Top Trading Ideas/Special Situations: BRADEAL
February 24, 2014 Our model portfolio Top Trading Ideas is performing very well in Brazil amid a weak market. This is because we highlighted six takeover situations in this market of which three have already received offers - the latest being America Latina Logistica today at a 50%+ premium, and one is going through a significant restructuring which in our view will lead to a sell-out. We expect to see a lot more deals in Brazil given the undervaluation of this market and remain very positive on the special situations that we recommend or have been recommending (below): Brookfield Inc SA (BISA3): Recommended 12/31/2013 at BRL 1.10 on the expectation of a minority buyout which was announced on 02/14/2014 - the shares are currently trading at 1.48, +35%. We expect that fair value will be set above the maximum offer price range of 1.60. We think the shares are worth in excess of 3.00 and we do not expect the offer to succeed at the indicated range. Fleury (FLRY3): Recommended 01/15/2014 at BRL 18.91 on the expectation of an LBO following the Diagnosticos de America acquisition. The controlling shareholder is currently negotiating the sale of its stake which would lead to a mandatory offer to minorities. Expectations are for an offer in the 20-22 range. We pegged fair value at around 22/share. We would not advise to tender at this level and would remain shareholder along with the private equity group. The shares are currently trading at BRL 19.05. America Latina Logistica (ALLL3): Recommended 12/31/2013 at BRL 6.56 on the expectation of a takeover. The company received after the close today an offer from Cosan SA at 10.184/share (+55%). Gafisa (GFSA3): We first initiated a buy on Gafisa in our 06/10/2013 report at BRL 3.14 with a target of 5.00 justified by the balance sheet restructuring at the company following the sale of a 70% stake in its Alphaville subsidiary for BRL1.4bn (Gafisa's market cap is only 1.3bn). The company announced two weeks ago it will consider to split in two by spinning off its Tenda unit. The company is in flux and may soon be in play. Our target remains unchanged at 5.00. The stock is currently trading at 3.00. We also continue to expect offers on PDG Realty (PDGR3) and Rossi Residencial (RSID3), two other troubled real estate development companies. PDG has a market cap of BRL 2.1bn compared to equity in excess of 5bn. The company counts a number of value/activist shareholders as its biggest shareholders. Rossi has a market cap of BRL 740m vs. equity capital of 2.5bn. Some of the same shareholders in PDG are also large and recent shareholders in Rossi. In fact we believe the Brazilian real estate sector will significantly consolidate given its very fragmented nature while having collapsed (only in the stock market - physical property in Brazil is going through the roof) in the last 3 years. We would not be surprised also to see take-private offers for BR Malls (BRML3) and especially BR Properties (BRPR3), two major REITs selling at significant discounts to NAV.