Housing, energy equipment can offer high returns

Highly taxed telecom and electricity less attractive

Brazil's infrastructure boom is creating investment opportunities in transportation and housing, industry executives and analysts said on Tuesday, although high demand for industry stocks is leaving some listed companies overvalued.

Medium-size companies involved in energy equipment that can benefit from state oil company Petrobras' $224 billion, five year investment plan or the government's low-income housing crusade can provide attractive returns, said Silvio Camargo, head of equity research for Fiducia Asset Management, at an industry seminar.

Rodrigo Fonseca, who helps manage $835 million in assets for Rio de Janeiro-based Pollux Capital, recommended scaffolding and equipment rental firm Mills Engenharia (MILS3.SA), which he said it slated to benefit from growth of sectors ranging from construction to the oil and gas industry.

"We have one of the lowest infrastructure investment to GDP ratios of (emerging market) nations, but this has been changing," Camargo said.

Brazil's government is slated to invest $830 billion in infrastructure over the coming five years to make up for decades of underinvestment that has left the country's ports and roads overstretched by the country's rapidly growing industries.

Major investments in oil and gas and huge outlays for the the 2014 World Cup and 2016 Rio de Janeiro Olympics have spurred the interest of investors and fund managers in opportunities in infrastructure.

Telecommunications and electricity generation are less attractive because of their high tax rates and lower returns, Camargo said. He recommended companies such as homebuilder Direcional (DIRR3.SA) and logistics provider Julio Simoes (JSLG3.SA).

Fonseca said investors have to be cautious when getting involved in Brazilian public companies because asset values have been stretched due to capital markets optimism about the country's growth prospects.

"We have clients that are bullish about infrastructure in Brazil, and they want to get into equities," he said.

"But people have expectations and they price (them) into the stock ... once stocks start trading at 10 times EBITDA they may provide lower returns."

EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, is a gauge of operational profitability.

Pollux's Fonseca added that infrastructure projects such as roads, telecommunications and sanitation by nature have relatively low returns -- while companies that operate as suppliers to those projects offer better prospects.

"If you are satisfied with 8 percent real return, then you have a lot of opportunities," he said.

"For a 15 percent return, you have to look at ... an unregulated part of the economy where you don't have price controls, you don't have the government keeping profits down," he said. (Editing by Guillermo Parra-Bernal and Steve Orlofsky)