We reiterate our Neutral recommendation on Companhia Paranaense de Energia (ELP). The company, also named COPEL, is a fully integrated electric utility of Brazil serving approximately 3.8 million customers in 393 municipalities and 1,115 localities in the State of Parana.
Energy demand in Brazil is rising based on the resumption in economic growth and industrial development. The country’s energy utility companies are thus gearing up to serve the mounting consumption scenario, thereby expecting a boost in profitability. Under such circumstances, we believe COPEL will stand out in the coming quarters backed by the ten-year capacity-raising plans of the Ministry of Mines and Energy’s (MME) alongside the Brazilian Government for electricity generation.
COPEL posted impressive results in 3Q11 with a jump in net revenue, driven by higher electricity sales volume. COPEL’s strong cash position strengthens our outlook on the stock. Moreover, for the full fiscal, COPEL has a huge capital investment plan for Generation and Transmission, Distribution as well as Telecommunications. All these factors make the company’s long-term prospects promising.
However, rising expenses remain a major impediment for the company’s growth. During the quarter, operating costs and expenses soared, primarily due to a rise in expenses in health care, personnel, pension, etc. Such a trend among almost all the expense categories, remain a cause of concern. Moreover, COPEL depends precariously on rainwater from which it generates 99% of its hydroelectricity. Hence, the unpredictable weather conditions thwart its performance.
Mention may be made of the political interference in the company ‘s affairs, which also clouds our view. This unsolicited meddling, such as directing some of the company’s activities and expenses, controlling the election of the board of directors has been leading to unnecessary delays and uncertainty in case of regular operations for quite some time.
Though the above concerns cannot be disregarded, we believe hope survives. COPEL operates in a non-cyclical industrial environment, and is well positioned in the Brazilian electric utility sector. The company accounts for 7% of total electricity production in the State of Parana, Brazil. Focused on improving its internal generation capacity and distribution network, the company is anticipated to witness smarter performance and profitability.
The provincial government of the State of Parana controls 58.6% of COPEL. The company faces stiff competition from Cia Energetica de Minas Gerais (CIG) and Enersis S.A. (ENI).
Currently, COPEL has a Zacks #3 Rank, which indicates a short term (1-3 months) Hold rating.
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