1k m of total GLA, 121 stores and 872 parking slots. Aliansce holds a 37.5% stake in this mall also. In February 2011, the company approved a share buyback program to acquire up to 3.6mn shares (5.2% of free float), or around R$110mn (12 days of trading). The program is open for 365 days until Feb-23rd 2012. As of 1Q11 Multiplan had a net cash position of R$382mn, with total cash at R$785mn.
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Also in February, Multiplan announced the development of Morumbi Corporate, two high-end commercial towers, for leasing, with total GLA of 73.4k m in the city of So Paulo, with inauguration expected in the second half of 2013. Total capex is expected to be R$444mn. In April 2011, the company announced the acquisition of a 11.2k m land plot in Ribeiro Preto for R$33mn (of which 86.4% will be financed in 60 months). The purpose of the transaction is to use the area for Ribeiro Shoppings expansion, as it has a potential construction area of 56k m. In July 2011, Multiplan announced its new master plan for Ribeirao Shopping (46.8k m2, Multiplan stake 76%) that includes 3 expansions, adding up to 32k m2 in total GLA (+45% vs current GLA). The master plan also includes a parking deck with 1,200k slots, 1 hotel and an apart-hotel with 19.2k m2, and 4 residential towers with 86k m2. According to Multiplan, further details on expected capex and on timing for this development will be announced in the future.
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Iguatemi
A good story, fairly valued. Initiate with Neutral
Neutral
Company Data Price (R$) Date Of Price 52-week Range (R$) Mkt Cap (R$ mn) Fiscal Year End Shares O/S (mn) Price Target (R$) Price Target End Date 35.00 15 Jul 11 44.88 - 30.70 2,773.96 Dec 79 49.00 31 Dec 12 Iguatemi (IGTA3.SA;IGTA3 BZ) FYE Dec EPS Reported (R$) FY EPS Reported FY (R$) Revenues FY (R$ mn) EBITDA FY (R$ mn) Net Income - GAAP FY (R$ mn) Bloomberg EPS FY (R$) 2010A 1.91 1.91 264 185 152 1.58 2011E 1.80 1.80 315 219 143 1.91 2012E 2.11 2.11 386 272 168 2.25 2013E 2.49 2.49 478 337 198 2.67
We are initiating coverage of Iguatemi with a Neutral rating and a Dec-12 price target of R$49.00/share, based on DCF valuation that represents potential upside of 40% from current levels. The company has a portfolio of 13 malls, with a 238 m2 of owned GLA, concentrated in the state of So Paulo (9 malls) and in the South region (4 malls) and focused on the middle- and higher-income segments. The companys portfolio also includes 2 commercial towers, located in SP, totaling GLA of 29k m2. Iguatemi is our preferred Neutral-rated stock among the large caps given its relatively higher upside vs peers and superior growth, with lower execution risk, in our view. The company holds a 51% stake in Shopping Iguatemi So Paulo, the first mall opened in the country, in 1966, which has the highest rent/m2 in the country at around R$210. The company is trading at 14.1x P/FFO 2012e, discounts of 6% and 10% to Multiplan and BR Malls, respectively.
Investment Thesis
Strong pipeline of greenfields ahead; debentures issued in 1Q11 represent an upside risk on acquisitions Iguatemi has the largest pipeline of greenfield projects among the peers, totaling 169k m2 in own GLA to be opened in the next 4 years and including the recently opened (April 2011) Iguatemi Alphaville (25k m2 own GLA). In the coming years the company expects to add another 154k m2 in own GLA, with 144k m2 from 5 greenfield projects in the state of So Paulo JK, Ribeiro Preto, Jundia, Votorantim and So Jos do Rio Preto and 11k m2 from already-announced expansions in Praia de Belas Mall and Galleria, representing capex of more than R$890mn in the next 3 years. Moreover, it is important to flag that Iguatemi has officially guided to 520km2 of own GLA by 2015, which is not included in our estimates.
55
+21% +13%
238 7 25 270
+8%
388 30 418
+19%
4 46 320
68
Expansions
Expansions
Greenfield
Greenfield
Greenfield
Greenfield
2011E
2012E
2013E
In 1Q11 the company also issued R$330mn in 5-year debentures, to finance possible acquisitions, which are not included in our estimates. According to Iguatemi, those acquisitions should offset the delay on Iguatemi JK, expected initially for 2H11 and postponed to the end of 1Q12, allowing the company to reach its 25-30% guidance on revenue growth vs our estimate excluding potential acquisitions of 20%. Looking at current greenfields under development, it is worth mentioning that Iguatemi JK has an occupancy rate of 70% despite the delay. Iguatemi expects to obtain a real and unleveraged IRR of 20.5% on this development, and the company is already at work on the final details for this mall. Regarding the other greenfields Iguatemi is looking for contractors for Iguatemi Ribeiro, while the company is obtaining the final approvals on Jundiai Mall. Regarding Iguatemi S.J.R.P. the company should send its project proposal to the municipality soon. When looking to Iguatemi capex it is important to flag that the expected figures announced by the company are net of key money and thus not directly comparable to peers. To make capex comparable, we assumed that key money represents, on average, 10% of capex. Although Iguatemi has 2 commercial towers in its portfolio, we are not considering any multiuse projects in our estimates. Although Iguatemi has not been aggressive in terms of development of multiuse projects, the company is constantly doing swap agreements with its excess land bank, and in 2010 those agreements contributed more than R$20mn on the other revenues line.
