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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA
15.may.18

Signum Perspectives

Company visit: Consorcio ARA

We recently paid a visit to the corporate offices of Consorcio Ara (ticker symbol: ARA) where we touched on a number of topics related to the current environment, Q118 performance and the company’s short and long-term prospects.

Given recent trading levels in the stock, we raised the possibility of the company using its buyback fund, but given its conservative strategy, management does not consider repurchasing own shares as a viable option in the near future.

We also touched on the implementation of new international financial reporting standards (IFRS 15 and 9) and how they will continue to be reflected in 2017 quarterly comparison figures and eventually in 2016 annual figures. Generally speaking, the main impact is a deferment in the recognition of homes with a reservation of ownership scheme corresponding mainly to the residential segment and representing around 2% of total homes in that segment. The adjustment should therefore be marginal and offset by the remainder of sales corresponding to 2018.

Average house prices in the different housing segments have historically been irregular. Management mentioned that the area where a development is located strongly influences future price increases; this is especially the case of the entry-level sector, due to large supply in some states and financing and subsidy conditions peculiar to each region.

Although the middle-income and residential segments are relatively more price elastic, a greater price range typically results in such housing developments opening with prices close to range limits, which easily causes downward or upward pressure on the average house price and makes it difficult to project an overall average price increase. That said, we expect the consolidated average price of all housing segments to appreciate on an annual basis.

Likewise, regarding housing demand and the impact of interest rate volatility, management said that mortgage demand remains solid. Relatively more interest in low rates in the middle-income and residential housing sectors translates into home acquisition deferment.

Regarding margin projections, management was conservative and expects them to remain stable or decrease slightly due to the growing number of accessories homes must include, such as security, quality locks and a number of environmentally-friendly modifications as well as increase in the price of some construction inputs like steel.

We also enquired about concerns derived from the forthcoming government changeover. Management is confident about the solidity and diversification capacity of Ara’s products which should enable them to deal with housing sector policy changes.

Should housing policy favor the entry-level segment, higher subsidies or loans, 75% of their land reserve could be used for entry-level homes, which means they would be equipped to meet relatively higher demand in that segment. In any case, they view a drastic change in Infonavit (the main source of mortgage loans) policy derived from a government changeover as unlikely, due to the tripartite nature of the institution.

Management has no major acquisition plans aside from the usual ones for expanding its land reserve. Their land reserve currently spans 18 states, which is enough for a master plan of more than 133,000 homes.

Regarding the mall division, Ara favors the strategy of growing existing assets over new developments. They are currently in the process of expanding 13,000 m2 of Centro San Miguel; 75% progress has been made and it should be ready during the third quarter of 2018. Total investment in this mall is estimated at P$351.8 mn, P$164.1 mn of which has already been disbursed.

Regarding its debt schedule, Ara has no plans to take out secured loans or bridge loans for horiztonal housing developments. Management said that the time spent on paperwork makes their use in developments of less than 6 levels inefficient.

Likewise, given the successful placement of unsecured bonds last year and a greater maturity schedule, management does not rule out another issuance, the only obstacle being currently high bank interest rates, which means new issuances are more likely to take place in the medium term.

The company’s debt ratios remain healthy with historic lows of -0.10x in terms of net debt to Ebitda due to negative net debt resulting from high cash levels. Management expects to end 2018 with neutral to slightly positive net debt.

In our view, Ara’s prospects are favorable due to the company’s historical performance and strong geographical and product diversification and we believe its business strategy is in line with projected growth rates.



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