Brazil Currency Keeps VCP a Hold
We are keeping our Hold recommendation on Votorantim Celulose e Papel S.A. (VCP). Demand for pulp and paper remains heated in Brazil and abroad, especially in Asia, which is keeping prices up. First quarter 2008 results were in-line with our expectations, and the short-term outlook for the pulp and paper market remains encouraging. However, sales have stagnated, and the less benign Brazilian monetary policy is a source of concern.
Finally, the continued strength of the Brazilian real is troubling, since it undermines the company's exports and increases domestic competition. All things considered, we believe that it is still prudent to keep a Hold recommendation on VCP. VCP shares are trading at 15.1x our 2008 earnings estimate, close to the industry median. VCP posted better-than-expected results in the fourth quarter 2007 and results as expected in the first quarter 2008. The outlook for pulp prices in the near future remains encouraging.
However, the continued appreciation of the Brazilian real and the stagnated revenues are huge concerns. Last but not the least, the increasing likelihood for a recession in the U.S. remains a real threat for commodities prices in general and pulp in particular. We expect the shares to trade closer to the current valuation of Aracruz Celulose (ARA) the biggest pulp producer in Brazil, around 16x our 2008 EPS. Our target price is $33.50.
Neutral Philips Outlook Maintained
Koninklijke Philips Electronics N.V. (PHG) reported slightly lower-than-expected revenue for the first quarter of 2008, as revenue recovered in the medical systems division but was weaker in connected displays. This led to the company underperforming our revenue estimates while lower gain on stake sale and a higher effective tax rate led to an earnings slip.
The company has worked to improve its cost structure, as its EBITA margins improved along with modest revenue performance despite the weaker-than-expected dollar. We were pleasantly surprised by the bounce-back of the healthcare division, which constitutes the second largest revenue earning segment for the company. This strength has caused us to project an overall revenue growth of 2.71% (in euro terms) for 2008, compared to 0% recorded for 2007.
The revenue growth rate in terms of dollars is projected at 11.60% for FY08 compared to 9.72% for FY07. While the company is calling for solid growth for the first half of 2008, the continued weakness of the US dollar continues to be a concern, and we are not optimistic that the dollar will rebound anytime soon.
We are maintaining our revenue estimates for 2008 in euro terms, but have lowered our expected currency rate for this period to $1.50 per EUR 1, which makes it appear we have raised our estimates in US dollars more than euro estimates. The company has worked to improve its cost structure as its EBITA margins improved despite the weaker-than-expected revenue performance in 1Q08.
Philips needs to better manage its inventory, and the build-up in healthcare and consumer lifestyle and leading into an election year may cause hospitals to delay orders further. The company has acknowledged that there is a lot of improvement needed in its inventory management in the future, and the increase of inventories is concerning.
Based on these results, we are maintaining our revenue estimates for 2008 and continue to rate the shares of PHG a Hold with a price target of $40.25 per share over the next six months, or between 17.2x and 17.4x our new 2008 EPS estimate of $2.32.
Uncertainties for Siliconware
Siliconware Precision Industries Co., Ltd. (SPIL) has reduced its capital expenditure budget for 2008 and is experiencing severe pricing pressure in its memory testing business. We continue to rate SPIL a Hold, as we believe there is no significant upside from current levels. We have fixed our price target at $10 or 12.8x our 2008 earnings estimate.
Shares of Siliconware Precision Industries are currently trading at 12.2x our 2008 earnings estimate of $0.78 and 11.2x our new 2009 estimate of $0.85. There is an indication of further erosion in gross and net operating margins in 2008 due to reduction in average selling prices in all three segments computing, communication and consumer. It is for this reason that we maintained our revenue estimates while lowering our earnings estimate for 2008.
We were shocked by the comnpany's fourth quarter revenue weakness due to its dependence on one of its top customers, Mediatech. That, plus the uncertainty in global financial markets has left little upside to the stock, in our opinion, at this time. It is for this reason that we are maintaining our Hold rating on shares of SPIL. We still expect the company to outperform its peers, but believe that growth for the company and industry as a whole has started to slow, and a P/E in this range better reflects the uncertainty in the market over the coming quarters.
Banco Bradesco Controlling Costs
We are continuing our Hold on Banco Bradesco S.A. (BBD), as well as our $22 target price. On April 16, Bradesco paid a 50% stock dividend, for which all data in this report has been adjusted. Bradesco is expected to report first quarter earnings on April 28. We are retaining our 2008 EPADS estimate at $1.54.
Revenues should benefit from growth in the lending portfolio, though net interest margins are declining and loss provisions should rise. Bradesco reported fourth quarter earnings of R$1,854 million, up 15% from a year ago, but below consensus and our estimate, largely due to comp costs growing more than expected. Other costs were generally well controlled, and the efficiency ratio improved 30 basis points to 41.8%. We believe dividend is safe.
At its current price, Banco Bradesco's ADS are now trading at 13.6X the 2008 consensus earnings estimates and 11.9X the 2009 consensus estimates, with both years well above the industry medians of 10.0X and 8.7X, respectively, based on consensus estimates as shown in the table following.