Table 36: Expansion pipeline
Shopping Praia de Belas Praia de Belas Galleria Total Expansions Alphaville JK Ribeiro Preto Jundiai Votorantim - Fase 1 So Jose do Rio Preto Total Greenfields
Source: J.P. Morgan estimates, company data. 56
Location State RS RS SP SP SP SP SP SP SP
GLA m2 Iguatemi 100% 5,047 13,424 1,579 4,200 4,099 8,198 10,726 25,822 24,905 31,930 17,623 35,246 28,600 32,500 23,700 30,000 43,853 43,853 30,448 34,600 144,224 176,199
% Part. 37.6% 37.6% 50.0% 41.5% 78% 50% 88% 79% 100% 88% 81.9%
Opening 4Q11 2Q11 2Q12 2Q11 1Q12 2012 2013 2013 2014
2014E
2010
Healthy balance sheet, should not limit growth Although we expect Iguatemi to invest more than R$850mn over the next 3 years, we dont believe current leverage expectations should limit the companys growth. According to our estimates, net debt to EBITDA should peak at only 1.1x in 2012. Based on Iguatemis leverage and FFO in 2013e, we believe the company can add around 150k m2, or around 35% of its expected own GLA in 2013. This compares with potential GLA expansion in 2013 of 66% for BR Malls and 64% for Multiplan. The company ended the 1Q11 with R$1.0bn in cash and a net cash position of R$98mn, having a weighted average cost of debt at 104.1% of CDI, or around 12.7%, and duration of 3.7 years. Iguatemis debt is 100% Brazilian, with TR and TJLP (BNDES long-term interest rate) exposure totaling 40% of Iguatemis debt. Iguatemi is the only company allowed to raise debt linked to TJPL given its shareholder structure controlled by local players. Iguatemi has 2 debenture programs, the first issued in 2007 and totaling R$200mn at 110% of CDI due 2014, the second issued this year and totaling R$300mn at CDI+1.35% due 2016. As mentioned before, Iguatemi expects to use the proceeds of this second issuance for opportunistic acquisitions of third-party malls and/or to increase its stakes in Malls in which it already participates.
Table 37: Iguatemi Debt Breakdown as of 1Q11 Figure 79: Expansion pipeline
13% 0% 26%
BNDES BNDES BNDES BNDES BNDES BNDES Santander Santander Santander Santander Bradesco Ita Other lines Debentures Debentures Short term Long term Total Debt
Source: Company reports.
60%
Due date May-11 Feb-11 Jun-17 Oct-17 Jun-17 Jun-17 Aug-16 Aug-16 Oct-16 Jan-19 Sep-19 Mar-20 Dec-14 Mar-16
TR
CDI
TLJP
IGPM
Rate per year 4.4% 2.9% 3.5% 3.8% 4.5% 5.5% 99% of CDI 9.5% 9.5% 12.0% 10.5% 10.0% 110% of CDI 1.4%
% of total 0.0% 0.4% 9.9% 3.1% 0.2% 0.2% 0.5% 1.4% 1.2% 9.9% 9.2% 4.4% 0.2% 22.9% 36.4% 3.1% 97.9% 100.0%
57
222
Iguatemi has significant amortization in 2015-16 given the debenture programs from 2007 and 2011.
220
97 28
118
124
43
28
25 2
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Why is Iguatemi our preferred Neutral-rated stock? Iguatemi is our preferred Neutral-rated stock among the large caps given its attractive valuation. Based on P/FFO 2012e, the company is trading at discounts of 10% to BR Malls and 6% to Multiplan; moreover, we see higher potential upside from current levels for Iguatemi of 40% vs 29% for Multiplan. Although we recognize that Multiplan has slightly superior liquidity vs Iguatemi, trading US$6mn daily vs US$4mn for Iguatemi, and has more room on its balance sheet for additional debt, we believe the development of Multiplans multiuse projects for sale will continue to impact the companys margins and bring volatility to its balance sheet and income statement, exposing the company to real estate risk and volatility that could lead to lower-than-average consolidated margins. In our view, not having such risks is an advantage for mall companies. Thus our preference for Iguatemi over Multiplan.
