We reiterate our Underperform recommendation on Companhia Paranaense de Energia (ELP), also known as COPEL, a fully integrated electric utility of Brazil.
The company is one of the leading Brazilian electric utility companies and accounts for approximately 7.0% of total electricity production in the region with 99% of its production is derived chiefly from hydroelectric sources.
With the global economy reviving gradually from the recent crisis, demand for electricity is seen to be rising, especially in emerging countries like Brazil. The country’s economy is growing with large investments being made to improve its infrastructure and power generation capabilities.
The country derives the majority of its power needs from hydroelectric sources. Despite having an attractive long-term future prospect, we apprehend that COPEL in the near-to-mid term will face difficulties grappling with the impact of rising operating expenses.
In the third quarter of 2010, operating costs and expenses went up 12.4% year over year to R$1,223.6 million (US$695.3 million) attributable to a 17.7% increase in electricity purchased for resale, a 56.4% hike in materials and supplies, and a 79.7% increase in raw material and supplies for electricity generation. Third party service expenses soared 21.3% while provisions and reversals were up by 139.4%.
Moreover, being a state-owned company with 58.6% of outstanding voting shares with the government of the State of Parana, COPEL’s decisions will largely meet with political interference. Also, the government has the power both to control the election of the majority of the company’s Board of Directors and appoint senior management. Unfavorable political decisions can impact the company’s financials over time.
The company faces stiff competition primarily from peers like Cia Energetica de Minas Gerais (CIG) and Enersis S.A. (ENI). Considering all these factors and anticipating a lack of any positive share price driver, we maintain an Underperform recommendation on the stock.
CEMIG SA -ADR (CIG): Free Stock Analysis Report
COPEL-ADR PR B (ELP): Free Stock Analysis Report
ENERSIS S A ADR (ENI): Free Stock Analysis Report
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