Companhia Paranaense De Energia

Transcription

1 January 21, 2015 Companhia Paranaense De Energia (ELP-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/21/2015 Current Price (01/20/15) $12.20 Target Price $ Week High $ Week Low $9.97 One-Year Return (%) 2.69 Beta 1.05 Average Daily Volume (sh) 452,921 ADRs Outstanding (mil) 274 Market Capitalization ($mil) $3,343 Short Interest Ratio (days) 7.18 Institutional Ownership (%) 4 Insider Ownership (%) N/A Annual Cash Dividend $0.91 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.1 Earnings Per ADR (%) -7.5 Dividend (%) 92.8 using TTM EPADR 6.9 using 2015 Estimate 6.5 using 2016 Estimate 5.8 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY We find the long-term growth prospects of COPEL quite bright, as huge infrastructural developments in Brazil will subsequently call for an increased electricity supply and hence, will boost the demand for electric utilities. To capitalize on this growing demand, COPEL is making efforts to improve its generation capacity. In addition, the company is working toward expanding its business not only in Parana but also in regions where it is engaged in other projects. Considering these positives, we have upgraded our recommendation on COPEL from Underperform to Neutral. The upgrade has been restricted to a neutral view due to the presence of near-term risks arising from political interference, rising costs and expenses, huge debt levels and dependence on water resources. Risk Level * Above Avg., Type of Stock Mid-Value Industry Util-Elec Pwr Zacks Industry Rank * 64 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,190 A 1,190 A 1,190 A 1,190 A 1,190 A ,293 A 1,383 A 1,448 A 4,110 E ,520 E 1,493 E 1,409 E 4,235 E ,189 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 $0.73 A $0.45 A $0.44 A $0.29 A $1.87 A 2014 $0.90 A $0.41 A $0.18 A $0.24 E $1.73 E 2015 $1.06 E $0.44 E $0.18 E $0.20 E $1.88 E 2016 $2.10 E Projected EPADR Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Companhia Paranaense de Energia (ELP), also known as COPEL, is a fully integrated electric utility in Brazil. The company is engaged in the generation, transmission and distribution of electricity in the state of Paraná. The provincial government of the state controls about 58.6% of the shares of COPEL. The company directly serves approximately 4.3 million customers in 395 municipalities and 1,113 localities. COPEL has roughly 5,454 megawatt (MW) of generating capacity, 99% of which is hydroelectric. The company owns 20 power plants, including 18 hydroelectric, 1 thermal and 1 wind plant. Moreover, it has interests in as many as 10 power generation companies. COPEL also provides telecommunications, natural gas, engineering, water and sanitation services. COPEL operates primarily through its five subsidiaries, including Copel Geração e Transmissão (GeT deals with generation and transmission of electricity), Copel Distribuição (DIS deals with distribution of electricity), Copel Telecom (TEL deals with the telecommunication business), Copel Participações (manages the company s interests in special-purpose entities in the energy, gas, telecommunication, sanitation and service sectors) and Copel Renováveis (deals with the company s investments in renewable energy generation projects). REASONS TO BUY REASONS TO SELL To capitalize on the growing demand for electricity, COPEL is making possible efforts to enhance its electricity generation capacity. For this purpose, an investment worth R$2.5 billion has been planned for Of the total amount, nearly 52.5% will be used for the Generation and Transmission business, 31.7% for the Distribution business, 4.3% for the Telecommunications business and 11.5% for other businesses. In May 2014, the company s GeT subsidiary won multiple rights to build and operate transmission lines, involving an annual permitted revenue (APR) of over R$95 million. The company is also expanding its wind farm portfolio. In Nov 2014, COPEL acquired 100% stake in Santos Wind Farm Complex, while it had earlier bought 49% stake in São Miguel do Gostoso wind farm complex. Exiting third-quarter 2014, the company had 4 operating wind farms and 14 under construction, with a total installed capacity of 473 MW of electricity. COPEL operates in a non-cyclical industrial environment and is well positioned in the Brazilian electric utility sector. The company accounts for about 7% of total electricity production in the Brazilian state of Paraná. Efforts are being made to expand the company s business not only in Parana but also in regions where it is engaged in other projects. COPEL aims to achieve 6% annual reduction in costs related to personnel, materials, services and others for its subsidiary, Copel Distribuição, within Stringent measures including workforce reduction and cutting down managerial positions, among others, are being implemented gradually. The company saved approximately R$30 million in 2013 and expects to reduce operating costs further by R$300 million through High level of long-term debts, roughly R$4.4 billion at the end of third-quarter 2014, increases the company s financial burden and in turn, impacts profitability. Also, dealing with lawsuits is a risky affair for the company as any judgment against it might result in huge losses. Exiting third-quarter 2014, COPEL maintained a provision for legal claims amounting to R$1.4 billion for cases considered as probable losses. Also, the company had cases worth R$2.9 billion, which can be classified as possible losses. Equity Research ELP Page 2