58
7.5
4.0
3.8
Expected returns on greenfields, expansions Although we have a conservative approach in our models, we rely on company estimates regarding capex, expected rents, opening schedule and project returns. It is important to flag that higher- or lower-than-expected construction and/or financial costs, delays or advances in mall openings and lower- or higher-than-expected rents can impact our estimates and the companys returns. Given Iguatemis significant exposure to greenfields, which should represent 93% of its portfolio growth, any deceleration or acceleration in market demand for new projects or lower- or higher-than-expected costs can significantly impact our forecasts.
(0.2) 2009
2010
2011E
2012E
Acceleration or deceleration in consumer and domestic growth Given the current structure of rent contracts, a deceleration or acceleration in consumption growth and/or domestic GDP can affect Iguatemi by influencing the annual rent adjustments and affecting our growth forecast. Higher- or lower-than-expected inflation While malls provide a hedge against inflation given current rent contracts, with contracts adjusted annually for inflation, high inflation can impact consumption and domestic growth, impacting consumers disposable income and thereby impacting occupancy rates and reducing same store sales and margins. Higher-than-expected inflation can also lead to higher-than-expected interest rates slowing down economic growth. Conversely, the less inflation there is, the more money there is for everyone to spend at the mall. Interest rates Although on the leverage side the impact from higher interest rates is limited as part of companys debt is linked to TR (Taxa Referencial), which has little correlation with the Selic, they can impact consumption and GDP growth. Currently our economists forecast a year-end Selic of 12.75% vs 12.25% currently; for 2012 we expect the Selic to be at 12.75%. Moreover, higher interest rates increase the attractiveness of fixed income assets such as government bonds. E-commerce may take retail market share from malls Despite malls being an underpenetrated market in Brazil, with average of 49m2 in total GLA for each 1,000 inhabitants vs 81m2 for Mexico and 2,180m2 for the US, companies can lose market share to E-commerce given the services offered by those companies and the agility with which customers can compare prices on line.
5.9 4.3
6.5 5.0
2009
2010
2011E
2012E
12.8
2009
2010
2011E
2012E
Changes in rent contract structure Any changes to the rent contract structure can impact the expected return on future and current malls. In our view, these changes could include the removal of the step up clauses and the percentage-of-sales rent. Mismatch between demand and supply Although we dont expect a short-term mismatch between demand and supply of GLA, an excess of GLA can impact Iguatemis bargaining power, and, consequently, the amount of key money received, thereby impacting future returns. Furthermore, an
59
such an imbalance could cause a reduction in expected rents. On the other hand, too little supply could move rents upward.
Company Description
Iguatemi has 431k m of total GLA, with ownership of 238k m, for an average stake of 55.2%. The company has 15 malls under operation and also owns 2 commercial buildings with total GLA of 29k m2. The company is focused on the higher-income segments and has its portfolio concentrated in the South and Southeast regions, with 10 malls in the region and with all greenfields located on the state of So Paulo, where it already has 60% of its operations. Iguatemi was founded and is controlled by the Jereissati family, which has a 54% holding in the company.
Financial Outlook
We expect net revenues to grow 20% in 2011 (slightly below company guidance of 25-30% given the delay in the JK opening), 22% in 2012 and 24% in 2013. In 2011 revenues should be positively impacted by the opening of Alphaville in April and the expansion of Praia de Belas. In 2012 we expect Iguatemi to inaugurate JK and Ribeiro; we expect the expansions of Galleria and the second phase of the Praia de Belas expansion, adding 52k m2 to its GLA. For this year we expect parking revenues, the second most important revenue line for Iguatemi, to represent 22% of rental revenues in 2011 vs 21% in 2010, meaning 25% growth yoy, slightly below the 32% growth yoy reported in 1Q11. Despite the healthy increase in revenues that we expect for Iguatemi this year, we expect a 6% contraction in net income and 3% in FFO as the result of a net financial loss and a higher effective tax rate. For 2012 we expect growth of 17% in net income and 18% in FFO. We expect the EBITDA margin to contract 70bps in 2011 and to be below company guidance of 70-72%. This is a consequence of a lower-than-expected margin in 1Q11, only 60.0%, which was impacted by nonrecurring items. For 2012 we expect an expansion of 100bps on the back of higher cost dilution. We expect cash COGS to represent 19.5% of revenues in 2011 and G&A 10.0%. For 2012 we expect further dilution of COGS and G&A to 18.5% and 9.5% respectively. It is important to flag that Iguatemis EBITDA margins are positively impacted by land swap, which amounted to almost R$25mn in 2010. According to Iguatemi, this line should continue to impact margins positively going forward as the company has a significant potential for swaps in its land bank. Iguatemi stated that from 2011 to 2014 the company will distribute at least R$0.63/share of dividend and/or interest on own capital, representing a yield of around 1.6% based on current prices.
