This report was developed to encompass all business areas of the construction company Tenda, listed in the Brazilian B3 index. It includes a business description, industry overview, competitive positioning, financial analysis, valuation, risk analysis, and ESG positioning. Each area was thoroughly developed with the most recent and best available information found by our team.
Authors: Joao Viotto, Jose Artur Fortunato, Matheus Parra, Vitor Bressan.
Special thanks to our great Advisor, Maria Paula Cicogna.
Warning: A thorough English and aesthetical revision is still warranted.
Investment Highlight
We are initiating coverage on Tenda S.A. (TEND3) with a BUY recommendation and a YE21 target price of R$ 32.86 / share due to the attractive risk/return relation presented at the current moment. Our investment thesis is based on (i) Best-in-class Minha Casa Minha Vida (MCMV) homebuilder (ii), Scalable business model and addressable market (iii), Solid and constant market share gain over the past years (iv), and Great potential to develop the offsite construction in Brazil.
Full potential ahead
Tenda's ability to increase launches, sales, revenues, and market share for the last years was impressive. The management is aligned with the Company's long-term goals. Few SKUs allow a high level of specialization and continuous improvement, at significantly lower than average prices, suitable for the mid-low income population (Tenda's target audience). At the same time, the Brazilian housing deficit is enormous. To summarize, Tenda is one of the most efficient homebuilders in the country and is ready to keep increasing its share; however, Tenda's restriction is not placed in the demand side but in its business model that requires at least 1000 launches per year in a region to be viable. The necessity of sizeable local scale in a continental country as Brazil restricts Tenda's operations to large cities and metropolitan areas, leaving a large part of the market share to local small and inefficient players in the countryside. As both Tenda's restriction and quality are already known, its stock price reflects this potential, although there is still an up-side in the mid-term and opportunity to realize gains along with Tenda's growth.
Lifetime opportunity
The offsite construction would be a game-changer for the sector since putting elements of civil and production engineering together could increase productivity, reduce the costs, and allow Tenda to operate in the countryside, expanding its addressable market. Due to Tenda's pioneering spirit, operational excellence, and target audience, we believe Tenda would be the player with the most excellent fit for this new business model in Brazil. However, the first trial is just being made, and we think the project must mature before incorporating it into our assumptions.
Valuation
As Tenda has been gaining market share by increasing its launches year after year, we built three scenarios in which Tenda reaches its full operational capability (around 31,000 launches) in different time frames, and our price range goes from R$ 27,2 in our bear case to R$ 34,3 in our bull case. For our base case, we stipulate a R$ 32.86 target price that incorporated Tenda's operational excellence in its business and took macroeconomic risks into consideration.
Major risks
Being 100% dependent on the MCMV, Tenda is highly exposed to changes in the financing programs from FGTS. Early this year, the Federal Government economic team presented a proposal to reduce subsidies by almost 70% percent to R$ 3 billion, but given the negative response from the construction sector, the reduction will be made gradually with a R$ 500 million reduction per year. Even in a dramatic decrease in the FGTS funding capability, we believe Tenda would be able to increase its market share since they have a lean and efficient operation and one of the best prices in the market; however, Tenda's historic growth was backed by MCMV, and a keen reduction in the FGTS funding program would decrease significantly the Company's growth rates seen in the past
Business Description
Tenda started its operations in 1969 from the foundation of the Company Tenda Engenharia e Comércio (having no ties with the current Company). In 2008 the Company underwent an incorporation process led by Gafisa SA, which aimed to expand into the popular housing sector. In 2011, Tenda instituted its own board of directors giving birth to the current Company.
Business model:
Tenda (TEND3) is a company that operates in the civil construction industry, being present in 9 Brazilian states. It is the only national Company focused entirely on the civil construction of mid-low housing by working alongside the Brazilian government in the housing programs: Minha Casa, Minha Vida (MCMV), and Casa Verde Amarela (CVA).
The Company's business model aimed at the population with an income between R$ 1,800 and R$ 4,000 (represented by the 1.5 and 2 income ranges of the MCMV and CVA programs). According to data presented by the Brazilian Institute of Geography and Statistics (IBGE) in 2019, the Company's operating ranges represent approximately 30% of the Brazilian population.
Tenda's consumers have an average income of R$2,432, which is 2.3 times the Brazilian minimum wage of February 2020. The Company's consumer's average salary is very close to the overall average Brazilian salary, which, in 2019, was R$ 2,308, according to the IBGE.
Products portfolio (images 1 and 2):
The units offered by Tenda are standardized, with 40m2 with two bedrooms.
There are three types of Stock Keeping Units (SKU): (i) ground floor + four floors, without elevator; (ii) ground floor + ten floors, with elevator; and (iii) ground floor + twenty floors, with elevator.
