Malls CS June2013

  • View

  • Download

Embed Size (px)

Text of Malls CS June2013

  • 7/29/2019 Malls CS June2013


    Brazilian MallsBenign Growth Outlook Combined with Defensive Features

    June 18, 2013

    Research Analysts

    Guilherme Rocha55 11

    Nicole Hirakawa55 11

    Vanessa Quiroga52 55

    DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to dobusiness 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 thisreport. Investors should consider this report as only a single factor in making their investment decision.


    In this report we analyze (i) impact of the shift in interest rates and inflation expectations in the malls shares,(ii) malls sales prospects in a scenario of potentially less buoyant overall retail sales, (iii) supply outlook ofnew malls (iv) malls operators development track-record and performance of the most recent inauguratedbatch of assets.

    Malls shares have been under pressure since early 2013 when interest rates expectations startededging up, but investors should focus on real rates. Future changes in nominal rates could impactshares in the ST, but real rates are way more comparable to FFO yields. In other words, if nominal ratesmove up on the back of higher inflation expectations, the impact should be neutral for the shares. Moreover,if inflation expectations deteriorate we could see investors willing to jump back into the sector given mallsinflation hedging characteristics and more compelling FFO yields relative to the benchmark.

    Malls shares offer a combination of defensiveness and inflation protection, which can provehandy if macro uncertainty remains. We like malls earnings foreseeability and inflation-adjusted rentalagreements (combined with underlying real assets), especially in light of recent BRL depreciation.

    Unlike bond yields, malls FFOs tend to increase over time and growth potential continues to beinspiring, in our view. Despite the high correlation between malls shares and LT inflation bonds thiscomparison has its caveats: Bond yields remain flat until maturity, whereas malls FFO yield tend to grow.Malls FFO CAGR was 14-49% from 07-12 and we expect it to be 12-20% during the next five years.

    Fundamentals remain supportive of future growth. Supply of new malls until 2014 should not harmsectors expansion plans and malls sales should continue to outperform overall retail sales, ultimatelyincreasing malls sales representativeness in total retail sales. Lastly, retail sales could pick-up during 2H13.

    Future growth should be geared towards new malls development. We expect listed-players to outruncompetition. Our track-record analysis underscores our positive stance on Multiplan. We see the company

    as the best positioned player to deliver on organic growth.Stock Selection: (i) Upgrading BR Malls to Outperform, (ii) resuming coverage of Multiplan with anOutperform rating and (iii) Downgrading Sonae Sierra and Aliansce to Neutral.

  • 7/29/2019 Malls CS June2013



    June 18, 2013

    Table of Contents

    Coverage Summary 3

    Brazilian Shopping Malls Overview 4Recap of Malls Shares Performance YTD 5Impact of Interest Rates Expectations in Malls Shares 6

    Inflation-hedging Characteristics 7

    Retail Sales Outlook 8Why we prefer to focus on IRRs? 11Why Malls Operators are More Defensive ? 4Stock Selection 4

    Multiplan 13

    BR Malls 14

    Aliansce 15

    Sonae Sierra 16

    Future Growth Should Be Geared Towards Developments 17Solid Outlook Attracted New Entrants, But Listed Players Should OutrunCompetition 18Snapshot of New Developments Coming to the Market 19GLA penetration outlook post 2014 21

    Development Track Record and Performance of Recently Opened Malls 22

    Multiplan 23

    BR Malls 24

    Aliansce 25

    Sonae Sierra 27

    How Much GLA Growth We Have In Our Numbers? 29

    CSe versus Consensus 3012M Fwd P/FFO 3124M Fwd P/FFO 32

    Appendix: Household Consumption to Support Retail Sales 33Corporate Templates 34Disclosures 34

  • 7/29/2019 Malls CS June2013



    June 18, 2013

    Coverage Summary

    Company Name


    Market Cap (R$ mn)

    ADTV 20d (R$ mn)

    Target Price (R$/share)

    Current Price (R$/share)

    Upside (%)


    P/FFO 2014

    P/FFO 2015

    EV/Ebitda 2014

    EV/Ebitda 2015

    IRR (real and leveraged)

