By KIERAN GARTLAN Dow Jones Newswires SAO PAULO, Brazil– Shares in Brazilian steel manufacturer Gerdau SA are poised to continue their bullish run, with a number of analysts peddling the stock as their top pick of 1999.

Gerdau preferred shares gained a whopping 233% in the first seven months ofthe year, outperforrning the benchrnark index ofthe Sao Paulo Stock Exchange, which itself posted a healthy 54% increase. Cornpany shares were trading at 29.1 O reals Tuesday, and analysts’ target prices for the stock for this year range from 34 reals to 3 7 reals.

“Prospects for the cornpany are excellent, the stock has been our top pick since the end of ’98,” concurred Reginaldo Alexandre, steel analyst for BBA Creditanstalt in Sao Paulo.

Gerdau’s solid performance in the second quarter — share prices rose 67% in the three-month period — was boosted by higher prices, with hikes of 7% both in February and April, and continued strong dornestic dernand.

“The company has a good pricing policy, with the devaluation and strong demand making room for the price increases, while the bulk of its costs are denorninated in reals,” Mr. Alexandre said. The Brazilian real has lost 33% of its value against the dollar since it was allowed to float freely in early January.

The euphoria surrounding the company was nurtured by the recent release of first-halfresults, with net profit at 168 million reals, an 18% increase on the year-ago period, while net revenue was up 16% at 1.6 billion reals during the same period.

Demand Fueled by Recent Privatizations

Despite the general slowdown in the economy, civil construction activity, which represents nearly 15% of Brazil’s gross domestic product and is responsible for 62% of Gerdau’s revenue, was boosted by the recent spate of privatizations.

“As a long-steel producer Gerdau is being favored by infrastructure growth arising from the privatization process, especially in the telecommnunications, energy and highway sectors,” said Mr. Alexandre.

Gerdau, based in Brazil’s southernrnost state of Rio Grande do Sul, is the leader in the cornrnon long steel sector, with a 51 % rnarket share. And with econornic growth expected next year after a sluggish 1999, analysts believe demand for long steel products will continue to soar.

“The company should do very well. It has a good balance sheet with a nice cash position and relatively little debt”, said Francisco Martins, steel products.

On the back of this growing demand, the company, which was founded in 1901 as a nail factory, recently announced it will invest between $120 million and $150 million in plant upgrades and expansion in Brazil during the next 12 months. Interest in CSN, Acominas Seen as Positive The rally in Gerdau stock has also been fueled by recent speculation the company could take a controlling stake in fellow steel manufacturer Companhia Siderurgica Nacional SA.

“The stock’s performance in coming months will be strongly linked to expectations of Gerdau acquiring a significant stake in CSN, which would be very positive,” said Mr. Martins. Gerdau would become Latin America’s leading steel manufacturer if the CSN acquisition goes through, and would be ranked among the top 15 steel companies in the world, with annual revenues of $4.5 billion, according to a report in this week’s edition of Dinheiro magazine.

The deal to acquire the CSN stakes is reportedly valued at 670 million reais and would add production of steel sheets, used for the automotive sector, to Gerdau’s portfolio. Company officials weren’t available to comment on the possible CSN acquisition. Gerdau, which has a presence in Uruguay, Canada, Chile and Argentina, is also expected to increase its participation in local steel company Aço de Minas Gerais, or Acominas, in an upcorning rights offering.

Gerdau already acquired an 18% stake in Acominas in January 1998 from the Minas Gerais state government for the minimum price of 280 million reais. “Increasing its participation in Acominas would be very strategic given Acominas’ 2.5 million ton capacity to produce billet and slab steel,” sai d Mr. Alexandre. “There would be significant synergies to be gained from a closer cooperation between Gerdau and a producer of semi-manufactured billets, such as Acominas,” added Mr. Martins. Concern About Chile Operations Despite the overwhelming confidence in the company’s stock, analysts have pointed to a few concerns that could dampen future performance.

“Gerdau is almost entirely dependent on the civil construction sector, which, if it slows down could stifle the company’s progress,” said Mr. Martins. Another concern is the anemie state of the Chilean economy where Gerdau has recently expanded its operations, gaining a 20% share in the country’s common long steel market. Gerdau opened its second steel mill in Chile in June of this year with a production capacity of 360,000 tons of steel a year.

“On the down side is the fact that the Chilean economy, where the company recently built a new plant and has significant operations, is not doing so well, so this could effect the company’s overall performance,” said Mr. Martins. While some concerns exist, the general market sentiment is extremely positive, with Gerdau recently being elected as the best listed company in Brazil in 1998 by the Brazilian Capital Market Analysts Association, or Abamec, comprised of over 2,200 investment analysts.