Competitive differentials:
The standard unit is built using aluminum molds. Even though aluminum molds are not the cheapest material for the construction industry, economies of scale are present due to the standardization and industrialization of molds. Compared to the masonry method commonly used in Brazil, aluminum molds reduce construction time and result in less material waste, leading to a lower total cost per construction. The reduction in the total cost of construction is also due to the lower use of labor enabled by the aluminum molds.
The average price per unit sold by Tenda is R$ 139,000, while the average cost of its competitors is R$ 174,000 (graphic 3). That is, Tenda sells its products 25.18% cheaper than its competitors.
•Minimalist construction: The use of aluminum molds allows Tenda to accomplish an extremely minimalist and standardized construction, allowing greater predictability of costs and lower building construction time when compared to other companies in the market.
•Fast construction: Tenda's unconventional civil construction method allows the building completed in less time compared to traditional masonry. Tenda's average construction time is approximately 11 months, while its competitors take an average of 20 months on an equivalent construction, or a reduction of 55% in total construction time compared to competitors, which reduces the operational cycle of its working capital.
•Growth in launches: As a result of Tenda's competitive advantages, in the last five years, Tenda reached the compound annual growth rate (CAGR) of 20.76%, and an accumulated CAGR of 112.6% from 2015 to 2019. These figures show that the Company's substantial increase in launches recently (Exhibit 4).
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Suppliers:
The primary raw material used in the construction of the units is the aluminum molds and concrete. The mold's leading and only supplier is a foreign Company. However, the molds are reusable and long-lasting. Concrete is a simple raw material that can be found anywhere at an accessible price in Brazil.
Concerning other raw material suppliers, likewise, for concrete, Tenda has a diversified range of suppliers, mitigating the risk of lack of products for its operations.
Market Share: (seen in exhibit 5)
Tenda currently focuses only on metropolitan regions because large cities have higher.
The Company's expansion strategy is to reach a new metropolitan region each year and consolidate its brand across the country. Another critical point for the Company's expansion is creating a new production method (offsite), which aims to revolutionize civil construction in the Brazilian market, allowing the Company to enter non-metropolitan regions.
Offsite construction - an innovative method that consists of producing precast units on an industrial scale and transporting them to their destination. Tenda seeks to employ new production technologies, reduce labor costs, bring more agility in the production of units, and reduce construction time. This will also grant cost savings throughout the operational cycle in a strategy that aims at increasing efficiency and the Market Share.
Market Share (MCMV): Tenda's construction embody 6.2% of all construction financed by MCMV (Exhibit 5), and 10% of the program within the nine regions where the company is present (Exhibit 6), this allows the company to lead the program in the metropolitan areas of Salvador (44%), Recife (22%), and Rio de Janeiro (20%).
Minha Casa, Minha Vida (MCMV) and Casa Verde Amarela (CVA):
The Minha Casa, Minha Vida (MCMV) program was launched in 2009 to reduce Brazil's housing deficit. According to data from the National Research of Household Sample (PNAD), Brazil's housing deficit consisted of 7.7 million houses in 2017. MCMV is a housing program of the Brazilian Federal Government focused on the construction of mid-low income housing, which subsidizes properties for families with a monthly income of up to R$ 1,800 and facilitates the financing conditions of properties for families with income up to R$ 9,000. Since its creation, MCMV has already financed the construction of 4 million houses.
The Casa Verde Amarela (CVA) housing program was launched in 2020, as a restructuring of part of the MCMV program, designed to offer differentiated financing conditions for the north and northeast regions of the country, where the housing deficit is more severe, and the population has a lower average income than the rest of Brazil. The CVA reduced interest rates for the people in the lowest income ranges: while the MCMV interest rate is equal to 5% per year for families with incomes up to R$ 2,000.00, the CVA offers interest rates between 4.25% to 5% for the same income brackets, as can be seen in the table below.
Industry Overview
The "new normal":
The world is currently going through an unprecedented state of affairs that has given rise to what we now call the "new normal." The "new normal" has become a reality that every sector has been obliged to deal with due to the COVID-19 sanitary crisis. This emergency comes as a game-changer for the way people, and companies, conduct their responsibilities. The Brazilian macroeconomic scenario has shifted towards unforeseen low-interest rates and high unemployment rates (Exhibit 7). All factors mentioned have had their toll on the construction sector as a whole.
Social distancing:
Returning just recently to some form of human interaction, the Brazilian economy suffered from almost four months of intense social distancing. This practice helped in dispersing COVID-19 cases through a longer time-line while damaging most businesses' ability to function correctly. The construction sector was not exempt from this impact as it faced the difficulty of selling houses without ever talking person to person with the client. Because of its early adherence to the digital revolution, Tenda had little problem ramping up the digital transformation and quickly adapted to online sales. In terms of gross sales, the Company sold R$ 941 million, its highest ever-recorded value for the January/June period. This reinforces the adaptive capabilities of the Company.