60
20%
2010
2011E
2012E
2013E
2010
2011E
2012E
2013E
7.4%
8.6%
10.0%
9.5%
9.0%
2009
2010
2011E
2013E
Capex
Net Debt/EBITDA
406
2011E
2012E
2013E
61
Valuation
Iguatemi is trading at a 10% discount to BR Malls and a 6% discount to Multiplan based on P/FFO 2012e at 14.1x. Though the company is trading at a 6% premium to Multiplan based on P/FFO 11e, we believe this premium is justified given higher revenue growth in 2011e of 20% vs 7% for Multiplan. According to our calculations, the company trades at a 7.1% yield for 2012e, which compares to 6.4-6.7% for peers. We see potential upside of 40% for Iguatemis shares, based on our DCF-derived R$49.00/share price target for December 2012. Our DCF analysis assumes a WACC of 9.5% derived from a 3.4% risk-free rate, a 0.9 beta, 1.9% country risk and a 5.0% equity premium risk, and an assumption of 4.0% long-term growth. Our target price implies that the company will be trading at 16.6x 2013e P/FFO.
Table 39: Shopping Malls Valuation
Iguatemi BR Malls Multiplan Sonae Sierra Brasil Aliansce General Shopping (BBG cons) Average Share Price (R$) 35.00 17.25 33.28 23.80 13.98 12.70 Mkt Cap US$ mn 1,762 4,925 3,789 1,156 1,239 407 Avg. Vol. US$ MM 3.9 23.8 6.0 2.6 2.3 1.2 6.6 P/BV Current 1.9 1.5 2.0 1.4 1.9 1.6 1.7 EV/EBITDA 11e 12e 12.6 9.8 14.4 10.7 13.4 10.2 13.4 8.5 12.9 10.5 9.8 8.3 12.7 9.7 P / FFO 11e 12e 16.7 14.1 20.2 15.7 15.8 15.0 15.2 12.8 19.1 15.0 n/a n/a 17.4 14.5 Cap rate Curr 7.9% 6.6% 8.3% 8.1% 8.6% 10.9% 8.4%
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EV/EBITDA 11e 12e -13% -9% -6% -5% -7% 15% -2% -7% -1% 1%
P / FFO 11e 12e -18% -10% 6% -6% 10% 11% -13% -6% -4% -3%
Iguatemi
Source: Company reports. La Fonte Telecom also belongs to the Jeiressati family.
Iguatemis board is elected in shareholders meetings. Each member of the board is elected for a two-year term, and there are no restrictions on re-election. The board meets quarterly or when convened by the chairman or by the majority of its members. The members of the Executive Board are elected by the board of directors for three-year terms.
63
Independent Director
Independent Director
Sidnei Nunes
Director
Director
Pedro Jereissati
Director
Independent Director
64
Recent Events
In October 2010, the company signed a BNDES financing line for the construction of Shopping JK Iguatemi, with a rate of TJLP+3.8%, to be amortized in 60 monthly installments starting after a 24-month grace period. Iguatemi holds a 50% stake in JK that will have 35.2k m of total GLA and 188 stores. The total capex estimated for this greenfield is R$270mn. Opening is expected for 1Q12. In January 2011, Iguatemi acquired for R$12mn a 3.4% stake in Shopping Center Esplanada, located in Sorocaba-SP. With this acquisition, the company achieved 14.7k m of own GLA in this mall (33.1% of participation in the ownership). The mall has a total GLA of 44.5k m, 180 stores and 2,000 parking spaces. Also in January, the company announced a greenfield project in front of Shopping Center Esplanada (Sorocaba-SP). The project encompass a new mall that will be called Iguatemi Votorantim (100% Iguatemi) and 4 additional towers, with a total capex of around R$426mn. The first phase of the project will represent an additional 43.8k m of total GLA, with the opening expected for the second half of 2013. The second phase, planned to be delivered in 2018, will have 57.6k m of total GLA, 425 stores and 2,959 parking slots. In March 2011, Iguatemi raised R$330mn through its second debenture issue, paying the CDI rate+1.4%. This amount will be used to finance growth opportunities such as the acquisition of additional interests in malls. In April 2011, Iguatemi Alphaville Mall opened. The company holds a 78% stake of its total GLA of 30.1k m, and the capex invested in this mall was around R$200mn. The project was financed with a BNDES line of TJLP+3.45% per year, to be amortized in 60 months after a 24-month grace period from the signing date.
65
66
Iguatemi
Multiplan
BR Malls
Aliansce
SSBR
Iguatemi
Multiplan
BR Malls
Aliansce
SSBR
9.0% 9.0%
9.3%
97.1% 96.7%
SSBR
BR Malls
Aliansce
Iguatemi
Multiplan
Multiplan
BR Malls
SSBR
Aliansce
Iguatemi
BR Malls
Aliansce
Multiplan
SSBR
Iguatemi
BR Malls
Iguatemi
Aliansce
SSBR
Multiplan
67
Source: ABRASCE as of 4Q10. JK Iguatemi was already postponed for 1Q12. Uberlandia Shopping is expected for 4Q11/1Q12.
