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  • PREVIEW-Profit At Brazil's BM&FBovespa, Cetip To Hinge On Costs

    Cetip releases earnings today. BM&FBovespa releases results next week. This is an article I wrote for Reuters ... Suggestions, comments welcome,



    By Guillermo Parra-Bernal

    SAO PAULO, Aug 1 (Reuters) - Record-low interest rates and

    easing risk aversion bolstered second-quarter results at

    exchange and clearinghouse companies in Brazil, with expense

    controls the defining element behind profits, a Reuters poll of

    analysts showed on Wednesday.

    Analysts covering the so-called market structure industry

    predict contrasting fortunes for the two firms, with BM&FBovespa

    <BVMF3.SA>, the nation's sole listed bourse, posting the

    stronger results after successfully curbing operational


    Volatility, which for most of 2011 dragged on BM&FBovespa's

    revenue, this time around helped bolster volume growth. Yet, as

    pointed out by Credit Suisse Group analyst Victor Schabbel, it

    "may become a hurdle for the long run."

    Flagging demand for auto loans weighed on profits at Cetip,

    Brazil's largest securities clearinghouse, offsetting rising

    revenue from bond registration and custody. Expenses rose from

    abnormally low levels in the prior quarter as Cetip awarded more

    stock options to its executives, the poll found.

    Still, earnings may not trigger swings in share prices.

    Investors will instead focus on comments by management on the

    outlook for competition between both firms and capital markets

    activity and, in the case of Cetip, for the cloudier outlook on

    auto financing.

    "We do not expect earnings to be a major driver for share

    performance, as both companies already disclosed operational

    data" for the quarter, Votorantim Corretora analysts Flavio

    Yoshida and André Parize wrote in a recent client note.

    Cetip will report earnings on Thursday after markets close,

    while BM&FBovespa will unveil them on Aug. 7.

    Investors buy shares of market structure firms to gain

    exposure to local capital markets. BM&FBovespa, the world's No.

    3 exchange, handles all the equity and derivatives trading and

    is the main beneficiary of all stock listing activity in Brazil.

    Cetip, which registers 97 percent of all bond deals in the

    local market, looks set to lag behind BM&FBovespa in terms of

    profit and revenue growth as well as expense controls. Revenue

    growth probably expanded at a single-digit pace on an annual

    basis for the first time in two years, the poll found.

    In Cetip's traditional segment of registration and custody

    of fixed-income securities, revenue rose roughly 15 percent from

    a year earlier, while sales of liens on auto loans at the

    financing unit fell about 9 percent, the analysts said.

    Banks in Brazil are scaling down vehicle financing this year

    after defaults on the segment rose to a record. Cetip's

    financing unit depends heavily on loans in the segment because

    it registers them and sells specific, customized data on their

    value to banks.

    "We should also start seeing higher deductions from gross

    revenues, as banks seek higher discounts" in depositary fees, J

    Safra Corretora analysts Francisco Kops and Rafael Ferraz said

    in a note.

    The poll showed net income up 15 percent to 68.8 million

    reais ($33.6 million) from a year earlier, according to the

    average estimate of nine analysts; it fell 3.6 percent from the

    first quarter on rising operating and financial expenses.

    Earnings before interest, tax, depreciation and amortization

    -- a measure of operational profitability known as EBITDA --

    edged up a modest 4.3 percent to 141.5 million reais on an

    annual basis. The indicator fell 0.3 percent from the first


    Net income at BM&FBovespa rose 8 percent from a year earlier

    to 317.7 million reais, according to the average estimate of

    nine analysts. On a sequential basis, profit jumped 13.3 percent

    despite a small decline in revenue per contract and an increase

    in the share of high-frequency trading.

    The poll also forecast net revenue to increase 17.7 percent

    to 550.6 million reais from a year ago, with EBITDA climbing

    27.3 percent to 398.8 million reais from the year-earlier


    Average trading volume at the Bovespa equities segment rose

    7 percent to a record 6.7 billion reais in the quarter, while

    that for the BM&F derivatives and commodities segment jumped 24

    percent to 3.4 million contracts -- an all-time high.