Inflation?:
For the last couple of years, Brazilian inflation has kept steady. In a revival of Brazilian
Inflation, the General Market Price Index (IGP-M) rose 17.9%, while the National Construction Cost Index (INCC) rose 5.3%, both on a year-over-year basis from September 2019 to September 2020. The IGPM has reached its highest year-over-year point since 2003, as seen in Exhibit 8.
Chinese demand:
As Chinese iron ore production declined 4.6% year-over-year for the first quarter of 2020 due to the pandemic, its demand for Brazilian ore rose substantially (REASEARCH GATE, 2020). The 21.9% increase in Chinese demand for iron ore from January to September 2020 has assisted the soar in prices, according to the Brazilian Ministry of Industry, Foreign Trade, and Services (MDIC).
Construction panorama:
Representing 3.18% of value-added to the gross domestic product (GDP), 7.57% of employed people in Brazil, and responsible for more than 50% of investments, the construction sector has a vital role in the national economy. Nevertheless, the Brazilian government plays a central part in the industry through its Minha Casa Minha Vida (MCMV) program, aiming to disseminate affordable housing and decrease the housing deficit. Since the program finances up to 80% of the property based on completion, access to credit is relatively ample. One concern with the program's financing during the pandemic is the use of the Seniority Guarantee Fund (FGTS). This is an obligatory saving account implemented by the federal government, so people have some money to withdraw in times of hardship. To mitigate damages caused by the COVID-19, the federal government released up to R$ 4,000 per person that fit the criterion established.
Brazilian housing deficit:
A study conducted by Joao Pinheiro Foundation (FJP) in 2015 asserted a housing deficit in Brazil of more than 6,356,000 houses. 80% of the urban deficit is concentrated in the Northeast, Southeast, and South regions of the country, three of Tenda most vital regions, as seen in Exhibit 9. Another relevant piece of information for the construction of affordable housing in Brazil is the number of people coming of age in the next few years. Since the country still has a growing population, there should be a steady stream of people looking for homes apart from the already existing housing deficit. The housing deficit, allied to an increasing population and constant government financing, makes for a steady demand for enterprises.
Demographics:
According to research conducted by
Brazilian Association of Real Estate Developers (Abrainc), in association with Getúlio Vargas Foundation (FGV), to meet the housing demand for the next ten years, Brazil would need to construct 1.2 million houses a year. Exhibit 10 shows us the housing deficit gap is widening. This data aligns with the Brazilian demographic trend of increasing population and the formation of new families. As for the industry, this guarantees demand is way above supply and shouldn't be a problem anytime soon, at least as long as financing is available.
Fragmented market:
The structure of the construction sector is quite peculiar by having too fragmented market participants. According to the Brazilian Industry and Construction Chamber (CBIC), while there were nearly 200,000 companies in the civil construction sector, only 874 had 250 or more active employees. This means that at least 199 thousand companies thrive with a small number of employees, reinforcing the idea of a fragmented market. This can be understood by the few economies of scale and excessive demand generated by the housing gap, enabling the small builder to be Tenda's direct competitors.
Suppliers:
Brazil is a well-positioned country for the construction sector because of its national suppliers of concrete, iron, and other essential primary products for the industry. At any other time, this allows suppliers to be extraordinarily decentralized and the risk of suppliers mitigated but, with the rise of exports of primary construction products to China, suppliers have increasingly become a liability.
Role of innovation:
Innovation has a crucial role in every sector, even more so during the pandemic. Tenda was quickly able to adapt to social distancing norms and even increase sales during the period. Innovation in construction methods is also crucial in allowing companies to have a competitive advantage over their peers. As new technologies develop, capital takes a higher percentage of investment in relation to labor. This also favors a more agile construction, which reduces the time needed to conclude projects. Tenda is exceptionally well-positioned in terms of innovation as it implemented a construction method with aluminum molds and concrete. This method enabled the Company to obtain the advantages of quicker and less labor-intensive construction in a country where labor liabilities play a significant role in the balance sheets
Competitive positioning
Tenda's competitive positioning within the market will be evaluated through a SWOT analysis paired with Porter's five forces. This will be done using the former's division but going through all five aspects of Porter's forces (seen on exhibit 11). inside the SWOT matrix.
