Brazilian flair makes firm an intriguing play

By Joanne Hart for The Mail on Sunday
Updated: 12:19 EDT, 11 May 2011

The stock market has faced conflicting signals over the past few days.

Some stocks, such as Marks & Spencer, have been boosted as brokers suggest they are doing better than expected.

But broader concerns about commodity prices and inflation have put downward pressure on shares.

On Wednesday, inflation worries gained fresh momentum when the Bank of England said British inflation could hit 5 per cent his year and would probably remain above 2 per cent throughout 2012.

The forecasts prompted expectations that Bank base rates (on which bank loans and mortgages are based) would start to rise by the end of the year, having been held at 0.5 per cent since March 2009.

Squarestone Brasil

Ticker: SQB (Aim market)

Contact: squarestone.com.br or 01481 810102

Such fears are not helpful for British companies but an increasing number of them are doing business in emerging markets, whose economic circumstances are very different.

Aim-listed Squarestone Brasil, for example, was set up to develop shopping malls in Brazil, particularly in areas currently under-served by good retail outlets.

It is widely known that Brazil has one of the fastest growing economies in the world, growing 7.5 per cent last year and likely to continue to expand over the next few years.

This growth has prompted a rapid increase in the middle classes, which have risen by 20 million since 2002 out of a total population of just over 190 million.

Many of these people are city-dwellers, as 80 per cent of Brazilians live in urban centres. They also love to shop. Malls are an integral part of life in Brazil and a weekend activity for young and old, particularly in the summer when air-conditioned centres provide a welcome respite from the heat.

In downtown São Paolo and Rio, this enthusiasm for mall-life is well-served. Elsewhere however, many Brazilians have to put up with old-fashioned, down-at-heel shopping malls which are far less attractive than their counterparts in Britain and America.

Squarestone Brasil hopes to change that. The company was founded in 2007 by three young property entrepreneurs, James Morse, Robert Sloss and Tim Barlow. The group joined Aim a year ago at a price of 100p and has since trod water, trading at 107p today.

The company initially hoped to raise £250 million but its plans were kyboshed by the impact of the Greek debt crisis on investor appetite for overseas risk and in the end it raised just under £30 million.

This early setback has not diminished the group's ambitions. Last month, it raised £70 million through a convertible bond issue to fund the development of its first major mall, Golden Square in São Bernardo do Campo, a suburban offshoot of São Paolo with a population of nearly a million people.

Key participants in the bond issue were Brazil's leading investment bank, BTG Pactual, and a large American private equity firm specialising in property, Walton Street Capital.

The duo have invested in the bond and agreed to help fund three future developments in the suburbs of São Paolo.

BTG and Walton's commitment to Squarestone is a strong endorsement of the group's strategy. Morse and his fellow directors intend to make Golden Square as modern and attractive as the best on offer in the West, not just in terms of the look and the layout but also in terms of shops on offer.

Many mid-market retailers are keen to open up in Brazil but would prefer to work with British property developers whom they know and trust.

Squarestone is actively talking to several such operators and hopes to announce some high-profile occupants later this year.

Later this month, the group will put out results for 2010, expected to show a net asset value of at least 108p a share. This should rise steadily over the next year and beyond, as Golden Square takes shape and other projects are launched.

Midas verdict: Squarestone Brasil offers investors an intriguing play on a fast-growing sector in a fast-growing emerging market.

Morse, now a full-time resident in Brazil, has developed a network of contacts in the region and the company will gain further support from BTG and Walton Street.

Not a share for the nervous but one that could deliver some excitement over the next two to three years. Buy.