Bankrupt Fabricato Doubling on Colombia Free Trade Deal May Signal Bubble

Fabricato SA, Colombia’s bankrupt textile producer, more than doubled this year on prospects for a U.S. free-trade accord, a rally some analysts say is unwarranted as investors overestimate the potential benefit to earnings.

“It’s totally a bubble,” Rupert Stebbings, the Colombia director for Santiago-based brokerage Celfin Capital, said in a telephone interview from Bogota. “Nothing in terms of the market or fundamentals can justify Fabricato’s price.”

The 173 percent advance in Medellin-based Fabricato pushed the price to 29 times estimated 2012 earnings, the third-highest in the world among the 71 textile companies for which Bloomberg has 2012 estimates after China’s NingBo YAK Technology Industrial Co. and Taiwan’s Ruentex Industries Ltd. The stock is up 13 percent this month, while Colombia’s benchmark index fell 0.3 percent. The share fell 0.7 percent to 73.5 pesos at 10:45 a.m. New York time today.

Fabricato, mired in bankruptcy since 2000 after a recession in 1999 and stiffer competition from Asia, is the world’s second-biggest gainer for textile companies with a market value of at least $100 million as the accord awaits a vote by U.S. lawmakers. Peruvian manufacturers enjoyed a similar rally before a U.S. free-trade agreement was approved in 2007 only to plummet afterward on lower-than-forecast sales to America, said Roberto Flores, an analyst at Lima-based brokerage Inteligo SAB.

In Colombia, investors are betting the deal would improve the outlook for textile companies by locking in trade benefits that expired in February after U.S. lawmakers didn’t renew the measures, said Angelica Dominguez, an analyst at brokerage Bolsa y Renta in Medellin. The accord would immediately end most remaining tariffs on yarns, fabrics and fibers, according to Maria del Mar Palau, the head of Colombia’s textile chamber.

‘Great Benefits’

Fabricato Chief Executive Officer Ivan Zuluaga said the company will see “great benefits” financially by 2013 should the U.S. pass a free-trade agreement with Colombia this year.

“Clothing makers around the world including Brazil and Asia will push to do business in Colombia so they can send their products to the U.S. without tariffs,” Zuluaga said in a July 26 conference call. The company is in talks with European clothing brands that want to use Colombia as a potential tariff- free base for shipping to the U.S., he said.

Fabricato’s financial results have played an “important role” in the price of the shares, Zuluaga said.

Colombian textile producers may prove more resilient than Peruvian counterparts as they have been “learning to live” with a strong peso and seeking new markets in Mexico, Ecuador and Peru after a 2009 diplomatic crisis with neighboring Venezuela led to a plunge in exports, said Palau at Colombia’s textile chamber. The companies also reduced debt, Palau said.

U.S. Politics

Peruvian companies Cia Universal Textil SA (UNITEXI1) and Industria Textil Piura (PIURAC1) doubled in a 2007 rally on free-trade accord optimism. Shares erased gains by 2009 as U.S. demand slumped.

Colombia’s congress and constitutional court both endorsed the agreement by 2008. U.S. President Barack Obama’s plan to send the trade deal to Congress along with pacts the U.S. reached with two other nations has been delayed by a dispute over renewing a worker aid program opposed by Senate Republicans.

While leaders are negotiating to advance the pacts, debate will probably be postponed until after a recess next month because the Obama administration is consumed in resolving a federal borrowing stalemate, U.S. Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee, told reporters July 27.

“Nobody was putting a penny” on approval of the Colombia deal until U.S. Republicans won the House majority last November, Palau said. The accord was held up as labor unions opposed it, citing the killing of 51 union leaders last year in Colombia, the world’s deadliest nation for organized labor.

Colombia-U.S. Ties

The agreement is supported by U.S. companies from San Jose, California-based Cisco Systems Inc. (CSCO) to Caterpillar Inc. (CAT) of Peoria, Illinois. Duties would end on more than 80 percent of manufactured-goods exports to Colombia, the Office of the U.S. Trade Representative says. The U.S. exported $11 billion to Colombia last year. The U.S. has free-trade agreements in force with 17 nations, including Mexico and Chile.

Fabricato and smaller producer Coltejer SA (COLTEJ) may face so- called Dutch disease — when gains in the local currency driven by a resource boom erode profits for exporters and make non- commodity industries such as manufacturing less competitive, said Andres Jimenez, head of international sales at Interbolsa SA, Colombia’s biggest brokerage. The peso has jumped 8.1 percent against the dollar since March 1, the best performance among 25 emerging-market currencies tracked by Bloomberg, on record oil and mining investment.

Government Efforts

Fabricato reported second-quarter profits of 2.7 billion pesos ($1.5 million), compared with a 5.6 billion peso loss a year ago, as currency gains “somewhat deteriorated” profits, Zuluaga said.

In a bid to ease the peso’s rally, the government said it would create an overseas fund with as much as $1.2 billion from dollars bought in the local market through the end of 2011, and forgo repatriating funds from abroad the rest of the year. The central bank announced last September it would buy more than $20 million a day for at least a year.

Fabricato has paid off all but 1.6 percent, or $3 million, of the debt it had when it began restructuring in 2000, Zuluaga said. The company said in a March statement that it may come out of bankruptcy in 2013, 10 years before the legal deadline.

Coltejer’s first-quarter revenue rose 51 percent from a year ago to 75 billion pesos, while profit wasn’t comparable to 2010 because of a property sale. Coltejer’s shares rose 27 percent this year to 1.12 pesos. Rafael Moises Kalach, chairman of Medellin-based Coltejer, didn’t respond to requests for comment.

Stock Outlook

Stebbings said speculation of a Fabricato sale has also boosted the share price since Zuluaga announced his resignation in May. Zuluaga, who will leave the company Aug. 1, denied reports in La Republica newspaper that the company plans to sell to Mexico City-based Grupo Kaltex, according to a statement in May.

“Even if Venezuela suddenly reopened and the U.S. agreement was passed, Fabricato can’t make enough to justify that rally,” Stebbings said.