Strengths:
When considering construction companies listed in the stock market, Tenda positions itself as the third-largest Company in apartments launched. Since it is the only company that works exclusively with the MCMV program, it has a competitive advantage in constant financing and great demand. For comparison, CYRE3 sales from January to June 2019 to MCMV bands 2 and 3 represented less than 30% of overall sales and MRVE3 around 80%. While focusing all its resources on various products directed to the same buyers may be a problem in some industries, it represents a significant competitive advantage when demand is not a problem. As long as there are no regulatory or significant political changes, the demand for affordable housing in Brazil should not suffer. This enables Tenda to focus on economies of scale through its standardization process and increasingly capital-intensive construction methods. Even though the Company already uses an innovative way of building homes by using aluminum molds and concrete walls, it is developing a new offsite construction method that will be implemented in the coming years. This will allow Tenda to see a substantial increase in revenue since its growth barrier is not currently based on demand but more so on the operational process of building. Offsite construction offers immense scalability for the Company. Price competition in the sector usually presents itself as a significant threat, but since TEND3 average sale price is already 20% cheaper than the average price for the same MCMV band, this poses more so as a strength for the Company.
Weaknesses:
One significant weakness of the Tenda model is its dependency on suppliers. Even though suppliers are well distributed and diluted because of the ease of substitution, any macro change in price and availability will severely affect the company. In times of normalcy, this is not a problem, but it has devastating potential given the pandemic. The increased demand for ore by China and increasing cases of COVID-19 in mining have both contributed to inflation and the unavailability of material in the sector. Concrete prices have also felt the impacts of the "new normal." Soaring prices and the absence of inputs should have an equal effect on Tenda and its competitors; however, due to the Tenda business model, which focuses on its speed of construction and asset turnover, this represents severe problems.
Opportunities:
The "new normal" presents itself as a substantial rupture with standard practices. From the increased need to work from home to selling houses despite social distancing, enterprises have taken various steps to adapt. Tenda has taken the rupture to accelerate its implementation of online sales. This allows the Company to improve marketing strategies and expenses management while maintaining the growth in sales. Costs associated with home-office performance for the administrative personnel are proving worthy as the Company saw a 4.84% increase in sales against MRV's 3.16% and Cyrella's decrease of 9.02% for the period of January to June 2020 (exhibit 13).
Threats:
In a market governed almost exclusively by the financing of a governmental program, new entries' threat is always significant. Even though the necessity of capital is somewhat large, any enterprise with some money can enter the construction business through the MCMV program. This threat is mitigated by the housing deficit but always present. What should be considered the most significant threat for all construction enterprises, and even more so for Tenda, because it works exclusively for the MCMV program, is regulation changes. If the government does decide to implement any changes to the program's rules or forms of financing, there would be a significant impact for all players involved. As for now, regulation changes should only favor the program in a bid to stimulate the national economy and attenuate has implications of the COVID-19 crisis.
There is also a significant threat posed by the rise in unemployment and a decrease in FGTS. Even though substantial, they should not mean much for the sector as the Brazilian economy's current structure is dependent on public financing and construction to generate jobs. (seen an exhibit 14)
Financial Analysis
Market share
Tenda's pronounced increase in sales, launches, and revenues in the last years has taken its market share in the MCMV launches from 0.8% in 2013 to 6.6% in 2019. The ~20% CAGR in the last five years was driven by operational excellence, and we believe Tenda is the best-in-class low-cost construction player in the MCMV 1.5 and 2 brackets since its competitors are mostly small countryside players focused on the old-fashioned masonry construction.
Aluminum molds - Up-sides and Down-sides:
One of the significant Tenda's competitive advantages is the mix of a short construction period and below the average selling price, which are both made possible by the Aluminum mold construction. However, the predictability of the construction costs using this method comes at a cost. In 2019, During 2016-2019, Tenda's price per square meter was ~9% higher than the average BUC (Base Unity Cost) in the regions Tenda is present, but even using a more expensive construction method, Tenda managed to maintain its gross profit among its peers average mainly by reducing waste and labor expenses
SG&A
Tenda's efforts to dilute its back-office expenses have paid off, and the SG&A expenses dropped from 2.6% from its revenues in 2015 to 17.4% in 2019. The otimization drove the keen reduction in the Marketing, payroll and related taxes, services provided, I.T., and payments of contingencies expenses. However, the new efforts regarding the offsite construction initiatives reverse the dilution trend in the G&A expenses since specialized labor is being brought to the team to lead the initiative.
Working Capital
Due to Tenda's fast construction rhythm and its exclusivity to the governmental program MCMV, Tenda's business model cash cycle is shorter than the market average, which requires less working capital and provides Tenda with the ability to have a higher asset turnover than its peers longer time-line while damaging the ability of most businesses to function correctly. The construction sector was not exempt from this impact as it faced the difficulty of selling houses without ever talking person to person with the client. Because of its early adherence to the digital revolution, Tenda had little problem ramping up the digital transformation and quickly adapted to online sales. In terms of gross sales, the Company sold R$ 941 million, its highest ever-recorded value for the January/June period. This reinforces the adaptive capabilities of the Company. MCMV and CVA financing programs follow the Percentage Of Completion (POC) system, and Tenda gets paid every month by (1/11) of the VGV of the apartments sold, which helps Tenda to reconcile its cash position and shorten its cash conversion cycle.