    The following is a table with earnings estimates for both

    firms. All the figures are in Brazilian reais.



    (BVMF3.SA) MARGIN (%)


    Q2 2012 (NYSE:E) 550.6 mln 398.8 mln 72.4 pct 317.7 mln

    Q2 2011 467.6 mln 313.2 pct 67.0 pct 294.2 mln

    (y/y pct) + 17.7 pct + 27.3 pct n.a. + 8.0 pct

    Q1 2012 502.8 mln 368.3 mln 73.3 pct 280.4 mln

    (q/q pct) + 9.5 pct + 8.3 pct n.a. + 13.3 pct



    (CTIP3.SA) MARGIN (%)


    Q2 2012 (E) 196.7 mln 141.5 mln 71.9 pct 68.8 mln

    Q2 2011 184.8 mln 135.7 mln 73.4 pct 60.0 mln

    (y/y pct) + 6.5 pct + 4.3 pct n.a. + 14.3 pct

    Q1 2012 185.6 mln 142.0 mln 76.5 pct 71.4 mln

    (q/q pct) + 6.0 pct - 0.3 pct n.a. - 3.6 pct


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 02 1:22 PM | Link | Comment!
  • Steelmaker Gerdau Sees Recovery In Brazil As Second-Quarter Profit Beats Estimates

    Note: This is a note I wrote for Reuters News. Suggestions/comments more than welcome,



    SAO PAULO, Aug 2 (Reuters) - Robust output and sales in

    Brazil helped steelmaking giant Gerdau <GGBR4.SA> post

    second-quarter net income that beat analysts' estimates, as the

    world's No. 2 producer of long steel products foresees a gradual

    recovery in its home market.

    Operational results signaled that activity in the sector is

    recuperating despite the impact of high raw materials costs,

    mounting competition from imported steel and a year-long

    slowdown in Brazil. A recovery in homebuilding in Brazil should

    spur steel sales through 2013, Chief Executive André

    Gerdau-Johannpeter told reporters at a conference call on


    "We believe that the market is coming back and the company

    is getting prepared for that," Gerdau-Johannpeter said.

    Gerdau, based in Porto Alegre, Brazil, earned 549 million

    reais ($269 million) in the quarter, compared with 503 million

    reais a year earlier, according to a securities filing on

    Thursday. A Reuters poll of 11 analysts had forecast average net

    income of 428.4 million reais for the period.

    On a quarter-on-quarter basis, the most-widely used gauge of

    earnings performance by investors, profit soared 38 percent from

    397 million reais in the first quarter. Revenue per tonne sold

    rose in the quarter, highlighting efficiency gains and the

    ability of Gerdau to keep expenses relatively at bay.

    Production of raw steel gained 2.1 percent sequentially to

    5.046 million metric tonnes, the highest level in a year, as the

    company's Brazilian unit and, to a lesser degree, the Latin

    American and specialty steel units experienced rising orders.

    Sales climbed 1.1 percent from the first quarter.

    As a result, gross margins in the Brazil and specialty steel

    units rose, and will do so as demand for long steel, mostly used

    in construction projects, gains traction. Despite all that,

    revenue came in at 9.975 billion reais, below the poll's

    estimate of 10.008 billion reais.

    "We highlight improvements in the Brazilian domestic market

    demand, which in our view is a positive sign for the second half

    of this year," said Ivano Westin, a senior mining and steel

    analyst for Credit Suisse Group in São Paulo.

    Preferred shares of Gerdau rallied 2 percent to 18.40 reais

    on Thursday. The stock is up 29 percent this year.

    Costs per tonne produced rose 3.4 percent, below the 6.2

    percent gain in revenue per tonne produced. Expenses rose 6

    percent on a sequential basis and 8 percent from the

    year-earlier period.

    "We are taking all the steps to rein in the impact of costs

    and expenses in a very challenging environment,"

    Gerdau-Johannpeter said in the call.

