CPFL Energia a Strong Brazil Play

We rate CPFL Energia (CPL - Analyst Report), the largest private company in the Brazilian electricity sector, as a Buy. The company posted solid results for the first quarter and the outlook for the following quarters remain positive, mainly considering the growing demand for electricity in Brazil and the positive outlook for the Brazilian economic environment.

We also believe that the tariff correction in 2009 will be quite positive. Finally, CPL has a solid dividend payout and an attractive valuation.

According to ANEEL (Brazilian Government Agency for electric utilities), the demand for electricity in Brazil is expected to increase by 4.5% on an average in the upcoming years. We find this estimate as conservative, since the potential for growth seems to be quite higher. Only in the first quarter of 2008 sales within the company’s concession area increased by 8.1% year over year.

Additionally, the company paid dividend of US$413 million. In spite of having unsustainable dividend yield currently, the company has very aggressive dividend policy that establishes a minimum payoff of at least 50% of its half yearly net income in the form of dividends and/or interest on own capital.

At current levels, CPL’s ADRs are trading at 11.1x our 2008 earnings estimates, well below the industry average. But the recent upgrade of Brazil to investment grade by Standard & Poor’s and by Fitch and the tariff correction in 2009 will be very encouraging.

We continue to have a positive view on the company’s medium-term outlook and the stock’s dividend yield is attractive. We used an earnings multiple of around 13.0x our 2008 EPS to arrive at the target price of $73.50.

Read the full analyst report on CPL