Capital Structure
By leveraging its balance sheet in the last 30 months (~R$ 2 billion contracted in loans), Tenda had a solid capital structure surpassing the covid-19 crisis while still maintaining its liquid cash position as one of the less leveraged players in the industry. The current capital structure (2S2020) is financed 49% by debt and 51% by Equity, preserving R$ 1,4 billion in debt and R$ 1,5 billion in cash, enough to liquidate all debt.The cost of debt is currently around ~5%, CDI+3%, but is expected to rise in the next years based on the worsening country risk and the ongoing fiscal crisis.
Profitability
In the last five years, Tenda has been increasing its operating margins and its mark-up, which made 2019 the best of the most recent years, reaching an EBITDA margin of 15,8% and a net margin of 13,6% and taking the ROE and ROIC indexes of 19,6% and 13,1%. However, we believe 2019 was an outlier and, since Tenda plans to increase its R&D and people expenses, we expect the EBITDA margin to be within the 10-13% range for the next years.
G&A expenses trend by increasing costs with specialized labor to lead the innovative initiative.
Valuation
As highlighted before, our model shows there is an upside of 22.3% for Tenda, enough for a buy recommendation. Its fair price of R$32.89 at the beginning of 2021 shows us the Company is undervalued, therefore, presents room for making money.
Percentage Of Completion Method (POC)
For our revenue & costs projections, we used the POC accounting method in which revenues and costs are recognized accordingly with the completion of the project and the sales of the real state property,
Revenue Forecast:
Launches: According to Tenda's management expectations, the current business model has a limit of ~31 thousand launches, which is caused by a minimum requirement of 1,000 launches per city/region per year for Tenda to be profitable in a selected area. As Tenda operates with a great price point, we projected a market share gain driven by the increase of quarterly launches until 2024, when we believe they will reach full capacity with 31,297 launches.
Sales: For our sales assumptions, we divided sales into two major periods: in the project's launch (T0), where 60% of apartments are sold, and; the next 16 months (5 months before the construction and 11 during the building) where 2,5% of units will be sold monthly
For our average ticket projections, we assumed the percentage of apartments from brackets 1.5 and 2 sold would be constant, and 2019 prices would be corrected by the National Construction Cost Index (INCC) projection
Cost & Gross Margin
Construction costs: Since Tenda's construction method is based on the Aluminum mold, the cost of construction in 2019 was 18% higher than the average price in the regions Tenda operates. From the price found in 2019, we projected the construction cost by correcting it by our INCC projections.
Land costs: Historically, the land cost has been a little volatile, around 10,7% - 11,7% of VGV, so we projected the five-year average relation between land cost and revenues and projected it for the next five years
Development cost: Tenda's development costs have been falling continuously in revenue percentage for the last five years, so we projected a soft reduction in the development costs for the next years, going from 4.5% in 2020 to 4.0% in 2025 and 2026
Other costs: the remaining costs were projected constant in revenue percentage terms
Gross Margin: Due to Covid impact and the rise of construction material, we projected a lower margin in 2020 of 29,7%, but rose the mark-up for the next years, going up to 33,3% in 2026
SG&A & EBITDA Margin:
For the selling, general, and administrative expenses that were being reduced and diluted during the last years, we projected a trend reversal in which the offsite construction will lead to the increase in R&D and payroll expenses to develop a new business model. In our projections, our SG&A is going from 17.4% of revenues in 2019 to 20,4% in 2026.
EBITDA Margin:
Following the SG&A trend, the EBITDA margin from 2020 on will be slightly lower than the 2018/19 levels ranging from 9% in 2020 to ~12,0% in 2026
CAPEX & Depreciation:
For PP&E, we assumed machinery & equipment, molds, and others would have to increase along with revenues and new launches, and for depreciation, we used the data given by the Company regarding the speed of depreciation for each line of the PP&E.
Working capital:
Tenda has a high necessity of working capital since it is necessary to buy land to increase launches and financing clients reach up to 20% of the VGV. Also, suppliers Payroll, related taxes, and profit-sharing are significant liabilities to the working capital construction. According to our assumptions on less inventory acquired, less financing for clients and less financing grom suppliers, we expect Tenda's cash conversion cycle to get worse in 2020 and 2021 due to a high speed of growth and to increase gradually after 2021.
