Brazil: Temer On Trial, Will Consumer Visit Malls?

Brazil: Temer On Trial, Will Consumer Visit Malls?

EMERGING MARKETS DAILY Brazil: Temer On Trial, Will Consumer Visit Malls?

Brazil’s president is under fire, but Morgan Stanley hope springs eternal for Brazil’s consumer and some shopping malls.
ByDimitra DeFotis June 6, 2017 10:59 a.m. ET
A court in Brazil begins deliberations today on allegations that President Michel Temer used illicit funds in his 2014 election campaign.

A decision could take weeks or longer, and Temer would likely appeal a negative result. But the electoral court decision could force Temer — and his economic reform agenda — from office, The New York Times reports.

The iShares MSCI Brazil Capped exchange-traded fund (EWZ) was up 0.6% in recent trading, but is down more than 7% over the past four weeks. Shares of mining giant Vale (VALE) were up 1.6% in recent trading, and are up 0.6% over four weeks. Shares of state-controlled oil producer Petroleo Brasileiro or Petrobras (PBR) were down 0.8%.

But the economy may not come to a stand still. Morgan Stanley analysts Nikolaj Lippmann and Jorel Guilloty said in a note Tuesday that they still like Brazilian malls, with an overweight rating on Iguatemi Empresa de Shopping Centers (IGTA3.Brazil) and an upgrade of BR Malls Participacoes (BRMSY) to overweight. Neither trades with an American depositary receipt, but BR Malls trades over the counter. They write:

” … Both names are self-help stories, with material embedded growth at a discount to U.S. peers. We see Iguatemi as farther along the restructuring cycle, with growth nearer term yet see an opportunity in BR Malls as well as the company restructures operations … Brazil offers compelling demographic tailwinds … We estimate that even with zero growth per capita, demographics alone can add 200-300 basis points to mall revenue (real) per year. While the internet will take some of the growth, we view Iguatemi and BR Malls as making the right moves, focusing on differentiated content (stores and other mall features). We forecast U.S. dollar earnings before interest, taxes, depreciation and amortization (Ebitda) growth of 54% for Iguatemi and 24% for BR Malls in 2016-2019 estimated versus the 10% U.S. mall REIT average; the stocks trade at discounts of 33% and 31%, respectively, to US peers on 2019e Ebitda multiples …
Iguatemi remains our preferred pick in Brazil. Our R$40 price target (+5% higher) implies +26% upside. IGTA is part of the Morgan Stanley Latin America model portfolio. …”
One tiny fund trying to capitalize on real estate trends in the region: the $2.9 million Tierra XP Latin America Real Estate ETF (LARE), which is up 21% in 2017, while the iShares MSCI Latin America 40 ETF (ILF), with assets of $1 billion, is up 11%.


See our posts Brazil Roundup: Rate Cut to 10.25%, Moody’s Slashes Bank Outlook and Petrobras CEO Wants Continuity In Brazil’s Political Storm.