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Cemig Upgraded to Outperform

ELP CIG

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We recently upgraded our recommendation on Brazilian electric utility, Companhia Energetica de Minas Gerais (CIG - Analyst Report), also known as CEMIG from Neutral to an Outperform rating.

Ranking fifth among the electricity generators in Brazil, Cemig derives approximately 97% of electricity from hydroelectric sources. The company is in a constant pursuit to attain the position to benefit from the expected growth in electricity demand in Brazil which is gearing up to host two major sporting events in the coming years.

The Brazilian government, in a bid to improvise the electricity industry through its Second Accelerated Growth Program (PAC 2), has allocated approximately R$1.1 trillion. In Cemig’s area of operation—according to the national Energy Research Institute, EPE—average consumption growth is expected to be 4.5% from 2011 to 2021.

Cemig’s management, over the long term (2011-2015), expects total energy distribution to reach a range of 48.8-53.8 TWh by 2015. Energy generation in 2015 is estimated to be roughly 36.1 TWh while EBITDA for 2015 would be within the R$5.3-6.1 billion range by 2015.  

Prospects look bright for the company as is depicted in its impressive third quarter 2012 results. Net income registered a 43% year-over-year increase and EPADR came in at US$0.64. Net revenue grew 19% to US$2.4 billion on the back of a 1.7% increase in electricity sold to 17,715 GWh.

The current Zacks Consensus Estimates for 2012 and 2013 are US$2.57 and US$1.46 per ADR, reflecting annual increase of 35.3% and decline of 43.2%, respectively.

The stock currently bears a Zacks #1 Rank, translating into a short-term Strong Buy rating. On the other hand, the company’s prime competitor Companhia Paranaense de Energia (ELP - Analyst Report) currently has a Zacks #3 (Hold) Rank while its 2012 and 2013 Zacks Consensus Estimates stand at US$1.70 and US$2.02, predicting annual decline of 27.4% and growth of 18.8%, respectively.
 

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