Companhia Energetica de Minas Gerais

Transcription

1 February 25, 2015 Companhia Energetica de Minas Gerais (CIG-NYSE) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 06/15/2014 Current Price (02/24/15) $4.41 Target Price $4.75 SUMMARY CEMIG s long-term prospects appear bright as electricity demand in Brazil is expected to increase in the years ahead. To leverage benefits from the rising demand, the company is keen to increase its production and distribution capacity. Also, acquisitions play an important role in boosting the company s growth prospects. Also, the company s agreement for participation in the construction of 25 wind farms is expected to work in its favor. Moreover, the payment of dividends and interest on equity will boost shareholders return. However, rising operating expenses, governmental interference and dependence on hydro sources for electricity might prove to be potential headwinds for the company, going forward. Thus, we maintain a Neutral recommendation on CEMIG. SUMMARY DATA 52-Week High $ Week Low $4.02 One-Year Return (%) Beta 1.00 Average Daily Volume (sh) 3,232,101 ADRs Outstanding (mil) 1,116 Market Capitalization ($mil) $4,922 Short Interest Ratio (days) 4.98 Institutional Ownership (%) 10 Insider Ownership (%) Annual Cash Dividend $0.83 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per ADR (%) Dividend (%) 37.0 using TTM EPADR 6.4 using 2015 Estimate 5.6 using 2016 Estimate 5.7 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page Risk Level * Above Avg., Type of Stock Large-Value Industry Util-Elec Pwr Zacks Industry Rank * 91 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,839 A 1,669 A 1,555 A 1,740 A 6,803 A ,017 A 2,125 A 1,688 A 1,658 E 7,488 E ,359 E ,081 E Earnings per ADR Estimates (EPADR is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.51 A $0.31 A $0.36 A -$0.09 A $1.09 A 2014 $0.47 A $0.30 A $0.01 A $0.11 E $0.89 E 2015 $0.79 E 2016 $0.78 E Projected EPADR Growth - Next 5 Years % 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Companhia Energetica de Minas Gerais (CIG), known as CEMIG, is one of the largest integrated electric utilities in Brazil. Approximately 97% of the company s installed generation capacity is hydroelectric power. Currently, the company is the fifth-largest electricity generator in Brazil. Currently, the company meets roughly two-thirds of its power needs from the internal generation assets and purchases, and the rest from third parties. CEMIG s customer base, which includes residential, industrial, commercial and rural customers, is located primarily in the south-eastern state of Minas Gerais. In addition to its integrated electricity business, CEMIG is engaged in natural gas distribution and telecommunications. The state government of Minas Gerais is the company s largest shareholder with 51% stake in voting shares. The company is the third-largest transmission company in Brazil with a 13% market share and more than 10,000 km of transmission lines across the nation. The company operates through a number of subsidiaries, of which two prime ones are Cemig Dis tribuicao (Cemig Distribution or Cemig D) and Cemig Geracao e Transmissao (Cemig Generation and Transmission or Cemig GT). REASONS TO BUY CEMIG operates in one of the promising industries of Brazil. The country s electricity market is the largest in South America with an installed capacity of 129 thousand Megawatts (MW) as on Jun 2014, including 3,428 MW generated by wind firms. The installed wind capacity is anticipated to reach 22,439 MW in 2023, according to the Ministry of Mines and Energy's (MME) 10-year energy expansion plan. Energy consumption in Brazil is expected to rise in the years ahead. Globally, demand for electricity is anticipated to grow 56% during , according to the International Energy Outlook 2013 published by the U.S. Energy Information Administration (EIA) in Jul CEMIG is making earnest efforts to improve its electricity generation capacity and distribution services. In first-half 2014, the company acquired 49.9% stake in Retiro Baixo Energética. The latter operates the Retiro Baixo hydroelectric plant, which has an installed generation capacity of 83.7 MW. Also, the company acquired 12.4% interest in Madeira Energia. In third-quarter 2014, CEMIG and Renova Energia agreed to participate in construction of 25 wind farms, with an installed generation capacity of MW. In Oct 2014, the company increased its stake in Renova to 27.37% while also acquiring 40% equity interest in Gasmig. The stake increase in Gasmig is part of a strategy for the creation of a new company, Gás Natural do Brasil S.A. Over a period of 30 years, the company targets to capture a major share of the Brazilian generation and distribution businesses, thus becoming the chief player in the Brazilian electricity utility sector. CEMIG s integrated nature of operations (generating and distributing energy), along with its aggressive expansion plans, ensures its presence among industrial customers all over the south and southeast Brazil. For Cemig D, the company anticipates earnings before interest, tax, depreciation and amortization (EBITDA) to be within R$1,719 R$2,023 million in For Cemig GT, EBITDA is projected to be within R$2.2 R$4.1 billion in Consolidated EBITDA is predicted within R$5.9 R$8.1 billion in For , planned investments are anticipated to be roughly R$4.4 billion for Cemig D and R$2.6 billion for Cemig GT. Equity Research CIG Page 2