68
City Campo Grande Manaus Manaus Londrina Londrina Rio de Janeiro Rio de Janeiro Barueri Jundiai Mogi Mirim Campinas Caraguatatuba Ribeiro Preto Macapa Pelotas Belo Horizonte Florianopolis Salvador Belem Itaborai Campo Grande Jundiai Contagem Recife Taubate Belo Horizonte Betim Sao Bernardo Rio de Janeiro Cabo Frio
UF MT AM AM PR PR RJ RJ SP SP SP SP SP SP AP RS MG SC BA PA RJ MT SP MG PE SP MG MG SP RJ RJ
Total GLAe 35,000 NA 38,000 29,000 48,500 32,000 NA 25,000 30,000 21,943 42,000 20,336 32,500 29,101 24,400 36,188 40,000 48,800 23,000 NA 21,000 35,418 NA NA 33,375 10,685 53,368 42,586 25,653 NA 777,853
Opening 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 Apr-12 Apr-12 Apr-12 Apr-12 1H12 1H12 1H12 Aug-12 Sep-12 Oct-12 Nov-12 Sep-12 Nov-12 2H12 2H12 2H12 2H12
69
Location State SP AM SP SP SP SP SP SP SP DF
GLA m2 Sonae 100% 61,936 121,444 46,775 46,775 22,463 30,674 24,495 24,495 16,041 16,041 11,710 18,152 6,921 23,071 6,536 21,788 3,977 19,885 3,008 28,923 203,862 351,248
Stake 51% 100% 73% 100% 100% 65% 30% 30% 20% 10% 58.0%
Opening 2002 2009 1992 1980 2004 1993 1994 1998 2005 1997
Location State RJ RJ MG BA PA SP SP RJ RJ RJ SP DF PB SP BA BA RJ
GLA m2 Aliansce 100% 52,189 52,189 37,528 53,904 30,111 43,016 27,825 61,342 25,493 33,991 13,528 35,601 13,250 26,499 10,224 25,559 9,522 23,805 9,193 36,770 8,703 23,208 8,463 16,925 6,331 17,335 5,891 17,542 2,339 5,246 2,108 2,108 2,108 2,108 264,804 477,148
Stake 100% 70% 70% 45% 75% 38% 50% 40% 40% 25% 38% 50% 37% 34% 45% 100% 100% 55.5%
Opening 2009 1995 2010 1993 2004 2007 2009 1985 2005 1999 1999 2000 2001 2008 1975 2002 2007
Location State RS PR MG SP SP RJ DF MG MG SP RJ SP SP
GLA m2 Multiplan 100% 68,407 68,407 41,945 49,934 38,038 47,547 36,225 55,085 35,635 46,784 35,398 69,313 30,725 51,526 19,250 21,388 16,646 17,254 15,113 50,377 11,136 22,271 14,505 23,208 8,482 28,274 371,504 551,368
Stake 100% 84% 80% 66% 76% 51% 60% 90% 96% 30% 50% 63% 30% 67.4%
Opening 2008 2003 1979 1982 1981 1981 1983 1996 2004 1999 1999 1999 2009
70
Location State RJ PR RJ RJ SP SP MG MG MS SP RJ MG SP PE RJ RS RJ AL MG PR GO GO SP SP PR RN RJ RJ AM SP MA MT RJ SC PA MG SP MG SP RJ
GLA m2 BR Malls 100% 58,041 77,908 54,716 54,716 35,055 35,055 33,196 33,196 46,776 46,776 30,769 30,769 26,732 52,415 24,161 37,171 23,792 33,415 23,188 29,813 21,614 21,614 19,360 23,214 19,248 19,248 18,968 61,079 14,886 14,886 13,241 29,101 11,544 38,481 11,892 34,742 11,515 16,451 11,456 23,379 11,039 22,078 10,983 22,692 10,733 27,023 9,587 27,870 8,880 12,686 8,845 17,690 6,955 6,955 6,359 18,168 6,124 34,214 5,689 14,367 5,118 34,123 4,319 43,187 4,288 14,294 2,855 27,453 2,744 20,631 2,282 17,555 982 32,718 747 35,120 602 46,285 15,033 30,680 634,314 1,219,218
Stake 74% 100% 100% 100% 100% 100% 51% 65% 71% 78% 100% 83% 100% 31% 100% 46% 30% 34% 70% 49% 50% 48% 40% 34% 70% 50% 100% 35% 18% 40% 15% 10% 30% 10% 13% 13% 3% 2% 1% 49% 52.0%
Opening 2000 4Q10 1994 1992 1994 2010 1994 1991 2001 1993 1994 1989 1997 1996 1996 1999 1995 1986 1991 1989 2001 1986 1995 2001 1997 1987 1996 2005 1997 1991 1992 1980 2001 1995 1982 1994 1996 1992 2004 2011
Location State SP SP SP SP DF SP RJ RS SP RS SP SP SC SP RS
GLA m2 Iguatemi 100% 35,818 55,105 26,017 26,017 23,539 30,178 22,466 29,176 21,632 33,800 20,393 40,303 15,905 26,203 14,152 39,310 11,992 23,983 10,847 28,695 9,156 27,663 8,559 19,020 6,054 20,180 3,678 3,678 2,444 29,101 232,652 432,412
Stake 65% 100% 78% 77% 64% 51% 61% 36% 50% 38% 33% 45% 30% 100% 8% 53.8%
Opening 1980 1995 2011 1980 2010 1966 1996 1983 1992 1991 1991 1997 2007 1991 1996
Location State SP SP RS SP SP SP SP SP PR SP SP SP SP