    Still, the company borrowed more short-term debt to unload

    unwanted inventory. Working capital loans, or the money that

    Gerdau borrows to finance day-to-day operations, rose by 13

    percent in the quarter to 10.3 billion reais, the filing added.

    Working capital turnover rose by five days in the quarter,

    prompting management to "instruct all our units to reduce it," a

    move that could help enhance profitability, Chief Financial

    Officer Osvaldo Schirmer said in the same call.


    Gerdau's investment totaled 850 million reais in the quarter

    as management exerted greater selectivity when assessing new

    projects. "This is a sign of discipline in capital allocation in

    a period of challenging environment," said JPMorgan Securities

    analyst Rodolfo de Angele.

    Growing optimism over a potential recovery in the United

    States, where results disappointed for the first time in three

    quarters, led Gerdau to resume plans to build a $540 million

    plant in Mexico to produce profiles in cold-bended steel.

    The new mill will have capacity to produce 1 million tonnes

    of steel and 700,000 tonnes of rolled products and should begin

    operations by 2014.

    A hot rolled coil mill with the capacity to produce 770,000

    tonnes of the product will begin operations by year-end,

    Gerdau-Johannpeter added. The company maintained its estimate

    for capital expenditures at 10.3 billion for the 2012-2016


    Earnings before interest, tax, depreciation and

    amortization, a gauge of profitability known as EBITDA, jumped

    23 percent to 1.244 billion reais from the first quarter.

    EBITDA came slightly below analysts' average forecast of 1.270

    billion reais.

    The sequential gain in EBITDA was stoked by the robust

    results posted by the Brazilian steel and the specialty steel

    divisions. Both increases helped outweigh a 24 percent tumble in

    EBITDA at the Latin American steel division and a 1 percent

    decline at the North America unit.

    EBITDA per tonne produced, a gauge of profitability per

    unit, rose 21 percent to 246.5 reais in the second quarter from

    the prior three months. EBITDA rose to 12.5 percent of revenue,

    compared with an 11 percent so-called EBITDA margin in the first


    Net income rose 9.1 percent from the second quarter of last

    year after a drop in taxes and financial expenses helped offset

    a faster gain in production costs.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Aug 02 1:20 PM | Link | Comment!
  • Record-low Interest Rates In Brazil Alone Won't Jump-start Local Equities -- At Least In The Short Term
    This is a recent article I wrote about the recent disconnect between the level of interest rates and earnings expectations, and how that might mean heady days for the Brazilian equity markets. Hope this helps some of you who are looking for information about Brazil's markets,


    Analysis - Lowest Brazil rates unlikely to jump-start Bovespa By Guillermo Parra-Bernal

    SAO PAULO | Tue Jun 12, 2012 4:25pm BST

    (Reuters) - Brazil's record-low interest rates are unlikely to kick-start the local stock market as they did in the aftermath of the 2008 global financial crisis - another sign that the government's heavy-handed economic policies are losing their punch.

    An inverse relation between rate trends and the price-to-earnings ratio, a gauge of earnings expectations, was broken this year for the first time since 2006, according to Thomson Reuters data. Some investors say this means that local stocks will fail to benefit from central bank efforts to slash borrowing costs, at least in the short term.

    Steep downward earnings revisions and worries over growing government meddling in the private sector have made investors more cautious about Brazilian stocks, even as they look increasingly cheap. Appetite has also been hurt by some European countries' escalating debt woes.

    "The perception is that Brazil is heading into a difficult situation in the short term, and that not even low rates will bring about a turning point for equities," said George Sanders, who helps manage 400 million reais (127 million pounds) in assets for Infinity Asset Management in São Paulo.

    The situation underscores some of the policy risks in Latin America's largest country, where a strong government hand in the economy has ignited fears of a credit bubble and fostered a perceived loss of autonomy at the central bank. Some investors also worry that the government's focus on economic growth is undermining Brazil's inflation-targeting regime.

