We recently maintained a Neutral recommendation on Companhia Energetica de Minas Gerais , also known as CEMIG. The company is one of the largest integrated electric utilities in Brazil and has more than 6,896 megawatts of installed generation capacity.
In the recently reported second-quarter 2011 financial results, the company fared well and posted net earnings increase of 29% year over year. The company’s top line escalated 11% on the back of higher prices for electricity sold and higher demand.
Growth prospects of the company looks promising, with the global economy reviving from the recent crisis. Demand for electricity in the emerging countries is noticeable. Brazil, for instance, is a country that stands at an advantageous position making huge investments in infrastructure and power generation capabilities. Moreover, demand for electricity increased as the country hosts two major sporting events in the coming years.
Management, over the long term (2011-2015), expects total energy distribution to reach a range of 48.8-53.8 TWh by 2015 from 42.7-44.8 TWh anticipated for 2011. Energy generation in 2015 is estimated to be roughly 36.1 TWh. EBITDA for the full company in 2011 is expected to be within R$5.0-5.6 billion range and reach R$5.3-6.1 billion by 2015.
Despite all these positives, the growth momentum gets a setback from rising operating expenses. In the second quarter of 2011, expenses jumped 7% year over year primarily due to higher expenses for electricity bought for resale, outsourced services and gas bought for resale.
Furthermore, heavy dependence on natural water resources and interference from the state government tend to be problematic. CEMIG also faces competitive pressures in the Brazilian market from its rivals like Companhia Paranaense de Energia .
Considering all these factors, we are currently maintaining a Neutral recommendation on the stock.