GLA m2 General 100% 75,958 75,958 19,583 19,583 13,913 16,487 13,269 26,538 11,477 11,477 10,276 10,276 10,233 10,233 8,858 17,716 7,590 8,877 7,092 14,140 6,369 6,369 3,218 3,218 2,264 4,527 190,100 225,399
Stake 100% 100% 84% 50% 100% 100% 100% 50% 86% 50% 100% 100% 50% 84.3%
Opening
Companies regional diversification BR Malls has the most diversified portfolio among the listed companies, with 40 shopping malls in 15 states and 27 cities as of 1Q11; it is the only company present in all regions of the country, with almost 40% of its total GLA located outside the Southeast region, which represents 69-89% of other listed players portfolios, especially the states of So Paulo and Rio. Also noteworthy is Aliansces regional diversification, as the company has a presence in 4 regions, excluding the Southern. Iguatemi and Multiplan have significant exposure to the South and Southeast regions, which represent 92% and 91% of their own GLA respectively.
Table 51: Geographical diversification
Total GLA ('000 m2) States Cities # Malls per region Northern Northeastern Mid Western Southern Southeastern % of total GLA Northern Northeastern Mid Western Southern Southeastern BRML 1,219 15 27 3 3 4 5 25 7% 9% 10% 12% 61% MULT 551 6 7 0 0 1 2 10 0% 0% 9% 21% 69% IGTA 432 6 13 0 0 1 3 11 0% 0% 8% 20% 72% ALSC 477 9 13 0 5 1 0 11 0% 25% 4% 0% 71% SSBR 349 3 7 1 0 1 0 8 13% 0% 8% 0% 78% GSHP 225 3 9 0 0 0 2 11 0% 0% 0% 11% 89%
72
69%
North South
Source: Company reports.
Northeast Southeast
Mid West
North South
Source: Company reports.
Northeast Southeast
Mid West
72%
71%
North South
Source: Company reports.
Northeast Southeast
Mid West
North South
Source: Company reports.
Northeast Southeast
Mid West
Northeast Southeast
Mid West
North South
Source: Company reports.
Northeast Southeast
Mid West
73
Amazonas
Para
Maranhao
Ceara
Piaui Acre Rondonia Mato Grosso Distrito Federal Goias Tocantins Bahia
Northeastern # of cities: 1,793 Population: 14.1mn % of total GPD: 13.1% GPD per capital R$6.0k
Mid Western # of cities: 466 Population: 13.2mn % of total GPD: 8.7% GPD per capital R$15.5k
Parana Santa Catarina Mato Grosso do Sul Sao Paulo
Southeastern # of cities: 1,668 Population: 77.9mn % of total GPD: 56.8% GPD per capital R$16.9k
Rio de Janeiro
Southern # of cities: 1,188 Population: 26.7mn % of total GPD: 16.3% GPD per capital R$14.2k
74
2010 596 546 (60) (60) 486 (54) (13) (9) 12 (11) 411 5 428 (94) 556 874 (40) (201) (139) 495 285 448
2011e 898 827 (83) (83) 744 (76) (13) (12) 8 (12) 638 5 656 (203) 435 (50) 14 (25) 374 383 687
2012e 1,219 1,121 (107) (107) 1,015 (99) (14) (15) 2 (17) 872 6 895 (301) 571 (69) (26) 476 493 943
2013e 1,437 1,322 (126) (126) 1,197 (114) (15) (19) 2 (20) 1,031 6 1,057 (319) 712 (85) (28) 599 619 1,126
2014e 1,576 1,450 (138) (138) 1,312 (125) (16) (21) 2 (22) 1,131 6 1,160 (241) 890 (116) (29) 745 767 1,241
2010 318 155 108 81 9,896 12 10,570 127 28 877 1,439 2,310 307 5,482 10,570
2011e 623 190 147 127 11,377 7 12,471 159 45 365 2,657 2,396 318 6,531 12,471
2012e 551 258 158 172 12,441 (1) 13,579 183 58 389 3,066 2,624 344 6,914 13,579
2013e 1,331 304 169 203 12,484 (10) 14,481 184 69 414 3,081 2,967 372 7,394 14,481
2014e 2,329 334 182 222 12,511 (21) 15,558 184 75 441 3,081 3,386 401 7,989 15,558
75
2010 663 604 (98) (45) (143) 462 (99) (43) (10) 309 (45) (4) 357 44 (4) 349 (120) (15) (105) (11) 218 263 425
2011e 713 649 (109) (55) (164) 485 (93) (19) 2 375 (55) 4 426 21 4 400 (132) (66) (66) (12) 256 311 481
2012e 855 778 (112) (62) (174) 604 (109) (27) 2 470 (62) 532 (35) 435 (143) (86) (57) (13) 278 340 611
2013e 1,060 965 (96) (72) (169) 796 (135) (24) 2 639 (72) 711 (67) 572 (189) (132) (57) (14) 369 441 837
2014e 1,219 1,109 (122) (78) (200) 909 (155) (11) 2 745 (78) 823 (39) 707 (233) (210) (23) (16) 458 535 966