3 RECENT NEWS The extension of COPEL s power transmission, electricity generation and distribution depends on the renewal of the company s concession agreement with the Brazilian federal government. In 2013, the Brazilian government adopted measures by which electric utilities were forced to reduce their power costs in exchange for renewal of their concessions. Lowering power costs impacted the financials of electric utilities and did little to lower costs for consumers. Any such move in the future to lower energy costs will hurt the financials for the Brazilian electric utilities. COPEL s majority shareholding of 58.6% rests with the government of the state of Paraná, giving it power to control the election of the company s board of directors and direct some of its activities and expenses. This has, however, led to unsolicited meddling, causing delays in execution of regular operations of the company. Further, roughly 99% of the company s total power generation capacity comes from hydroelectricity. Such dependence on rainwater to source majority of its hydroelectric power becomes risky for the company in the event of an unpredictable, lower-than-average rainfall. Capex 2015 On Dec 11, 2014, COPEL announced its capital expenditure plan, amounting to R$2,476.9 million, for Of the total amount, roughly R$1,300.1 million will be used for the Generation and Transmission business, R$784.7 million for the Distribution business, R$107.7 million for the Telecommunications business and R$284.4 million for investments in new businesses. Dividend and Interest on Equity On Nov 21, 2014, COPEL paid dividends and interest on equity for 2014 to shareholders of record as on Nov 6. As disclosed, approximately R$350.8 million were paid as dividend, comprising R$1.22 per common shares, R$1.35 per Class A preferred shares and R$1.35 per Class B preferred shares. Also, the company s interest on equity disbursement amounted to R$30 million, including R$0.10 per common shares, R$0.12 per Class A preferred shares and R$0.12 per Class B preferred shares. Wind Farm Projects On Nov 17, 2014, COPEL announced that it has acquired 100% stake in Santos Wind Farm Complex from Rodrigo Pedroso Energia Ltda RPE Energia. The complex, situated in Rio Grande do Norte, has six wind farms with a total installed generation capacity of MW. Earlier, the company has acquired 49% stake in São Miguel do Gostoso wind farm complex from Voltalia Energia do Brasil Ltda. The complex is situated in the state of Rio Grande do Norte and has four wind farms, with an installed electricity generation capacity of 108 MW. Third-Quarter 2014 Highlights On Nov 13, 2014, COPEL reported third-quarter 2014 results. Net income came in at R$233.4 million (US$102.8 million), down 14.5% year over year. Earnings were R$0.40 per share or US$0.18 per American Depository Receipt (ADR). Revenue: COPEL generated revenues of R$3,286.9 million (US$1,448 million), increasing 45.8% year over year. The top-line improvement was driven by sales increase in the following categories: 39.5% in electricity sales to final customers, 134.8% in electricity sales to distributors, 14.5% in use of the main distribution Equity Research ELP Page 3

4 and transmission grid, 37.3% in construction and 18.3% in telecommunications. However, these were partially offset by declines of 15.9% and 39.8% in revenues generated from distribution of piped gas and other sources, respectively. Electricity Sales: COPEL s electricity sales to final customers improved 3.1% year over year to 5,870 Gigawatt hours (GWh) in third-quarter The rise was prompted by a 0.9% increase in the Residential segment, 4% in Industrial, 5.7% in Commercial, 2.3% in Rural and 2.1% in Other segment. Electricity sales to final customers include Copel Distribuição s sales in the captive market and Copel Geração e Transmissão s sales in the free market. Expenses/Income: COPEL s operating costs and expenses soared 51.7% year over year to R$2,980.8 million (US$1,313.1 million). As a percentage of revenues, it came in at 90.7% as against 87.1% in the year-ago quarter. The company recorded steep increases of 623.7% in cost of materials and supplies for power electricity, 335.3% in natural gas and supplies for the gas business, and 664.3% in provisions and reversals. Additionally, higher costs were reported in the following categories: 57.3% in electricity purchased for resale, 63.5% in charges of the main distribution and transmission grid, 36.3% in construction costs and 22.7% in materials and supplies. Earnings before interest, tax, depreciation and amortization (EBITDA) improved 7% to R$495.8 million (US$218.4 million) with an EBITDA margin of 15.1% versus 20.5% in the year-ago quarter. Balance Sheet: Exiting third-quarter 2014, COPEL had cash and cash equivalents of R$1,790.1 million (US$736.7 million), down 3.2% from R$2,063.5 million (US$938 million) at the previous quarter-end. Loans, financing and debentures declined 7.4% sequentially to R$4,396.4 million (US$1,809.2 million) from R$4,745.4 million (US$2,157 million) in the previous quarter. Cash Flow: In the nine months ended Sep 2014, COPEL generated net cash of R$1,217.5 million (US$529.3 million) from its operating activities, down 1.8% from the prior-year comparable period. Capital spending on the purchase of property, plant and equipment shot up 150.1% over the year-ago period to R$639.6 million (US$278.1 million). During the period, the company distributed approximately R$249.8 million (US$108.6 million) as dividends and interest on equity. Outlook: In 2014, COPEL plans to spend R$2,616.7 million as capital expenditure. Of the total amount, roughly R$1,309 million will be used for the Generation and Transmission business, R$895.9 million for the Distribution business, R$80.0 million for the Telecommunications business and R$331.8 million as investments in new businesses. Equity Research ELP Page 4

5 VALUATION COPEL s current trailing 12-month earnings multiple is 6.9x compared with 21.9x for the peer group and 18.6x for the industry. Over the last 5 years, COPEL s shares have traded in a range of 5.9x to 12.3x trailing 12-month earnings. COPEL faces near-term risks arising from political interference, rising costs and expenses, huge debt levels and dependence on water resources. However, despite these, the company s long-term growth prospects, driven by rising domestic energy demand as well as management s focus on improving its internal electricity generation capacity and distribution network, encourages us. Considering these factors, we currently upgrade our recommendation on COPEL from Underperform to Neutral. Our $13.00 target price is based on 6.9x 2015 earnings per ADR. Key Indicators F1 F2 Est. 5-Yr EPADR Gr% P/CF 5-Yr High 5-Yr Low Companhia Paranaense de Energia (ELP) Industry Average S&P CIA Paranaense (ELPVY) Ameren Corp (AEE) Wisc Energy CP (WEC) Scana Corp (SCG) 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 Paranaense de Energia (ELP) Industry Average S&P Equity Research ELP Page 5

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

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ELP. 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 1114 companies covered: Outperform %, Neutral %, Underperform 5.9%. 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 Rec Change Update Equity Research ELP Page 7