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Mexican Housing Thaw to Push Geo to Three-Year High
 Thomas Black - Bloomberg
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February 22, 2010
Corporacion Geo SAB, the Mexican housing company whose shares more than doubled last year, may rise to a three-year high in 2010 as banks boost mortgage lending and the government backs more loans, Credit Suisse Group AG says.
Geo shares will climb 26 percent to 46 pesos by year-end from a Feb. 19 close of 36.51 pesos, as profit rises 28 percent to 1.93 billion pesos ($150 million) and sales increase more than 10 percent, said Alan Solis, an analyst at Credit Suisse in Mexico City who rates the stock “outperform.”
“Geo is gaining market share,” Solis said. The builder is benefiting from the government-subsidized mortgages that make up more than 60 percent of home loans in Mexico, he said.
Single-family home building, the largest component of construction, will help the industry expand 2.3 percent this year after it shrank 7.5 percent in 2009 amid Mexico’s worst economic slump since the 1930s, according to the Mexican Construction Industry Chamber. Homebuilding for individual families makes up more than 18 percent of construction, according to the chamber.
“Our economic model shows the construction industry has begun a gradual recovery,” the Mexico City-based construction chamber said in a Web site presentation with its 2010 forecasts for construction and the Mexican economy.
The total number of housing loans, including private and public lenders, may rise 8 percent to 732,000 this year, according to the Mexican Mortgage Association. Last year, mortgages dropped 12 percent to 677,594.
Latest Results
Mexico City-based Geo, the country’s second-largest homebuilder, is scheduled to report fourth-quarter earnings March 1. Culiacan-based Desarrolladora Homex SA, the largest homebuilder, and Consorcio Ara SAB, based in Mexico City, will report earnings tomorrow. Another builder, Mexicali-based Urbi Desarrollos Urbanos SA, is slated to report today.
Mexico escaped the worst of the housing crisis that struck the U.S., U.K. and Spain because there was no wave of foreclosures, said Dan McGoey, an analyst with the Mexican brokerage of Citigroup Inc. Mexican lenders only offered “prudent” loans with fixed interest rates that required down payments, he said from Mexico City. The average rate of non- performing loans is 4.7 percent in Mexico, the mortgage association said, compared with 9.5 percent in the U.S., according to the Mexico City-based Mortgage Bankers Association.
“Mortgage penetration in Mexico remains very much underdeveloped,” McGoey said. “The ills that affected the U.S. and a whole host of other countries really are worlds apart from the environment in Mexico.”
Home Prices
The country has a housing deficit as about 8.9 million families either don’t have homes or live in substandard dwellings, the government’s National Housing Commission said. The registry of new home construction fell 35 percent last year and inventory declined to about six months worth of homes, the Mexico City-based commission said.
The average price for the 26.7 million homes in Mexico is about 445,000 pesos ($34,800), the commission said.
A lack of financing last year caused many small construction companies to scale back or abandon projects, allowing Geo and other larger builders to gain market share, McGoey said.
“In 2009, small builders were still selling from inventory of projects that were already underway,” McGoey said. “There’s much less inventory for those small builders to work off of in 2010.”
Tax Rules
Geo’s earnings could be hurt by new tax rules on companies that consolidate several units, said Christian Papayanopulos, an analyst with the Mexico City brokerage Ixe Grupo Financiero. Geo and Homex, the two homebuilders in Mexico that could face payments for past deferred taxes, haven’t commented on the impact of the new rules, he said.
“It could be a risk,” said Papayanopulos, who has “buy” recommendation on Geo. “We don’t know yet.”
Vania Fueyo, investor relations officer for Homex, and Hans Schroeder, investor relations officer for Geo, didn’t immediately respond to e-mail requests for comment.
Empresas ICA SAB, Mexico’s largest construction company, said Feb. 12 the tax change will result in payments of 2.7 billion pesos over a five-year period.
Jose Miguel Garaicochea, who helps manage 10 billion pesos of stocks at the Mexican brokerage of Banco Santander SA, rates Geo shares “overweight,” betting the company will outperform its forecast. The company in December said it expects revenue to rise between 8 percent and 11 percent in 2010 and to post cash flow margins of about 21 percent to 23 percent.
“Because of the restrictions on credit last year, the housing companies are being a bit conservative with their guidance,” Garaicochea said.
Geo is the top pick for McGoey because the company manages working capital better than its peers, he said. Urbi is his second choice, he said.
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