2010 795 180 62 36 416 2,497 3,986 62 79 610 246 23 22 2,943 3,986
2011e 396 171 67 43 422 3,218 4,315 85 55 549 320 39 128 3,139 4,315
2012e 358 205 72 51 425 3,754 4,865 196 63 562 509 40 141 3,354 4,865
2013e 699 254 77 63 429 3,795 5,317 252 78 534 603 42 155 3,653 5,317
2014e 1,053 292 83 73 433 3,759 5,693 252 99 507 603 43 170 4,019 5,693
76
2010 294 264 (55) (15) (70) 194 (23) (22) (11) (6) 32 164 (20) 185 9 63 (54) 173 (22) (0) 152 172 203
2011e 352 315 (62) (18) (79) 236 (32) (24) (4) (5) 25 196 (23) 219 (13) 66 (79) 183 (40) (0) 143 166 249
2012e 431 386 (71) (22) (93) 293 (37) (27) (4) (7) 25 244 (29) 272 (29) 90 (119) 215 (47) (0) 168 196 312
2013e 534 478 (86) (27) (114) 365 (43) (33) (4) (8) 25 301 (36) 337 (48) 86 (134) 253 (56) (0) 198 233 393
2014e 666 596 (104) (34) (139) 457 (54) (42) (4) (10) 25 373 (45) 417 (48) 92 (139) 325 (72) (0) 254 298 496
2010 628 71 0 24 22 135 1,414 2,294 21 29 103 276 376 0 1,488 2,294
2012e 862 101 0 28 25 163 2,053 3,233 29 29 87 603 761 0 1,724 3,233
2013e 915 126 0 30 31 173 2,244 3,520 32 35 93 695 785 0 1,880 3,520
2014e 1,021 157 0 33 39 184 2,318 3,751 32 43 100 695 797 0 2,084 3,751
77
FY09A 1,141 130 87 6,958 147 8,463 106 20 238 1,347 70 1,614 3,395 68 5,068 8,463
FY10A 318 236 108 9,688 220 10,570 127 28 877 1,439 128 2,181 4,780 307 5,789 10,570
FY11E 623 317 147 11,145 240 12,471 159 45 365 2,657 83 2,313 5,622 318 6,849 12,471
FY12E 551 430 158 12,179 261 13,579 183 58 389 3,066 77 2,547 6,321 344 7,258 13,579
Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
Net debt Net Debt/Equity Debt/Equity Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV P/FFO FCF yield Dividend yield Capex/Revenues Cash Earnings Assets/Equity Coverage (EBIT/Interest) Shares WACC Perpetual Growth Cost of equity Cost of debt
312 6.2% 28.7% 1.0 FY09A 4.5 12.7 16.0 2.0% 0.0% 35.4% 376.9% 1.7 0.8 202 0.0% 0.0% 0.0% 0.0%
1,248 21.6% 27.0% 2.9 FY10A 3.7 26.1 24.5 (17.5%) 1.0% 298.2% 68.1% 1.8 1.2 406 0.0% 0.0% 0.0% 0.0%
2,193 32.0% 41.1% 3.3 FY11E 4.3 20.7 20.2 (13.6%) 0.9% 180.1% (14.7%) 1.8 1.8 449 9.4% 4.0% 9.3% 9.6%
2,699 37.2% 44.8% 3.0 FY12E 3.6 16.2 15.7 (5.2%) 1.2% 96.7% 23.6% 1.9 2.3 449 0.0% 0.0% 0.0% 0.0%
Days receivable 121 158 Days inventory Days payable 224 169 Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data).Fiscal year ends Dec
78
FY10A 795 180 62 2,497 452 3,986 62 79 469 246 184 23 1,021 22 2,943 3,986
FY11E 396 171 67 3,218 464 4,315 85 55 403 320 216 39 1,048 128 3,139 4,315
FY12E 358 205 72 3,754 476 4,865 196 63 410 509 222 40 1,370 141 3,354 4,865
FY13E 699 254 77 3,795 492 5,317 252 78 376 603 186 42 1,509 155 3,653 5,317
Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
Net debt Net Debt/Equity Debt/Equity Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV P/FFO FCF yield Dividend yield Capex/Revenues Cash Earnings Assets/Equity Coverage (EBIT/Interest) Shares WACC Perpetual Growth Cost of equity Cost of debt
(386) (13.1%) 13.9% (1.1) FY10A 17.7 27.5 22.8 843.5% 0.7% (15.1%) 12.1% 1.4 (6.9) 179 8.8% 4.0% 0.0% 0.0%
113 3.6% 16.2% 0.3 FY11E 16.0 23.4 19.3 (340.7%) 0.9% (5.4%) 103.7% 1.4 (15.8) 179 8.8% 4.0% 0.0% 0.0%
450 13.4% 24.1% 0.8 FY12E 12.8 21.6 17.6 289.6% 1.1% (3.8%) 782.9% 1.5 (11.6) 179 8.8% 4.0% 0.0% 0.0%
260 7.1% 26.2% 0.4 FY13E 9.6 16.3 13.6 145.1% 1.2% (4.0%) 384.4% 1.5 (2.5) 179 8.8% 4.0% 0.0% 0.0%
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data).Fiscal year ends Dec
79
FY10A 628 71 24 1,414 157 2,294 21 29 103 276 54 322 806 0 1,488 2,294
FY11E 905 83 26 1,694 174 2,882 24 25 81 438 82 640 1,290 0 1,592 2,882
FY12E 862 101 28 2,053 188 3,233 29 29 87 603 118 643 1,509 0 1,724 3,233
FY13E 915 126 30 2,244 204 3,520 32 35 93 695 137 648 1,640 0 1,880 3,520
