ProLogis Still in Best Position
Operationally, ProLogis' (PLD) portfolio continues to perform well with stable occupancies and increasing rents. FFO (funds from operations) was $1.06 per share in 2Q08 versus $1.16 in 2Q07. The company reiterated its earlier full year 2008 FFO guidance range of $4.65 - $4.85 per share, with heavy CDFS (Corporate Distribution Facilities Services) income expected in the 4th quarter.
The US economy continues to slow; PLD has 65% of its asset base in the US, which adds to near term risk. The company is continuing to focus its development efforts outside of North America. We think PLD is still the best-positioned industrial REIT (real estate investment trust) with a stable balance sheet and global platform. Shares are off nearly 30% over the past three months. We maintain our Buy rating, and investors now have the opportunity to buy heavily discounted shares.
PLD now trades at 9.0x 2008 FFO estimates, putting it at a 5% discount to industrial and 40% discount to office REITs. The company has a large, diversified development pipeline, with high projected yields that should be accretive to earnings as projects come on line. With the decrease in share price, the yield is now over 4%, and the company is covering the payout with operating cash. Shares are attractively valued; we are setting our six month price target at 10.0x 2008 estimates or $50.00 per share.
Banco Bradesco Target Adjusted
We are continuing our Hold on Banco Bradesco S.A. (or Bradesco) (BBD), but cutting our target price to $19. In its second quarter report, Bradesco posted net earnings before nonrecurring items of R$2,002 million, up 11% year-over-year, but below our estimate due to a higher-than-expected effective tax rate.
Despite this, we are maintaining our 2008 EPADS estimate at $1.60 and raising our 2009 estimate to $1.90 from $1.88, due to a change in our FX assumptions from depreciation of the US$ against the Brazilian real. Revenues should benefit from growth in the lending portfolio, though net interest margins are declining and loss provisions should rise. We believe the $0.61 indicated dividend, which provides a 3.3% yield, is safe.
As a result of better economic conditions, the Brazilian credit business has been growing, and Bradesco has been able to take advantage of this improved economic environment. Due to Bradesco's successful segmentation strategy, it has experienced solid portfolio growth in consumer and small- and medium-size companies. During second quarter 2008, Bradesco's loan portfolio increased 37% over 2007's second quarter, reaching R$148 billion. We expect continued strong growth in upcoming quarters.
The bank continues to show strong profitability due to strict cost controls, growth in assets, solid fee income growth, increased credit portfolio, and remarkable growth in its assets under management. As expected, Brazilian retail banks benefited from the uncommon combination of increasing credit demand and higher local interest rates.
Sciele Target the Buyout Price
On September 1, Sciele Pharma, Inc. (SCRX) entered into a definitive agreement with Japanese company Shionogi for $1.4 billion, or $31 per share. The offer price represents a huge 61% premium over Sciele's closing price on August 29. Sciele s shares shot up 59% following the takeover announcement. We previously had a Buy rating on Sciele but are now moving back to a Hold rating.
We believe that Sciele has done a good job saving the Sular franchise from generic erosion. In our opinion, Sciele's strong sales and marketing experience and solid late-stage pipeline should help Shionogi strengthen its presence in the U.S. market once the acquisition goes through in the fourth quarter of 2008.
Our new target price on Sciele is $31, which is based on Shionogi's offer price.
