We recently downgraded Companhia Energetica de Minas Gerais (CIG), also known as CEMIG, from Neutral to an Underperform recommendation.
CEMIG is one of the largest integrated electric utilities in Brazil. It has more than 6,716 megawatts of installed generation capacity, deriving approximately 97% from hydroelectric power.
Third Quarter Highlights
In the third quarter 2010, CEMIG’s net earnings dipped 2.4% year over year to R$553.3 million (US$314.4 million), or R$0.89 per share, due to higher operating and financial expenses. However, earnings per ADR were US$0.51, above US$0.49 in the third quarter of 2009 and the Zacks Consensus Estimate of US$0.44 per ADR.
Net revenue jumped 6.5% year over year to R$3,183.2 million (US$1,808.6 million) attributable to higher volumes sold. Electricity sold improved 8.1% year over year to 16,478 GWh versus 15,242 GWh in the year-ago quarter due to higher consumption by all final customers.
Detailed discussion on the earnings release can be found here: CIG 3Q Disappoints, Exceeds Estimate
Recommendation Downgraded
We believe CEMIG is well positioned to benefit from the rising demand for electricity in Brazil. Its integrated nature of activity (generating and distributing energy) along with its aggressive expansion plan is making its presence felt among industrial customers all over the southeast and south of Brazil.
However, the company’s growth momentum will be restricted in the quarters ahead, being largely affected by escalating operating expenses and energy purchase costs. Besides, adverse impacts are expected from the tariff adjustment announced in 2010 and the rising debt levels.
Moreover, persistent interference from the state government, competitive pressures in the Brazilian market and high dependence on natural water resources tend to be problematic. Prime competitors include Companhia Paranaense de Energia (ELP), DP-Energias de Portugal, S.A. and Eletropaulo Metropolitana Eletricidade de São Paulo SA.
Thus we downgrade the stock from Neutral to an Underperform recommendation.
CEMIG SA -ADR (CIG): Free Stock Analysis Report
COPEL-ADR PR B (ELP): Free Stock Analysis Report
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