Accounts payable Other current liabilities Long-term debt Deferred taxes Other liabilities Total liabilities Minority interest Shareholders' equity Liabilities + Equity
Net debt Net Debt/Equity Debt/Equity Net Debt/EBITDA Valuation, Macro EV/EBITDA P/E P/BV P/FFO FCF yield Dividend yield Capex/Revenues Cash Earnings Assets/Equity Coverage (EBIT/Interest) Shares WACC Perpetual Growth Cost of equity Cost of debt
(130) (8.7%) 20.0% (0.7) FY10A 15.4 18.3 16.1 0.8% 0.8% 65.6% 65.5% 1.5 3.0 79 9.5% 4.0% 9.6% 9.4%
94 5.9% 29.0% 0.4 FY11E 14.0 19.4 16.7 (5.5%) 1.4% 82.9% (16.3%) 1.8 2.5 79 9.5% 4.0% 9.6% 9.4%
307 17.8% 36.7% 1.1 FY12E 11.3 16.6 14.1 (5.2%) 1.3% 105.2% 30.4% 1.9 2.0 79 9.5% 4.0% 9.6% 9.4%
349 18.5% 38.7% 1.0 FY13E 9.1 14.0 11.9 0.0% 1.5% 46.4% 19.3% 1.9 2.2 79 9.5% 4.0% 9.6% 9.4%
Source: Company reports and J.P. Morgan estimates. Note: R$ in millions (except per-share data).Fiscal year ends Dec
80
Other Companies Recommended in This Report (all prices in this report as of market close on 15 July 2011) Aliansce (ALSC3.SA/R$13.88/Neutral), Sonae Sierra Brasil (SSBR3.SA/R$23.85/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. In compliance with Instruction 483 issued by Comissao de Valores Mobiliarios (the Brazilian securities commission) on July 6, 2010, the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views about the securities and issuers; (2) that all recommendations issued by him or her were independently produced, including from the entity in which he or she is an employee; and (3) that he or she will set forth any situation or conflict of interest believed to impact the impartiality of the recommendations herein, as per article 17, II of Instruction 483.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Sonae Sierra Brasil within the past 12 months. Client:J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: BR Malls, Sonae Sierra Brasil, Aliansce. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Sonae Sierra Brasil, Aliansce. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: BR Malls. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Sonae Sierra Brasil, Aliansce. Investment Banking (next 3 months): J.P. Morgan expect to receive, or intend to seek, compensation for investment banking services in the next three months from Sonae Sierra Brasil, Aliansce. Non-Investment Banking Compensation:J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from BR Malls.
BR Malls (BRML3.SA) Price Chart
36
27
Price(R$)
18
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
81
70
56
42 Price(R$) 28
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
75
60
45 Price(R$) 30
15
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
82
42 35 OW R$35
28 Price(R$) 21
Date 10-Jun-11
14
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 10, 2011.
24
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Jun 10, 2010.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] The analyst or analyst's team's coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Motta, Marcelo Garaldi: Sonae Sierra Brasil (SSBR3.SA)
83
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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(JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. 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Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of
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publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. 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The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised June 13, 2011.
Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P
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