    Multiplan Aliansce Sonae SierraBR Malls


    9,393 9,720 3,186 1,978

    130.4 29.1 10.7 1.8

    26.50 67.00 24.50 31.50

    20.63 51.16 20.05 25.88

    28.5% 30.0% 22.0% 22.0%

    16.9x 17.1x 19.1x 13.8x

    14.1x 15.3x 14.5x 11.8x

    12.2x 13.4x 12.7x 10.5x

    10.9x 12.2x 11.0 x 9.0x

    8.0% 7.9% 7.6% 8.8%


  • 7/29/2019 Malls CS June2013


    June 18, 2013


    Brazilian Shopping Malls Overview

    We remain optimistic about shopping malls longer-term story. Fundamentalsremain solid regardless of a potentially less vibrant outlook for overall retail in the short-term. Malls sales penetration in total retail sales climbed to 25% from 13% in the lastten years and we expect this trend to continue playing out. Shopping experience inmalls tend to be superior to street stores, especially in light of Brazils weather andsecurity conditions.

    Growth should be m ainly geared towards new developments in the follo wingyears. We expect companies (especially the listed ones) to continue to be aggressiveon organic growth. Our coverage sample targets 16% IRR (real and unleveraged) forGreenfields and 14% IRR for expansions to existing assets (Brownfields), attractivereturn rates, in our view and higher that what we assume in our models.

    M&A should continue to come, but will l ikely not abound as in the past, sincethe more obvious targets seem to have been already taken and competition for assetsgot stiffer. Nonetheless, the industry is still highly fragmented and we still see room forconsolidation; ten largest players account for c.30% of the total market and the top-fiveones for 25%.

    Focusing on the short-term

    Large portion of the recent move in real interest expectations seems already priced in.Since the beginning of 2013, the real rates implied in NTN-B 24 yields (after taxes)increased ~150bps. Meanwhile, mall stocks contracted significantly, bringing spreadsto previous levels, which are fairly above historical average in a scenario of still decentgrowth outlook for mall operators.

    Retail sales should pick up when and if inflation starts easing (2H13 in our view). The

    sharp increase in consumer inflation from 4Q12 to 1Q13 likely helped explain the lowergrowth in the retail in 1Q13. However, inflation is expected to drift lower over thecoming months, especially food inflation, potentially bringing some relief to retail salesalready in 3Q13.

    Malls sales continue to be significantly more resilient than overall retail sales. Mallsaverage SSS figure was decent in 1Q13 at 7.5%, relatively flat qoq, despite themoderation seen in retail sales.

  • 7/29/2019 Malls CS June2013


    June 18, 2013

    Shares Poor Performance YTD Was Mainly Owing to Changes in Real Rates ExpectationsShares have been under pressure since early 2013, when interest rates expectations started shifting more meaningfully. Recent concerns over the economicoutlook did not help at all, but real rates explained most of the ~20% sell off seen in Malls shares. Real rates implied in the NTN-B 24 treasury bond (after taxes) climbed

    ~150bps since January to 4.1% (after taxes) and the decision of the Brazilian Monetary Policy Committee (Copom) to increase the Selic reference rate by 50bp in its last

    meeting at the end of May caused malls shares suffer more.Correlation of mall operators shares with longer-term inflation-linked bonds is definitely high. Correlation of malls shares performance with real interest ratesimplied in NTN-B 24 is significantly higher than with nominal rates (DI). We estimate R to be 0.75 in the former versus 0.18 in the latter. This is mainly because malls lease

    agreements are adjusted by inflation and properties tend to appreciate at least in tandem with inflation over time, making real rates way more comparable. Back in 2012, a

    contraction in real rates was one of the main reasons behind the strong performance of shares, which ended the year up 30% and outperformed the Ibov by 44%.

    Market consensus point to an additional 100bps increase in the basic interest rate until 2014YE. In our view, current expectations are already reflected in stockprices, although we continue to expect a volatile environment in the ST. Nonetheless, future changes in market participants perception about long-term inflation prospects

    and tightening cycle (length and intensity) could continue to impact shares in both directions.

    R = 0.75

    -23.6%-19.8% -19.1% -18.5% -18.0%

    -15.0% -14.8%


    Source: Bloomberg, Credit Suisse Research. Prices as of June 14th.*Performance YTD

    Nominal Rates Edged Up 110 bps Since Early May Moving Real Rates Expectations higher In The Same Proportion

    And Causing Malls Shares To Underperform the Broader Index*8.0%











    Jan-12 Apr-12 Aug-12 Nov-12