Bloomberg News

How Faucet Maker Duratex Became Favorite Brazilian Stock

March 27, 2013

The Brazilian company that most excites stock analysts makes faucets, toilets and fiberboard.

Duratex SA (DTEX3) has the highest consensus rating on the benchmark Bovespa index with 11 buys, 2 holds and no sells, data compiled by Bloomberg show. Three analysts raised ratings on the Sao Paulo-based construction-materials supplier in the past three months, the best percentage improvement of any stock.

President Dilma Rousseff’s stimulus measures such as halting a tax on industrial products have been a boost for Duratex, whose biggest shareholder is the holding company for bank Itau Unibanco Holding SA. (ITUB4) Duratex also has pared output costs, while a factory fire disrupted a rival’s production, said Maria Eduarda Lassance, an analyst and partner at Jardim Botanico Investimentos.

“Even with the increase in the stock price, we are very comfortable that the results will continue to be strong,” Lassance, who helps manage 800 million reais ($397 million) including Duratex shares, said by telephone from Rio de Janeiro. “This year should continue to be hot and if competitor problems continue, prices could continue to rise.”

Duratex rallied 39 percent in the year that ended yesterday and traded at 17 times estimated 2013 earnings, data compiled by Bloomberg show. That compared with a ratio of 11 for the Bovespa index, which fell 17 percent in the period. The shares rose 3 percent, the most since March 11, to 16 reais at the close today in Sao Paulo.

Wood Division

Revenue rose 14 percent in 2012 from a year earlier to 3.4 billion reais after volumes at the wood division, which accounts for two-thirds of sales, climbed a record 16 percent. Demand for Duratex’s wood panels increased after a fire in September shut the Montenegro plant operated by Chile’s Masisa SA (MASISA), its biggest competitor, until February.

Duratex fiberboard goes into products such as furniture, for which the IPI tax on industrial goods was cut to zero from September until January as Rousseff’s administration works to revive economic growth in the world’s second-largest emerging market. The IPI rose to 2.5 percent through June, when it probably will return to 5 percent.

Rousseff’s measures also include a reduction in electricity rates and paring payroll taxes. Growth in Brazil slowed to 0.9 percent in 2012 from 2.7 percent in 2011.

“Government incentives for the furniture sector helped the company a lot,” said Karina Freitas, an analyst at Concordia SA Cvmcc, in a phone interview from Sao Paulo. “Even without benefits like the energy cost reduction, the company has been able to cut costs well.”

Furniture Efficiency

Duratex’s division that makes wood for furniture is becoming more efficient, Freitas said. Costs at the unit fell to 470 reais per cubic meter at the end of last year from 518 reais a year earlier. Meanwhile, revenue per cubic meter increased 2.7 percent to 887 reais, according to a regulatory filing.

Furniture demand is rising as more Brazilians enter the middle class, which accounts for 52 percent of the population, up from 40 percent in 2003. While Duratex raised wood-panel prices by 6 percent this year after boosting output, Masisa’s wood sales in Brazil dropped by 18 percent in 2012, according to a regulatory filing. A spokesman for Masisa at Ketchum Inc. declined to comment and wouldn’t give his name.

“The new Brazilian middle class is demanding furniture -- they want to live better,” Duratex Chief Financial Officer Flavio Donatelli said in a telephone interview. That means the loss of the IPI tax break in June won’t “have much of an impact on demand,” he said.

More Competition

Duratex will face increased competition this year with the restart of Masisa’s plant and joint project between Calhoun, Georgia-based Mohawk Industries Inc. and Chile’s Celulosa Arauco & Constitucion SA. Mohawk’s corporate line went unanswered, and Arauco didn’t respond to requests for comment.

“We have to wait and see how the market behaves, but we don’t foresee another escalation” in prices, Donatelli said.

After expanding through acquisitions in recent years, a “key obstacle” now facing Duratex is the lack of suitable prospects, Diogo Miura and Marcelo Aguiar, analysts at Goldman Sachs do Brasil CTVM SA, wrote in a March 1 note to clients. Rising wages and benefit costs also remain a risk, they said.

Duratex paid 161 million reais last year for a 37 percent stake in Colombian wood-products maker Tablemac (TABLEMA) SA and bought valve-maker Industria Metalurgica Jacarei Ltda for 46 million reais. In January, it acquired shower heating system maker Thermosystem Industria Eletro Eletronica Ltda for 58 million reais, according to a regulatory filing.

“We think there are still good opportunities out there,” Donatelli said about future acquisitions.

With existing factories operating at full capacity, Duratex will increase output of medium-density fiberboard by 40 percent by mid-year.

“The way the market is growing and how capacity is already at its limits, they have to keep investing more,” Jardim Botanico’s Lassance said.

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net.


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