Time to sift opportunities in Brazil’s infrastructure financial market

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


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