NETC a Quality Brazilian Play

We are reiterating our Buy recommendation on Net Servicos (NETC). Although higher worldwide inflation and interest rates, particularly in Brazil, are source of great concern, we are highly encouraged by the company's solid operating results during the first quarter. We expect this trend to continue in the short term due to the still positive economic environment in Brazil.

Brazil was recently upgraded to investment grade by Standard & Poor's and by Fitch. The outlook for Brazilian real in the short term remains positive, and that will help reduce the interest expenses in the following quarters. The incorporation of Vivax and BIGTV consolidates the company's presence in the key State of Sao Paulo. Additionally, the performance of its voice service and broadband products remains highly encouraging.

Currently, NETC is trading with a valuation of 19.0x our 2008 expected earnings, somewhere close to industry median. It is important to remember that the company has a long tradition of weak results; however, we are convinced that NETC is now in a positive cycle and that should include continued growth in its subscriber base, positive cash flow generation and increasing net income.

We believe the company is in a unique position to benefit from the growing demand for cheap telecommunication products and reliable broadband devices in Brazil. However, we are decreasing our target price to $14.50 from $15.25, based on the higher worldwide inflation and interest rates. Our target represents a P/E around 24x our 2008 earnings estimates, between the industry mean and median.

Downgrading Highwoods to Hold

Highwoods Properties (HIW) is a fully integrated, self-administered real estate investment trust (REIT) that owns or has management interests in office, industrial, retail and service center properties, including development projects and apartment units.

The company's core FFO [funds from operations] increased 17% in 1Q08 vs. 1Q07. Operations are holding steady as occupancy and rents are slowly rising in many of the company's markets. The company continues to focus on higher yielding development which will drive long-term NAV [net asset value] growth.

Although, the US economy is rapidly declining and job losses are accelerating across the county. We think operations will get worse in 2008 and suburban office owners will have difficulty maintaining occupancy and increasing rents. We are changing our near-term recommendation to Hold based on valuation.

At 11.6x 2008 FFO estimates, HIW trades at about a 25% discount to office REIT peers that we cover. Due to recent share price declines, the company now trades at a nearly 20% discount to our NAV estimates. The yield is now 5.5%, above sector averages and safe in the near term.