    Since taking office last year, President Dilma Rousseff has made spurring annual GDP growth of above 4 percent her top priority. But for investors, such a goal risks eroding some of the economic stability that made Brazil a market darling under her predecessor and political mentor, Luiz Inacio Lula da Silva.

    The central bank slashed the benchmark overnight Selic rate to a record low of 8.5 percent late last month, and policymakers have signaled that more reductions will take place "sparingly," despite some signs that inflation may soon stage a comeback.

    Her efforts have so far failed to prevent analysts from slashing earnings and economic growth forecasts this year. Investors are especially worried about government pressure on Brazil's biggest private company, Vale (VALE5.SA), to invest more in steel, and on banks to charge lower interest rates.

    Rousseff's stance has led investors to demand bigger premiums to own Brazilian equities. In May alone, $1.2 billion in investor money left the domestic equity market.

    "Brazil has great policy options, but the government should make better use of them," Sanders said.

    Moreover, many investors say that Brazil has become a difficult place to do business, which could be hampering its ability to lure and retain foreign equity investors.

    According to the World Bank's Doing Business survey last year, Brazil ranked 126th among 183 countries in terms of deal-making conditions. Brazil had ranked 120th in the 2010 survey.


    Unlike in 2008, when massive fiscal stimulus and aggressive rate cuts helped Brazil's Bovespa stock index .BVSP soar 83 percent in 2009, investors believe that this time any stock rally will be short-lived. At the time, the central bank slashed the benchmark interest rate to a then-record low of 8.75 percent.

    The Bovespa is down 4.2 percent this year, on top of an 18 percent tumble in 2011.

    The last time the Bovespa had back-to-back yearly declines was between 2000 and 2002, when it shed a combined 38 percent. While analysts acknowledge that the correction seen over the past 18 months is making the Bovespa look cheap, foreign investors fail to see an attractive entry point at the moment.

    "For a re-rating in equities, we believe investors may need greater confidence in the bottoming and potential reacceleration in earnings growth later in the year," Credit Suisse Group strategist Andrew Campbell said in a recent report.

    The number of downward earnings revisions climbed to 275 in May from 196 in December, while the number of upward revisions rose to 198 from 133 in that period, Thomson Reuters I/B/E/S data showed. Economists have cut their 2012 economic growth estimates to 2.53 percent as of last week, from 3.4 percent in January, a weekly central bank survey found.

    Earnings-per-share estimates fell an average 7 percent since January, Campbell added, with the bulk of the reductions focused in the heavily weighted mining, energy and real estate sectors.

    "Persistent downward earnings revisions and a less favorable investment environment are the main reasons why lower rates alone are not enough to drive a re-rating in the Brazilian market," Campbell wrote.


    Carlos Sequeira, head of equity strategy at BTG Pactual, expects about half of consolidated earnings estimates for the 68 stocks comprising the Bovespa to be revised downward soon.

    Yet stocks have rarely looked so attractive compared with local bonds. The difference between bond and dividend yields, a gauge of relative returns between both asset classes, posted negative readings between March and May this year, which had not happened since early 2009, Thomson Reuters data showed.

    The Bovespa is now trading at 9.3 times estimated 12-month earnings, which looks cheap compared with the S&P 500 .SPX, which trades at about 12 times projected earnings, according to Thomson Reuters data.

    Brazil's stock index, whose component stocks are heavily dependent on commodity prices, is especially susceptible to hiccups in the global economy. That means that low stock prices and falling interest rates are not the only consideration when looking at the Bovespa.

    "We acknowledge that in the short term, a more predictable global scenario, and thus less risk aversion, is a necessary condition for the better performance of Brazilian stocks," BTG Pactual's Sequeira said.

    According to Frederick Searby, a strategist with Deutsche Bank Securities in New York, Brazil is in some ways in a relatively resilient position but remains vulnerable to a reversal in foreign investment inflows into bonds and stocks.

    Of Latin America's five largest equity indexes, Searby identified Brazil's as the most vulnerable to a downturn in China and to a decline in commodities prices.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jun 17 10:31 PM | Link | Comment!
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