Cost of Capital:
Kd: Since Tenda has leveraged its balance sheet in the last 30 months, we have projected a gradual amortization of the gross debt. The cash generation will not be enough to face debt amortization, but Tenda has enough cash (and financial securities to liquidate) to amortize it. The percentage of debt will decrease gradually since we are not projecting the necessity of new debt issuances.
Ke: Tenda's' operations are 100% in Brazil, so we decided to project the CAPM (Capital Asset Pricing Model) for the next seven years using Brazilian variables (except for the ERP) such as:
Rf: NTN-B Principal 10y proxy: Vertex 3673 from the CDI-IPCA SWAP (real interest rate for 10y) + long term IPCA projection liquid of capital taxes (15%):
Equity Risk Premium (ERP),Damodaran 07/2020 : 5,23%
Unlevered β: 0,73 (5y beta = 1,09 deleveraged by the Hamada equation)
Average CAPM (2020-26): 9,6%
Disclosure: (1)NTN-B is long-term inflation + yield bond and to utilize it as a risk-free rate, we summed up our long-term inflation projections and subtracted 15% of capital earnings tax.
Discounted Cash Flow (DCF) & Free Cash Flow to the Firm(FCFF) methodologies:
The primary methodology used in our value analysis for Tenda was the DCF. In this methodology, we calculated the projected cash flows generated by Tenda's operation, not considering its financial/non-operational expenses. The Average cost of capital for 2020-26 was 10,2% and the growth used in perpetuity was our INCC long-term projection of 3,4%.
Scenarios:
Due to Tenda'soperational full capability being around 31,000 launches, we built three different growing scenarios in which Tenda gets to the 31,000 launches mark. For our bull scenario, we projected that Tenda would accomplish its full capability in 2023; for our base scenario, it would be in 2024, and in our bear case, Tenda would not surpass 31k launches until 2026. Since Tenda's business model does not support growing after its operational capability, even in our bull case, the valuation would be around ~R$33/R$34. Offsite constructioncoulddoubleTenda's full capability and would have a significant impact on its business valuation, but as its early-stage project, we did not incorporate it in our projections
FCFF and WACC
Risk
Business risks
Offsite: The offsite project can have a great return, but returns never come detached from risk. In its bid to implement the offsite Project, Tenda has already been consuming a considerable amount of cash by hiring a team exclusively dedicated to the project while still generating no revenue. This means the project is consuming money in increasing amounts and might if the project fails, turns to become sunk costs. Being invested in the offsite project also suggests the Company would have a more challenging time changing its creative course if any other disruptive innovation overwhelms the sector.
Offsite logistics: Regarding the offsite bid in itself, even if the Company successfully constructs houses in a pre-specified location, taking homes to their destination is hugely problematic. Tenda will have to either spend tremendous amounts on transportation or develop new methods to do so efficiently. This will require a large part of capital and immense commitment from the Company, maybe even making the project infeasible.
Dependency on a single revenue source: Tenda is 100% dependent on sales of houses backed by the MCMV program. This presents itself as a significant risk to the Company's because it's completely dependent on that source and, as the old saying goes, never put all your eggs in one basket.
Increased Administration expenses due to the more extensive operation: As Tenda grows, its administration becomes more costly and harder to manage. Swollen management means higher costs and lower margins in all operations. Tenda is expected to increase house sales from 19 thousand in 2020 to 31 thousand in 2024, and that will challenge the Company's operational capabilities.
Availability of inputs: With the increase of global demand and decreased production due to the pandemic, there is a great risk of unavailability of construction inputs. Tenda is especially vulnerable to this unavailability since it works with a quicker capital turnover and, therefore, any absence of inputs will significantly damage the Company.
Default rates: When families buy a Tenda property, they acquire financing from state-owned banks (Caixa Econômica Federal and Banco do Brasil) linked to the MCMV and CVA programs. Both programs finance up to 80% of the property, leaving the remaining 20% in charge of Tenda, through FGTS subsidies, financing, or a down payment. The Company is, therefore, exposed to default risk from its customers.
Currently, Tenda's net provision for doubtful debts (PDD) portfolio stands at 333.1 million, with 61 million pre-delivery (before delivery of the property), and 272.1 million post-delivery (after delivery of the property).
Tenda's post-delivery provision funds are divided in:
· Undelivered: 100.6 million
· Delivered, Defaulted: 130.2 million
· Delivered, Defaulted in less than 90 days: 29.1 million
· Delivered, Defaulted in more than 90 days: 12.1 million
The Company's provision coverage index is 28.7%:
· Undelivered: 16.9%
· Delivered, Defaulted: 1.8%
· Delivered, Defaulted in less than 90 days: 17.2%
· Delivered, Defaulted in more than 90 days: 86.9%
Macroeconomic risks
FGTS reduction: There is a high risk associated with the FGTS because of its relevance to the Company. The most recent climb in unemployment and informal employment mean there is less money going into the fund, and there may have to be a re-adequation of policies. Withdrawals because of the pandemic have also further debilitated the fund's capacity to finance operations, as seen in exhibits 25 and 26. Both facts pose a significant risk for all companies that depend on government financing and even more so for Tenda since the Company has all its sales from the program.