3 REASONS TO SELL RECENT NEWS CEMIG s disappointing performance in third-quarter 2014 was largely a result of escalating operating expenses, especially costs related to electricity brought for resale, and losses arising from equity contribution from subsidiaries. Electricity sold to final consumers edged down 0.7% year over year. In the quarters ahead, any unchecked increases in expenses can prove detrimental to the company s profitability. With nearly 51% of its stake lying with the government of the Brazilian state of Minas Gerais, CEMIG s business operations are influenced by political intervention. This may impact the company s performance unfavorably, as interests of the state government might not agree with those of the minority shareholders. Also, the company faces a natural limitation on its generation capacity, as hydroelectric power plants cannot generate more electricity than what is made possible by the available water resources. Lack of sufficient water resources due to dry weather conditions may compel the company to use thermoelectric generation plants, which entails significantly high costs. Brazilian electric utility companies face other problems that must be considered. Based on higher productivity and lower cost of capital, ANEEL (Agência Nacional de Energia Elétrica) decides the tariff revision for companies to regulate a monopolistic environment. The more efficient the companies, the greater the tariff cut on a periodic basis. Naturally, as this legislation creates a difficult business environment, each company must operate efficiently in the short term in order to take advantage of the tariff over the long term. Subsequently, any efficiency gains will be incorporated into prices and thus the company, paradoxically, will find itself penalized for greater efficiency. Interest on Equity On Dec 26, 2014, CEMIG announced payment of interest on equity amounting to R$230 million or R$0.18 per share for The payment will be made in two instalments, with the first one on Jun 30, 2015 and the second on Dec 30, Third-Quarter 2014 Highlights On Nov 13, 2014, CEMIG reported third-quarter results. Adjusted net income came in at R$26.6 million (US$11.7 million), down 96.1% year over year. Revenues: CEMIG generated net revenue of R$3,831.9 million (US$1,688.1 million), reflecting a yearover-year increase of 8.1%. Sales to end consumers accounted for 98% of the net revenue generated. Electricity sold to CEMIG s final consumers edged down 0.7% year over year to 15,466 Megawatt hours (MWh). Expenses/Income: Operating expenses escalated 22% year over year to R$3,420 million (US$1,506.6 million). The increase was due to higher costs related to electricity brought for resale, use of the national grid, post-retirement liabilities, personnel and managers, employees and managers profit shares, materials, depreciation and amortization, operational provisions and other expenses. On the other hand, partially offsetting these were decreased costs associated with royalties for use of water resources. Equity Research CIG Page 3

4 Adjusted EBITDA fell 56.7% year over year to R$490.4 million (US$216 million) while EBITDA margin was 12.8% versus 31.9% in the year-ago quarter. Balance Sheet and Cash Flow: Exiting third-quarter 2014, CEMIG had cash and cash equivalents of R$1,327 million (US$546.1 million) as against R$1,989 million (US$904.1 million) recorded at the previous quarter-end. Loans and financings inched up 0.2% sequentially to R$2,089 million (US$859.7 million). In the first nine months of 2014, CEMIG generated cash of R$3,249 million (US$1,412.6 million) from its operating activities, reflecting an increase of 22% year over year. Capital spent on fixed and intangible assets plummeted 75% to R$614 million (US$267 million). Stake increase in Renova On Oct 28, 2014, CEMIG announced that it presently holds 27.37% equity interest in Renova. This happened after Renova issued roughly 8.7 million shares for R$ per share. Stake increase in Gasmig On Oct 14, 2014, CEMIG announced to have successfully completed acquiring 40% equity interest in Gasmig held by a subsidiary of Petrobras, Gaspetro. The transaction value was approximately R$570.9 million. The acquisition is part of a strategy for the creation of a new company, Gás Natural do Brasil S.A. On Jun 16, CEMIG and Gas Natural Fenosa entered into an agreement for the creation of Gás Natural do Brasil S.A. The new company will deal with natural gas projects. Equity Research CIG Page 4

5 VALUATION CEMIG s current trailing 12-month earnings multiple is 6.4x compared with the 20x for the peer group and 18.4x for the S&P 500. Over the last 5 years, the company s shares have traded in a range of 3.3x to 11.4x trailing 12-month earnings. We maintain a Neutral recommendation on CEMIG, anticipating the company to perform in line with the broader market in the next 6 12 months. Our $4.75 target price is based on 6x 2015 earnings per ADR. Key Indicators F1 F2 Est. 5-Yr EPADR Gr% P/CF 5-Yr High 5-Yr Low Companhia Energetica de Minas Gerais (CIG) Industry Average S&P Spark Energy (SPKE) Natl Grid -ADR (NGG) E.ON AG-ADR (EONGY) Enel Societa PR (ENLAY) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Companhia Energetica de Minas Gerais (CIG) Industry Average S&P Equity Research CIG Page 5

6 Earnings Surprise and Estimate Revision History Equity Research CIG Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CIG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Payal Jalan Copy Editor Content Ed. QCA Lead Analyst Reason for ate Anuja Mitra Payal Jalan Supriyo Bose Payal Jalan Daily update Equity Research CIG Page 7