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Joaquín Sánchez

Joaquin Sanchez, CFA
28.aug.18

Signum Perspectives

Initiation of Coverage: ARA (Q419 target price: P$7.92, BUY)

Following the implementation of new operating rules under the 2012 National Housing Plan, the Mexican homebuilding sector experienced a big transformation. The main factors that impacted the industry were the reorientation of subsidies and change in land specifications for housing development, including boundaries aimed at urban containment.

Due to the large concentration of most homebuilders in entry-level homes, the government housing subsidies department was a very big one; consequently, the reassignment of those subsidies had a negative impact on sector sales. At the same time, land outside the new boundaries could not be used for the construction of new housing developments, which only added to homebuilding sector complications.

Furthermore, home remodeling and used home acquisition support had begun undermining demand for new housing since before the changes came into effect, and high levels of indebtedness among the main housing developers forced them to go bankrupt and/or to lose a significant percentage of their market caps.

As a result, the sector was viewed as highly volatile, which eroded investor confidence in homebuilders in general. However, thanks to its varied sales mix, which focuses on the relatively more profitable housing segments, and low debt levels, ARA managed to weather the storm.

In subsequent years, new homebuilders began trading on the Mexican Stock Exchange, and the main housing sector players changed. ARA, CADU, JAVER and VINTE emerged as sector leaders for their solid performance and relatively more conservative strategies.

Company background

Consorcio ARA S.A.B. de C.V. (ARA) is mainly engaged in the design, construction, promotion, and sale of housing developments. It is also engaged in the purchase and sale of land and lease of malls.

Housing developments can be divided into three categories: Entry level, Middle Income and Residential, each with its own pricing range and focus on specific markets.

ARA’s products have been diversified for at least the last 4 years. None of the abovementioned segments alone represents more than 50% of total revenues, and the company has been flexible enough to prioritize housing developments in certain segments based on market conditions.

Furthermore, ARA has a land reserve spread across 18 states that is sufficient for 131,648 homes with a cost of acquisition value of P$4.636.0 bn. Its land reserve is equivalent to more than 10 years of inventory based on current sales levels.

According management’s estimates, the land reserve’s market value is almost double its acquisition value, so in the event of a financing contingency, it would be an important source of income.

ARA’s homes are mainly acquired through financing granted by commercial banks, FOVISSSTE, and Infonavit, the latter being the main financing agent having financed more than 50% of homes with title deeds.

Government subsidies are also an important factor to consider when determining how a home will be acquired. As the only homes eligible for a subsidy are Entry-Level homes, their percentage of total revenues and the number of homes in the segment are usually related to the government subsidy budget for a given year.



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