Increasing rates are problematic for long-duration projects (seen exhibit 24) – Government overspending in the pandemic makes expected interest rates go up in the future. Because of the long duration of housing finances, the sector is hugely dependent on interest rates.
Cyclical demand: The Construction sector has cyclical demand, which highly influences Tenda's ability to navigate the market.
Land prices: At a time of increased demand for land, due to the fall in interest rates and devalued real, land value tends to rise, squishing Tenda's profit margin. This is due to the Company's inability to pass its cost increase to the final customer. Lower rates push investors towards other, more profitable investments and make taking loans cheaper. A more affordable Brazilian Real also enables bargains for land and other assets in Brazil for foreign investors.
Inflation: Since prices are given at an international level, and there was a rise in demand from China and a decrease in production, there is expected inflation for the sector, as seen in exhibit 27. With the same causes of availability of inputs, its consequences differ significantly by pressuring the Company's margins and placing the Company in a tight spot.
Changes to the MCMV program or credit restriction from lender banks: Any change to the MCMV program represents a massive risk to Tenda since the Company's sales depend solely on the program. The Company gets 80% financing of its constructions from the public program and has all its cash flow, working capital, and even margins built around its ability to swiftly and consistently work within the program. Lender banks also pose a significant threat since a reduction in credit would devastate the Company.
ESG (Environmental, Social and Governance)
Environmental
Primary products in the construction of Tenda:
Aluminum molds: The aluminum mold is the material responsible for optimizing the construction of Tenda units. It is, therefore, essential to understand the impacts this material has on the environment.
Aluminum is not a product extracted directly from nature, requiring industrial production to obtain it. The primary raw material used in this production is Alumina. The extraction process of Alumina is achieved through the utilization of the Bayer process in refining bauxite. After obtaining this Aluminia, which is aluminum oxide (Al2O3), it is necessary to purify it into metallic aluminum. This can be done through a process called electrolysis, in which an electric current passes through Alumina, causing it to transform into metallic aluminum, the primary aluminum.
Positives about aluminum:
Aluminum has a recycling rate near 100% and high corrosion resistance, allowing several uses before its obsolescence. It is also an extremely light material, easy to be processed and molded, generating greater production efficiency.
Recycling:
Aluminum has a property that allows it to be recycled several times without losing its properties, making it extremely beneficial to the environment since recycling 1 kilogram of aluminum consumes only 5% of the amount of energy needed to produce the same amount of aluminum from scratch.
Recycling also contributes to the preservation of the ozone layer, reducing CO2 emission by 9 tons (each ton of CO2 is equivalent to driving about 4800km)
Negatives about aluminum:
Because aluminum is a stable metal it huge quantities of energy to create it are necessary. In the metal production, greenhouse gas emissions are considerably high since bauxite and Alumina's extraction emit significant amounts of carbon dioxide and perfluorocarbons ( PFCs ). Being major contributors to the greenhouse, PFCs are Considered to be 6500 to 9200 times more potent than carbon dioxide in creating the greenhouse effect. Red mud is also generated in Alumina's production during the clarification stage of the Bayer process, which is extremely toxic and hard to manage waste. The Environmental Protection Agency (EPA) and the U.S. Environmental Protection Agency, do not consider red mud as toxic waste. However, because it is extremely rich in metals and has a very high alkalinity residue, the mud can have a powerful influence on the environment, changing its properties and stability. A great example of accidents caused by red mud is the rupture of Vale's dam in Brumadinho.
Comparison of competitors environmental projects:
Cyrela: Cyrela is part of recycling programs and carbon-neutral program (CarboboNeutro®). The Company also has a Benchmark in waste management, in which they have a whole sustainable planning and sustainability criteria for all suppliers are well established.
MRV: MRV is considered the most sustainable Company in the civil construction sector by the Exame Sustainability Guide.
i) The Company has been launching numerous projects aimed at sustainable development, namely: i) Planting over 1.2 million trees since 2010; ii) pioneering the implementation of photovoltaic panels in its constructions, making energy use sustainable. 70% of its projects launched since 2019 have this system; iii) Implemented a project that has removed 700 thousand tons of CO2 from the atmosphere; iv) Introduced systems that reduce water and energy consumption; v) Purchased carbon credits - 100% related to their emissions; vi) Connected with SDGs and the 10 principles of the U.N. global pact; vii) carries out a thorough assessment concerning the environmental impacts of its suppliers and others.
