While the Brazilian
government plans to attract private investors to its massive concession program
in highways, railroads, ports, airports and high-speed rail (HSR), institutional
investors have been looking for ways to invest in infrastructure. Although many
of them prefer investing directly, there are some opportunities in the capital
markets, either in bonds or even in the equities. Despite the recent volatility
in the stock market, some brokers and analysts still believe long-term
investors can find profitable investments in infrastructure companies listed in
Brazil’s stock exchange (Bovespa), though it is necessary to sift them.
Bovespa index, highly
concentrated in commodities companies, has been performing poorly this year —
the benchmark has not closed a single month in the positive territory in this
year. And the short-term international investors have been penalizing the
market while the country’s economy continues to show signs of weakness. IPCA
consumer price index rose 6.67% during the 12 months that ended in mid-June,
above the government's inflation-targeting range of
2.5% to 6.5%. As a result, Brazil’s central bank was forced to raise its base
interest rate for the first time in nearly two years. Infrastructure companies,
however, have steady revenues as their contracts are adjusted annually by
inflation, which makes their shares a good way of hedging.
The companies
have a great level of future cash flows predictability, and the major risk is
traffic volatility, though the Brazilian new car sales have been increasing.
The traffic volume of light and heavy vehicles might remain strong and continue
to grow above the country’s GDP in the next few years, several economists believe.
Despite the
volatility in the stock market, there is no lack of appetite for infrastructure
companies and investors have been showing lower pessimism in this sector.
CCR, EcoRodovias, Triunfo Participações and Arteris are the four companies listed in the Brazilian stock exchange, but the
perspective to the companies varies. CCR, which is responsible for 2,437
kilometers of highways in the states of São Paulo, Rio de Janeiro and Paraná, is
the preferred toll road stock among analysts.
UBS, for instance, is
overweight in CCR’s shares, which are the top pick in the toll road sector. The company has R$ 7 billion (US$ 3.2 billion) to
invest in new projects. The largest concession controlled by CCR is
Autoban, considered one of the best roads in Brazil in terms of quality.
CCR has been
diversifying its business, investing not just in highways but in other ways of
transportation, which is positive. In April, a consortium called VLT
Carioca and formed by CCR, Invepar, Odebrecht, TransPort and RioPar
Participações won the PPP contract to build a 28km-rail-transit (LRT) in Rio de
Janeiro and operate it for 25 years.
Political risk
Brazil’s
regulatory environment for toll road operators has been transparent, but not fully
independent of political interference. After weeks of protests focused
on the high cost of transportation, Brazil’s largest state of São Paulo decided
to freeze all highway toll fares until July 2014. The state suspended
the toll increase of as much as 6.5 percent that was set to take effect on July
1 and froze fines for delays in construction and fees it charged from the
companies to compensate the scrapped increases in fares.
The cancellation in the toll adjustment will be possible due to a
reduction in the revenue charged by São Paulo State Transportation Concession
Authority (Artesp), the state transportation regulatory agency, from 3% to 1.5%.
The total cost for the government will be BRL 400m (USD 182m) in 2013.
At first sight, it seemed the São Paulo state government was
breaching contracts, but it is not, because there is a compensation for
possible losses.
