July 1, 2016 / 4:11 PM / 2 years ago

Cyrela sees cash flow at risk amid record Brazil home cancelations

SAO PAULO, July 1 (Reuters) - Cyrela Brazil Realty SA could generate no free cash flow this year, as Brazil’s largest listed homebuilder struggles with the impact of cancellations and the harshest real estate market in decades, a senior executive said on Monday.

São Paulo-based Cyrela has negative free cash flow from operations so far this year, Chief Financial Officer Eric Alencar said. Free cash flow is the money left for holders of bonds and shares after a company pays all operating and financial expenses.

Company estimates put the current rate of cancellations at around 25 percent of total sales, the highest since at least 1982.

The company, controlled by billionaire tycoon Elie Horn, generated about 900 million reais ($281 million) in cash last year, with almost half of it coming in the final quarter.

“The company may not generate cash in 2016,” Alencar told Reuters in an interview this week, explaining that cancellations are affecting its ability to produce free cash flow.

The outlook for 2017 cash generation appears less challenging, he added, provided banks resume lending and confidence returns to consumers.

In the first quarter, Cyrela burned through 13 million reais of cash, according to regulatory filings. The company is scheduled to report second-quarter results on Aug. 9.

His remarks come as investors have grown concerned that Cyrela could make acquisitions a priority over protecting cash amid Brazil’s harshest recession in eight decades.

This month, Cyrela announced a plan to pump as much as 100 million reais into rival Tecnisa SA, a decision that analysts at JPMorgan Securities said would put at risk the policy of beefing up cash.

However, Alencar said Tecnica was a good investment opportunity since it would only consume a fraction of the company’s 2 billion reais cash position. The deal requires regulatory approval.

Shares of Cyrela have inched up around 3.5 percent since the Tecnica announcement on June 26. The stock slipped 0.3 percent to 10.26 reais on Friday.

When Cyrela begins to generate free cash flow again, management will “preferably buy back shares or distribute dividends,” Alencar said. He mentioned land acquisitions or potential debt repayments as additional options.

Losses due to sales cancellations obliged the company to set aside about 21 million reais in the form of loss provisions in the first quarter. The company began the practice of building up provisions at the suggestion of auditors, Alencar said. ($1 = 3.2082 Brazilian reais) (Reporting by Daniel Flynn; Editing by David Gregorio)

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