Tenda: None available / no disclosure of environmental projects
Social
Comparison of competitors social programs:
Cyrela: One of Cyrela's main social focuses is to improve the living conditions of its employees' families. For this improvement to happen, the Company provides education to all workers to eliminate illiteracy. It also stimulates an increase in its employees' average family income by offering professional training courses to their wives and professional training to their kids.
The Company also created the Cyrela Institute, an institution dedicated to developing programs and NGOs. One of the institutions main program is to offer professional initiation in needy communities.
MRV: it has some social measures: i) The MRV Institute, which invests in education. MRV invests annually 1% of its net profit in the Institutes projects, which corresponds to nearly 6.5 million per year; ii) Combat work in conditions analogous to slavery by using operational objectives to certify that its suppliers and outsourced employees comply with the established measures; iii) Project to diversify race and gender in their operations; iv) Carry out projects for the development of peripheral areas, among others;
Tenda: None available / no disclosure of social projects
Corporate Governance:
Tenda is listed on B3 in the Novo Mercado segment, which is responsible for leading companies to the best corporate governance practices. It is one of the few companies that meet 100% of the criteria required by the Novo Mercado (see graph X). Among them the executive committee and the remuneration.
Employees: Tenda has 5,453 employees (Q2 2020), of which 65% are staff employees who carry out activities in the buildings.
Administrative council: (seen an exhibit 14)
The board of directors is composed of a minimum of 5 and a maximum of 10 members. All members osare elected with a 2 year term in office which can be reelected or removed at any
moment by council assembly. Tenda's board of directors is composed of 7 elected members with a 2- year term of office, being 100% independent, having no family ties and all being individually assessed for their performance.The board of directors is responsible for appointing and supervising the executive officers. Board decisions must be approved by a majority vote of the directors present.
Executive board:
The members of the Company's board of directors appoint the composition of the Executive Board. According to the Brazilian Corporate Law, these officers must be Brazilian residents, with a three-year term and may be reelected or removed by the board of directors at any time.
The members of the executive board are legal representatives of the Company, being responsible for carrying out the Company's operations, implementing the policies and guidelines as determined by the Board of Directors. Following the rules of the Novo Mercado, the board of directors of Tenda must have a minimum of two and a maximum of twelve members. Currently, Tenda's Executive Board is composed of 10 members. Of these members, two are fully focused on the development of the offsite system.
Compensation policies:
The compensation policies aim to determine the compensation criteria and models for the Board of Directors, Advisory Committees, Fiscal Council and Statutory Board of the Company, in line with the best compensation and corporate governance practices. Variable remuneration has a significant share in the total remuneration, allowing a greater alignment of interests between executives and shareholders. The Company adopts a compensation composition model that concentrates a significant portion of total compensation in the variable components, both short and long term, which is part of its policy of sharing risk and results with its managers.The targets defined for the period in indicators, such as ROE, cash generation, EBITDA, volume of transfers.
Types of compensation:
Short-term compensation:
The objective of short-term variable remuneration is to reward the year's result, if the goals established for the period are on tained in the Company's Scorecard, which is approved annually by the Administration council and contains the goals defined for the period.
Long-term compensation:
Likewise, long-term incentives, based on the option to purchase shares and restricted share programs, aim to reward the result of a longer period, usually from 3 years. The Stock Remuneration Plan only considers the valuation of the Company's shares (including dividend distribution and interest on own capital) within the periods predetermined by the program.
The participant (and no longer the Company) runs the risk of appreciation or devaluation of the share price during vesting periods and the program lock-up.
Professional positions:
Executive Board:
The members of the statutory Executive Board are compensated with fixed remuneration, short-term variable, and long-term share-based incentives. The amount paid as fixed compensation, short-term variable and long-term incentives, thus allowing an alignmentofinterestsbetweenthe board and the Company's shareholders.
Administrative Coucil:
Approximately 50% of the total compensation of the members of the Board of Directors is defined, based on the format of restricted shares, considering the share price at the time of compensation. The shares granted will only be transferred to the beneficiaries after the vesting period (2 years) and may be traded on the stock exchange after 1 year of lock-up, that is, 3 years from the compensation. Thus, the remuneration of the Board of Directors is directly aligned with the Company's results during the period and the consequent appreciation/depreciation of shares.
Disclaimer:
All investments, even more so stocks, is speculative in nature and involve a substantial risk of loss. We encourage investors to invest carefully. We also encourage investors to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. All our information was derived directly from companies' information or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way warrant or guarantee the success of any action you take in reliance on our statements or recommendations.
Past performance is not necessarily indicative of future results. All investments carry risk and all investment decisions of an individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.
Don't enter any investment without fully understanding the worst-case scenarios of that investment.
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