Consorcio ARA To Outperform As Homebuilding Recovers

BMI View: Mexico's housing sector is headed for a recovery over the coming quarters and we believe Consorico Ara is the best placed homebuilder to benefit from a revival in the sector. Activity in the sector is likely to pick up in line with an economic recovery and a major government drive to restructure the housing market and provide financial support at the lower end of the market.

Over the coming quarters we anticipate a revival in Mexico's housing market. We note the following factors supporting our forecast:

  • The significant housing focus included in the MXN7.7trn National Infrastructure Plan.

  • Early Signs Of Recovery
    Mexico Construction And GDP Real Growth

BMI View: Mexico's housing sector is headed for a recovery over the coming quarters and we believe Consorico Ara is the best placed homebuilder to benefit from a revival in the sector. Activity in the sector is likely to pick up in line with an economic recovery and a major government drive to restructure the housing market and provide financial support at the lower end of the market.

Over the coming quarters we anticipate a revival in Mexico's housing market. We note the following factors supporting our forecast:

  • The significant housing focus included in the MXN7.7trn National Infrastructure Plan.

  • Our expectation that the economy as a whole will recover will help support demand for additional housing capacity.

  • The Banco de México's surprise 50 basis point rate cut on June 6 th - taking the policy rate to 3.0%. Our Country Risk team anticipate that cheap credit conditions will remain in place through to H1 2015, which will support further near-term expansion of the mortgage market, which remains under-penetrated in Mexico.

The National Infrastructure Plan, announced in April, included MXN1.8trn for housing and urban development. Specific programmes include mortgage financing, subsidies for low income housing and revitalising existing housing projects. This should help to provide a much needed injection of capital into the housing sector. In addition, under the National Infrastructure Plan we expect far greater clarity over the government's nebulous vision for restructuring the country's housing sector - the proposal of which triggered concerns over cash flow at the major homebuilders leading to spikes bond yields and a sell-off in equities (see, 'Cashflow Concerns Continue To Cripple Mexican Homebuilders', March 1 2013).

Early Signs Of Recovery
Mexico Construction And GDP Real Growth

The expectation of a recovery in the housing market supports our view that Mexico's construction industry will return to growth at 3% in 2014, following a steep contraction of 4.5% in 2013. Whilst the recovery is not expected to fully take hold until 2015 (when growth of 4.1% is expected), already we are seeing early signs of an easing in construction activity. The Industrial Production Index for construction contracted by just 1.4% in March 2014, the best performance since April 2013. Within this, 'buildings' is one of the best performing construction sub-indices, with the contraction easing far ahead of 'civil engineering'.

Nascent Residential Recovery
Mexico: Industrial Production - Housing Components

As the industry begins to recover, we would highlight Consorcio ARA as a major beneficiary. As one of the few homebuilders still trading, the company is likely to see gains in its share price as positive news emerges from the sector and the outlook improves. Already the company has benefitted from a more positive sentiment toward the sector, with its share price appreciating 23% since January 2014 (as of June 9). However, it remains 37% below previous highs seen in 2009.

On a more fundamental basis, with many of the Mexican homebuilding majors going through bankruptcy proceedings and re-structuring, it is one of the few homebuilders with a cash flow able to support acceleration in activity. In its Q1 2014 results it reported a significantly improved cash position on a year-on-year basis (cash and cash equivalents up 50%), as well as reduced debt load (-25%). As both one of the least indebted, as well as one of the least dependent on government subsidies, ARA has remained one of the few solvent homebuilders in Mexico. Following the suspension of trading of Geo, Urbi and Homex, Ara now stands as the largest publicly traded homebuilder by market capitalisation.

Strongest Left Standing
Mexican Housing Majors - Share Prices, MXN

The company is also in a strong position to benefit from a recovery in the economy through its commercial real estate assets. The company owns a number of malls in Mexico, with a combined value estimated at US$387mn. The assets are up for sale, which would provide ARA with a further cash injection to support its financial position and leave it well placed for a recovery in the sector. Whilst attempts to offload the assets have not been successful thus far, ARA has reiterated it remains in a strong cash position.

Read the full article

This article is tagged to:
Related sectors of this article: Infrastructure, Construction, Residential Construction, Companies - Infrastructure, Social Infrastructure, Housing
Geography: Mexico
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.