A Sound Investment Pathway into Brazil

While the coming week looks busy on the domestic IPO front, we want to briefly turn our attention to Brazil, where a potential billion-dollar IPO is heating up. Brazilian toll operator Ecorodovias will look to offer roughly 125 million shares with a range of BRL9 to BRL12 ($5 to $6.70) per share in late March. With overallotments, the deal could reach $1 billion. This offering comes on the heels of another huge IPO--OSX Brazil, an oil and ship-building firm which raised 2.5 billion reais, or $1.37 billion, last week. However, the OSX deal was a huge disappointment comparatively, given the company originally sought capital of around $4 billion. We'll be interested to see what effect, if any, it will have on the climate for Brazilian IPOs in general and Ecorodovias in particular. Here is Morningstar analyst Mike Gaiden's take on Ecorodovias:

"Operating roughly 830 miles (1,320 km) of toll roads in Brazil on which 40% of the country's imports and exports travel, we think Ecorodovias holds an attractive investment profile buttressed by a narrow moat gained through long-term concessions and other competitive dynamics. Over 70 million vehicles per year travel through Ecorodovias' highways located throughout Brazil. Commercial activity, from areas as diverse as grain export to steel production, drives roughly 60% of this traffic.

"Ecorodovias' primary risks stem from macro-economic and political threats, acceptable hazards in our view. Even with a global financial and economic crisis, vehicle traffic grew in the low-single digits during 2007 and 2008 on a comparable-road basis. Also, we would posit that political risk proves rather palatable given Brazil's investment grade status. We believe that numerous key strengths outweigh these hazards. We are attracted by the barriers to entry created by the firm's long-term regulatory approvals, while also accepting the temporal nature of these contracts. Further, the relative price inelasticity of toll charges brings heightened revenue visibility--average tolls have increased consistently in mid-single digits or better in the last two years. Finally, Ecorodovias' large footprint creates economies of scale in its operations from business administration to roadway maintenance.

"Ecorodovias earned consistent returns on assets of roughly 20% during each of the last four years. We look for these attractive fundamental traits to bring ongoing strong investment returns to the firm in the future."

This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at marc.demoss@morningstar.com or +1 312 384-4052.