We recently downgraded our recommendation for Companhia Paranaense de Energia (ELP), also known as COPEL, one of the leading Brazilian electricity utilities, from Neutral to Underperform.
Second Quarter Highlights
COPEL’s second quarter results were disappointing with its net income dipping 53.2% year over year to R$135.7 million (US$75.4 million), or R$0.50 per share (US$0.28 per ADR) compared with R$290.0 million (US$138.8 million) or R$1.06 per share (US$0.51 per ADR) in the year-earlier quarter. Earnings per ADR lagged behind the Zacks Consensus Estimate of US$0.50.
The year-over-year decline was primarily due to higher operating expenses, which more than offset a modest increase in net revenues.
Considering the top line, net revenues of R$1,438.1 million (US$799.0 million below the Zacks Consensus Estimate of US$834 million) soared 6.0% year over year because of an increase in the average price per megawatt hour (MWh) and higher sales volume.
During the quarter, operating costs and expenses went up 33.4% year over year to R$1,308.5 million (US$726.9 million) attributable to a 73.7% year-over-year increase in electricity purchased for resale, 15.7% rise in costs related to the use of main transmission grid and 17.6% rise in materials and supplies.
Downgraded to Underperform
COPEL, one of the leading Brazilian electric utility companies, accounts for approximately 7.0% of total electricity production in the region with 99% of its production derived chiefly from hydroelectric sources. We believe over the long-term, the company will benefit from growing demand for electricity in Brazil.
However, being a state-owned company with 58.6% of outstanding voting shares with the government of the State of Parana, COPEL’s decisions will be largely influenced by political interference. Also, the government has the power to control the election of the majority of the company’s Board of Directors and also appoint senior management. Unfavorable political decisions can impact the company’s financial over time.
Moreover, the company’s weak financial results for the second quarter of 2010 have dampened its growth prospects for the second half. Based on all this and anticipating a lack of any positive share price driver, we downgrade our recommendation on COPEL to Underperform from a Neutral rating.
COPEL-ADR PR B (ELP): Free Stock Analysis Report
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